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M O N T H L Y S u o w m a & / i e u > IN THI S I S S U E - . F E D E R A L RESERVE BANK of CLEVELAND “Fannie M a e ” In The Secondary M ortgage M a r k e l........... 2 Notes on Fed eral Reserve Pu blicatio ns.. • . 9 /luycut t</63 D airy Farm er Indebtedness........................... 10 The Federal National Mortgage Association (FNM A) acts as a middleman in bringing together buyers and sellers of government-insured mortgages. Mortgage companies which originate over three-fifths of these home loans are the most important sellers of mortgages to the FNMA. In contrast, life insurance companies, mutual savings banks, savings and loan associations, and commercial banks, are all important secondary holders of government insured mortgages. S ou r c e of d a t a : F e d e r a l HOLDERS BUYERS FROM FNM A MORTGAGE COMPANIES COMMERCIAL BANKS SA V IN G S and LOAN AS SOCIATIO NS MUTUAL SA VIN GS BANKS INSURANCE COMPANIES D ecem b er 31, 1962 H o u s i n g A d m i n i s t r a t i o n , V e t e r a n s ’ A d m i n i s t r a t i o n , a n d F e d e r a l N a t i o n a l M o r t g a g e A s s o c ia ti o n . “Fannie Mae” In The Secondary Mortgage Market markets involve the resale of financial instruments after their original issue. The markets vary in size, type of in strument traded, and nature of the buyers and sellers. Financial lending institutions have been active in certain markets for a number of reasons. For example, by means of a secondary market, lending institutions can increase their liquidity, i.e., their ability to convert different kinds of assets into cash quickly and without large capital losses. eco n d a r y S A secondary market for particular invest ments enhances their marketability in that the securities can compete more equitably for available funds with other types of invest ments which also have existing secondary markets. U. S. Government securities and corporate bonds, for example, have wellestablished secondary markets. These securi ties are traded through a nation-wide net work of brokers and dealers who make mar kets by quoting a bid price at which securities will be purchased and an offering price at which they will be sold. The residential mortgage market, which constitutes the largest single demand for funds in the capital market, has no similarlyorganized secondary market. Basically, this is because lending to home builders and buy ers is inherently a highly individualized proc ess, unlike lending to the U.S. Government and to corporations. Home construction and purchase are financed by conventional credit and by mortgages insured by the Federal Housing Administration and the Veterans’ Administration. Since there are wide varia 2 tions in both the credit-worthiness of mort gage borrowers and their loan collateral, con ventional mortgages (which comprise the bulk of home mortgage credit) are financed pri marily by lending institutions in local areas. An organized secondary market for these mortgages has not developed largely because of the individualized nature of the loan agreements. On the other hand, the financing of government-insured mortgages (which comprise twofifths of total residential credit outstanding) contrasts markedly with the financing of con ventional mortgages. FHA-insured and VAguaranteed mortgages must meet certain standards defined by law, thereby imparting a measure of uniformity or homogeneity to the securities. This uniformity enhances the trading of government-insured mortgages among investors beyond the local area in which the loans originate. Although there is no network of dealers making a market for FHA-insured and VAguaranteed mortgages, the Federal National Mortgage Association (FN M A ), a constitu ent agency of the Housing and Home Finance Agency, provides a secondary market facility for trading government-insured mortgages. The FNMA, or “ Fannie Mae” as the agency is facetiously called, was initially chartered in 1938 to support the F H A program which was started four years earlier. Subsequent recharterings in 1948 and in 1954 attempted to define the function of the FNMA more adequately in terms of the needs of govern mental housing programs. Thus, support of the V A mortgage program was added to its functions in 1948. From 1948 to 1954 Fannie Mae purchased government-insured mortgages primarily in order to support special housing programs of the F H A and VA. The most recent reorganization of Fannie Mae stemmed from the Housing Act of 1954. The principal objective as it now exists is to provide a secondary market facility for mak ing government-insured mortgages more liq uid. This purpose is to be accomplished by buying government-insured mortgages when mortgage funds in general are scarce and, alternatively, selling from the FNMA port folio when there is a demand for mortgage investments. In addition, through “ buy and sell” activity, Fannie Mae attempts to effect transfers of mortgage funds from areas where capital is plentiful, e.g., the Northeastern section of the country, to capital-short areas, e.g., the Western section of the United States. In the initial years following the most re cent reorganization, a number of comments and criticisms arose concerning the ability of Fannie Mae to implement its principal objec tive of a secondary mortgage market. In view of the fact that in those years Fannie Mae seldom sold mortgages, many observers main tained that the Association was