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March 9,1973

The price trends, the recriminations,
the exhortations— even the cartoons
— all are reminiscent of the early
days after World War II, when
hordes of affluent consumers with
ravening appetites for red meat
descended upon the supermarkets
and practically swept the shelves
clean. Admittedly, recent price
increases have not approached the
15-to-20-percent annual increases
of the 1946-47 period, which were
caused in part by the lifting of
controls (including rationing) within
a relatively short time span. Still,
there is reason for concern when
Department of Agriculture spokes­
men forecast a 6.5-percent increase
in retail food prices for 1973—
almost double the forecast made
several months ago— and suggest
that even that projection may be
Where prices go up
Except for food, consumer prices
have increased much more slowly
this past year than during most other
recent years. During Phase II,
nonfood commodities increased at
about a 2.5-percent annual rate,
while services rose at about a 3.5percent rate. In each case, this was
no more than half the rate recorded
during the 1969-70 period. But
retail food prices increased at more
than a 6.0-percent rate during Phase
II and (unlike other prices) they
rose at a faster rate as the period
came to an end. Food prices have
risen at a 9.0-percent rate during the
past six months, primarily because
of a January gain which was the
largest monthly increase since
Korean War days.1

Within the food category, some
items have increased only modestly
in price. At retail, prices of cereals
and bakery products have risen only
2.3 percent over the past year,
despite the soaring price of grain,
and prices of dairy products have
advanced by a like amount. But
fruit and vegetable prices are now
7.9 percent above a year ago,
reflecting such factors as weathercaused shortages, while the
meat-poultry-fish category—
one-third of the entire budget for
home-prepared food— is up 12.8
percent for the year.
Further increases can be expected in
retail prices of meat and other foods,
especially in view of the sharp
upsurge recently in farm and
wholesale prices. (Historically, the
movement of retail food prices
follows the wholesale-price index,
although not necessarily by the
same amount.) Wholesale prices of
consumer food increased at an
11.2-percent rate during Phase II,
but during the November-January
period the annual rate of increase
was 27.2 percent, because of sharp
gains in farm prices of meat animals.
Why demand expands
An examination of meat market
developments should suggest a few
explanations for these startling price
trends. One obvious explanation is
the strong expansion of consumer
after-tax income, which rose 8.5
percent last year and has far more
than doubled since 1960. As
incomes have advanced overtime,
the demand for income-elastic food
items has strengthened, causing in
(continued page 2)


particular a strain on available meat
supplies. Per capita food con­
sumption has increased 7 percent
overall since I960, but cereals and
dairy products have declined 5 to
6 percent, in contrast to a 35percent rise in beef consumption
and a 50-percent jump in poultry
consumption. An Agriculture
Department study made just a
half-decade ago forecast beef
consumption of 117 pounds per
capita in 1980, but that consumption
figure may be exceeded by 1974.
Another important factor is the
substantial rise in the population
of meat-eating teenagers and young
adults. This category of 16-to-24
year-olds, although making up only
one-sixth of the total population,
has accounted for almost one-half
of the total population increase
since 1960. Young adults normally
consume about one-third more
meat per capita than the middleaged and elderly, and with their
growing importance on the
employment rolls, they now have
the incomes to support that habit.
The rapid expansion of Federal
food programs has helped support
meat and other prices during the
past several years. The Govern­
ment's cost for such programs has
more than tripled since 1969, to
about $3.5 billion in 1972, largely
because of increased distribution of
food stamps. Government policies
have shifted recipients to higher
income brackets for food-consump­
tion purposes. Since rising incomes
mean a rising demand for meat, as

opposed to such staples as cereals
and potatoes, food programs thus
have provided an extra stimulus to
meat purchases.
International events also have
affected prices significantly.
Reduced food production in several
major countries— China, India, and
the Soviet Union— along with
increased livestock production in
Japan and Western Europe, have
expanded worldwide demand for
food and feed grains. The U.S.,
being the only major food exporter
with large carryover supplies of
wheat and other grains, has met
most of this increase in worldwide
demand with a 22-percent jump in
food-crop exports last year alone.
(Moreover, with a second devalua­
tion, these and other U.S. products
should be increasingly attractive to
foreign buyers.) Yet, the upsurge
in exports has meant a jump in farm
prices of grains, and this has been
translated into a jump in meatproduction costs and thereby in
retail meat prices.
Why supply lags
The current supply problem can be
traced back to the 1970-71 period,
when first cattle and then hogs
reached the low end of their
respective cycles, even while prices
remained quite low. (Cattle prices
then were about one-third below
current levels, and hog prices were
less than half current quotations.)
A number of weather problems—
the 1970 corn blight, the 1971 Texas
drought, and the 1972 California
drought— then led to substantial
reductions in output of feed.

