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deral Reserve Bank of Atlanta jeral Reserve Station anta, Georgia 30303 Bulk Rate U .S. Postage dress Correction Requested Atlanta, G a. Perm it 292 PAID NEW WORKING PAPERS AVAILABLE State Usury Laws: A Survey and Application to the Tennessee Experience FEATURES: by Robert E. Keleher Checking vs. Savings: The Lines B lu r.............................. 51 Southern Banks and the Confederate Monetary Expansion by John M. Godfrey For cop ie s of these p u b lication s, write to the Research D ep art ment, Federal Reserve Bank of Atlanta, Atlanta, G eo rgia 30303. Please in clu d e a com plete ad dress with Z IP code to ensure delivery. Interested parties may also place their names on a sub scription list for future studies in the series. Innovations in financial services which combine the benefits of checking and savings accounts are catching on rapidly throughout the nation. The trend may not be a boon to all consumers, however. Disintermediation?....................................................... 52 High interest rates once raised the spectre of time and sav ings deposit losses at banks. But in the past few years, regu latory changes have allowed banks to restructure deposits, reducing their vulnerability to outflows of these funds. Lagging Indicators: Guide to the Future?......................... 55 Paradoxically, the ratio of those business indicators which move in step with overall economic activity to those that lag can be used to predict upturns and downturns. This leading indicator has been signaling a slowdown since the second quarter of 1977. Implications of Farmers' Planting Intentions in 1978............ 57 D irector of Research: Harry Brandt Editing: Pa tric ia Faulkinb erry Production and Graphics: Susan F T a y lo r and Eddie W Econom ic Review, Vol Lee, Jr LXIII, No 3 Free subscription and additional copies available upon request to the Research Department, Federal Reserve Bank of Atlanta, Atlanta. Georgia 30303 M aterial herein may be re printed or abstracted, provided this Review, the Bank, and the author are credited Please provide this Bank's Research Department with a copy of any publication in which such material is reprinted This year's crop output should be heavier on low-cost crops like soybeans and lighter on cotton and corn, crops which produced poor returns in 1977. Fewer Cattle = Less Beef = Higher Prices....................... 62 Several years of hard times for cattle producers have re duced herds dramatically. And the long breeding cycle en sures that the impact on beef availability and prices won't be offset for many months. CHECKING VS. SAVINGS: THE LINES BLUR by W illiam N. C o x A Tennessee credit union permits its members to write a check-like instrument against deposited funds. A Louisiana bank's automatic teller machines let depositors shift funds be tween checking and savings accounts. A Florida savings and loan association allows its customers to pay bills with phoned-in deposit transfers. A Georgia stockbroker makes it easy for wealthier clients to write checks on their investment balances. These examples, drawn from hundreds around the Sixth District, have something important in common. They are evidenc.e of a blurring of the distinction between traditional checking and savings accounts. They allow the consumer to combine more conveniently the advantages of each. If his funds are in a bank checking account, the consumer can transfer them easily to someone else, but they earn no interest.1 If his funds are in a traditional savings account, he earns interest, but it is relatively awkward and inconvenient to transfer them to anyone else. Most businesses and government units operate on a big enough financial scale that it is worthwhile for them to minimize their noninterest-bearing checking account balances. They can hire managers to ferry funds back and forth from one account to another. Most consumers, however, do not find the small amount of interest earned worth the inconvenience of moving the funds around. This is all changing. The innovations cited at the beginning of this article all provide more convenient ways for the *The Banking Act of 1933 says, in part: "N o member bank shall directly or indirectly, by any device whatsoever, pay an interest on any deposit which is payable on demand " This is the basic legal impediment to combining checking and savings accounts directly consumer to earn interest on transferable funds. They are, in fact, a few local skirmishes pointing the way toward new substitutes for checking and savings ac counts in the Southeast. Elsewhere in the country, stiff competitive struggles among various kinds of financial institutions have already moved past or around the judges, legislators, and regulators and into the marketplace. For several years, commercial and mu tual savings banks in New England have been offering "Negotiable Order of W ith drawal" (N O W ) accounts. Functionally, these are interest-bearing checking ac counts. Consumers there have adopted them enthusiastically. Congress is con sidering the extension of N O W accounts to the rest of the country. Nationally, a Federal court has approved credit unions' use of the share draft— the "check-like instrument" mentioned in our opening sentence. The Federal Reserve and the FDIC have announced new regulations permitting bank customers to "co ver" checking account overdrafts with savings account funds automatically. Each development is somewhat different, of course. But the trend