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Rese&irdh D@parta@imft April 5,1974 Fem e© to P@ nn© ( The nation's farmers are relatively optimistic as they enter the spring planting period because of soaring farm prices and the prospects of another bumper-crop year. Farm commodity prices should remain high, at least during the first half of the year, because of continued world-wide conditions of strong demand and tight supply. These price pressures may weaken later, however, as record grain crops enter the world's markets. With production expenses also soaring, net farm income could decline significantly from the 1973 high. The expected crop production boom could be dampened for a number of reasons, including energy shortages, tight fertilizer supplies and transportation problems. But given continued good weather, the "fence-to-fence" planting intentions of U.S. farmers should yield a sharp expansion in food supplies. The livestock situation is less clearcut, in large part because of the many market distortions that devel oped in 1973. As a result, output has lagged considerably despite very favorable price developments of the past year. In addition, the cost squeeze, aggravated by high feed costs and the recent break in whole sale livestock prices, has discouraged production. But some of the in dustry's problems may disappear later in the year, as feed grains and protein-meal supplies become more plentiful. Digitiked for FR A SER Reaching a plateau Altogether, the agricultural econ omy may be reaching a plateau, after one of the strongest expansion periods in this century. With high prices and record production, farm cash receipts should continue to rise 9 percent to perhaps $91 billion, although the increase would be far smaller than last year's spectacular 37-percent increase. On the other hand, net farm income may slip by about 15 percent, to roughly $22 billion, because farmers face both breathtaking increases in produc tion expenses and a dramatic de cline in government payments. As the 1972-73 farm boom devel oped, prices jumped 54 percent over a brief two-year period— the most spectacular advance since the halcyon days of 1945-46. The boom was attributable in part to 1972's massive crop failures overseas, which caused a 3.2-percent decline in the world's total crop output that year. More importantly, the boom reflected a fundamental shift in export markets, which came about because of the devaluation of the dollar, the worldwide up surge in population, incomes and prices, and the expansion of trade relations with the U.S.S.R. and Mainland China. Falling export demand? Looking ahead, many observers wonder whether the forces that pushed farm prices and incomes upward so fast may turn out to be (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. only temporary. Given the enormous productive capacity of the U.S. farm economy, a return to more normal market conditions throughout the world could lead to a reduction in export demand and thereby to downward adjustments in farm prices and income. World grain production rose 7.5 percent to a record high in 1973, on the strength of Russia's recovery from the sharp 1972 decline, as well as the expansion of such key producers as the U.S., Canada and. Australia. This year, grain output could rise 3.2 percent more. But with harvests at this record level, world production may outstrip effective demand, permitting some rebuilding of reserves in the coming crop year. The world supply situation still re mains somewhat tight, and this, plus strong demand forces, could keep U.S. farm exports high for some months to come. However, foreign sales of U.S. farm products are mostly on a cash basis now, and much less dependent than before on concessional sales and gifts; conse quently, they are more vulnerable to supply changes in the world mar ket, and less insulated from price fluctuations, than they used to be. Moreover, as supplies continue to expand, farm exports could decline in the 1975 crop year, reflecting re duced shipments and lower prices for wheat, feed grains and oil crops. Digitized for FR A SER Maximum effort Despite the shortages and high prices of crucial inputs, the nation's farmers plan to go all out in planting crops this year. On the heels of a 25-million increase in planted acre age in 1973, farmers may bring another 19 million acres back into production this year, putting more acres into crops than at any time since 1956. Although the total of 339 million acres would be below the 1944 record of 366 million acres, it represents a maximum effort by farmers to bring virtually the entire, productive cropland in