The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
BuoimMffiu/ieu/ MONTHLY IN FEDERAL RESERVE BANK of CLEVELAND THIS ISSUE Trends in Bank Loans to Business.... .. . 3 Whittling Down the Stake in Farm Price Supports................... ... 7 BUSINESS LOANS OUTSTANDING Weekly Reporting Member Banks Trends in Bank Loans to Business (Fourth District) e t r e n d in business loans outstanding liabilities has declined from 51 percent at the banks in the Fourth Federal Reserve end of 1954 to 41 percent at mid-1957. ThatDistrict changed markedly during the past year. The turning point, as shown on the cover chart, appears to have occurred during June when outstanding business loans at the District’s 17 weekly reporting member banks reached a record level of $1,978 million. Dur ing the previous 32 months, business loans outstanding had been rising sharply, increas ing nearly 80 per cent between the low point in October, 1954, and the peak in June, 1957. Over the last six months of 1957, however, business reduced its obligations about 4 per cent. The continued upward trend in business borrowing during the first half of 1957 was largely a result of tax borrowing. About $209 million was added to outstanding business loans near the March and June payment dates for Federal income taxes, but the net addition to such loans over the entire six-month period amounted to only $174 million. Similarly, the major exceptions to the steady reduction in bank loans outstanding during the second half of the year occurred near the September and December tax payment dates. The revised Mills tax plan required payments of 40 per cent of the 1956 tax liability on both the March 15 and the June 15 payment dates. The September and December rate was 15 percent of the 1957 tax liability. In addition to the accelerated rate of tax payment, a decline in the liquidity position of business contributed to the need for bank loans to finance tax obligations. Information collected from all nonfinancial corporations in the nation by the Securities and Exchange Commission indicates that corporate liquidity has declined steadily since 1954, despite addi tions made to working capital. Reflecting large expenditures for plant and equipment expansion from internal funds, the ratio of cash and Government securities to current The volume of business borrowing at tax payment dates has been intensified by the practice of sales finance companies of borrow ing from business concerns on short-term notes that are scheduled to mature near the payment date. When sales finance companies make such notes, they shift from banks to business as a source of financing, returning to banks when the notes become due. As shown on the cover chart, changes in business loans at Fourth District weekly re porting banks follow a pattern similar to business borrowing trends throughout the nation. However, the rate of decline in 1954 and the rate of increase posted in 1955 and 1956 were both somewhat larger in the Fourth District than in the nation. The tendency of outstanding business loans at Fourth District banks to vary over a wider range than the national average reflects in part the high de gree of industrial concentration in the area. Business Loans by Type of Business Sample data obtained from 14 large mem ber banks in the Fourth District indicate that the change in the trend of business loans dur ing 1957 was not followed by all types of industry. As shown on the accompanying chart depicting the ehanges in outstandings, the bulk of the decline in business borrowing at 14 Fourth District banks between the first and second halves of 1957 occurred in three industries — manufacturers of metals and metal products, sales finance companies, and public utilities. The reduction in borrowing was less marked in the petroleum and textile industries. Three industry groups — com modity dealers, manufacturers of food-liquortobacco products, and trade firms — made small additions to their bank obligations dur3 After significant first-half gains, BUSINESS LO A N S outstanding at 14 Fourth District weekly reporting banks declined during the second half of 1957, but changes varied widely among industries. LAST HALF 1957 Millions of Dollars FIRST HALF 1957 Much of the firstto-second half change was due to: METALS SALES UiHions of Dollars I---------10--------♦ 50r -50 50 0 *50 MOO I------------ -------------1------------1 MANUFACTURERS FINANCE PUBLIC COMPANIES U T ILITIE S . . . but the shift was also felt by: PETROLEUM, COAL and CHEMIC AL MANUFACTURERS T E X T ILE , APPAREL and LEATHER MANUFACTURERS M ISCEL LA NEO US and MINING MANUFA CTURING F IR M S Seasonal forces were the main influence in borrowing by: C O M MO DITY FOOD, OEALERS LIQUOR and TOBACCO MANUFACTURERS TRADE F IR M S CONSTRUCTION ALL OTHER FIRMS INDUSTRIES I__________ I_____I 4 ing the second half in contrast to reductions posted earlier in the year. Construction firms repaid bank debt during both semi-annual periods, but the volume of repayments de clined sharply in the second half. The debt reduction by metals manufac turers during the second half of 1957 was clearly contraseasonal; it was accompanied by a slowdown