actually a primary or long-term lender rather than the force behind an effective secondary market for trading mortgages among institutions. Secondly, critics held that, given the frame work within which the FNMA operated, its activity was inherently conflicting with gen eral credit policy and thus with overall sta bility in the economy. Finally, doubts were expressed as to whether Fannie Mae would become entirely privately-owned and financed according to the means established in the charter. An understanding of these issues in light of the recent operations of Fannie Mae and the factors which influence these operations may provide perspective for an appraisal of current trends. Recent activity of the FNMA has shown a pattern which is in marked con trast to the period immediately following the reorganization of 1954. This activity, more over, suggests that Fannie Mae has become a stronger force in the home mortgage market than was originally anticipated. A Secondary Market Facility As shown in the chart on the cover, the FNMA acts as a middleman in bringing to gether buyers and sellers of existing mort gages. The principal types of lending institu tions which sell mortgages to Fannie Mae are basically different from the principal buyers of mortgages. Mortgage companies which originate over three-fifths of governmentinsured home loans are the most important sellers of mortgages to Fannie Mae. The rela tive role of mortgage companies has doubled since 1956; prior to this time commercial banks were more important originators o f government-insured mortgages.(1) By making regular surveys of market trans actions, FNMA attempts to establish its pur chase prices on mortgages within the range of market prices. The announced schedules o f prices vary according to the state in which the property is located, the contract rate on the mortgage, and the amount of borrower equity. Until late in 1962 Fannie Mae pur chased only newly-originated mortgages which were insured by the F H A or guaranteed by the V A less than four months earlier. In order to increase the volume of mortgage purchases, however, Fannie Mae currently purchases government-insured mortgages that have been originated anv time after August,, 1954. When Fannie Mae purchases a mortgage, it requires the seller to pay a marketing fee equal to 0.5 percent of the unpaid principal amount of the mortgage. In addition, the ( i ) The role played by mortgage companies illustrates the specialization that has occurred in real estate financing since the establishment of the secondary market operations of the F N M A . The practice of “ warehousing” mortgages has devel oped, whereby commercial banks make short-term loans tomortgage companies on the security of government-insured mortgages. Individual mortgage companies then accumulate mortgages until the combined volume is large enough to be sold as a unit to large investors such as life insurance com panies or mutual savings banks. In this way, mortgage com panies act as correspondents in originating and servicing mortgages for subsequent resale to other large investors. The intermediate financing is provided by the commercial banks. 3 C h a ri I . P rio r to 1961 a c tiv ity of the FN M A took the form prim arily of m ortgage pu rch ases. Since the beginning o f 1961, h o w ev er, the volume of m ortgage sales has in cre a se d and the FN M A has been a net se lle r of m ortgages during th ree diffe re n t perio ds. S o u rc e of seller is required to purchase common stock in Fannie Mae equal to 1 or 2 percent of the amount of mortgage, depending on the cur rent FNM A decision. These fees and stock purchase requirements make the amount re ceived in selling mortgages to FNMA slightly less than sellers obtain by dealing directly with secondary holders of government-insured mortgages. Thus, the Association is not in direct competition with other mortgage lend ing institutions, but stands ready to buy when needed. Fannie Mae does not sell directly to poten tial buyers of mortgages. Sales are effected through numerous d i s t r i b u t o r s located throughout the country. The distributors or mortgage dealers order large units of mort gages from FNMA and in turn resell the mortgages to their customers. Therefore, Fannie Mae does not know the identity of the specific purchasers.(2) Life insurance com 4 panies, mutual savings banks, savings and loan associations, and commercial banks are all important secondary holders of government-insured mortgages. When Fannie Mae acts as a middleman in the exchange of government-insured mort gages between originators and buyers, its purchases and sales tend to cancel over sev eral years time. As shown in Chart 1, nearly all activity of Fannie Mae during 1955-57 took the form of mortgage purchases. More over, mortgage sales were relatively unim portant before 1961, with the exception of mid-1958. Consequently, the mortgage port folios resulting from secondary market oper ations expanded to a high of nearly $2.8 (2) On the cover chart the percentage distribution of origi nators of government-insured mortgages is the same as the percentage distribution of sellers of mortgages to the F N M A . Although there is no distribution available of mortgage buy ers from the agents of F N M A , it is assumed that this dis tribution is the same as the percentage distribution of hold ers of government-insured mortgages, as reported by F H A and V A . billion at the end of 1960. Since the