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Sam Fm
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April 25, 1975

Commodity prices have declined
on a broad front in the past half­
year, reflecting the impact of the
worldwide recession on the de­
mand for farm products and
industrial raw materials. The Bu­
reau of Labor Statistics' index of
commodity prices, which meas­
ures spot price movements of two
dozen internationally-traded
commodities, now stands about
20 percent below last July's
peak. Prices of some components
have recently shown signs of
stability, but the general trend
still appears to be downward.
The broad-based decline in pri­
mary commodity prices has
worked to hold down prices for
processed food and industrial
goods at later stages of the
production process, as evidenced
by the steady decline since last
winter in the overall wholesaleprice index. The consumerprice index continues to rise
because of the pressure of rising
middlemen's costs, but the rate of
increase has slowed to about onehalf of the late-1974 pace.
Commodity inflation
This slump marks an abrupt end to
the pervasive 1972-74 inflation in
commodity markets. The quadru­
pling of crude-oil prices in the
winter period a year ago was the
most dramatic indication of this
price upsurge, but there were

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many other sharp increases posted
during this two-year time-span.
In fact, the BLS commodity index
which—does not include
petroleum—nearly doubled be­
tween mid-1972 and mid-1974.
The only comparable episode
during the past generation was the
commodity “ crunch" at the
onset of the Korean War, and that
upsurge was followed by a weak­
ening trend that lasted for at
least a decade and a half.
The recent price surge was at­
tributable to a worldwide eco­
nomic boom that boosted the
demand for both farm products
and industrial raw materials. For
the first time in two decades, the
economies of most industrial
nations moved together in the
expansion phase of the business
cycle. This synchronized boom
stimulated employment and out­
put, but at the same time it
strained the capacity of many
basic industries, creating short­
ages and upward pressures on
prices. Indeed, by the third
quarter of 1973, U.S. production
of such basic materials as petro­
leum, steel, nonferrous metals,
forest products and textiles
reached 96.3 percent of capacity,
the highest since World War II.
Meanwhile, strong worldwide
demand for reduced supplies of
farm products created a price

(continued on page 2)

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.

spiral in a sector which had
experienced relative stability
throughout most of the two
preceding decades. The foodand feed-grain situation stabilized
temporarily in late 1973 because of
the expectation of bumper
crops and a recession slowdown
in demand, but as weather
disasters destroyed crop hopes,
prices headed upward again until
the fall of 1974. Similarly, poor
growing weather in the tropics
helped boost prices for the
world's coffee, cocoa and
sugar crops.
As for nonferrous metals, process­
ing capacity during this period
proved inadequate to meet the
sudden surge in worldwide de­
mand. New capacity had failed
to come on stream in adequate
amounts, reflecting such factors
as a prolonged downtrend in the
rate of return on investment in
earlier years. In addition, a grow­
ing share of the available new
investment had gone into (non­
producing) pollution-control
equipment.
Final push
The Arab oil embargo during the
winter of 1973-74 provided a final
push to an already frenzied mar­
ket. By aggravating the overall
inflation, undermining many na­
tional currencies and creating a
general fear of shortages, the

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embargo touched off a wave of
speculative buying that pushed
industrial commodity prices to new
heights. But then, as the embar­
go ended and the worldwide
recession deepened, a specula­
tive sell-off and consequent de­
cline in raw-material prices was
all but inevitable.
Normally, commodity prices act
as a leading indicator, turning
downward before the onset of
recession. That failed to happen
this time. The hoarding sparked
by the oil embargo postponed
the price decline for raw industrial
materials until April 1974, several
months after the U.S. economy
registered its first decline in
physical output. For most food­
stuffs—and for the overall
index—the turn didn't come until
much later. Livestock prices
peaked in early 1974 as the rising
cost of feed forced ranchers to
liquidate herds and reduce
feeding operations, but it wasn't
until late fall that prices began to
tumble in the markets for grains,
sugar, cocoa, and fats and oils.
Once the decline began, how­
ever, prices fell with great mo­
mentum, so that the overall
index now stands 20 percent
below last summer's peak.
Continued weakness
The near-term outlook is for
continued weakness in com­
modity prices, at least until a
turnaround occurs in economic
activity. In nonferrous metals