in inventory accumulations and in production. Large primary metals pro ducers, such as steel, were affected by the slackened sales volume of consumer durables and inventory reductions by durable goods producers. On the other hand, the reduced borrowing rate of sales finance companies and public utilities during the second half of 1957 appears to be largely a shift from bank to nonbank financing rather than a curtailment of their operations. In both cases bank loans were partly replaced by funds raised in the capital market. Sales finance companies bor rowed from nonbank investors on short-term notes and in some cases on sales of long-term debentures. Public utilities raised a record volume of long-term funds through new security issues during the second half of 1957. Additions to bank loans by commodity dealers and food processors were less than ex pected despite increased inventories and a reduced marketing volume during the second half of the year. Trade firms in reducing their bank obligations responded to a decline in demand for consumer durables by reducing inventories. Consumer Spending and Business Spending Changes in the rate of consumer spending and business spending during 1957 were also reflected in the trend of business loans. In the chart on the next page, all manufacturing and mining industries and public utilities have been grouped together as industries most responsive to business spending. All other in dustries, principally trade firms, sales finance companies, commodity dealers, and construc tion firms, have been grouped together as industries most responsive to consumer spending. CHANGES IN LARGE BUSINESS LOANS OUTSTANDING at 14 Fourth District Weekly Reporting Banks 1957 1954 1955 1956 1st half 2nd half 1st half 2nd half 1st half 2nd half 1st half 2nd half (iii millions of dollar Manufacturing and Mining.............. —137,714 — 79,610 + 58,531 + 25,462 +152,610 5)+ 65,325 +108,555 — 61,168 Food, Liquor, and Tobacco ....... — 15,223 — 5,532 — 4,931 + 10,219 — 848 + 18,710 — 15,318 + 5,662 Textiles, Apparel, and L eather. . + 1,492 — 5,289 + 3,319 — 4,702 + 10,269 — 9,993 + 10,195 — 11,503 Metals and Metal Products........ — 91,614 — 57,629 + 14,349 + 21,585 +104,889 + 26,218 + 82,138 — 32,620 Petroleum, Coal, Chemicals, and Rubber................................. — 11,998 — 3,535 + 26,550 — 2,308 + 8,540 + 20,455 + 12,659 + 1,344 Other Manufacturing and Mining — 20,371 — 7,625 + 19,244 + 668 + 29,760 + 9,935 + 18,881 — 24,051 Trade................................................... — 8,674 + 16,753 — 6,407 + 21,298 — 907 + 3,053 — 2,036 + 4,967 Wholesale T rade............................ — 545 + 10,040 — 7,321 + 9,548 + 2,478 + 3,901 — 4,062 — 3,459 Retail T rade................................... — 8,129 + 6,713 + 914 + 11,750 — 3,385 — 848 + 2,026 + 8,426 Other Industries................................ — 54,120 + 29,757 + 53,544 + 96,652 — 40,640 +146,117 + 57,876 + 14,909 Commodity Dealers..................... — 4,886 + 15,496 — 19,521 + 24,351 — 11,586 + 17,465 — 14,490 + 6,031 Sales Finance Companies............ — 15,602 + 6,244 + 50,158 + 77,773 — 55,779 + 40,745 + 34,856 — 7,089 Public U tilities ............................. — 19,482 + 1,966 + 2,597 — 29,240 + 11,182 + 61,596 + 48,439 + 15,431 Construction Firm s ...................... + 3,455 — 563 + 5,764 + 12,324 + 10,702 + 11,245 — 7,944 — 1,256 All Other Types ............................ — 17,605 + 6,614 + 14,546 + 11,444 + 4,841 + 15,066 — 2,985 + 1,792 All Industries.................................... —200,508 — 33,100 +105,668 +143,412 +111,063 +214,495 +164,395 — 41,292 TYPE OF INDUSTRY 5 CHANGES IN BUSINESS LOANS OUTSTANDING By Type of Business 14 Fourth District Weekly Reporting Banks 1954 loans 1955 1956 1957 O utstanding to manufacturing, mining, and utilities clim bed m arkedly in and early 1957, as business investm ent provided the upw ard thrust behind the Outstanding loans to businesses most responsive to consum er decisions rose in late J954 and in 1955, reflecting the role of consum er spending in the re covery. As indicated on the chart, “ consumerresponsive” businesses markedly increased their bank loans at weekly reporting banks in 1955. Much of the increase can be attributed to borrowing by sales finance companies to finance the large share of the 7,000,000 autos that were purchased on more lenient credit terms. Borrowing by “ business-responsive” firms also increased in 1955, but by narrower margins. Conversely, in 1956 “ businessresponsive ’’ firms stepped up their borrowing pace as the rate of business expenditures for new plant and equipment increased sharply. Consumer buying slowed, car sales dropped nearly one-sixth, and borrowing from banks by “ consumer-responsive” firms fell behind the 1955 pace. In late 1957, it appears that both a reduced rate of business expansion and a slowdown in consumer spending contributed to the decline in business loans outstanding at weekly re porting banks in the Fourth District. “ Business-responsive” firms added $157 million to their bank obligations in the first six months of 1957 in sharp contrast to a net reduction of $46 million during the second half. “ Consumer-responsive ’ firms added $7 million to their bank-held debt during the first half of the year. The net addition during the second half amounted to a slight $4 million, contrast ing sharply to the comparable change in each of the three preceding years. In the coming months, both consumer spend ing and business spending will be carefully watched for signs of renewed strength and a reversal of the present decline in business activity. Increased spending by either con sumers or business would most likely stimu late business confidence and business demands for bank credit. 