beginning of 1961, Fannie Mae has alternately been a net buyer and a net seller of mortgages. As a result, the mortgage portfolio at mid-1963 was near the level of mid-1959. The unusually large volume of mortgage sales by Fannie Mae during the first half of 1963 was due in part to the demands from commercial banks, savings and loan associ ations, and mutual savings banks. These insti tutions have sought higher-yielding invest ments, particularly in view of the relatively high interest rates being paid to savers for the use of their funds. The Volume of Purchase and Sale Activity Since 1961 the volume of purchases and sales of mortgages by Fannie Mae has in creased. The major reason for the larger vol ume has been a closer correspondence in the timing of fluctuations in the housing indus try with general credit conditions. During this period the housing industry has clearly been a procyclical influence in general busi ness activity; that is, the expansion in resi dential construction and its financing have paralleled the expansion in general business conditions. In marked contrast, in the imme diate postwar period, residential construction and its financing had been countercyclical; that is, surges in building usually began dur ing periods o f economic recession and then moved sideways or declined as the rest of the economy reached levels of high prosperity. Government-insured mortgages contributed importantly to the earlier countercyclical be havior of mortgages largely because the inter est rate ceiling on FHA-insured and VAguaranteed credit (coupled with the inflexi bility of the discount and premium system) made such credit attractive during recessions but comparatively less attractive during busi ness expansion when other interest rates were rising faster. Thus, it can be seen that the need for a secondary market for governmentinsured mortgages was not imperative during periods when the housing industry was countercyclical due to the fact that the sup 5 ply of mortgages was increased at a time when idle funds were seeking attractive in vestment outlets. As the countercyclical stim ulus of the housing industry has declined, the need for Fannie Mae’s services to insulate the volume of government-insured mortgages from general credit conditions has increased. The seesaw pattern of activity in purchases and sales since the beginning of 1961 is un usual when compared with earlier periods of FNMA activity. Nevertheless, the recent ac tivity is not uncommon to the functions of a secondary market facility. It seems clear that since 1961 the FNMA has no longer been a primary investor in government-insured mort gages, but rather the pivot in an active sec ondary market. In fact, during recent years Fannie Mae has effected substantial shifts among lending institutions in holdings of government-insured mortgages. The Timing of Purchase and Sale Activity General credit conditions have influenced the timing of Fannie Mae activity as a net buyer or net seller of mortgages, in addition to the volume of the agency’s activities. Chart 2 shows the effects of the general availabil ity of credit on FNMA activity. Increases in the mortgage portfolios of FNM A indicate periods when Fannie Mae was a net purchaser of mortgages, while decreases indicate periods as a net seller. The volume of free, or net bor rowed, reserves of the member banks of the Federal Reserve System reflects changes in the rate of growth of total credit. The chart shows that periods of increasing mortgage portfolio (or net buyer position) have corresponded closely to periods of net borrowed reserves in the commercial banking system. Furthermore, periods of a declining inventory (or net seller position) have corre sponded, although not to the same degree, to periods of free reserves. Thus, during periods of monetary restraint when funds are rela tively scarce, Fannie Mae has been a net buyer of mortgages and, alternatively, when funds are relatively ample, the FNMA has been a net seller of mortgages. This has tend- respon ded clo se ly to p erio d s of m onetary re stra in t, as re b o r r o w e d r . , . r » o , o f the c o m m e r c ia l mg m ortgage inventory (o r a net se lle r p o sitio n l have c re d it ea se as re fle cte d in the volume of fre e re se rv e s. r— .......... ....... -I--------------- — — f ... ------------- i— ..... ...... 1------------------------- j. .................. l io n s of d o ll a r s FN M A M O RTG A G E PORTF' FREE RESERVES NET BO RRO W ED RESERVES 19 5 5 195 6 ■ S o u r c e of d a t a : 19 5 7 1958 1959 196' i ■ £ ■ '■ i'# ;:-® F N M A a n d B o a r d o f G o v e r n o r s of t he f e d e r a l R e s e r v e S y s t e m ed to insulate the mortgage market from sharp changes in the total supply of credit. There is strong evidence, moreover, that general credit conditions are more important determinants of the timing in activity of Fannie Mae than are any adjustments made by Fannie Mae in prices, fees, and stock pur chase requirements. The FNMA, for example, can make changes in the schedules of prices it will pay sellers of mortgages and of prices which the Association will charge mortgage buyers. To sellers of mortgages, the FNMA can also adjust the various marketing fees and the percentage amount of common stock which the Association requires the sellers to purchase. Use of these marketing adjust ments, however, must be made within the legally-prescribed restriction that the opera tions of the FNMA be