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FEDERAL RESERVE BANK OF RICHMOND MONTHLY REVIEW Using T he F utures M arkets T o H ed g e R ecent Changes in Fifth D istrict S M S A ’ s T he H ousehold W o r k e r Volume 59 Number 8 AUGUST 1973 USING THE FUTURES MARKET TO HEDGE Some Basic Concepts In the U nited States organized trading in com m odity futures began in Chicago m ore than years ago. 100 T od ay there are 20 licensed exchanges housing, and processing activities, and the lenders who finance them, with the basic principles under lying the operation o f the futures market. in the United States and an even larger num ber abroad. T here has been an increasing aware Major Commodity Exchanges ness of the futures markets on the part of busi nessmen and the general public in recent years. This T he 124-year-old C hicago B oard of T rade is by far interest has been reflected in substantial year-toyear increases in the number and value of transac tions on the nation’s com m odity exchanges. T rading activity in 1972 was m ore than three times the level 10 years earlier. A gricultural products dominate the long list of com m odities traded, but there is also an active market for such com m odities as silver, p ro pane gas, and copper. In 1972 soybeans were the most actively traded com m odity, follow ed by frozen T h e r e are fiv e principal com m odity exchanges in the U nited States. the largest, accounting fo r m ore than one-half o f total trading. It lists contracts in corn, wheat, oats, soybeans, soybean oil, soybean meal, plyw ood, and silver. T he C hicago M ercantile E xchange is the second largest exchange. H andling contracts in live cattle, live hogs, frozen pork bellies, lumber, grain sorghum , and Idaho potatoes, this exchange accounts for about 25 percent o f total trading. T he N ew Y o r k Cotton E xchange lists contracts pork bellies. in frozen orange juice, liquefied propane gas, cotton, T he recent grow in g interest in the futures markets is likely to accelerate, particularly on the part of agribusiness firms. These firm s are relying increas ingly on borrow ed capital, and by using the futures and w ool. Futures contracts in platinum, boneless beef, M aine potatoes, and silver coins are traded on the N ew Y o rk M ercantile E xchange. T h e C om m odity E xchange in N ew Y o rk provides a m arket markets to hedge, both borrow ers and lenders can place for copper and silver. protect themselves against risks of com m odity price changes. M oreover, the benefits o f hedging are likely to becom e m ore obvious to those w h o deal in agricultural com m odities as Government stocks de The Futures Contract T h e p h y sica l c o m m o d ity itself is not bought and sold on the futures market. Instead, trading is in contracts for the delivery o f a cline. In recent months Government grain stocks have dwindled to almost nothing. A s long as G overn ment stocks are low or nonexistent, prices of grains and other com m odities likely will be much m ore volatile as supply-demand conditions change. C onse quently, managers will probably turn to the com m odity futures markets m ore frequently as they seek to hedge their crops and inventories against drastic price changes. A long history and grow in g importance notw ith standardized quantity and quality o f a com m odity at some future date at a designated price. Suppose, for example, that on A pril 11 an individual decides to buy a contract of Decem ber corn that is selling at $1.52 per bushel. T he initial step in implementing the transaction is to open an account with a co m m odity broker w ho is represented on the exchange where corn is traded. T he individual then instructs the broker to buy a contract o f Decem ber corn. By purchasing the contract he enters into an agreement standing, knowledge o f the institution o f futures that calls for him to accept delivery and make pay trading is not widespread, even am ong businessmen. ment o f $1.52 per bushel fo r corn in Decem ber. This article is designed to acquaint businessmen who might use futures markets in their production, w are this case, where the trader’ s first transaction is a 2 In contract to buy, he is said to be long the futures. The M ONTHLY REVIEW, AUGUST 1973 individual w ho sells the contract agrees to deliver corn in Decem ber for a price of $1.52 per bushel. W h ere the trader’s first transaction is a contract to sell, he is said to be short the futures. T he fo llo w ing items are specified in the co n tra ct: the com modity, price per unit, quantity, quality or grade, delivery date, place o f delivery, and terms o f pay ment. In the case of grain, a standard contract is months for corn are July, September, Decem ber, 5,000 bushels, and the place of delivery is a public futures. warehouse designated by the com m odity exchange. livered on only 2 to 3 percent o f the futures contracts. In addition to the contract terms, additional regula Because of the additional costs of making delivery, M arch, and M ay. A lthough some contracts are for periods other than a year, m ost extend forw ard up to one y e a r; and when a contract matures it is re placed by a contract for the same month of the fo l low ing year. A futures contract may be settled