industries, producers have at­
tempted to stabilize prices by
cutting back production, but their
efforts have been largely unsuc­
cessful because of the weakness
of demand from the housing,
auto and appliance industries, and
also because of the excessive
level of inventories throughout
the world. In the food industry,
prices could recede further if
this year's crops come up to
expectations, although heavy
inventories (and therefore
downward price pressures) are
lacking in many sectors; for
example, world grain stocks are
now at the lowest level of the
past two decades.
While the immediate problem of
shortages has been overcome,
the question arises whether the
world will be confronted in future
decades with chronic and per­
sistent shortages of minerals, food
and other primary commodities.
The answer is probably no, ac­
cording to a Brookings Institute
panel of 15 experts from the
European Community, Japan and
North America. Relative prices
of primary products might very
well rise over the long-run
because of the growth of world
demand, increased environ­
mental costs, and the necessity
to utilize lower-quality land and
mineral resources. However, the
Brookings group does not believe
in the inevitability of this
course, principally because tech­
nological change will continue to

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offset many of these cost press­
ures. Moreover, the experts doubt
the ability of non-oil producer
cartels to dictate prices and
control supplies, partly because
of the widespread incidence of
primary commodities throughout
the world, and partly because of
the effect of artificially high prices
in spurring conservation and
encouraging the development of
substitute materials and new
sources of supply.
At the same time, the Brookings
panel argues that several require­
ments must be met to assure
adequate supplies at relatively
stable prices. In its view, produ­
cers must be assured of an ade­
quate rate of return on invest­
ment to encourage the develop­
ment of resources and necessary
processing capacity. In that
regard, producers and consumers
may find it worthwhile to coop­
erate in the creation of buffer
stocks, in order to stabilize prices
in the face of shifting supply-anddemand developments. As an
additional incentive to invest­
ment, the panel suggests the
development of international
rules—by the World Bank, for
example—that would govern
sensitive issues such as ownership
rights and taxes in a manner
mutually acceptable to host
governments as well as foreign
investors.
Yvonne Levy

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BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks

Amount
Outstanding
4/9/75

Change
from
4/2/75
+
+
+
+

Loans (gross, adjusted) and investments*
Loans (gross, adjusted)—total
Security loans
Com mercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
O ther securities
Deposits (less cash items)—total*
Demand deposits (adjusted)
U.S. Governm ent deposits
Time deposits—total*
States and political subdivisions
Savings deposits
O ther time depositst
Large negotiable C D ’s

85,871
65,747
1,984
24,304
19,595
9,787
7,541
12,583
85,139
24,240
196
59,347
6,565
19,540
29,593
16,405

Weekly Averages
of Daily Figures

W eek ended
4/9/75

Member Bank Reserve Position
Excess Reserves
Borrowings
Net free (+) / Net borrowed (-)
Federal Funds—Seven Large Banks
Interbank Federal fund transactions
Net purchases (+) / Net sales (-)
Transactions of U.S. security dealers
Net loans (+) / Net borrowings (-)

+

-

+
+
+
+
-

+
+
-

-

24
0
24

Change from
year ago
Dollar
Percent
+
+
+
+
+
+
+

460
354
192
209
13
13
4
102
501
920
70
190
21
46
237
153

-

+
+
-

+
-

+
+
+

W eek ended
4/2/75

+

+ 5.05
+ 5.13
+ 106.24
+ 7.36
+ 4.30
+ 6.31
+ 26.82
5.08
+ 8.38
+ 2.63
46.30
+ 11.87
.32
+ 7.64
+ 15.17
+ 28.25

4,131
3,209
1,022
1,666
808
581
1,595
673
6,584
621
169
6,297
21
1,387
3,898
3,614

Comparable
year-ago period

70
0
70

+

75
22
53

+ 2,107

+ 1,740

+ 1,625

+ 1,184

+

+

715

77

♦Includes items not shown separately. ^Individuals, partnerships and corporations.

Information on this and other publications can be obtained by calling or writing the Public
Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco
94120. Phone (415) 397-1137.
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Federal Reserve Bank of St. Louis