is evident, and the pace is quickening. Financial institutions in this region and across the country are reassessing their objectives, their powers, their costs, and their markets in the context of a broader competitive struggle. Many banks want permission to underwrite industrial revenue bonds but are looking warily at the movements of investment banks, retailers, and foreign banks toward traditional banking turf. Savings and loan associations generally desire broader lending powers and new types of home mortgages but are anxious to preserve their ability to offer a premium interest rate on savings accounts. Credit unions can now issue home mort gages but are worried about losing their tax advantages.2 W ill this be a breakthrough for the consumer? Consumers will benefit from the new competition among institutions, 2A separate concern relates to monetary policy M onetary growth, as measured by the Federal Reserve in Its M i and M ; definitions, basically means the growth of checking and savings account balances at banks The spread of the in novations we have been discussing will, at best, add substantial uncertainty to the meaningful measurement of monetary growth but it will be no bonanza. It is very likely that the low-balance/high-transactions customer will be worse off, whereas the high-balance/low-transactions customer will be pleased. On a conventional bank checking account, which earns no interest, the bank usually "pays" its depositor by absorbing most of the costs of the checking services provided. On typical accounts, the bank-absorbed costs, over and above service charges, are equivalent to an implicit interest payment of about AVi percent.3 But if it turns out that checks can be written on an account bearing explicit interest, financial institutions will have to charge for the services, either directly on a per-item basis or implicitly in the form of minimum account balances. ■ 3Stephen H Axilrod and others. The Impact of the Payment of Interest on De mand Deposits/' Table 111-1 This studv by the staff of the Board of Governors of the Federal Reserve System was released to the public on February 1,1977 DISINTERMEDIATION? by John M . Godfrey When analysts begin to foresee strong public and private credit demands and rising interest rates, their attention quickly turns to the prospect of disintermedi ation— the shift of consumer funds from banks and other financial intermediaries to higher yielding open market securities that results in a net loss of time and savings deposits. Commercial banks and other thrift institutions experienced bouts of disintermediation in 1966, 1969-early 1970, and, to a lesser extent, in 1973-74 as in terest rates rose. Yields obtainable from Treasury bills and notes, commercial paper, and money market mutual funds rose significantly above the maximum rates that the regulated banks and thrift institutions were allowed to pay for deposits subject to interest rate ceilings. W ith interest rates higher now than at any time since 1974, disintermediation has become a growing topic of conversation. However, a sustained reduction in interestbearing deposits at District member banks is unlikely in the near future, mainly because the region's banks have shifted the composition of deposits toward those accounts which are well insulated from withdrawals. Nearly one-half of the time deposits are no longer subject to Regulation Q interest ceilings, and other liberalizations of regulations have allowed banks to offer more competitive rates on other time deposits. Passbook savings accounts seem to be less sensitive to the level of interest rates than in the past. Furthermore, interest rates have not reached 1974 levels. Even with a further rise in market rates, potential disintermedi ation problems could be minimized by raising the interest rate ceilings. Recent History. Building a more stable deposit base has taken time and a number of regulatory changes. In the 1969-70 period, member banks could offer only very limited interest rate incentives to attract and retain longer maturity con sumer deposits. They could pay depositors only 4 percent on passbook savings and short maturity time deposits and only 5 percent for time deposits maturing in 90 days or more. Although some banks did establish time deposits that were auto matically renewable at each maturity date, the depositor retained the option of withdrawing his deposit each quarter without penalty. When interest rates rose, member banks lost $300 million (about 7 percent) in savings deposits from late 1968 through early 1970. Banks outside the District's larger cities, however, were able to increase total consumer time deposits. During that period, the area where banks were most vulnerable to com petition from higher open market rates was negotiable CDs in denominations of $100,000 or more. Regulations then allowed banks to pay 51/2 percent on maturities of less than 60 days and 53 /4 percent for those of less than 90 days. (Most large CDs are issued for 90 days or less.) These rates were not sufficient to prevent the loss of over $250 million (about 40 percent) of these deposits at the larger District banks. Thus, banks lacked the flexibility to offer competitive rates on money market CDs and could not provide adequate incentives for consumers to commit savings to longer maturity deposits. In early 1970, the Board of Governors recognized this situation and raised the maximum interest rates. It also restruc tured the rates to provide some incentive for committing funds to banks