self-supporting. Since yields on mortgages tend to rise with 6 other interest rates during periods of mone tary restraint, the prices charged buyers of mortgages from the FNMA portfolios cannot be decreased in order to increase mortgage sales, unless losses are incurred. On the other hand, during periods of ample funds, the prices that the FNM A pays sellers of mort gages cannot be lowered in order to decrease purchases because the relatively high yield to the FNMA would make it more difficult to resell at a later time without incurring a loss. Despite the fact that the timing of Fannie Mae activity is influenced more by general credit policy than by adjustments in prices, fees, and stock purchase requirements, the FNMA has not provided funds at rates below those available in other money and capital markets. General credit policy is concerned with the total supply of credit. The allocation of this supply among competing uses is de Chari 3. termined largely by the market on the basis of relative prices or yields. The operations of the FNMA have been conducted within this framework. Sources of Funds and Their Cost The reorganization of FNM A in 1954 established the secondary market facility as a mixed-ownership corporation which would eventually become owned by and financed en tirely from private sources of funds. Fannie Mae is unique in that the Association is the only governmental agency which issues com mon stock. Common stock is issued to sellers of mortgages to the FNMA through the re quirement that the sellers in turn subscribe to common stock in an amount equal to 1 or 2 percent of the amount of mortgages sold. The amount of common stock issued through such stock purchase requirements has grown to over $100 million in mid-1963, or about one-third of the total equity of Fannie Mae. The U. S. Treasury holds the remaining equity, or about $200 million in preferred stock. Although the equity of Fannie Mae is rela tively small in relation to its total funds, as shown in Chart 3, this amount o f capital provides the leverage for the sale of deben tures and notes in the private capital market. Private borrowings, the largest source of funds to the FNMA, have grown rapidly and have comprised more than four-fifths of total funds of the FNMA since 1956. Under its charter, Fannie Mae is permitted to borrow up to ten times the amount of its capital and surplus. Since the FNMA potential borrow ing authority is over $3 billion and the amount of debentures and notes outstanding was less than $2 billion in June 1963, there is currently a considerable margin between the borrowing authority and the amount of outstanding indebtedness. During periods of a continuously large volume of mortgage pur chases, however, Fannie Mae has had to issue preferred stock to the Treasury in order to increase its borrowing authority. Most of the early issues of borrowings were in the intermediate- and long-term maturity 1955 1957 1959 1961 1963 S o u rc e o f < jolo: FNM A. Sin ce 7 9 5 6 notes and d ebentu res issued to the public have been the m ajor so u rce o f funds fo r the seco n d a ry m arket o peratio ns of the FN M A . range. Since the beginning of 1960, however, Fannie Mae has also issued short-term notes of one to nine months maturity. These short term notes have at times comprised as much as 15 percent of total borrowings from the public. The use of short-term credit has the advantage of permitting a more flexible amount of borrowing, in that the notes enable a closer timing of borrowing maturities with the use of funds to purchase mortgages. Then, when the mortgages have been sold and the funds are no longer needed, the notes will be retired. The retirement of short- and inter mediate-term notes was particularly impor tant during the first half of 1963 when there was a relatively large volume of mortgage sales. Fannie Mae has not borrowed in the short-term market since the end of 1962. Fur thermore, intermediate issues have not been refunded during this period. of Interest rates affect virtually every aspect Fannie Mae’s operation, and interest 7 Ch art 4. The small differential between 90-day issues of FNMA notes and similar issues of the U. S. Treasury indicate the comparatively favor able credit standing of FNM A among money market instruments. The short-term rate of the FNMA, for example, is approximately the same as the rate charged for bankers’ accept ance borrowers. T OF FUND FHA M O RTG AG ES FNMA BONDS FNMA NOTE5 TREASURY BILLS (91-d a y ) 1960 So u rce of d a ta : 1961 1962 19 6 3 FH A , F N M A , a n d U.S. T re a s u r y D eportm en t. The in terest rate s on FN M A notes and debentures indicate the relative c o sts o f these funds as com pared with the ra te on FH A m o rtg a g e s, i.e.. the major so u rce of income to F N M A . charges constitute both the major source of income and the largest expense. Chart 4 shows the relative prices and costs of the agency’s important sources of income and expense. The major source of income is the return on F H A mortgages. The rate on such mortgages is the price Fannie Mae pays to the sellers of mortgages.