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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
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12



M ONTHLY REVIEW, AUGUST 1973


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