for two years or more. Later that same year, the ceiling rates on shorter maturity money market CDs were suspended. These actions enabled banks, including District banks, to make significant strides in tying down consumer time deposits for longer periods of time and helped them compete for large CDs. When by mid-1973 rising market rates once again threatened disintermediation, Regulation Q ceiling rates were raised for the short maturity time and savings deposits and higher rates were set for even longer maturity time deposit categories. These ceiling rates, still in effect today, have allowed District banks to restructure their deposits, sharply reducing the likelihood of significant deposit outflows. THE D EPO SIT BASE TO D A Y Savings Accounts. At year-end 1977, the nearly $28-bi 11ion time and savings deposit base was far more stable, or less vulner able to runoffs, than in 1969-70 or 1973. Savings deposits comprise nearly $11 billion, about 38 percent of the total. Nearly all of these deposits are owned by individuals and nonprofit organizations. Corporations and profit-making organi zations, which are usually more concerned with yields than are individuals, hold only about $600 million in such deposits. Although savings deposits pay only 5 percent and can be effectively withdrawn without notice, the prospect that with drawals will greatly exceed inflows in the near future seems unlikely. Higher interest rates have been available from other types of deposits, other financial institutions, and open market instruments for some time. Therefore, liquidity, and not the rate of return, has probably been the overriding reason for placing funds in bank savings accounts. In earlier years, savings deposits probably contained some interest-sensitive household funds that were subject to being shifted out of these accounts. For example, during the 1969-70 disintermediation period, the 90-day Treasury bill rate peaked at 7.87 percent (387 basis points above the 4-percent ceiling rate for savings accounts) and District member banks experienced net savings deposit losses. By 1974, however, the situation was vastly different: Bank savings accounts ap parently no longer contained interestsensitive funds. The ceiling rate was then 5 percent (changed in July 1973). The Treasury bill rate reached 8.96 percent in August 1974 (396 basis points above the maximum), but District banks actually had net savings deposit inflows of nearly $400 million. Discounting seasonal influences, District member banks, as a whole, had no net outflows from savings accounts during any single month of 1974, although some individual banks did. In light of the 1974 experience and since short-term interest rates are substantially below their previous peak, there seems to be little reason to expect consumer savings deposit inflows (nearly $400 million in the first quarter of 1978) to deteriorate into sustained out flows during this year. Since 1974, however, business firms and governmental units have been allowed to hold passbook savings accounts. W hile these funds may be more interest-sensitive than consumer deposits, they comprise only a small portion of District banks' total savings deposits. Time Deposits. District banks' time deposits — other than savings accounts — now total about $17.1 billion, and the banks have considerable latitude in their ability to pay rates sufficient to attract and retain these funds. Time deposits in denominations of $100,000 and over are exempt from maximum interest rate ceilings; these account for about $8.2 billion, or 48 percent of total time deposits. In addition, District banks hold about $3.8 billion in deposits of state and local governments (many are largedenomination deposits and are included in the $8.2 billion above) on which they are permitted to pay up to 8 percent for any maturity. Therefore, a large volume of District banks' time deposits is effectively insulated from high market rates if the banks are willing to pay competitive rates. This flexibility contrasts sharply with previous disintermediation periods when no time deposits were exempt (1969) or only one-third were exempt (1973) and when holdings of public deposits were less significant. Therefore, only about one-half of District banks' time deposits —$8.9 billion — are subject to interest rate ceilings and might be withdrawn because banks cannot pay competitive rates. However, slightly more than $4 billion of these deposits are long maturity. Four-year deposits may carry 71/\ percent yields and six-year maturities, 7Vi percent. Severe interest penalties make premature with drawals from these deposits unlikely. The present competitiveness of these rates and the advantages of holding funds at banks should allow banks to continue to draw funds into these long maturity accounts. And on June 1, banks' ability to compete for even longer maturity funds will be further enhanced when they will be able to offer an eight-year maturity deposit at 7 V a percent. (When the interest is com pounded, the effective yield will be slightly more than 8 percent.) About one-half of the remaining time deposits mature every quarter and currently carry rates of 5 V2 percent. Depositors are attracted to these 90-day accounts because they offer a slightly higher yield than passbook savings but are only slightly less liquid. That these deposits from households have remained relatively constant in dollar volume since the early 1970s indicates that they are not very interest-sensitive. The remaining small-denomination time