<3) Since the FH A rate is also the rate charged against buyers of mortgages from the FNMA portfolio, the profit or loss on operations is obtained in part through differentials in the F H A rate from the time of purchase to the time of sale of mortgages. In addition, the relative profitability of F N M A ’s operations depends on the differen tial between the income received and the costs of borrowing. The two interest rates of the FNMA on the chart indicate the costs of bor rowing short- and intermediate-term funds. (3) The F H A mortgage rate is based on average bid prices for 25-year mortgages at the prevailing contractual interest rate. 8 Another source of income to FNMA is the various marketing fees charged against sellers of mortgages. Marketing fees have so far been of relatively minor importance to total in come and, therefore, to profits. The periods of largest profits of the FNMA have occurred during periods of general recession in busi ness activity when there has been a relatively large volume of mortgage sales. This is prob ably due to the fact that while interest rates in general are relatively low during reces sionary periods, mortgage rates do not fluctu ate as much as other interest rates. Therefore, the differential between interest received as income and interest paid as a cost of borrow ing widens during periods of general reces sion in business activity. In recent years FNMA earnings (after provision for income taxes) have ranged between 7 and 13 percent of total income. Although the FNMA has succeeded in be coming almost entirely privately-financed in terms of obtaining nearly all its funds from private sources, the Association is a long way from becoming entirely privately-owned. The Treasury still retains the major part of FNMA equity. This is somewhat surprising in view of the comparatively favorable ac ceptance of the common stock by the invest ing public. Since the common stock is issued through stock purchase requirements, it is not sold initially on an auction basis. Fannie Mae, however, places no restriction on second ary transfers of its common stock, therefore sellers of mortgages to the FNMA can pro ceed to dispose of the stock through the overthe-counter market. Dividends on the common stock have ad vanced continuously from a monthly rate of $.18 a share in 1956 to $.30 a share in the first half of 1963. The increases in dividends cou pled with the growing interest in the stock have steadily improved its resale value. Thus, the bid price on the over-the-counter market has increased from about $50 a share in the beginning of 1956 to about $90 a share in June 1963. The average annual yield of the common stock, however, has decreased from 4.3 percent in 1956 to 4.0 percent during the first half of 1963. Despite the comparatively favorable mar ket performance of the common stock, Fannie Mae has had to add Treasury capital from time to time in order to be able to increase mortgage purchases. The need to add Treas ury capital, particularly during periods of a heavy volume of mortgage purchases, sug gests that a higher rate of stock subscription may be necessary if the Association eventu ally is to become privately-owned. Notes on Federal Reserve Publications Among the articles recently published in the monthly publications of other Federal Reserve Banks are: “ Gold, the Balance of Payments, and Monetary Policy,” Federal Reserve Bank of Atlanta, June, 1963. “ The Current Dialogue on Financial Developments,” Bank of Kansas City, May-June, 1963. Federal Reserve “ Conversations on International Finance,” Federal Reserve Bank of New York, August, 1963. “ Certificates of Deposit,” Federal Reserve Bank of New York, June, 1963. “ Today’s Mild-Mannered Inventories,” Federal Reserve Bank of Phila delphia, July, 1963. “ U. S. Balance-of-Payments Deficits in Perspective,” Bank of St. Louis, July, 1963. Federal Reserve Recently published by the Board of Governors of the Federal Reserve System: “ Monetary Developments, First H alf ’63” and “ Measures of Member Bank Reserves,” Federal Reserve Bulletin, July, 1963. “ Recent Changes in Liquidity,” Federal Reserve Bulletin, June, 1963. “ Farm Debt As Related to Value of Sales,” Federal Reserve Bulletin, Feb ruary, 1963. 9 Dairy Farmer Indebtedness on fa r m debt collected in the Sample Survey of Agriculture by the Bureau of the Census in Autumn of 1960 showed that nearly three-fourths of the dairy farmers in the nation reported having some debt.(1) Recent analysis of the data collected indicates that debt on dairy farms totaled nearly $3.1 billion, as shown in Table I. Op erators with debt accounted for 87 percent of the total; the remainder of the debt repre sented credit outstanding to landlords of dairy farms. The average debt per farm was $10,559. D a ta Dairy Farms Lead in Proportion With Debt As shown in Table II, among those farms reporting debt, the amount per farm was somewhat smaller for dairy farms than for several of the other types of farms. In con trast, the percentage of dairy farms report ing debt was higher than for most other types of farms. In examining only dairy farm operators the same pattern emerges, operators with debt constituted nearly three-quarters o f all dairy farmers in contrast to about 60 percent of the operators of cotton and tobacco farms, as shown in Chart 1. The ratio of debt to total net cash income and the ratio of debt to value of land and buildings owned by dairy farmers were also higher than those for most other types of farm operators (see Chart 2 ) . (2) Thus, it ap pears that the use of borrowed funds was not (1)S ee the Appendix for a further explanation of the sur vey and Tables I through V . (2) Total net cash income represents farm cash receipts plus off-farm income m inus cash expenses. D ata did not permit allowance for non-money income furnished by farm s, net change in inventories, or for depreciation of buildings and equipment. 