Farmers passed along higher feed
costs when they brought whatever
livestock they had to market, but at
the same time, the high levels of
feed costs discouraged them for
some time from building up their
herds more rapidly.
Altogether, domestic production of
food commodities declined about
2 percent last year. Sharp weatherrelated cutbacks in fruit and
vegetable production accounted
for much of this, but meat output
also declined slightly, although
remaining about 6 percent above
the levels of the late 1960's. Pork
reached a low phase in its
production cycle, and beef output
rose less than anticipated, partly
because favorable market prices
caused cattlemen to feed their steers
to heavier weights and to retain
more stock for the expansion of

Administration is selling grain
from Government stocks to make
more feed available for livestock and
poultry. As a longer-run measure,
it is bringing back into production
about one-half (30 million acres) of
the land idled in earlier years under
crop-control programs, and it is
opening much idle land for grazing
to help expand beef supplies. The
just-reported February decline in
grain prices may reflect the impact
of these output-expansion plans.

Produce, produce, produce
The Administration recently began
to attack the supply problem, in
many cases by modifying or even
reversing restrictive legislation put
on the books a generation ago. It
has withdrawn export subsidies on
such commodities as flour and
chickens, hoping thereby to redirect
those commodities into the
domestic market. Also, it has lifted
all quotas on meat imports; these
increased about 12 percent last year,
and accounted for roughly one-third
of the total increase in beef
consumption, despite being
concentrated in cheaper grades
such as hamburger meat.

In contrast to a one-third increase
in nonfarm productivity since 1960,
output per manhour has increased
more than two-thirds in crop
production and has more than
doubled in livestock production.
(Earlier gains came about from
changes in feeding patterns, for
example by feeding calves to
heavier weights before slaughtering,
but future gains may result from
changes in breeding patterns,
perhaps by emphasis on multiple
calving.) Given a continuation of
this trend in farm productivity and
production, the current expansion
of consumer demand should be met
with reduced pressure on consumer
William Burke

As a short-run measure, the

Some observers fear that 1973 will
be a replay of 1967 and similar years
in the past, with the upsurge in
supply generated by a previous
jump in demand leading to a
precipitous fall in farm prices. The
possibility may seem ridiculous at
this stage, but still it is unwise to
ignore the immense productivity
of the American farmer.

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B I U J O p |B 3


B U O Z jjy


(D ollar amounts in m illions)
Selected Assets and Liabilities
Large Com m ercial Banks
Loans adjusted and investments*
Loans adjusted— total*
Com m ercial and industrial
Real estate
Consum er instalment
U.S. Treasury securities
Other securities
Deposits (less cash items)— total*
Dem and deposits adjusted
U.S. Governm ent deposits
Tim e deposits— total*
O ther time I.P.C.
State and political subdivisions
(Large negotiable CD 's)
Weekly Averages
of Daily Figures
Member Bank Reserve Position
Excess reserves
Net free ( + ) / Net borrowed (— )
Federal Funds— Seven Large Banks
Interbank Federal funds transactions
Net purchases ( + ) / Net sales (— )
Transactions: U.S. securities dealers
Net loans ( + ) / Net borrow ings (— )

Am ount
O utstanding



— 60
+ 52
+ 18
— 471
— 818
— 761
— 437
— 27
+ 93

W eek ended

Change from
year ago
D o lla r
+ 7 ,9 8 4
+ 8 ,6 5 0
+ 2 ,5 9 3
+ 2 ,5 0 0
+ 1 ,4 0 2
— 555
— 111
+ 6 ,6 5 2
+ 1 ,3 6 6
+ 489
+ 4 ,5 1 1
+ 103
+ 3 ,0 8 3
+ 829
+ 1 ,9 5 9

+ 1 3 .0 0
+ 2 0 .0 2
+ 1 6 .2 6
+ 1 9 .5 0
+ 2 1 .5 3
— 8.10
— 0.98
+ 1 1 .0 4
+ 7.39
+ 5 2 .8 1
+ 1 1 .3 4
+ 0.57
+ 2 1 .1 7
+ 1 5 .2 9
+ 3 7 .5 9

W eek ended
Com parable
year-ago period

— 149

— 17r



— 34

— 945







’ Includes items not shown separately.
Information on this and other publications can be obtained by callin g or w riting the
Adm inistrative Services Departm ent. Federal Reserve Bank of San Francisco, P.O . Box 7702,
San Francisco, California 94120. Phone (415) 397-1137.
Digitized for F R A S E R