deposits are about evenly split between those maturing in one year and paying 6 percent and those maturing in two and one-half years and paying 6 V2 percent. Savers who commit their funds to these deposits are probably more concerned with yields than with immediate availability. Since open market rates on investments of the same maturities are presently higher, inflows may well slow down during coming months and some of these deposits might not be rolled over at maturity. Recent Regulation Q changes mean that after June 1, banks will be better able to compete for "interm ediate" size, short maturity funds that are currently chan neled into the commercial paper or Treasury bill markets. The new deposit should be attractive to investors with enough resources to purchase a minimum denomination Treasury bill but not enough to purchase the $100,000 CDs that are issued without Q ceilings. Banks will be able to offer the new six-month money market time certificate in a minimum $10,000 denomination, with the maximum rate of interest tied to the average yield for the most recent six-month Treasury bill auction. Based on mid-May auction yields, that rate would be about 7 percent. Although District banks' adjustments of time and savings deposits have made large losses unlikely, deposit inflows may not remain adequate if market rates rise significantly. In that case, further elevation of interest rate ceilings may become necessary to allow banks to compete for funds and to provide equitable returns to small depositors who cannot take ad vantage of higher returns available on open market financial instruments. ■ LAGGING INDICATORS: GUIDE TO THE FUTURE? by Charles J. H aulk An indicator of business cycle turns that is getting more attention lately is the ratio of the composite index of coincident in dicators to the composite index of lagging indicators. This ratio has been a good predictor of changes in real growth three to four quarters ahead. Year-long declines in the ratio have been followed, on the average, by real growth reductions of three percentage points. If past relationships hold, the decline in the ratio, which began in the second quarter of 1977, is signaling a weakening economy in 1978. Background. Components of the coincident composite index include: nonagricultural employment, personal income less transfer payments in 1972 dollars, industrial production, and manufacturing and trade sales in 1972 dollars. The selection of these variables as components of the index was based on the commonly held view that the purpose of economic activity is to produce goods, services, and income for the population. Hence, income, industrial production, sales, and employ ment are obvious choices — employment is related to both output and income. A preferable, narrower coincident indicator would be GNP. However, GNP data are only available quarterly, and it is desirable to have more frequent measures of coincident activity. The components of the composite lagging index include: the average duration of unemployment, manufacturing and trade inventories in 1972 dollars, unit labor costs in manufacturing, the average prime rate, commercial and industrial loans outstanding at large weekly reporting commercial banks, and the ratio of consumer instalment debt to personal income. Lagging indicators are those economic variables whose movements have been empirically determined to trail those of the coincident indicators by several months or quarters. Only in an economy which had reached a completely steady state would all economic variables grow at constant rates. Interest rates would be unchanging. In an economy given to cyclical behavior, some measures of economic activity will lag. The rate of change of the lagging in dicators relative to movements in the coincident indicators illustrates the degree of balance or imbalance in the economy. Thus, the ratio of the coincident com posite to the lagging composite index (RCL) is a measure of economic balance. It moves up when the coincident indicators rise faster than those which lag or when the coincident indicators are falling more slowly than the lagging. The RCL declines when the coincident indicators rise more slowly or fall more quickly than the lagging. Three of the lagging indicators are measures of conditions in credit markets. When these three are rising more rapidly than the coincident index, it indicates that the financial markets are beginning to come under stress and that growth in the real sector is nearing a cyclical limit. In general, a steady decline in the RCL means that economic activity has peaked or is about to peak. Only a slowdown sufficient to relieve financial market strain can return the coincident indicators to a faster rate of growth than the lagging indicators. Historical Behavior. From 1948 to 1976, the RCL had eight peaks, six of which appear to be major and two temporary aberrations (see chart). After each major peak, there was a recession. The lead time from the peak of the RCL to the beginning of the recession has varied from one to four years. Before the 1953-54 and the 1970 recessions, a major war effort in tervened between the time of the peak in the ratio and the eventual recession. Those two cases aside, the lead time from the peak of the RCL to the onset of recession has averaged slightly more than a year, with the 1957-58 recession lagging two and one-fourth years and the others one year each. More to the point, however, the year fol lowing a year of increase in the RCL has been one of good to