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I&@I TilJk\ November 30, 1978 Harvest Festival The American urban population celebrated its harvest festival last week, although with some grumbling over soaring food prices. But the nation's rural population had even more cause for rejoicing, because of a jump of about 20 percent in net farm income this year, after several years of sharp decline following the 1 973-74 boom. Indeed, the angry tractor drivers that marched on the state and national capitols last winter have returned to plowing the back forty, and Main Street merchants no longer forecast a 1 920- 30's-style farm depression, with its inevitable severe impact on the entire national economy. Rising farm prices have had a great deal to do with this improved income performance. Crop prices this September were 19 percent higher than a year before, reflecting the strong worldwide demand for grains and soybeans. Livestock-product prices were 27 percent higher than a year ago, reflecting the turnaround in the cattle cycle. And incidentally, after the usual transition from farm gate to checkout counter, the average food marketbasket has been costing the consumer 10 V2 percent more than a year ago. u.s. How much income? Despite the improved farm picture, many farmers - those who jumped into the market at the top of the 1 97374 boom - remain in dire straits. And even the average figures look weak in comparison to those recorded in the prosperous period of the earlier boom. In fact, net income per farm (in real terms) remains only about half as large as the 1973 peak figure. For a more rounded picture, we should examine the longer trend of real farm income, which has been rising- and in particular, examine the total income received by the rural population from nonfarm as well as farm sources. For the farm community as a whole - operators, hired workers, and their families - per capita after-tax income has strengthened significantly in recent decades. The farm per capita figure was only 54 percent of the comparable urban figure in 1960, but that ratio rose to 74 percent in 1970 and to 84 percent in 1977. In the 1973 boom year, the average farmer actually received more than the average city dweller - and that, presumably, is what the farmer would like to see every year. Income from nonfarm sources has helped bring about a sharp improvement in the standing of the farm population relative to the nonfarm population. Off-farm sources have provided at least half of total income in almost every year since 1963 - the sole exceptions being the 1 973-74 boom years. Farmers last year derived 61 percent of their income from factory work, bus driving and other such jobs. Three types of farmers Nonetheless, a more thorough analysis of the data suggests that many people classified as farmers shouldn't be, simply because they make practically all of their income from nonfarm (continued on page 2) JFf(&,1111§ cc: 1 cc: <!J) 11 Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San francisco r nor of the Board of Governors of the Federal Reserve System. sources. This is certainly true of the 1.1 million farms with sales of less than $2,500 - that is, 39 percent of all farms in 1976. Those farms sold only 1.4 percent of all farm products, but earned 9.5 percent of all farm income that year, simply because almost all of their income came from nonfarm sources. More than nine-tenths of their average income of $17,551 in 1976 came from nonfarm sources, and as a result, their total incomes were roughly in line with those of nonfarm families. That group aside, the farm population divides itself into two quite different groups -:-a group of 462,000 large farms with annual sales of $40,000 or more, and the 1.2 million family-sized farms with annual sales between $2,500 and $40,000. In 1976, the large farms sold 80 percent of all farm output even though they accounted for only 17 percent of the number of farms. They recorded average sales of $232,000 and average net income of $39,150, with three-fourths of that income coming from farm sources. The family-sized farms in 1976 sold only 19 percent of all farm products even though they accounted for 44 percent of all farms. These farms recorded average sales of $14,630 and average income of $1 3,008-and only about one-third of that total came from farm sources. In fact, the average family income in this group was considerably smaller than that of the small-farm group with annual sales below $2,500. The "farm problem'" centers in this group of 1.2 million farms, giving their below-average incomes, their inadequate financial ability to expand, and their inability to compete with the larger and stonger commercial farms. Export dependence Their fate, and the fate of farming generally, may depend as much on decisions made in overseas markets as on those reached in domestic markets. The output of one out of three acres of cropland is now sold in interna-, tional markets, so that the nation's agricultural prosperity depends on a large and growing world market. But by the same token, consumer markets have become strongly affected by foreign purchase decisions, as we have seen in the several recent bursts of inflationary pressure in supermarket prices. u.s. u.s. The farm-export boom has been a rather recent phenomenon; in fact, farm imports exceeded farm exports in most years prior to 1960. In the present decade, however, farm exports generally have run about double