either by delivery or by making an opposite or offsetting transaction in In practice, com m odities are actually de tions are usually im posed.1 it is generally m ore profitable for the seller to offset T he com m odity exchanges establish several de livery months for each com m odity. Delivery months the futures contract before maturity and deliver his are generally tailored to the seasonality o f prod u c tion and to the needs of the buyers and sellers of the particular com m odity in question. D elivery 1 For details of these regulations see Thomas A . Hieronymus, Eco nomics of Futures Trading for Commercial and Personal Profit (New York: Commodity Research Bureau, Inc., 1971), p. 34. product in the local market. Contracts in the futures market are bought and sold on margin. M argin funds, deposited with a broker by both buyer and seller, usually range from 5 to 10 percent o f the value of the contract and serve as perform ance bond to assure settlement in the event of unfavorable price changes. A FUTURES GLOSSARY Basis The difference between the price of a futures contract an d the price of the sam e or sim ilar com m odity in cash transactions. Delivery Month The calendar month during which a futures contract matures. Futures Contract A n agreem ent set forth in with his broker to insure perform ance on contract commitments. Open Interest The total of unfilled or un satisfied futures contracts on either side of the market. Regulated Commodities Those regulated by standardized terms under rules of an o r g a the C om m odity Exchange Authority (CEA) nized com m odity exchange to buy and re under specific provisions of the Com m odity ceive, or to sell an d deliver, a com m odity Exchange Act. at a future date. sa fe g u a rd in g futures trad in g a g a in st price Hedging Using the futures m arket to reduce exposure to price risk an d to help assure profits on business activities. Long Position O ne in which an in d ivid u al's his fo rw a rd sales; also, the bu yin g side of an open futures contract. Margin Source: m anipu lation an d abu sive trad in g practices. Short Position fo rw a rd inventory plus fo rw a rd purchases exceeds O ne in which an in d ivid ual's sales exceed his inventory plus fo rw ard purchases; also, the selling side of an open futures contract. Volume of Trading sales The am ount deposited by a trader The C E A is concerned with of a The total purchases or com m odity future during a specified period. U. S. Department of Agriculture, The Farm Index, July 1973, p. 14. FEDERAL RESERVE BA N K OF RIC H M O N D 3 Futures Quotations T h e fin a n cia l p a g e o f m ost large newspapers usually includes the opening, high, low , and closing price of contracts traded the pre vious day. These quotations reflect the prices de F o r exam ple, if an individual has an inventory o f 50,000 bushels of soybeans, he is long cash soybeans. If the price of soybeans goes up he gains, if it goes dow n he loses. H e can offset the risk o f a price termined by the actions o f buyers and sellers rep decline by selling 50,000 bushels o f soybeans on resented on the floor o f the com m odity exchange. Table I shows that the futures trading on A p ril 11, the futures market. H e is n ow hedged because he 1973 for M arch 1974 soybeans resulted in an opening is short futures and long cash soybeans. A s lon g as cash and futures prices m ove up and dow n together, contract of $4.11 per bushel, while transactions made what he makes on one position he will lose on the at the close of the market ranged from $4.15 to $4.16 other. a bushel. A n individual w ho buys a M arch con tract at $4.15 agrees to accept delivery o f 5,000 changes. W h en the cash soybeans are sold, the futures contracts are bought and the transaction is bushels of soybeans at this price at expiration o f the completed. T h e owner (h e d g e r) shifted the price risk of ownership to the purchaser o f the futures contract in M arch 1974. If he decides not to fu l fill this contract by accepting delivery of the soy beans, he may sell a M arch futures contract p rior to the maturity date fo r the contract. Since the terms of the tw o contracts offset each other, both Consequently, he is unaffected by price contracts. T he person w ho assumes a position o p posite a hedge position is generally a speculator w ho hopes to profit from a price change he has c o r rectly anticipated. Speculators are willing to accept the inherent risks because o f the opportunities fo r contracts are cancelled. quick and substantial profits. H edging A n y o n e w h o o w n s an in v e n to r y o f a com m odity is faced with a speculative risk because the value of the inventory may fall. Businessmen w ho need to purchase com m odities for use in their business are faced with the risk that prices may rise. by T h e futures market provides a means w here the businessman can speculators by hedging. transfer risks Because they reflect the cost of storage, insurance, and in terest for the com m odity being carried for future delivery, futures prices are generally higher than cash prices. A t any given time, however, local sup- to ply-dem and conditions may be such as to cause the Indeed, this is the p ri cash price to be higher than the futures price. N o r mally, cash and futures prices tend to m ove up and mary function o f the futures market. the H ed gin g is possible because of the relationship between cash prices and futures prices. A hedge is established by taking a position in futures equal to dow n together. and opposite an existing or anticipated cash position. cancelled by the purchase of an opposite contract, the A lthough most futures contracts are Table 1 SOYBEAN FUTURES PRICES, WEDNESDAY, APRIL 11, 1973 M onth Close Change Open High Low M ay 609 619 599 617-618 + 61 /4-71 /4 July 570 581 y2 564 579% A u gu st 538 553 537 Vx 551-551 Vi + 6% + 5V2-6 Septem ber N ovem ber 465 409 447 464% 412% 407 475 41214 + l 3 8 - l% / 410 411 4 13 y2 416V2 408 4 1 3 14 - 4 1 3 1 / /2 + l!