1956 boom. 6 * Whittling Down the Stake in Farm Price Supports h e s t o c k p i l e of farm commodities ac reduced from the level of two years ago by Tcumulated under price support opera sales at reduced prices for special uses, and tions of the Commodity Credit Corporationdonations to school lunch programs. A net was at an unprecedented level two years ago. At that time the value of the inventory of commodities acquired, plus price-support loans held and guaranteed, represented an investment of nearly $9 billion. The storage costs alone were reported to have exceeded a million dollars per day. By November of last year the stockpile had been whittled down despite virtually peak levels of crop and live stock production. This contraction in the corporation’s invest ment in farm commodities came about largely because of an aggressive disposal program. The smaller quantity of 1957 crops placed under price-support agreements and the lower level of price supports which prevailed were additional factors in pulling the investment down to $7.2 billion at the end of November— a drop of about 20 percent. (See chart.) accumulation of dried milk and butter oc curred during the past year, however, because of an increase in price-support purchases. Com, sorghum grains and barley holdings have mounted under the pressure of large crops. Smaller Quantity of 1957 Crops Supported Another development that has tended to hold the price support investment well below year-ago levels is the smaller quantity of 1957 The contraction in price-sup p ort investm ent has been largely confined to guaranteed loans; but loans and inventory holdings of the C om m odity C re d it C o rp o ra tio n have also declined. Surplus Disposal The surplus disposal program was aided by an unusually large volume of exports, particu larly of cotton, wheat, and rice in the fiscal year ended last June. Foreign shipments of agricultural products since June have re mained close to the high year-ago levels even though cotton, wheat, and rice are no longer being exported at peak rates. A large volume of export shipments for commercial sale and for foreign aid programs, together with domestic sales and donations, has reduced holdings of a majority of the com modities listed in an accompanying tabula tion. Holdings of dairy products have been 7 QUANTITY OF MAJOR COMMODITIES HELD UNDER PRICE SUPPORT (November 30, 1957) Wool, lbs.................... Oats, bu...................... Cotton, bales.............. Rice, cwt.................... Tobacco, lbs............... Wheat, bu.................. Cheese, lbs................. Dried Milk, lbs.......... Butter, lbs................... Grain Sorghums, cwt. Corn, bu..................... Barley, bu................... Million Units 19.8 58.3 5.9 12.8 933.0 951.0 245.0 157.0 84.0 64.5 1,268.0 145.9 Percent change from 1956 1955 -76.2% -86.7% -2 2 .3 —37.1 -4 3 .8 -5 3 .6 -3 7 .5 —44.1 —11.7 — 7.8 —11.2 —14.3 - 4.3 -3 0 .2 + 8.3 -1 9 .9 (i) -5 6 .3 +29.2 +13.8 +12.7 +45.6 +62.7 +43.2 (l)—No butter held, 11-30-56. crops placed under price support. The high moisture content of a considerable portion of the 1957 crops of com and sorghum grain precludes holding substantial amounts of those grains under price-support agreements. The moisture content was so high in many instances that producers have apparentlyfound it more practical to feed the grain to livestock than to incur the expense of drying so that it may be safely held in storage. Re cent arrivals on livestock markets indicate that meat animals are being fed to heavier weights. Another deterrent to the quantity of the 1957 com crop placed under support agree ments is that a relatively high percentage of the growers in the principal corn-growing states exceeded their acreage allotment for com. Because of over-planting, these growers were ineligible for the full loan rate on corn. Much smaller than average crops of flax seed, wheat, cotton, and tobacco, and moder ately below average crops of rice, dry beans, and peanuts have also contributed to the smaller volume of 1957 crops placed under price support. The supported quantities of nine of the thirteen major crops, as listed in an accompanying table, were below a year ago, as of December 15. Additional quantities of a number of the crops were probably placed under support 8 between December 15 and January 31, the final date for acceptance of support price agreements for all crops except cotton, to bacco, and com. A recent announcement ex tended the period for accepting price-support agreements on sorghum grain until February 28, presumably