10 only more widespread among dairy farmers at the time of this survey, but they were using somewhat more credit in relation to total net cash income and value of land and buildings owned, as compared with most other types of farm operations. One of the reasons why dairy farmers were somewhat more heavily indebted may be the rather general conversion from can to bulk handling of milk, a development that began in the early 1950’s. The number of farms reporting bulk tank installations increased tenfold from 1954 to 1960.(3) In addition, the installation of bulk milk handling equipment has often served as the initial step in a series of developments leading to an enlargement of the dairy enterprise. Source of Real Estate Credit Individuals were the most important source of major real estate credit for dairy farmers. Individuals who extended credit secured by farm mortgages and land purchase contracts, accounted for about 35 percent of the total major real estate credit outstanding to oper ators of dairy farms. The survey results revealed that commer cial and savings banks were the most impor tant institutional source of major real estate credit (see Chart 3). Bank holdings of dairy farm major real estate debt accounted for 21 percent of the total. The second ranking in stitutional source of major real estate credit were the Federal Land Banks. They provided about one-fifth of the major real estate credit outstanding in 1960. Other prominent insti tutional lenders included the Farmers’ Home Administration and life insurance companies. (3) From data Association. assembled by the D airy Industry Supply C h a rt 1. FARM OPERATOR DEBT by Major Type of Farm 1960 AVERAGE INDEBTEDNESS PER FARM OPERATOR PERCENT OF OPERATORS WITH INDEBTEDNESS 100 % $ 1 0 ,0 0 0 75% Source of data $ 1 5 ,0 0 0 I U .S . Department of Commerce, Bureau of the Census. Sources of Non-Real-Estate Credit Commercial and savings banks also ac counted for 31 percent of total non-realestate and related credit outstanding to dairy farm operators at the time of the survey. The other principal non-real-estate lending group was the Production Credit Associations. These institutions accounted for over one-fifth of the total. Merchants and dealers supplied approxi mately one-fifth of the non-real-estate and related credit outstanding. The amount ex tended by individuals other than merchants and dealers was equal to about 13 percent of the total. Information as to purposes for which individuals may extend such credit is limited but it may be presumed to include credit granted by some sellers of dairy stock, and intra-family lending. Some non-realestate credit was also provided by insurance companies and the Farmers’ Home Admin istration. Types of Credit Considering the type of indebtedness re ported, operators of dairy farms held more major real estate than non-real-estate and related debt. Of the total amount of debt out standing, about 57 percent was in the major real estate category and the remainder, or 43 percent, was classified as non-real-estate and related credit. The proportion of major real estate credit used by dairy farmers, however, did not appear to be quite as high as that reported for most of the other types of com mercial farms. Operators With and Without Debt As would be expected, the survey shows that operators with debt operated somewhat 11 C h a rt 2. FARM DEBT RATIOS by Major Type of Farm I960 RATIO 3 TOTAL DEBT os a MULTIPLE OF TOTAL NET CASH INCOME 52 head in contrast with 41 head on the farms of operators without debt. Operators With Major Real Estate Debt Nearly two-fifths of dairy farm operators reported major real estate debt in the fall of 1960.(4) Operators of these farms (as shown in Table IV ) had an average total debt of $13,803, as compared with an average total debt of $1,998 for dairy farm operators without major real estate debt. As logic would dictate, the average size of farm, the dollar value of land and buildings, and the net cash income per farm for the op erators with major real estate debt was larger than for those operators without such debt. Operators With Non-Real-Estate Debt R A T IO > k 1.0 TOTAL DEBT as a MULTIPLE OF VALUE OF LAND and BUILDINGS 0 .5 0 IT T ! T T T_____ L N O T E : Total debt has been expressed as a multiple of total net cash income of the operator and his family, and as a multiple of the value of land and build ings owned by the farm operator. Source of da ta : U .S . Department of Commerce, Bureau of the Census. larger farms than those without debt (see Table III). The operators with debt both owned and rented more land. As a conse quence, the value of land and buildings per farm was also higher for the operators with debt. Debt, as a multiple of total net cash in come, was somewhat above the average indi cated for indebted operators of all farms (see Chart 2). Only livestock farms had a higher ratio of debt to total net cash income. More over, the debt in relation to the value of land and buildings owned, at 39 percent of the value, was also higher than for other types of farms. In keeping with the larger average size of the farms of operators with debt was the larger size of the dairy herd. The number of cattle and calves on these farms averaged 12 More than three-fifths of dairy farmers reported non-real-estate and related debt at the time of the survey (see Table I