/ 2 -l3 /4 M arch 415-416 M ay 413 4 I 6 V2 410% 413 + 1% - 2 7 /s + 2 1973 + 3!/3 1974 Jan u ary 4 M ONTHLY REVIEW, AUGUST 1973 416% fact that delivery can and does take place in some cases forces the tw o prices to m ove up and down together. Hedging Arithmetic T h e a rith m etic o f a h ed g e is illustrated by the follow in g examples. Suppose that on Decem ber 1 a grain elevator operator has in storage 5,000 bushels of soybeans valued at $3.60 per bushel. T o protect against a price decline he sells a M ay futures contract for $3.80 per bushel. In February he will simultaneously sell soybeans and buy a M ay futures contract. Assum e that by February when he sells the cash soybeans and buys the futures contract both cash and futures prices have declined 10 cents per bushel. CASH MARKET FUTURES MARKET December 1 December 1 Sell 5,000 bu. M a y futures @ $ 3 .8 0 Cash price @ $ 3 .6 0 per bu. February In this exam ple February 1 Sell 5,000 bu. soybeans @ $ 3 .5 0 Loss on cash grain = 10^ per bu. Net gain 1 Buy 5,000 bu. M a y futures @ $ 3 .7 0 G ain on per bu. futures = 10^ cash market was exactly offset by the gain in the futures market, and in the second exam ple the gain in the cash market was exactly offset by the loss in the futures market. T his situation rarely occurs in practice, however. W h ile cash and futures prices usually vary together in response to fluctuating market conditions, they generally do not m ove in lock step fashion. T he difference between the futures price on any exchange and the local cash price is called the basis. Basis varies am ong geographic locations and changes from month to month in each location, normally narrowing as the delivery month approaches. The basis reflects prim arily the cost of transportation and storage. A t any specific time, for exam ple, the basis in a local area will approxim ately equal the cost of delivering the grain to the city in which the exchange is located plus the cost of storing it until the delivery month. T he basis is normally highest at harvesttime since cash prices are depressed rela tive to futures. Because the basis reflects storage costs, it usually narrows as the month o f delivery approaches. In the case o f grains cash prices at most locations around the country are usually below the Chicago or loss = 0 the elevator operator lost 10 cents per bushel when he sold the cash soybeans and gained 10 cents per bushel when he bought back the futures contract. T he loss on the cash price was exactly offset by the futures price. T he exact amount of this difference — the basis— varies from location to location and from month to month. F or example, if soybeans in Richm ond, V irginia, during N ovem ber typically sell for 18 cents per bushel below the July futures in Chicago, the basis for N ovem ber is 18 cents. In gain on the futures price.2 It should be pointed out that while the hedge protects against a loss it also A pril the basis might be 6 cents. precludes a gain from a price increase. varies from month to month, it usually follow s a A s an il Even though basis lustration assume that in the previous example the fairly consistent and distinct pattern. price of soybeans had risen. basis in A pril of one year is likely to be about the same as it was in A p ril of other years. CASH MARKET FUTURES MARKET Cash price @ $ 3 .6 0 per bu. Sell 5,000 bu. M a y futures @ $ 3 .8 0 February 1 Sell 5,000 bu. corn @ $ 3 .7 0 G ain on cash grain = 10fr per bu. i Net gain 1 B eca u se the basis n o rm a lly the contract, an elevator operator can store grain and earn a profit on it and protect himself against price level changes by hedging. Buy 5,000 bu. M a y futures @ $ 3 .9 0 Loss on per bu. The Storage Hedge That is, the narrows from harvesttime to the delivery month of December 1 December 1 February In this exam ple had futures = 1 0 ^ purchases 5,000 bushels of soybeans for $4.30 per bushel. or loss = 0 A ssum e that at the time of harvest in O ctober a local elevator operator H e could immediately resell the soybeans at a price high enough to cover handling costs, in he not hedged, the elevator operator w ould have cluding a profit. But this w ould leave him with idle storage space on which he w ould like to earn a' gained an extra 10 cents per bushel. In these tw o examples, the hedge worked per fectly, that is, in the first example the loss in the return. Given the price he paid for the soybeans and the cost of insurance, taxes, and depreciation, he