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The nation's farm sector suffered through a severe drought and many other difficulties during 1974, and now, like the rest of the economy, it is in the grip of a major slow down. The series of calamities began early last spring when live stock feeders, after the lifting of price controls, began to unload burdensome supplies in an increas ingly depressed market. Then the drought took its toll in the Mid western farm belt, sharply reducing feed-grain and soybean crops. Finally, just a few months ago, foreign and domestic demand for U.S. farm products suddenly weakened, presaging in some peo ple's eyes a major cyclical down turn. The most striking thing about this development was its unexpec tedness, since the food-supply situation is still very tight and the fear of worldwide shortages remains unabated. Prices of farm commodities dropped for five consecutive months between November and March, bringing the index 19 per cent below the early 1974 peak— and many analysts expect that prices for the year as a whole will lag considerably below the 1974 average. This is good news to con sumers, suggesting as it does that food prices will not continue to rise 15 percent annually, as they did in each of the past two years. But for farmers, it means lower incomes and less profitable operations throughout 1975, as well as a fur DigitiZed for FR A SER ther erosion of the sharp income gains which they garnered during the 1972-73 period. Dimensions of the cycle Some observers see ominous parallels between the present situa tion and earlier cyclical downturns — exemplified by increasing market instability, slow production response, depressed price levels and low farm incomes. But there are also some unique elements in the present situation, such as a sig nificant decline in excess capacity and a continued tightness in the food-supply situation both here and overseas. Consequently, farm surpluses are not likely to build up to the levels of earlier years, and the present downturn may remain limited in terms of both duration and magnitude. For 1975 as a whole, cash farm receipts could decline about 3 per cent to $92 billion, with sharply lower prices more than offsetting moderate gains in output. This would represent the first decline in receipts since the 1966-67 period. Meanwhile, in view of the con tinued price-cost squeeze, net farm income could decline even more steeply than last year, falling perhaps 25 percent to about $20 billion. We may be entering the final phase of a four-year cycle in net farm income, similar to several other (albeit milder) cycles that have characterized the past decade. The present cycle began in mid- (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. 1972, with income escalating sharply until the spring of 1974. Following the current recession phase, a new upturn could develop by early 1976, perhaps initiated by a recovery in the now-dormant livestock sector. Plowing ahead Virtually all of the idled cropland that had earlier been held in reserve was put to the plow last year, and farmers are planning again for fullcapacity production in the new crop year. According to the March planting intentions report, total plantings may reach a postwar high of 335 million acres, including 1974-75 winter-wheat acreage. This contrasts strongly with the earlier expectation that farmers would withhold resources from produc tion this year. However, the increases will not be evenly dis tributed among crops; the gains should be concentrated in soybeans and wheat, while cotton acreage could drop precipitously. With adequate supplies available of fertilizer and other farm inputs, even though at sharply higher prices, a strong increase in total crop production is achievable under normal growing conditions. If actual plantings match intentions, the 1975 soybean crop could reach a record 1.6 billion bushels (up 19 percent over 1974), and the wheat crop could total a record 2.2 billion bushels (up 22 percent). In the case of corn, a return to a nor mal crop yield could boost output to more than 6.0 billion bushels (up 30 percent), in spite of a 3-percent cutback in planted acreage. Given a bumper crop of this magnitude and sluggish worldwide demand, a rebuilding of the nation's depleted grain stocks appears highly likely. Export shipments are expected to weaken because of the lagging pur chasing power of our foreign cus tomers and improved crop pros pects around the world. World production fell steeply in two of the past three years because of unfavorable weather, but many analysts are expecting considerably better weather— and larger