V) . These farmers had an average total debt per farm of $9,612. In this instance, the total debt was about equally divided between major real estate and non-real-estate and related debt. Debt in Relation to Age of Operator A fairly consistent pattern emerges when debt is related to the age of the operator. Well over 80 percent of the operators under 35 years of age had debt as against only 50 percent for those 55 years and over, as shown in Table V. The proportion of the operators 35 to 54 years of age who had debt was some what lower than for those under 35 years, but well above those of 55 years and over. The picture is relatively similar when the average debt per farm is considered. The op erators in the younger age group had the highest average debt per farm. In fact, their (4) M ajor real estate debt is defined so as to exclude real estate-secured debt owed to production credit associations and to merchants and dealers. It includes all real estatesecured debt to Federal Land B anks, life insurance com panies, and individuals from whom the farm was purchased. Debt owed to the Farm ers’ Hom e Adm inistration, banks, other institutions, or individuals other than those from whom part or all of the farm w as purchased was included only if it w as the largest, or the only, real estate debt owed by the borrowers. Non-real-estate and related debt consisted of all debt other than m ajor real estate. This classification w as designed to avoid including as m ajor real estate debt loans primarily secured by non-real-estate assets but which also had real estate as supplementary security. C h a rt 3. SOURCES OF CREDIT FOR DAIRY FARM OPERATORS 1960 T O TA L DEBT M A JO R REAL ESTATE DEBT N O N -R E A L-E S T A T E D E B T * / NONINSTITUT10NAI 34.1% OTHER INSTITUTIONAL OTHER INSTITUTIONAL 402% $2,663,000,000 $1,515,000,000 $1,148,000,000 % MAJOR REAL ESTATE DEBT Commercial and Savings Banks 20 . 8 % % NON-REALESTATE DEBT* 30.9% Federal lan d Banks Farmers Home Administration Insurance Companies Other Institutions Production Credit Associations Miscellaneous Individuals — form w as purchased: Under mortgage Under land purchase contract Other individuals Merchant and Dealer Source of data: U .S . Department of Commerce, Bureau of the Census. * Includes related debt. N o te: M ay not be additive due to rounding. average debt of $12,579 was more than twice the average debt per farm for those in the 55 years and over category. The operators in the 35 to 54 year age group had somewhat smaller average debt than the group under 35 years, but substantially more than those 55 years and over. The relatively heavy indebtedness of the younger operators of dairy farms reflects the comparatively low equity that many oper ators have in their farm business during the initial stages of its development. It may also reflect the increased willingness of some lend ers to extend credit to operators who presum13 ably have a greater number of years of pro ductive life in which to repay borrowed funds. Debt in Relation to Size of Farm Just as larger manufacturing firms usual ly require larger amounts of borrowed capital than smaller manufacturing firms, it seems that a close correlation also exists between the size of farm and the average indebtedness of dairy farm operators. The operators of farms of 99 acres and under had an average debt of about $5,000. The amount of debt per farm was nearly twice as large for the operators whose farms ranged from 100 acres to 499 acres. For operators of farms consisting of 500 acres and over, the average debt was $23,000. However, it would appear that the debt per acre tends to decline as the size of the farm increases. A similar relationship be tween indebtedness and value of land and buildings was revealed by survey results. APPENDIX The estimates presented here are based on unpublished data collected from a sample of farms in the United States (exclusive of Alaska and Hawaii) in Autumn, 1960. A stratified random sampling procedure was used which allowed heavier sampling rates for farms with higher values of farm prod ucts sold. A more detailed description of the sample appears in Part 5, Volume V, “ I960 Sample Survey of Agriculture,” o f the re ports of the 1959 Census of Agriculture, published by the Bureau of the Census. For comprehensive definitions of such terms as farm, farm operator, economic class, off-farm income, type o f farm, and value of products sold, see TJ. S. Census o f Agricul ture, 1959, Volume II, General Report, Sta tistics by Subjects— Introduction and Chap ter II. A listing of the items reported as debt as well as a more detailed technical explanation appears as part of “ A New Look at the Farm Debt Picture,” Federal Reserve Bulletin, De cember 1962. Included in this explanation are the reasons for differences between the esti mates of debt of farm operators and farm landlords in the 1960 Survey and those made by other agencies on the basis of other sur veys. It also includes a discussion of the sta tistical reliability of estimates obtained in the 1960 Survey and measures of sampling errors. Table I TOTAL DEBT OF DAIRY FARMS Amount of Debt Number Reporting Percent of Total Total Per Reporting Unit (000,000) (000) All dairy f a r m s .................................... 398 100 $3,075 $ 7,705 Farms with d e b t ..................................... Farms without d e b t ............................ 291 107 73 27 3,075 10,559 Operators with d e b t ............................ Operators without d e b t ........................ 282 116 70.8 29.2 2,663 9,456 Landlords with d e b t ............................ 66 n.a. 412 6,246 n.a. — N ot Available. 14 Table II DEBT OF DAIRY FARMS AND OTHER COMMERCIAL FARMS Farms With Debt Type of Farm Amount of Debt Percent of All Farms of Specified Type Number Reporting (000) Total Average per Farm Re porting Debt (000,000) D a i r y ..................................................... General and o t h e r ................................ Cash g r a i n ............................................. L ivestock ................................................. C o tto n ..................................................... Tobacco ................................................. M iscellaneous........................................ 291 310 293 365 137 133 n.a. 73.0 72.5 71.0 65.4 62.5 61.1 n.a. $ 3,075 3,519 3,683 5,910 1,125 524 224 $10,559 11,371 12,551 16,193 8,204 3,940 n.a. All commercial( a ) ................................ 1,529 67.5 18,061 11,810 n.a. — Not Available. (a ) The number and proportion of commercial farm s using credit sometime during the year w as probably higher than the survey indicated since the questionnaires were completed near the end of the year when m any farm ers may have repaid credit used in producing some crops and certain classes of livestock. Table III CHARACTERISTICS OF DAIRY FARM OPERATORS WITH DEBT AND WITHOUT DEBT— 1960 All Operators Operators With Debt Operators Without Debt Number of Operators ( 0 0 0 ) .................... 398 282 116 Average number of acres O p e r a t e d ................................................. O w n e d ..................................................... R e n t e d ..................................................... 212 154 58 225 161 65 182 138 44 Average value of land and buildings (dollars) O p e r a t e d ................................................. O w n e d ..................................................... R e n t e d ..................................................... $33,770 23,199 10,572 $35,467 24,511 10,956 $29,662 20,021 9,642 Average net cash income (dollars) Total w ..................................................... F a r m ......................................................... O f f - f a r m ................................................. $ 4,441 3,034 1,407 $ 4,520 3,146 1,375 $ 4,248 2,762 1,486 Average total debt ( d o l la r s ) .................... Major real estate.................................... Non-real estate and related debt . . . $ 6,692 3,806 2,886 $ 9,456 5,378 4,078 ___ ---- Debt as a multiple of: Total net cash income ........................ Value of land and buildings owned . . 1.50 .29 2.10 .39 ----- Number of cattle and calves per farm . . 49 52 41 Average age of op era tor............................ 48 46 54 (a ) Net cash income from sale of farm products plus net cash income from off-farm sources. 15 Tabic IV CHARACTERISTICS OF DAIRY FARM OPERATORS WITH AND WITHOUT MAJOR REAL ESTATE AND NON-REAL ESTATE AND RELATED DEBT Dairy Farm Operators With Major Real Estate Debt With NonWithout Major Real-Estate Real Estate and Debt Related Debt Without NonReal-Estate and Related Debt Number Dairy Farms (0 0 0 ) ................ 158 240 247 151 Average number of acres O perated............................................. O w n e d ................................................. R en ted ................................................. 239 196 43 195 125 70 231 158 73 182 146 36 Average value of land and buildings (dollars) O p erated ............................................. O w n e d ................................................. R en ted ................................................. $37,902 31,538 6,364 $31,042 17,696 13,346 $35,856 23,729 12,127 $30,367 22,318 8,049 Average total net cash income (dollars) T ota l(a)................................................. Farm..................................................... O ff-fa r m ............................................ $ 4,911 3,347 1,564 $ 4,131 $ 4,562 3,118 1,444 $ 4,243 2,896 1,347 Average total debt (d olla rs)................ Major real estate................................ Non-real-estate and related debt . . $13,803 9,571 4,231 $ 1,998 $ 9,612 4,957 4,655 $ 1,928 1,928 Debt as multiple o f: Total net cash i n c o m e .................... Value of land and buildings owned . Average age of operator........................ 2,827 1,304 1,998 2.80 .44 45 .48 .11 .45 .09 2.10 .40 50 45 53 (a ) N et cash income from sale of farm products plus net cash income from off-farm sources. Table V DAIRY FARM DEBT BY AGE OF OPERATOR— 1960 All Ages Number of operators ( 0 0 0 ) ............................ Number of operators with debt (000) . . . . Percent o f operators with d e b t .................... Average total debt (dollars)............................ Major real e s t a t e ........................................ Non-real-estate and related d e b t ................ Debt as a multiple of: Total net cash i n c o m e ................................ Value of land and buildings owned . . . 398 282 70.9% $9,456 5,378 4,078 2.10 .39 Under 35 Years 51 44 86.3% $12,579 7,338 5,241 3.20 .72 Age 35 to 54 Years 55 Years and Over 206 158 76.7% 115 60 52.2% $9,828 5,421 4,406 2.00 .40 $5,504 3,218 2; 286 1.30 .18 Age Not Reported 26 20 76.9% $11,446 7,183 4,263 2.50 .52
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