calculates that he will need to sell in M ay at a net 2 In these transactions the cost of the hedge is ignored for simplicity of presentation. If it were included the hedger would have lost an amount equal to $30.00 per contract. local price of $4.40 per bushel. H e thus establishes $4.40 as his price objective. FEDERAL RESERVE BA N K OF R IC H M O N D 5 F rom the historic records of basis he determines that the local price of soybeans is typically 18 cents per bushel below the July futures at harvest and that this basis usually narrows to 8 cents in M ay. W h ile plus the futures profit of 18 cents per bushel w ould have resulted in a net price of $4.38— 2 cents short of his price objective at the time he hedged. A lthough there is some risk in estimating the basis, it is less this basis pattern is not certain, it is considerably m ore certain than what the actual price of soybeans risky than estimating changes in the price level. will be in M ay. Checking prices he finds that the usual 18 cents harvesttime differential does in fact exist and that the July futures is selling at $4.48 per bushel. If basis follow s the normal pattern and narrows to 8 cents in M ay the futures price of $4.48 should re sult in a net local price of $4.40 in M ay. H is price objective met, he hedges by selling one contract (5,000 bu .) of July soybeans. Assum e that between O ctober and M ay the local price of soybeans drops from $4.30 to $4.20. A n unhedged storage of soy beans w ould have resulted in a loss of 10 cents per bushel plus the cost of storage. If in actuality the M ay basis is 8 cents, the Chicago July futures price is $4.28. Selling his soybeans for the local price o f $4.20 results in a loss o f 10 cents per bushel in the cash market. Establishing a Price in Advance futures market. F or example, assume that in July the futures price fo r N ovem ber soybeans is $4.25 per bushel. K n ow in g that the typical N ovem ber basis in his area is around 16 cents, the farm er realizes that the futures price of $4.25 translates into a local price of $4.09. H e decides that he w ould be satisfied to sell his anticipated production o f 5,000 bushels at this price.3 A ccordin gly, he sells soy beans fo r N ovem ber delivery. In N ovem ber, when he is ready to deliver his so y beans, he finds that the local price of soybeans is $3.89. A s anticipated the basis is 16 cents— meaning that the Chicago futures price is $4.05. beans O ffsetting his futures market position by T he fo l low ing is a summary o f his transactions. CASH MARKET locally and futures contract. simultaneously October Buys 5,000 bu. @ $ 4 .3 0 Sells 5,000 bu. Sells 5,000 bu. soybeans @ $ 3 .8 9 @ $ 4 .4 8 May May Sells 5,000 bu. @ $ 4 .2 0 Loss 10$ per bu. his July July Novem ber October back FUTURES MARKET Anticipated crop 5,000 bu. (expected price @ $ 4 .0 9 per bu.) FUTURES MARKET H e sells his buys T h e cash price of $3.89, plus the CASH MARKET buying a July futures contract for $4.28 per bushel results in a profit of 20 cents per bushel. A fa rm er m a y establish the price o f a g row in g crop by using the Sells 5,000 bu. Novem ber soybeans @ $ 4 .2 5 Novem ber Buys 5,000 bu. Novem ber soybeans @ $ 4 .0 5 Futures profit 20$ per bu. 20 cents per bushel profit on the futures transaction, yields a total price of $4.09 for his bean crop. Buys 5,000 bu. @ $ 4 .2 8 Profit 20$ per bu. T he M ay cash price of $4.20 per bushel plus the 20 cents per bushel profit on the hedge results in a net price of $4.40— his price objective. H edging allowed him to establish a storage return and simul taneously protect himself against a price decline. In this hypothetical exam ple the basis movement T he foregoin g exam ple illustrates h ow a farm er can use the futures market to establish a price for his g row in g crop. Farm ers can also use the futures m arket: (a ) to earn a payment for holding a crop in storage, ( b ) to establish the cost o f feed to be purchased at a future date, and ( c ) to speculate on a price increase without storing the crop. was exactly as expected— from 18 cents in O ctober to 8 cents in May. T h e hedger will seldom be able to predict exact movements in basis, however. In actuality, when a hedging position is to be closed Forward Contracting under cash contract. M a n y cr o p s are p r o d u ce d That is, at some time prior to the actual delivery of the com m odity a producer by an offsetting futures transaction, there is a risk enters a contract with a local processor or marketing that the relationship between cash price and futures firm to deliver the com m odity at a specified time for price may be different than expected. T his un certainty is referred to as basis risk, and its existence a specified price. makes hedging an im perfect method o f price p ro delivery and acceptance o f the actual com m odity are tection. expected. F or instance, in the example, if the basis Contrary to the futures market, in which m ost contracts are cancelled, in contracting, F o r example, a farm er can sell corn in had narrow ed to only 10 cents by M ay, the hedger would have realized an 18 cents rather than a 20 cents profit per bushel. Thus, the cash price o f $4.20 Digitized 6 FRASER for 3 Actually a farmer would probably not