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August 16,1974 The agricultural scene presented a very cloudy picture at midsummer. Wholesale farm prices turned around in July after a steep 18percent decline between February and June, and many analysts fore cast further increases in the wake of a serious drought situation. For non farmers, this development presaged a worsening of inflation, after a period in which falling farm prices offset at least some of the inflation ary pressure arising from the industrial sector. For farmers, meanwhile, several critical problems are now dogging their income prospects. The cur rent drought in the Midwest has destroyed the hopes for a bumper harvest and thereby set in motion the new upsurge in crop prices. The gradual slowdown in overseas economies and the improvement in foreign crop prospects have hampered the export trade, although they have also eased some of the pressures on domestic prices. Meanwhile, a price-cost squeeze has developed as a resul tant of the earlier slump in farm commodity prices and the con current upsurge in production costs. Because of these factors, the fall-off in receipts from last fall's peak has been precipitous, so that net farm income this year could fall 8 per cent or more below the 1973 level. It should be remembered, however, that net income rose nearly 85 percent to $32 billion in 1973, a year of unprecedented prosperity for the nation's farmers. Thus, farm1 Digitized for FR A SER ers this year seem certain to reach a much higher level of income than they attained in any year prior to 1973. Changing factors Farm markets have been undergo ing important structural adjust ments, due among other things to the disappearance of grain reserves and the recultivation of millions of acres of previously idle land. Given the relatively inelastic demand and supply schedules for farm com modities, prices and incomes have been very sensitive to changing production developments. During the second quarter alone, prices re ceived by farmers fell 13 percent from the record first-quarter figure, reflecting the massive shift from shortage to surplus of livestock products plus the prospect for bumper harvests of most major crops. But the situation then began to change because of several unex pected weather and market devel opments. Farm product prices rose 6 percent in the single month end ing mid-July, with increases of 11 percent for feed grains, 13 percent for wheat, 19 percent for soybeans and 16 percent for meat animals. At this juncture, most analysts fore see a continuing price uptrend into the early part of 1975. During the past several months, ad verse weather conditions have markedly reduced crop prospects for 1974. In early spring, excessive rainfall and plant disease caused delayed plantings, acreage aban donment and shifts to alternative crops in many important farming (continued on page2) JR airdrn O es@ ejpaurtaneim fc Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. areas. More recently, a severe drought has taken a heavy toll throughout the Midwest, com pounding the damage from earlier flooding. Crop estimates for all major products have been sharply reduced; the corn harvest, for exam ple, is now estimated at only 5.0 billion bushels compared with the 6.4-billion bushel figure accepted just a month ago. A record wheat harvest still seems likely, largely because of the strength of the al ready harvested winter-wheat crop, but the overall situation appears gloomy. past half-year alone, prices paid by farmers increased 8 percent, fueled by the dramatic rise in prices of fertilizer and petroleum products. The price-cost squeeze was most severe in the livestock industry, with some feeding operations going out of business or at least sharply restricting the number of animals on feed. Livestock producers may return only slowly to profitable operations, especially in view of the large farm inventory of animals and the unusually high levels of prices for feed and feeding stock. While prices should rise because of worsening crop prospects, some pressures may develop in the other direction because of a slowdown in export demand. For the marketing year just ended, farm exports jumped 65 percent to more than $21 billion. Demand for U.S. products may now decline some what, however, reflecting improved crop prospects abroad and a slow down in the economies of our major overseas trading partners. Of course, weakening crop prospects in this country could bring foreign buyers back into the U.S. market, causing price pressures to be some what stronger than would other wise be expected from the growing sluggishness of overseas demand. Changing prospects For 1974 as a whole, cash receipts from farm marketings may increase about 11 percent to $98 billion, with crop receipts again rising sharply and livestock receipts show ing only a moderate gain. This rise in total receipts would reflect a substantial year-to-year