the level of farm imports, and thus have represented one of the strongest elements in the foreign-trade picture. Exports jumped from $8.2 billion to $21.6 billion between the 1972 and , 1974 crop years, and have since continued to rise, although at a slower pace. Exports were unexpectedly strong in the crop year just ended, with a 1 6-percent rise to about $28 billion, as a depreciated dollar led foreigners to boost their purchases of wheat, feed grains and soybeans. The 2 u.s.hare of s world agricultural trade has risen from 12.3 percent of the total in the first half of the 1950's to 16.3 percent of the total in the first half of the 1970's. In contrast, the u.s. share of world nonfarm exports has dropped. from 20.5 percent to 11.2 percent over the same period. These figures suggest a significant improvement in the comparative advantage of American agriculture over the past quarter-century. In 1975, exports provided an outlet for about 100 million acres, or 30 percent of all cropland harvested in this country:"'" double the share devoted to that purpose in 1950. Again, in 1975, overseas markets took 55 percent of all u.s. production of wheat and flour, 50 percent of the soybeans, 40 percent of the cotton, and 25 percent of the feed grains. Over time, grains and oi/seeds (soybeans) have become the critical factor in this export performance, as their share of the total rose from 35 percent in 1950 to 73 percent in 1975. U.s. farmers - especially those in the Corn Belt and the Great Plains- thus have become very dependent on international markets. Cause of instability? But doesn't this heavy export dependence help push up prices in American supermarkets and create a general air of price instability? The University of Chicago's D. Gale Johnson, writing in Contemporary Economic Problems - 1977, wrote, "'Unfortunately, the agricultural and trade policies followed by the majority of the exporters and importers of agricultural products create substantial instability 3 in international prices, especially for grains." More than half of the world's grain is produced and consumed under regimes - the European Community, Japan, and the Soviet Union - that stabilize domestic prices for both producers and consumers by policies that equalize demand and supply at the predetermined prices. Johnson argues that such policies force other parts of the world, where domestic and international prices generally move in unison, to absorb the effects of variations in world demand and/ or supply. "'The United States is currently one of the few countries that does not have differentials, either fixed or variable, between domestic and international prices. Consequently it accepts the price variability that is imposed by policies of other countries." Despite that drawback, the world marketplace has become a key support of the u.s. farm economy, and hence of the U.s. economy generally. And most studies suggest a continuation of that trend, as world demand grows because of the growing size and affluence of other countries - and also (in many cases) because of their lagging farm productivity. According to Agriculture Department projections, world demand should ensure a return, 'by 1985, to the level of net farm income reached in the halcyon year of 1973. In that case, the "'Hell No! We Won't Grow!" signs that were so much in evidence during last winter's farm strike will seem like a quaint reminder of some long-distant past. William Burke u018u!4SE M.4Eln • uo8aJO • EpEAaN • o4 EPI !!EMEH • E!UJOJ!lE:) E U OZ! J'v''' E)jsEIV (G): J)<§ ·llle:::> 'O)SPUl! J:I J( (C)) 21( w\2?<tJ[ Ul! S (,;S"::: llWlEM ·ON OIVd :l9VlSOd ·s·n llVW SSV1315MB @AJ(@<§ @(QI JJ. BANKINGOATA- TWELfTHfEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and liabilities Large Commercial Banks Loans(gross,adjusted)and investments* Loans(gross,adjusted)- total Securityloans Commercial and industrial Realestate Consumer instalment U.s. Treasurysecurities Other securities Deposits(lesscash items)- total* Demand deposits(adjusted) U.s. Government deposits Time deposits- total* Statesand political subdivisions Savingsdeposits Other time deposits:j: LargenegotiableCD's Weekly Averages of Daily Figures Amount Outstanding 11/15178 Changefrom year ago Dollar Percent Change from 11/8178 122,063 98,711 1,983 28,655 34,275 18,265 8,640 14,712 115,697 31,948 432 81,369 6,705 31,624 40,221 19,311 + + - + + + + + + - + + - + + 905 558 356 237 262 133 254 93 89 75 54 130 8 69 328 18 + 15,680 + 15,919 - 2,370 + 4,193. + 7,633 + 4,132 153 86 + 14,391 + 2,378 90 + + 12,027 + 1,360 7 + + 10,216 + 7,118 - Week ended Week ended. 11/15178 11/8178 14.74 19.23 - 54.45 + _17.14 +. 28.65 + 29.24 - 1.74 - 0.58 + 14.21 8.04 + + 26.32 + 17.34 + 25.44 0.02 + + 34.05 + 58.38 + + Comparable year-ago period Member Bank Reserve Position Excess' Reserves(+)/Deficiency (-) Borrowings Net free(+ )/Net borrowed (-) 2 17 15 + 24 50 26 11 10 21 + 1,156 + 707 + 1,455 343 + 117 + + Federal Funds-Seven Large Banks Interbank Federalfund transactions Net purchases(+ )/Net sales( -) Transactions with U.s. security dealers Net loans (+)/Net borrowings (-) + 820 *lnc1udesitems not shown separately.:j:lndividuals, partnershipsand corporations. Editorial comments may be addressed to the editor (William Burke) or to the author •••• Free copies of this and other Federal Reserve 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) 544-2184.
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