hedge all of his anticipated production. The amount hedged will depend on a number of factors such as the amount of risk he is willing to accept and his specu lative skills. M ONTHLY REVIEW, AUGUST 1973 O ctober for delivery in January or M arch. A knowledge of the futures market and the concept of basis can be valuable to a farm er w ho intends to sell his crop under forw ard contract. B y checking the futures price for the month in which he plans to deliver his com m odity to the forw ard buyer, and subtracting typical basis for that month, he can tell if he is being offered a reasonable price for his com m odity. A though the specific exam ples given in this article relate to grain producers and handlers, other busi nessmen also use the futures markets. Livestock feeders can hedge and lock in an acceptable selling price in advance. Similarly, processors can establish in advance the selling price of finished products or the buying price of raw materials. Hedging and Credit In a d d ition to e n a b lin g a mostly in the form o f debt. Consequently, the sta bility of returns from com m odities has becom e in creasingly important to the b orrow er and the lender. Because o f these factors, transactions in the futures markets are likely to assume a g row in g im portance in the daily operations of many business enterprises. C o n clu sio n s A fu tu res m ark et p ro v id e s a m e ch a nism whereby traders can establish now the price of products they intend to buy or sell in the future and where speculators can attempt to profit from com m odity price fluctuations. In addition to p ro viding a method of protection against price level changes, hedging makes credit m ore accessible. Banks generally will lend more w illingly and in rela tively larger amounts to a producer or ow ner w ho hedges. W h ile the mechanics and the arithmetic of businessman to protect himself against price changes, a hedge are fairly easy to understand, successful hedging is not a simple matter. Detailed study o f hedging frequently facilitates credit acquisition. In the markets and a broad knowledge of com m odities, the case of grains, lenders generally will advance transportation costs, and general econom ic conditions are necessary to be a successful hedger. This article credit m ore readily and in larger amounts against a hedged inventory than against one not hedged. Ordinary bank financing is readily available for the was designed to explain only the basic principles of inventories, and the futures market and hedging. F o r the reader wanting m ore detail, several references are listed. lenders will frequently lend up to 90 percent o f the Thom as E . Snider purchase and storage of hedged value o f a hedged com m odity as opposed to 60 to 70 percent of an unhedged one. the collateral. It is not hard to understand w hy lenders will lend m ore against a hedged com m odity since a com m odity protected against erratic and sometimes rapid price changes provides a relatively safer collateral. T he grow in g com plexity o f the business environ ment along with the increased size o f agribusiness firms has increased the reliance on outside capital, REFERENCES In a loan against a hedged com m odity the warehouse receipts serve as Board of Trade of the City of Chicago. Introduction to Hedging. Chicago, Illinois, 1972. Richard G. Hedging Potential in Grain Storage and Livestock Feeding. Agricultural Eco Heifner, nomic Report No. 238. Washington, D. C .: Department of Agriculture, January 1973. U. S. Hieronymus, Thomas A. Economics o f Futures Trading fo r Commercial and Personal Profit, Commodity Re search Bureau Incorporated, New York, 1971. The Continental Bank and Trust Company. Borrowers Hedge. Chicago, Illinois. FEDERAL RESERVE BA N K OF R IC H M O N D Helping 7 RECENT CHANGES IN FIFTH DISTRICT SMSA's A ccord in g to the most recent listing of the Standard M etropolitan Statistical A reas released in A pril 1973 by the O ffice of Management and Budget, there are now 267 S M S A ’s in the United States and P uerto R ico. Tw enty-three of these are located wholly or partially in the Fifth District. T w o areas, Burlington, N orth Carolina and K ingsport-B ristol, Tennessee-Virginia, have been designated as new Standard M etropolitan Statistical A reas in the Fifth District since the last revision in N ovem ber 1972. T hree new areas were form ed by com bining existing areas— Charlotte-Gastonia, N orth C arolina; Raleigh Durham, N orth C arolina; and Greenville-Spartanburg, South Carolina. These combinations resulted from a g row in g social and econom ic integration of those areas. Thirteen areas were redefined, and five areas remained the same. T he concept o f the Standard M etropolitan Sta tistical A rea was devised to present statistical data on a standard geographical basis for purposes of APRIL 1973 SMSA'S: 1. 2. DEFINITIONS AND BOUNDARY CHANGES SINCE 1950 BALTIMORE, MD. Baltimore City; Counties: Anne Arundel, Baltimore, C a r roll (added June 1959), Harford (added March 1967), H ow ard (added June 1959). 14. B U RLING TO N, N. C. (New area, April 1973). Alam ance County. 15. C H AR LO TT E-G ASTO N IA , N. C. (New area, April 1973).h Counties: Gaston, Mecklenburg, Union. W A S H IN G T O N , D. C.