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September 14, 1973 Staff dF life A U.S. Senator recently stood in front of a San Francisco bakery and told assembled newsmen that it was outrageous that the price of the city's world-famous sour-dough French bread had gone up from 51 to 59 cents a loaf. His remark was not especially newsworthy, except that it was coupled with a demand for an embargo on the export of U.S. wheat—an increasingly pop ular demand today among bakers, millers and exporters. Conditions obviously have changed in little over a year's time. In mid-1972, this country was offering cut-rate prices to move its extra stocks of wheat, but today it is hard-pressed to meet its own requirements and at the same time act as supplier for nearly one-half of the world's wheat trade. The worst pressures may have been reached about mid-August. At that time, the farm price of wheat jumped to $4.45 a bushel, almost double the July figure and triple the year-ago figure. This reflected the mid-August wheat-export report, which showed that the amount con tracted for shipment already equaled the Department of Agricul ture's projected total of export sup plies for the entire marketing year. (However, the figures may have been inflated by over-booking by some purchasers.) Prices generally have been lower since then, but there is no doubt that we are still witnessing a universal scramble for supplies in a world market which is afflicted by the lowest wheat inven tories of the past 20 years. At the retail level, the average price Digitized for F R A S E R of cereals and bakery products jumped at a 12.4-percent annual rate between January and July. This was less than one-half as rapid as the increases in the fruits-and-vegetables and meat-poultry-fish cate gories, but it contrasted with gains of 4.5 percent or less in prices of services and non-food commodi ties. More importantly, further sharp increases are now occurring on the heels of the recent upsurge in the farm price of wheat. Last year disastrous The reason for all this can be found in last year's disastrous grain situation—the first reduction in total world production in modern history. The disaster, unappreciated at the time by U.S. policymakers, was highlighted by the crop failure in the U.S.S.R., which normally produces one-fourth of the world's total wheat supply. This crop failure required the Soviet Union to import some 25 to 30 million tons of grains and oilseeds in the 1972-73 period, after being a small net exporter for many years. The 1972-73 marketing year in the U.S. opened with a very substantial carryover of wheat stocks from the preceding year—863 million bushels. In this situation, the De partment of Agriculture announced a new wheat program designed to reduce acreage by 5 million acres and production by 150 million bushels. However, the picture began to change dramatically soon thereafter, with the July 8th agree ment by the Soviet Union to pur chase $750 million worth of wheat (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. and other grains over a three-year period. In the 1972-73 period alone, the Soviets paid $566 million for 345 million bushels of U.S. wheat— about $1.64 a bushel. This history-making deal was fol lowed by a large Chinese order, then by large orders from other Asian countries. These orders came about partly because of a decline in the rice crop in India and Southeast Asia, which forced many communi ties to shift to wheat consumption instead. Then there was a supply problem in one of the major ex porting countries, Australia, which lost about one-fourth of its total crop to drought. The U.S. market meanwhile was beset by falling in ventories, clogged distribution sys tems, excessive demand stemming from the sharply devalued dollar, and in addition, intense speculative pressures. Next year hopeful Nonetheless, by this July the De partment of Agriculture was rela tively hopeful, forecasting a 10-per cent increase in the 1973-74 world wheat harvest to a record 335 mil lion tons. This forecast was based on a recovery of production in the Soviet Union and Australia and sub stantial output boosts in the U.S. and Canada, offset partly by de clines in Argentina and the EEC. U.S. production for the 1973-74 growing year was estimated this week at a record 1,727 million bushels. Both output and acreage (54 million acres) were forecast as up 12 percent over the comparable Digitizid for T R A S E R http://fraser.stlouisfed.org/ FedeTal Reserve Bank of St. Louis r year-ago figures. Winter-wheat output should increase 11 percent, and spring wheat should rise even more (19 percent), because of last January's suspension of acreage setaside requirements. U.S. domestic use is likely to be off slightly from last year's 796 million bushels. Less wheat may be used for feed, because of a reduction in the number of consuming animals and a possible switch away from this now very high-priced feed. Food usage, on the other hand, may increase slightly as consumers sub stitute wheat products for even higher-priced food, such as meat. U.S. exports in the 1973-74 mar keting year could