increase in prices and a still-high level of crop production. However, net farm income may drop almost 8 percent to $30 billion, with the rise in re ceipts being offset by a continued uptrend in production expenses and a sharp decline in government payments to farmers. Even with a turnaround in farm prices, the recent severe cost squeeze should continue. Over the 2 Digitized for FR A SER The recent drought has reduced crop prospects severely, but the total harvest could still be large in view of the record amount of planted acreage, which reflects the lifting of government acreage re strictions last year. Supplies of grains and oilseeds should be very tight in the face of expected domestic usage and export demand. As already indicated, crop prices have risen sharply in the past month, because of some withhold ing of grain by farmers, some specu lative buying in the export markets, and a series of downward revisions of Agriculture Department crop estimates. Future price increases may be considerable, depending on the state of the weather and on such other factors as the state of foreign demand. The livestock situation has im proved somewhat from the de pressed June level, when prices hit a two-year low, but supply condi tions remain mixed. Substantial supplies of livestock products overhang the market, and the number of animals on the farm has grown significantly, but feeding operations are down sharply from a year ago, with a 21-percent drop for cattle and calves and a slight de cline for hogs. Altogether, red meat supplies should hold up well for the next few months, thereby keeping cattle and hog prices below the peak levels of a year ago. Price prospects The farm-commodity price index, although going up this summer and fall, may not return to the August 1973 peak. Even so, prices received by farmers may rise at least 9 per cent for the year as a whole, on top of last year's spectacular 37-percent increase. This continued price rise at the farm level could mean, for the second straight year, an increase of about 14 percent (annual aver age) in supermarket prices. The annual rate of increase in retail food prices dropped to 3 percent in the second quarter— only a fraction of the 1973-early 1974 increase— but the situation will probably worsen again, as indicated by the July wholesale-price figures. Looking further ahead, the Council of Economic Advisers recently fore cast a high level of farm output for the next several years, with severe pressures on farm inputs. Produc tion is likely to remain strong be cause of the need to replenish grain stocks and to meet a con tinued high plateau of export de mand. The cost squeeze meanwhile is likely to continue, with prices of fertilizers and fuels rising even faster than farm prices, with the farm labor situation becoming tighter, and with land availability being less than had previously been anticipated. (Only 33 million acres have returned to production in the past two years, compared with the 60 million acres originally considered available.) Thus, the Council concludes, farm prices will remain relatively high in the period ahead, and large price swings may develop from small shifts in pro duction or demand because of the absence of the excess productive capacity and reserves of the past. Dean Chen 3 Digitized for FR A SER O uoi8umse/v\ • qejfl • uoSaJO • epBA3|sj . oqepi HBM BH • B jU J O p | B 3 • B U O Z Jjy • B>|SB|V pi©iuuipT8<dI©(g upjn§®§©^[ BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks Amount Outstanding 7 /3 1 /7 4 Change from 7 /2 4 /7 4 Change from year ago Dollar Percent + + + + 9,315 + 8,666 + 436 + 3,074 + 2,742 + 762 - 466 + 1,115 + 6,556 + 663 - 243 + 6,250 142 + 6,195 - 222 + 4,272 Loans (gross) adjusted and investments* Loans gross adjusted— Securities loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other Securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Government deposits Time deposits— total* Savings Other time I.P.C. State and political subdivisions (Large negotiable CD's) 84,044 66,158 1,602 23,421 19,702 9,423 4,859 13,027 79,123 22,028 355 55,337 17,815 28,154 6,174 15,016 903 906 551 — 30 + 58 + 44 + 120 — 123 — 10 — 62 — 48 + 98 91 + 43 — 22 + 100 + + + + + + Weekly Averages of Daily Figures Week ended 7 /3 1 /7 4 Week ended 7 /2 4 /7 4 Comparable year-ago period 40 477 437 57 317 260 108 -1 9 9 - 91 + 1,417 + 1,400 + 167 + + - — + + + — + - + — + 12.47 15.07 37.39 15.11 16.17 8.80 8.75 9.36 9.03 3.10 40.64 12.73 0.79 28.21 3.47 39.76 Member Bank Reserve Position Excess Reserves Borrowings 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 borrowings ( —) 480 336 75 ’ Includes items not shown separately. Information on this and other publications can be obtained by calling or writing the Administrative Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco, California 94120. Phone (415) 397-1137. Digitized for FR A SER
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