-MD.-VA. District of Columbia. M arylan d Counties: Charles (added April 1973), Montgom ery, Prince Georges. Virginia: Cities: Alexandria, Fairfax,a Falls Church; Counties: Arlington, Fairfax, Loudoun (added March 1967), Prince W illiam (added March 1967). 16. FAYETTEVILLE, N. C. (New area, February 1965). Cum berland County. 17. G R E E N SB O R O -W IN S T O N -SA L E M -H IG H POINT, N. C.» Counties: D avidson (added April 1973), Forsyth, G u il ford, Randolph (added M arch 1967), Stokes (added April 1973), Yadkin (added March 1967). 18. R ALEIG H -DU RH A M , N. C. (New area, April 1973).i Counties: Durham, O range, W ake. 19. W IL M IN G T O N , N. C. (New area, July 1965). Counties: Brunswick, N ew Hanover. 20. AUGUSTA, 3. K IN G SPO RT-BRISTO L, TENN.-VA. (New area, April 1973). Tennessee Counties: Hawkins, Sullivan. Virginia: City: Bristol; Counties: Scott, W ashington. 4. LYNCH BU RG , VA . (New area, M a y 1959). Lynchburg City; Counties: Amherst, A ppom attox (added April 1973), Campbell. NEW PO RT N E W S-H A M P T O N , V A .b (New area, October 1952). Cities: Hampton, N ew port News, W illiam sburg (added April 1973); Counties: Gloucester (added April 1973), James City (added April 1973), York (added M a y 1959). 5. 6. 7. N O R F O L K -V IR G IN IA BEACH -PO RTSM O UTH, V A .-N . C.c Virginia: Cities: Chesapeake,*1 Norfolk, Portsmouth, V ir ginia Beach.e North Carolina: Currituck County (added April 1973). PETERSBU RG -CO LO N IAL HEIGHTS-HOPEW ELL, VA. (N ew area, February 1971 ).f Cities: Colonial Heights, Hopewell, Petersburg; Counties: Dinwiddie, Prince George. 8. R IC H M O N D , VA. Richmond City; Counties: Charles City (added April 1973), Chesterfield, Goochland (added April 1973), H anover (added October 1963), Henrico, Powhatan (added April 1973). 9. R O A N O K E , VA. Cities: Roanoke, Salem;S Counties: Botetourt (added April 1973), C raig (added April 1973), Roanoke. 10. 11. 12. 13. econom ic analysis. In 1949, the standard definitions were first issued as “ Standard M etropolitan A reas” to replace four different sets of definitions then in use for various Federal statistical series. T hey were “ metropolitan districts,” “ metropolitan counties,” “ industrial areas,” and “ labor market areas.” Each o f these series contained a slightly different territory, m aking it impossible to relate the statistics on popula tion, housing, industry, trade, employment, and other areas of econom ic analysis to a particular geographic area. B y using standard definitions, com parable stastisties could be generated by Federal agencies as well as by state and local governm ents and private statistical agencies. T he term “ standard metropolitan area” was changed to “ standard m etropolitan sta tistical area” in 1959 in order to describe m ore a c curately the objective for defining the areas. T hey are defined and their titles established by the O ffice of Management and Budget with the advice o f the Federal Committee on Standard M etropolitan Sta- CH ARLESTO N , W. VA. Counties: Kanaw ha, (Fayette deleted June nam (added April 1973). 1959), Put H U N T IN G T O N -A S H LAND, W. V A .-KY.-O H IO W est Virginia Counties: Cabell, W ayne. Kentucky Counties: Boyd, Greenup (added April 1973). Ohio: Lawrence County. PARK ERSBU RG -M ARIETTA, W. V A .-O H IO (New area, N o vember 1971). W est Virginia Counties: W irt (added April 1973), W ood. Ohio: W ashington County. ASHEVILLE, N. C. Counties: Buncombe, M adison (added April 1973). 21. 22. 23. G A .-S. C. Georgia: Counties: Colum bia (added April 1973), Rich mond. South Carolina: Aiken County. CHARLESTO N, S. C. Counties: Berkeley (added October 1963), Charleston, Dorchester (added April 1973). C O LU M B IA , S. C. Counties: Lexington (added December 1958), Richland. G REEN VILLE-SPA R TA N BURG, S. C. (New area, April 1973).k Counties: Greenville, Pickens, Spartanburg. a Became an independent city and separated from Fairfax County, October 1963. b Formerly Hampton-Newport News-Warwick. Title changed when Warwick consolidated with Newport News, July 1958. c Title changed from Norfolk-Portsmouth, Va. to Norfolk-Virginia Beach-Portsmouth, Va., November 1971 and to the above listing, April 1973. d Created by consolidation of South Norfolk City and Norfolk County, October 1963. e Became an independent city and separated from Princess Anne County, January 1952. Princess Anne County consolidated with Virginia Beach City, October 1963. f Title changed November 1971 from Petersburg-Colonial Heights, Va. g Became an independent city and separated from Roanoke County, March 1968. h Formerly Charlotte and Gastonia areas. Combined and title changed, April 1973. Gastonia was designated a new area, No vember 1971. Union County added to Charlotte area, October 1 9 6 3 . i Formerly Winston-Salem and Greensboro-High Point areas. Com bined, title changed, and Randolph and Yadkin Counties added, March 1967. j Formerly Raleigh and Durham areas. Combined and title changed, April 1973. Orange County added to Durham area, March 1967. k Formerly Greenville and Spartanburg areas. Combined and title changed, April 1973. Spartanburg was designated a new area, November 1971. Pickens County added to Greenville area, Oc tober 1963. tistical A