strong real growth and the year after a decline in the RCL has been one of weak or negative growth. Declines in the ratio have not always been followed immediately by full-fledged recessions, but, in every instance except 1963, they have been followed by slowdowns in the economy. Generally, the weakness in the economy has appeared three or four quarters after the RCL began to fall. Regression results confirm a highly significant three-quarter lead of the RCL on real growth. On the average, a year of declines in the RCL has been followed by a reduction of the rate of real GNP growth by three percentage points the next year. And the greater the rate of decline in the RCL the greater the drop in real growth the following year. To carry the idea a little further, we also examined the ratio of leading to lagging in dicators. If the ratio of coincident to lagging indicators is a measure of im balance in the economy, then the ratio of leading to lagging indicators might provide an even earlier signal. However, a plot of this ratio from 1948 to date suggests that it offers little additional information. The primary difference from the RCL is that the swings have been greater in amplitude. The turning points have been very nearly the same at the peaks and perhaps slightly ahead at the troughs. Outlook. Based on the RCL decline in 1977, the slowing of growth in the first and second quarters of 1978 will not be pre cipitous. But further rapid decreases in the RCL in the first quarter of 1978* would augur ill for fourth quarter 1978 and first quarter 1979. How likely are further declines? One of the components of the lagging indicator index is manufacturing and trade in ventories. Careful monitoring of in ventories thus far in the current expansion suggests that the excesses of 1973-74 may not happen again, but slower, better managed inventory growth will probably occur. Also, the ratio of consumer in stalment debt to income, another lagging component, may be close to a peak and, therefore, may not contribute very much to further increases in the lagging in dicator. However, with wages and interest rates subject to upward pressures, unit labor costs and the prime rate could in crease further, pushing the lagging in dicator up faster than the leading or coincident indexes. So, the leading in dicators may continue to rise after the RCL has signaled a downturn. As with any set of findings about the relationship of economic indicators, the usual caveats must hold. The past is not a perfect guide to the future. Relationships change, and shocks from external or unexpected sources can undermine the usefulness of predictors. As with any forecasting tool, once it is widely observed and heeded, it could lose its effectiveness. However, the reliable past performance of the RCL gives us confidence that it will be a useful tool for predicting directional changes in the economy for some time to come. ■ Preliminary first-quarter results obtained just prior to publication show the RCL dropped to 0 978 (about 3 percent), the largest quarterly decline in the current downward trend IMPLICATIONS OF FARMERS' PLANTING INTENTIONS IN 1978 by Gene D . Sullivan To plant or not to plant is a question that has been discussed often in farming circles in recent months. News accounts of strike threats have left the public wondering whether and how much plantings might be reduced when the season for strewing seed actually arrived. A survey of farmers themselves registered planting intentions as early as January 1, 1978, and again at the begin ning of April. Interestingly enough, those surveys reveal little evidence of intent to hold land out of production. Instead, farmers indicate that they will be shifting acreages from those crops which yielded poor returns in 1977 to crops that ap peared to offer brighter alternatives as the planting season approached. Table 1 shows the April survey results for selected crops of importance in Sixth District states. Planting intentions of southeastern farmers are compared with plans of all U. S. producers of the same crops. District farmers plan sharp increases in plantings of soybeans and rice, while acreages of nearly all other crops are to be reduced or unchanged. At the national level, plans are similar. Acreages of cotton and corn, crops that are traditionally important in the Southeast, will be greatly reduced in the District and, to a lesser degree, in the nation. Patterns for individual states are similar in the direction but variable in the degree of change. For example, soybean acreage is indicated to be 24 percent higher in Georgia but only 5 percent higher in Louisiana. By contrast, corn acreage is to be cut by 20 percent in Georgia while Tennessee's reduction will be 8 percent. Plantings of cotton, long the mainstay of southern agriculture, are to be cut by 10 percent in the District and by 39 percent in Georgia, while Mississippi's acreage should drop by only 1 percent. The U. S. acreage will fall by 6 percent, with more than onethird of this reduction occurring in the states of the Sixth Federal Reserve District. A summary of the indicated changes in crop plantings is shown in Table 2. The increase in soybean acreage will more than offset the reductions in other crops in Alabama, Louisiana, and Mississippi. However, large reductions in corn acreage will outweigh the rise in soybean plantings in Georgia and Florida; Tennessee farmers do not intend to expand acreage of any of the selected crops. Thus, total plantings in the District may be expected