the nation under cultivation. Crop prospects look particularly promising this spring because of favorable weather conditions, with a mild winter and good soil mois ture being especially beneficial to early planting. In contrast, this time last year, plantings were delayed and substantial acreage was lost be cause of severe storms and floods. Current planting conditions point to record crops this year, including 6.7 billion bushels of corn (up 19 percent over 1973), 2.1 billion bushels of wheat (up 23 percent) and 10.8 billion pounds of rice (up 16 percent). But soybean output could dip slightly, as soybean acre age is shifted to corn and cotton in response to favorable prices for those crops. The livestock outlook continues to be influenced by previous market disruptions as well as some new uncertainties. In fact, meat prices have been under severe downward pressure recently because of heavier marketings and reduced consumer demand. The recent increase in cattle and hog supplies clearly re flects producers' response to last year's price freeze and cost squeeze, when they withheld animals from slaughter and fed them to over weight. Even so, the prospect for red-meat supplies is not very bright, as re newed cost pressures have worked to prevent any significant increase in feeding operations. Placement of cattle and calves on feed dropped 20 percent, February to February, in major producing states, while the spring hog crop was no higher than a year earlier. For 1974 as a whole, cattle and hog production may be only slightly higher than a year earlier, with most of the increase coming in the second half of the year. New uncertainties In addition to their usual concern with the weather, farmers this year must face a new element of uncer tainty— the scarcity and expensive ness of key production inputs. This factor, together with prospective price declines in some areas, in creases the likelihood of a severe cost squeeze and a consequent reduction in net income. Petroleum apparently is only a minor problem now. Farmers are not major users of petroleum prod ucts, accounting for only 3 percent Digitized for FR A SER of total gasoline and diesel sales. Moreover, sufficient supplies al ready appeared to be available be cause of the Administration's earlier pledge of a 100-percent allocation of gasoline for farm uses, as well as the recent announcement of an ad ditional allotment of 220 million gallons. Then, with the suspension of the Arab oil embargo, ample supplies seemed to be assured for production expansion. Fertilizer shortages, in contrast, con stitute a real problem— perhaps the most serious threat to the hopes for abundant crops this year. Farmers will need more fertilizer because of a sharp increase in planted acreage and utilization of increasing amounts of marginal cropland. Ac cording to Agriculture Department estimates, availability of nitrogen may increase 8 percent, but there could be an overall fertilizer short fall of 2 to 5 percent for the year, which could necessitate substitu tions among crops and lead to re ductions in crop yields. Fertilizer supplies, where available, mean while, cost about 75 percent more than a year ago. For the first time in a generation, the nation's farmers are producing at full capacity. But faced with short ages and high prices of crucial pro duction inputs, they will find it difficult to obtain the maximum output from their fence-to-fence plantings. Dean Chen m o c=3 uoj§uji|seM • qe;n • M BM BH uo Sojo • BpBAa|\j . oqepi E !U JO J!| E 3 • B U O Z I J y • B>jSB|V • $ T O M P ® d fe )(Q BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks Loan 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) Weekly Averages of Daily Figures Amount Outstanding 3 /2 0 /7 4 Change from 3 /1 3 /7 4 Change from year ago Dollar Percent + + + + + + + + + + + + + + + + + 390 448 5 270 73 0 171 + 113 24 — 467 + 414 27 + 108 — 34 — 65 2 — 79,786 60,658 1,133 21,538 18,686 9,117 5,969 13,159 74,500 21,436 758 51,097 17,964 24,404 6,347 11,318 7,925 6,577 732 2,015 3,093 1,017 308 1,656 5,345 1,094 502 4,644 292 5,258 143 3,071 + 11.03 + 12.16 39.25 + 10.32 + 19.84 + 12.56 4.91 + 14.40 + 7.73 + 5.38 — 39.84 + 10.00 1.60 + 27.46 — 2.20 + 37.24 Week ended 3 /2 0 /7 4 Week ended 3 /1 3 /7 4 Comparable year-ago period 3 174 171 4 243 239 31 235 -2 0 4 + 2,026 + 1,582 + 176 + - + 283 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 ( —) 3 21 * 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, :rancisco, California 94120. Phone (415) 397-1137. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis
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