reas, which is com posed of representatives of the m ajor statistical agencies of the Federal G o v ernment. A n S M S A always includes at least one central city and its surrounding county or counties. The area may cross state boundaries if the econom ic and social relationships between the central and con tiguous counties meet specified criteria of m etro politan character and integration. T he m ajority of Standard M etropolitan Statistical A reas consist of one city with a population of 50,000 or more. A contiguous county is included in the area if at least 75 percent of the resident labor force of the county is engaged in nonagricultural pursuits and at least 30 percent of the employed workers living in the county w ork in the central county or counties of the area. T he urban character o f a county is determined by the fulfillment o f tw o of the follow ing crite ria : ( 1 ) at least 25 percent o f the population is urban, ( 2 ) the county had an increase of at least 15 percent in total population during the period covered by the tw o m ost recent Censuses o f Population, and ( 3 ) the county has a population density of at least 50 persons per square mile. One o f the basic criteria for measuring econom ic integra tion is the relationship o f place of residence to place o f w ork. T he present definition of each S M S A in the Fifth Federal Reserve District and the boundary changes made since 1950 in each area are given in the ac com panying table. T he num bering system on the definitional table is used on the map showing the present boundaries. Population data shown on this map were derived from the 1970 Census of Population. Patricia G. R hod es LEGEND POPULATION (APRIL 1, 1970) ■ ■ Over 1,000,000 §§§§§§ j 200,001-400,000 I Source: 400,001 -1,000,000 I Under 200,000 U. S. Department of Commerce, Bureau of the Census, 1970 Census of Population, Series PC(1)-A1 U. S. Summary. THE HOUSEHOLD WORKER A n Endangered Species T he service sector o f the econom y has exhibited impressive grow th over the past decade. In 1972, pacities as maids, butlers, babysitters, and chauffeurs, services accounted for almost 42 percent o f Gross National P roduct, com pared with 37 percent in 1960. all occupational groups. A lm ost half of all house hold w orkers were em ployed in the South, and the Em ploym ent in the service sector— which encom passes such areas as cleaning, food, health, personal, highest ratio o f household workers to population and protective services— increased by over 36 p er cent between 1960 and 1972. Grow th am ong the national average ratio of household workers to p op u lation was 5.5 to one thousand. M ost areas in the several com ponent activities of this important sector Fifth District, with the exception o f M aryland and of the econom y was by no means uniform , however. W est V irginia, had substantially higher-than-average ratios. T he D istrict’ s share of total household In particular, the subsector denoted as private house hold services declined sharply between 1960 and 1972, with the number of persons em ployed in this area decreasing by over 27 percent. while over 80 million individuals were em ployed in was also found in the southern states. In 1970, the workers has increased slightly over time. In 1920, about 11 percent o f all household workers w ere em ployed in the Fifth D istrict; in 1970, about 14 per In 1972, approxim ately 1.5 million people were cent. T he most dramatic historical changes, however, em ployed in private household services in such ca have been on a national rather than a regional level. 10 MONTHLY REVIEW, AUGUST 1973 T he household service sector is a relatively small one in the United States econom y today, and its recent decline suggests several important underlying social and econom ic changes. Supply: Characteristics of Household W orkers W om en have increasingly predominated in house hold w ork. In 1972, wom en constituted over 98 per cent of the total, as com pared with approxim ately 80 percent in 1920. N egroes accounted for slightly over half of all household workers in 1970. T he average household w orker is older than other w ork ers. In 1960, the median age of household workers was 46, com pared with 40 years for all workers. In 1965, the median age had increased to 52 years versus 37 years for all w orkers.1 The progressive increase in the average age o f household w orkers seems to be part of the trend toward a diminishing pool o f domestic employees. A s few er younger people enter dom estic service, the remaining older workers raise the average age. Lack of extended education is another key characteristic o f household employees. In 1972, the median years o f school completed by household workers was 9.9, tw o and a half years less than the average for all occupational groups. Y oun ger, m ore highly educated individuals ap pear, therefore, to be shifting from the household service sector into other fields. One reason for this movement, perhaps, is the low level o f household wages. Because of incomplete reporting, there may be inaccuracy in the estimation o f household earn ings, but an evaluation of the record over time p ro vides some indication of the relative differentials between the earnings of household