to fall this year. A 14-percent decline in winter wheat acreage that occurred last fall accounts for most of the drop in nationwide plantings. The cutback largely reflected the withdrawal of acreage that was required to participate in the government's income support program for wheat producers. W hat will be the impact of acreage changes on District agriculture? The most broadly felt influence is likely to be a decrease in crop production expenditures. Generally, southeastern farmers will be shifting from crops which call for relatively high production expenditures to PLANTED ACREAGES OF SELECTED SOUTHEASTERN CROPS WITH U. S. COMPARISONS Area Planted State 1976 1977 Indicated April 1978 (000 acres) 1978/77 (percent) Soybeans Alabama Florida Georgia Louisiana Mississippi Tennessee Total Sixth District States Total U. S. 1,200 259 890 2,280 3,335 1,920 1,650 334 1,250 2.750 3.750 2,300 2,000 390 1,550 2,900 4,000 2,300 121 117 124 105 107 100 9,884 12,034 13,140 109 50,226 59,080 63,664 108 540 125 113 Rice Louisiana Mississippi Total Sixth District States 570 145 _ 480 112 112 715 592 665 112 Total U. S. 2,489 2,261 2,594 115 Alabama Florida Georgia Louisiana Mississippi Tennessee 460 7 255 570 1,530 420 340 5 155 500 1,370 275 79 80 61 92 99 85 Upland Cotton Total Sixth District States Total U. S. 430 6 255 545 1,380 325 3,242 2,941 2,645 90 11,610 13,637 12,843 94 86 680 436 1,800 70 250 900 830 81 70 80 81 80 92 Com Alabama Florida Georgia Louisiana Mississippi Tennessee Total Sixth District States Total U. S. 880 542 2,300 90 240 890 840 623 2,240 200 4,942 4,939 4,016 81 84,374 82,680 80,237 97 130 17 160 40 96 89 119 89 71 83 Winter Wheat1 Alabama Florida Georgia Louisiana Mississippi Tennessee Total Sixth District States Total U. S. 140 19 150 45 150 365 135 19 135 45 140 373 100 310 869 847 757 89 57,668 55,980 48,141 86 Area Planted State 1976 1977 Indicated April 1978 1978/77 (percent) (000 acres) Oats' Alabama Florida Georgia Louisiana Mississippi Tennessee Total Sixth District States Total U. S. 90 33 140 19 30 102 92 33 130 19 30 108 92 25* 135 192 25* 90 100 76 104 100 83 83 414 412 3862 94 16,734 17,793 16,4082 92 92 23 100 Barley’ Georgia Tennessee Total Sixth District States Total U. S. 7 25 9 24 32 33 9,157 10,586 32 96 97 9,99s2 94 490 115 100 Rye1 Georgia Tennessee Total Sixth District States Total U. S. 390 22 425 22 22 412 447 512 115 2,652 2,652 2,860 108 65 70 35 50 40 87 93 100 83 100 Grain Sorghum Alabama Georgia Louisiana Mississippi Tennessee Total Sixth District States Total U. S. 65 85 45 71 45 75 75 35 60 40 311 285 260 91 18,639 16,994 15,925 94 Includes acreage planted in preceding fall. ' Estimated. Source: USDA. soybeans, a crop requiring substantially lower financial outlays for most production inputs. Table 3 shows the estimated production expenditures for southeastern crops in 1977. Cotton is one of the most expensive crops to produce, entailing especially heavy production outlays for fertilizers and chemicals. W ith variable costs estimated at $203 per acre, a reduction of 296,000 acres in the District states will decrease total cash expenditures for cotton production by $60.1 million (see Table 4). A reduction of 923,000 acres of corn will lower the variable production expenses for that crop by $97.8 million, or an estimated $106 per acre. The combined reduction of $163.3 million in corn, cotton, and wheat outlays will not be fully offset by the cost of the 1,106,000 additional acres to be planted in soybeans and the 73,000-acre expansion in rice. W ith variable ex penditures of $68 per acre, the additional expenses incurred by the larger soybean crop will be about $75.2 million; expanded rice acreage will add another $16.9 million. TABLE 2 SUMMARY OF INDICATED CHANGES IN CROP PLANTINGS, 1978 Item Alabama Florida Georgia +350 + 56 + 300 Soybeans Rice Upland Cotton Corn Winter Wheat Oats Barley Rye Grain Sorghum - 10 Total + 85 — - 90 -160 - 5 0 — — - 1 -187 - 2 - 8 — — — — Louisiana Mississippi (000 acres) + 150 + 250 + 60 + 13 - 45 - 10 - 16 - 50 - 5 - 40 0 - 5 -100 -440 + 25 + 5 0 + 65 - 5 — -142 — + 144 - 150 0 — - _ — 0 Tennessee - 10 + 148 50 70 63 18 1 0 0 -202 Sixth District States U.S. + 1,106 + 73 - 296 - 923 90 26 1 + 65 25 + 4,584 + 333 - 794 -2,443 - 7,839 -1,385 - 588 + 208 -1,069 - - 8,993 117 — Signifies no production. Source: Calculated from data presented in Table 1. V___________________________________ J TABLE 3 ESTIMATED VARIABLE COSTS OF PRODUCING SELECTED CROPS IN SOUTHEASTERN STATES Item Upland Cotton Com Small Feed Grains1 Winter Wheat Soybeans Rice ($ per acre) Seed Fertilizer and Lime Chemicals Custom Operations Labor Fuel and Lubricants Repairs Ginning/Drying O ther2 Total Variable3 5.64 36.70 66.01 17.50 17.72 9.40 20.25 24.75 4.89 8.19 41.26 14.98 8.82 12.19 7.19 7.83 2.79 3.15 4.56 17.21 2.04 6.16 9.85 5.66 5.86 .49 1.78 7.50 27.04 .48 2.99 8.60 5.24 5.68 6.12 10.86 16.48 5.69 12.26 7.38 7.61 2.55 1.87 22.38 39.45 24.59 18.99 33.67 31.72 14.47 33.09 13.07 202.86 106.40 43.61 60.08 68.27 231.43 — _ 1Oats, barley, rye, and grain sorghum. Estimates of some components of these costs were adapted from regions nearest to the Southeast. 1 Includes interest on operating capital and miscellaneous expenses. 