crops — in the period ahead. With crop conditions improving abroad, U.S. farm exports may fall somewhat below the $22-billion total of 1974, largely because of a projected 20-percent decline in physical volume of shipments. Still, dollar volume should remain several times higher than anything reached before 1973. Upturn in livestock? Soaring output in the livestock sector— especially a large supply of beef—will worsen the meat oversupply problem and increase Digitized for FRA SER the financial pressures on pro ducers, who have already been squeezed by the high costs of feed and other inputs. But the supplydemand imbalance may disappear later in the year, partly because of an anticipated sharp cutback in hog and poultry production, but also because of a continued downward adjustment in cattle-feeding operations. In March, the inventory of hogs and pigs on farms was 17 percent below the year-earlier level. Hog slaughter has lagged behind the 1974 pace to date this year, and an even larger cutback is now anticipated because of a 21-percent decline in plans for spring farrowings. Poultry and egg output should also decline because of a recent 10-percent cutback in broiler raising and a decline in the number of laying hens on farms. The beef-cattle industry, beset by both rising costs and falling prices, must still deal with very high cattle inventories on the farm. On the supply side, the industry hopes to shorten the adjustment period required to work off this inventory by reducing average slaughter weight; on the demand side, it hopes to benefit from the higher prices of substitute products (pork and poultry) expected later this year. With any improvement in these respects, cattlemen should work out of their depressed condi tion of oversupply by early 1976. Expected declines in prices of feed grain and feeder cattle, along with Digitized for FRA SER lower borrowing costs, should help feeding operations and stimulate a cyclical turnaround in producers' finances. The farm sector as a whole is again beset with the problems of plenty after several years of dealing with the problems of scarcity. The result is seen in sharply declining com modity prices and a probable siz able downturn in farm income. To shore up this sagging industry, Congress passed a bill (now in conference committee) boosting 1975 support prices for feed grains, wheat, cotton, soybeans and milk, but the President threatened to veto the bill because of its ten dency to raise taxpayer and con sumer costs. This development is significant because it indicates the tendency for old legislative solu tions to be advanced as soon as the old problem of farm oversupply raises its head. In any event, the aims of policy should encompass not only the short-run benefits of income and price stability, but also the longer-range benefits of all out production, as a means of rebuilding our depleted grain stocks and ensuring adequate food supplies to needy nations. Dean Chen uojSujqseM • MEMEH . • uoSaJO • EpeAaN . oqepi EjUJ0p|E3 • EUOZUV • E>jSE|V 7 !|B 3 'o a s p u e ij ues ZSZ ON JLlWHid OlVd 3DV±SOd s n HVW SSV1D 1SHIJ ^iLn®nM^jnfdI®(gj ttpre® g ® ^ j BANKING DATA— TWELFTH FEDERAL RESERVE DISTRICT (D o llar amounts in m illions) Selected Assets and Liabilities Large Commercial Banks Am ount Outstanding 4 /2 /7 5 Change from 3 /26/75 Change from year ago D o llar Percent + + + + + 3,747 + 2,905 + 735 + 1,490 + 844 + 624 + 1,643 - 801 + 7,345 + 602 - 391 + 7,117 + 202 + 1,290 + 4,431 + 4,262 Loans (gross, adjusted) and investments* Loans (gross, adjusted)— total Security loans Com m ercial and industrial Real estate Consum er instalm ent U.S. Treasury securities O ther securities Deposits (less cash items)— total* Demand deposits (adjusted) U.S. Governm ent deposits Tim e deposits— total* States and political subdivisions Savings deposits O ther time deposits} Large negotiable CD 's 85,411 65,393 1,792 24,095 19,608 9,800 7,537 12,481 84,638 23,320 266 59,537 6,544 19,494 29,830 16,558 Weekly Averages of Daily Figures W eek ended 4 /2 /7 5 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 ( - ) + 70 0 70 405 228 353 67 — 61 + 6 + 91 + 86 + 466 + 617 — 104 - 439 86 + 215 — 507 — 641 W eek ended 3 /26/75 + 35 15 20 + 4.59 + 4.65 + 69.54 + 6.59 + 4.50 + 6.80 + 27.88 — 6.03 + 9.50 + 2.65 — 59.51 + 13.58 + 3.19 + 7.09 + 17.45 + 34.66 Com parable year-ago period - 40 119 78 + 1,770 + 1,740 + 2,134 + 1,081 + - 715 16 in c lu d e s items not shown separately, tln d iv id u als, 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 Digitized for f R A S E R Ph» " e <4 ,5 >397-1137'
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