workers and those of other workers in the econom y. In 1951, for e x ample, average earnings per household w orker were about 37 percent o f those for all wage and salary w o rk e rs; in 1970, this ratio had declined to about 22 percent. A s approxim ately 65 percent of these workers were part-time (less than 35 h o u rs ), it is helpful to consider the wages of a full-time household employee. In 1969, the median wage o f a full-time THE HOUSEHOLD WORKER BY REGIONS: 1970 Percentage of Total u. S. Household W orkers United States Household W orkers/Population 100.00 5.5/1000 16.76 20.05 49.13 14.05 3.8/1000 4.0/1000 8.8/1000 4.5/1000 female household w orker was $1,851— 45.75 percent, or less than half, o f that of the average female wage and salary worker. E ffective minimum wage coverage is available to Regions Northeast North Central South West h ou seh old w o rk e rs in o n ly a fe w states, a m o n g them M a ssa ch u setts, N e w Y o r k , and W is c o n s in .2 1 Herbert R. Tacker, “ Household Employment under OASDHI, 1951-66,” Social Security Bulletin (June 1970), pp. 10-17. 2 Although several states have minimum wage laws applicable to domestic workers, coverage is limited because of certain exemptions applying to the number of persons employed in a household. See Women’s Bureau, U. S. Department of Labor, Employment Standards Administration, “ Women Private Household Workers Fact Sheet” (1971), release revised 1972. Fifth District M aryland D. C. Virginia W est Virginia North Carolina South Carolina Source: 13.87 8.3/1000 1.83 .88 3.35 .81 4.10 2.90 5.3/1000 13.1/1000 8.1/1000 5.3/1000 9.1/1000 12.6/1000 1970 Census of Population. FEDERAL RESERVE BA N K OF R IC H M O N D 11 Furtherm ore, few states have effective legislation governing overtim e compensation, w orkm en’s com S everal oth er co n sid e ra tio n s, h o w e v e r, exert pensation, or unemployment compensation for house countervailing influences. T he postw ar decline in birth rates, from 25.8 per 1,000 population in 1947 hold workers. Consequently, the private domestic worker."is not furnished with the benefits and p ro dramatic increases in the use of labor-saving ap j e c t i o n that the m ajority o f w orkers receive. T h e D em a n d fo r H o u s e h o ld W o r k e r s pliances, convenience foods, and easy-care fabrics, O n e o f the most salient trends discernible in recent employment statistics has been the increase in the participation rates of married wom en in the labor force. In the postwar period, the percentage of married wom en active in the labor force has more than doubled, from 20.0 percent in 1947 to 41.5 percent in 1972. A parallel trend has been the grow in g im portance in A m erican society of the so-called “ nuclear” family, i.e., a fam ily consisting only of parents and their children. F ew families today include a grandparent or other older relative. In 1971, only one out o f 15 households with a w orking mother with dependent children included a nonem ployed adult wom en (such as a gran d m oth er), and only one out of 25 house holds with dependent children under age six in cluded an additional nonem ployed w om an.3 T he com bination of an increase in the percentage o f m ar ried wom en relative w ho are w orking and importance of the nuclear an increased family to 17.3 per 1,000 population in 1971, coupled with would probably has lessened the need for domestic services. A lso, changing attitudes tow ard housew ork am ong men has led to what is probably a m ore efficient inter-family sharing of household chores, with a co n sequent reduction in the demand for outside help. It is difficult, consequently, to predict the nature of the demand for household services. Regardless o f the im provem ents in labor-saving devices, there would still seem to be some need in the future for specific cleaning services, particularly those of a heavy-duty nature. Perhaps such services will be provided by contractual cleaning services. W a ges in these services, unlike those for private domestics, have been increasing in past years. Furtherm ore, in most areas, the m ajority o f the w orkers em ployed by these establishments receive paid vacations and holidays and some kind of health, pension, or in surance plan. Such contractual services offer bene fits not only to the employee but also to the em ployer, who may not wish to retain an em ployee on seem to make for an enlarged demand for house a regular basis. hold help. be the only viable area in domestic services, which 3 See Janice N. Hedges and Jeanne K. Barnett, “ Working Women and the Division of Household Tasks,” Monthly Labor Review (April 1972), pp. 9-14. Contractual services may, in fact, would make the private household w orker increas ingly rare. Susan P . K ru g The M o n t h l y R e v i e w is produced by the Research Department o f the Federal Reserve Dank of Richmond. Subscriptions are available to the public without charge. Address inquiries to Bank and Public Relations, Federal Reserve Bank o f Richmond, P. O. Box 27622, Richmond, Virginia 23251. A rticles may be reproduced if source is given. Please provide the Bank’s Research Department with a copy of any publication in which an article is used. 12 M ONTHLY REVIEW, AUGUST 1973