3 Fixed costs for machinery, equipment, land, and management are not included. Once incurred, fixed costs do not influence decisions of which crops to plant in a given year. Source: Committee on Agriculture and Forestry, United States Senate. Thus, the indicated planting cutbacks in the Southeast should trim production expenses by $70.5 million from 1977's level. Although per acre costs of production differ at the national level, there, too, the additional 4.6 million acres of soybeans will not make up for the nearly 12 million-acre reduction in plantings of cotton, corn, wheat, and oats. Are actual plantings likely to differ significantly from announced intentions? Evidence indicates that farmers base their actions on the prices of their products that prevail during the three months just prior to planting and on their most recent production experiences. For example, those farmers who experienced disappointing yields of cotton and corn in 1977 because of the drought may turn to other crops they perceive to be more successful. In Georgia particularly, the poor returns from cotton and corn in 1977 are no doubt the f IMPACT OF ACREAGE CHANGES ON PRODUCTION EXPENDITURES FOR SELECTED SOUTHEASTERN CROPS Item Upland Cotton Corn Small Feed Grains* Winter Wheat Soybeans Rice Total Change in Production Expenses Variable Cost per Acre Acreage Change Indicated $203 106 54 60 - 296,000 - 923,000 + 13,000 90,000 + 1,106,000 + 73,000 68 231 Projected Expenditure Change - $60,088,000 - 97,838,000 + 702,000 5,400,000 + 75,208,000 + 16,863,000 - $70,553,000 *Oats, barley, rye, and grain sorghum. Source: Drawn from data presented in Tables 2 and 3. major influence behind a massive shift in crop acreage to soybeans in 1978. Soybean yields were not depressed nearly as much by last year's dry weather as were yields of other crops. The commodity for which prices changed most from December to April is soybeans. The average price of $6.05 per bushel during the first quarter of the year was 33 cents per bushel above the December price level, and prices were rising with each successive month. A continuation of that rate of gain could encourage farmers to plant even more acreage in soybeans than they planned in April, especially if conditions prove un favorable for planting of corn and cotton through the normal planting time. The exceptionally dry weather in March and early April that prevented emergence of seeds in the southern areas of the District (north Florida, south Georgia, and south Alabama) could intensify the shift to soybeans. The final planting decisions of farmers will not be known until the acres are counted at the end of June. It seems certain, however, that those numbers will show reductions in acreages of most crops in favor of soybeans. That, in turn, will have reduced crop expenditures and the needs for production financing during the 1978 crop year. The latter may be an especially welcome development in those areas where farmers have not yet been able to repay 1977 loans. ■ FEWER CATTLE=LESS BEEF= HIGHER PRICES by Yvonne F. Davies Beef supplies will be less plentiful in coming months as a result of the prolonged period of economic adversity that has affected cattle producers throughout the country. Over the past four years, depressed cattle prices and rising production costs have induced cattlemen to reduce the size of their herds; some ceased operations altogether when they were no longer able to survive the heavy losses. The adjustment in cattle numbers, which began with a plunge in cattle prices in 1974, reached its most severe proportions during 1977.* *Although producers began inventory adjustments in 1974, inventories con tinued to rise in 1975 because of breeding decisions made when prices were high JANUARY 1 CATTLE INVENTORIES BY CLASSES DISTRICT STATES AND U. S. State or Area 1975 1976 1977 1978 Percent Change 1977 1975 to to 1978 1978 (thousand head) All Cattle and Calves: Alabama Florida Georgia Louisiana Mississippi Tennessee Total District States Total U.S. Beef Cows:1 Alabama Florida Georgia Louisiana Mississippi Tennessee Total District States Total U.S. Replacement Beef Heifers:2 Alabama Florida Georgia Louisiana Mississippi Tennessee 2,700 2,950 2,420 1,832 3,000 3,300 2,850 2,920 2,370 1,880 2,723 3,100 2,360 2,800 2,300 1,700 2,670 3,000 2,130 2,350 1,975 1,425 2,130 2,700 -21 -20 -18 -22 -29 -18 -10 -16 -14 -16 -20 -10 16,202 15,843 14,830 12,710 -22 -14 132,028 127,980 122,810 116,265 -12 - 5 1,238 1,468 1,060 909 1,458 1,349 1,310 1,419 1,037 952 1,317 1,338 1,093 1,378 961 856 1,325 1,300 1,015 1,212 839 727 1,100 1,155 -18 -17 -21 -20 -25 -14 '■:. . : "f;:* :;■~ - 7 -12 -13 -15 -17 -11 7,482 7,373 6,913 6,048 -19 -13 45,712 43,888 41,389 38,747 -15 - 6 " 257 265 184 183 336 300 199 258 180 152 231 257 182 232 164 136 246 206 138 181 128 106 184 199 -46 -32 -30 -42 -45 -34 -24 -22 -22 -22 -25 - 3 Total District States 1,525 1,277 1,166 936 -39 -20 Total U .S. 8,884 7,196 6,529 5,834 -34 -11 Nondairy females that have calved. Young cows that have not calved and weigh at least 500 pounds. Source: Economics, Statistics, and Cooperative Service, U. S. Department of Agriculture. ■ The unusually harsh weather in January and February of 1977 made for poor grazing conditions. Then, a summer drought hit the Southeast and West, causing shortages of forages. These set backs, along with continuing low production returns, forced a larger-thannormal movement of cattle to slaughter and to feedlots last year. As a result, the January 1, 1978, inventory showed a decrease of over six million head, a 5percent drop from the previous January and the sharpest one-year decline on record (see table). That number represents a 12-percent reduction from the all-time high January 1, 1975, cattle count. Rapid liquidation of the cattle herd over the past three