exceed last year's unprecedented record of 1,185 mil lion bushels, despite the sharp drop expected in Soviet purchases. The tightness in world export supplies and crop uncertainties abroad have already led to a very substantial commitment of U.S. wheat for de livery in this new marketing year. Export bookings through late Au gust amounted to 1,300 million bushels, roughly equal to the amount predicted for the entire marketing year. Consequently, wheat "disappearance"— U.S. con sumption plus exports— should total 1,880 million bushels, well above the amount expected to be produced in the 1973-74 period. Thus, carryover by next July 1 should drop to a very low 298 million bushels, less than one-half of the average for the past decade. That assumes that output will be up to bumper-crop expectations and that there will be no further unex pected rise in foreign demand. Prices and supplies With supplies tight worldwide, a price upsurge has been practically inevitable. In mid-July the U.S. farm price of wheat was a dollar higher than a year ago, and by mid-August it was up two dollars more, to a peak $4.45 a bushel. In this tight world market, Australia, Argentina and the Common Market countries have all acted to halt further wheat exports, and Canada has been selling cautiously only to its tradi tional customers. Not surprisingly, Agriculture Secre tary Butz recently lifted all govern ment planting restrictions for next year, and offered “ target price" protection of $2.05 a bushel on 55 million planted acres for 1974-75. In addition, farmers are now free to plant additional acreage under the spur of record prices and with the secondary support of price-support loans. With this stimulus, total pro duction in the next marketing year might exceed 1,850 million bushels —even higher than this year's bumper-crop projection of 1,727 million bushels. The worldwide crisis could be over come with a succession of bumper crops, especially with a recovery of production in the Soviet Union, the world's largest producer. Some skeptics even envision another boom-and-bust cycle, leading to the type of oversupply situation that developed in 1967. On the other market henceforth Federal R eserve Bank of St. Louis will be lacking two features which helped maintain an "ever normal granary" for several decades—that is, substantial reserves in the major exporting nations (the U.S., Can ada, Australia, and Argentina) and substantial amounts of crop land idled under U.S. farm programs. People + affluence = demand Meanwhile, demand pressures should continue because of growing population and growing affluence worldwide. Population, growing inexorably by 2 percent annually, has created an ever growing demand for wheat and other cereals, although the neo Malthusian specter has been held off in recent decades by the Green Revolution, with its emphasis on new varieties of wheat and im proved production techniques. In the past two decades, world wheat production has risen 80 percent, as against a 52-percent increase in population. The effect of increasing affluence can be seen from the relative con sumption of wheat and other cer eals, which dominate the world food economy. In poor countries today, per capita grain consumption averages about 400 pounds per year; in North America, per capita utilization approaches one ton per year, with over 90 percent of this consumed not directly as cereals but indirectly in the form of meat, milk and eggs. Should the poorer countries ever approach the North American consumption standard, the demand for wheat and other grains could rise astronomically. William Burke uo*8uiqse/v\ • qejfj • uoSteJO ♦epeAaiM • oqepi neMBH « eiujojijeo • euozuy • b > |v jsb ©>II5 T <J TO S § >O aI 5? * F^ froa ®A<S®§®^[ |® S® p® J BANKING DATA— TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks Amount Outstanding 8/29/73 Change from 8/22/73 Change from year ago Dollar Percent Loans adjusted and investments * 74409 + 168 + 10756 + 16.90 Loans adjusted— total* 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— total0 Savings Other time I.P.C. State and political subdivisions (Large negotiable CD's) 57587 1287 20250 17151 8583 5043 11779 72109 21144 382 49530 17459 23333 5991 12338 + 98 157 133 112 27 17 53 192 226 79 130 107 252 16 241 + 10957 + 13 + 3579 + 2979 + 1326 — 902 + 701 + 9325 + 1313 — 43 + 8064 — 741 + 7112 + 831 + 6607 + 23.50 + 1.02 + 21.47 + 21.02 + 18.27 — 15.17 + 6.33 + 14.85 + 6.62 + 10.12 + 19.45 — 4.07 + 43.84 + 16.10 + 115.29 Weekly Averages of Daily Figures 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 ( - ) - + + + + + — — + + Week ended 8/29/73 Week ended 8/22/73 56 295 - 238 11 126 -115 -527 0 124 142 Comparable year-ago period - 8 25 33 - 1025 - 5 Includes items not shown separately. Information on this and other publications can be obtained by calling or writing the Digitized for F^ A S P S strative Services Department. Federal Reserve Bank of San Francisco, P.O. Box 7702, http://fraser.stIOuiSFediHrig/:o, California 94120. Phone (415) 397-1137. Federal Reserve Bank of St. Louis
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