years contrasts sharply with the 2- to 5-percent annual inventory gains of the early 1970s, when production was in an expansion phase. Cattle production is characterized by cycles, with herd ex pansion occurring during periods of strong prices and contraction when prices are less favorable. The last expansion phase began in 1967 and ended in 1975. During the herd build-up, cows were held for breeding purposes and slaughter slowed. In the recent liquidation phase of the cattle cycle, cattlemen stopped holding extra animals for future herd expansion and began heavy culling of the breeding stock. Some producers eventually sold entire herds. The result has been a relatively high slaughter rate. In 1977, total commercial slaughter of cattle and calves reached 47.4 million head, or 39 percent of the January 1, 1977, herd. This was the highest rate in 20 years and marked the second straight year in which total slaughter exceeded the new calf crop. Such imbalances rapidly diminish the inventory on which future beef production depends. In the Sixth District states, producers trimmed their cattle numbers by 2.1 million head during 1977. The 14-percent rate of liquidation greatly outpaced the national rate. In comparison, the District had led the national trend of herd reduction only slightly in 1976 but had trailed it in 1975 (see table). Mississippi and Florida accounted for nearly half of the area's 1977 decline in cattle numbers. In contrast, Alabama and Louisiana had the smallest herd reductions, possibly CHART 1 JANUARY 1 CATTLE INVENTORIES BY CLASSES District All Cattle and Calves Beef Cow Replacements Beef Cows Calves Born During Year because they had led the downturn in 1976 and were further along in the adjustment process. Except for Georgia and Tennessee, where fed cattle numbers increased, all District states reduced their inventories in each cattle class and for total cattle. An examination of the inventories of the different cattle classes shows the District paralleling the nation in the relative size of each class reduction. For both the U. S. and District, the largest decrease in numbers occurred in beef cows, calves born, and beef cow replacements, in that order (see Chart 1). The substantial reductions in the beef breeding stock reflect the poor financial condition of many cattlemen and indicate declining beef supplies for the next few years, especially after 1978. By January 1, 1977, the District states' share of the nation's beef cow inventory and calf crop had ceased to rise and, by the beginning of this CHART 2 U. S. COM M ERCIAL C A TTLE SLA U G H TER AND BEEF PRODUCTION Beef Production MIL. HEAD Fed Cattle Slaughter Nonfed Cattle ’73 '74 '75 ’76 *Fed cattle are fattened for market on grain or other feed concentrates. **Nonfed cattle go to market directly from pasture. U SD . year, had fallen. This interruption of a long-term trend is likely to be only tem porary, however, because the Southeast has an advantage over most of the rest of the nation in grass production. As grass-fed beef increases in importance, the cattle industry of this region is likely to continue to grow. Recent rises in feeder cattle prices suggest improved returns for cowcalf producers in the Southeast. Profitability hasn't returned, but the outlook is certainly brighter for the District's cow-calf operations than it has been since early 1974. With higher prices for calves and larger supplies of forage, cattlemen will probably halt herd liquidation this year and start to rebuild their stocks. Earlier, massive herd liquidation and heavy slaughter ^fd^bAOsteijd jaeef production throtigl#^W6XI^V(^har.t 2). But, by 1977, cattle inventories had'been trimmed so much thtet-beetfsirpplies began to fall. Further declines are'expected for the next few years because of.the long lead time required to^iricfease^rod^etjon. For example, breeding decisions madd in the Southeast on April 1, 1978, won't result in an increase in the supply of feeder calves for 18 months. The beef supply will not be increased until 24 months into the future. The lead time consists of a 91/2month gestation period, a 9-month weaning period, and 6 months on feed. Beef production will also be limited by the withholding of females for breeding stock when the expansion phase of the cattle cycle gets under way. The short supply of cattle has important price implications for cattlemen and for consumers. Prices of live cattle and retail beef have already begun to rise and are expected to continue their ascent. The amount of the increase in beef prices at the supermarket will depend on the supply of competing meats, primarily pork and broilers. Prices of hamburger and other lean beef cuts should rise at a faster rate than the more expensive cuts due to the sharp drop in the slaughter of grass-fed beef, the major source of lean beef. With more cattle fattened in feedlots and fewer slaughtered directly from pastures, the beef supply for the next few years will consist of more fed beef and less nonfed beef. Summary. The long period of economic hardship may finally be ending for cattle producers. Reaching this turnaround point has required massive reductions in cattle numbers since 1975, with the most drastic herd liquidation occurring in 1977. For consumers, the resulting short supply of cattle will mean less plentiful supplies of beef and higher beef prices at the supermarket. To cattle producers, it means the first real improvement in cattle prices in four years and a brightening of prospects for the future. ■
@FedFRASER