due to the difficulties encoun tered in drying the grain so that it could be safely stored. It seems improbable, however, that the quantity of crops placed under sup port in 1957 will equal that of 1956. Thus, the downtrend in the Commodity Credit Corpo ration’s investment in price-support com modities may continue. Lower Level of Price Supports Of the thirteen crops that are listed in the table below, all but two, rice and tobacco, were supported at lower levels in 1957 than in the previous year. A general reduction in price-support levels, ranging from about 2 percent for some crops, such as cotton, to as high as a 7-percent reduction for the feed grains, also contributed to the downtrend in the investment in price-supported commodi ties. A further easing in price-support rates is indicated for the current year. The announced QUANTITIES OF 1957 CROPS Placed Under Price Support % Change from 1957 Quantities Corresponding (million units) 1956 Quantities 2.1 Flaxseed, bu............... - 83.7% Corn, bu..................... 13.7 — 82.5 Tobacco, lbs............... 87.4 - 66.4 1.2 Cotton, bales.............. — 60.0 4.6 Rice, cwt..................... - 54.6 Peanuts, lbs................ 143.2 — 50.8 Dry edible beans, cwt.. 1.9 - 24.0 Soybeans, bu.............. 41.1 - 19.1 Wheat, bu.................. 185.0 - 17.8 Oats, b u ...................... 38.8 + 18.7 95.0 Barley, bu................... + 73.6 Rye, bu....................... 5.1 +129.0 Grain Sorghums, cwt.. 49.7 +188.9 U>Data for tobacco, cotton and peanuts are as of Novem ber 30, 1957; data for all other crops are as of December 15, 1957. support levels for the 1958 crops of wheat and rice, for example, are down 11 percent and 8 percent, respectively, from last year. Lower dairy price supports have also been an nounced for the year beginning April 1, 1958. Influence of the Soil Bank Program Approximately 20 million acres were placed in the acreage reserve of the Soil Bank pro gram in 1957. This acreage consisted of 12.8 million acres of wheat, 4.5 million acres of corn, 3 million acres of cotton, 204,000 acres of rice, and 80,000 acres of tobacco. The in fluence of the Soil Bank on the final outturn of these crops was tempered by several fac tors. For one thing, the acreage abandoned due to crop failure of corn, wheat, and rice was significantly smaller than in the previous year. Presumably the acreage planted tended to be the land that was least subject to crop failure. A moderate increase in the average yield per acre of each of these crops also served to prevent the reduction in acreage from being fully reflected in the final produc tion. The reduction in output of cotton and tobacco was somewhat greater in proportion to the reduction in planted acreage than in the case of the other crops, due mainly to a decline in the average yield per acre. The Soil Bank placed no limitations on the production of feed grains other than com. The acreage sown to barley and sorghum grains, as a consequence, increased substanti ally over that of the previous year, largely because of the end of the drought in the Great Plains. This increase in acreage, together with an appreciable increase in the yield of sorghum grains and a better than usual yield of barley, accounted for an unusually large outturn of feed grains. The net result was a total volume of crops equal to the record of the previous year. The Soil Bank program, therefore, brought no reduction in the over-all volume of crops (see tabulation) even though it did contribute to a significant cut in the output of cotton and tobacco and a moderate contraction in the outturn of wheat and rice, two of the major food grains. FARM OUTPUT OF SELECTED CROPS (1947-49—100) Feed grains................ Food grains................ Cotton......................... Tobacco...................... All Crops................ 1957 121 79 77 83 106 % change from 1956 + 8 —6 —17 —23 —0— Cost of Surplus Disposal Surplus farm products from Commodity Credit Corporation stocks were moved into consumption channels at record levels from June 1, 1956, to September 30, 1957. Surplus commodities having a cost value of $5,302 million were disposed of during that 15-month period, according to a statement of the Corpo ration’s commodity operations. In the previ ous comparable period, disposals are reported to have totaled $3,800 million. The accelerated rate of surplus disposal, as previously mentioned, has aided in reducing the Commodity Credit Corporation’s total in vestment in price-supported farm commodi ties, but it has also involved heavy losses. For the 15 months ended last September, losses to the Commodity Credit Corporation alone approximated $1,600 million, nearly onefourth more than in the previous comparable period. Moreover, substantial quantities of surplus commodities were also distributed through special outlets financed by other funds and agencies. Typical of these distribu tions were exports under the International Wheat Agreement and foreign shipments under the programs of Public Law 480. The net realized loss on price-support op erations advanced to a new high in the year ended June 30, 1957, presumably because of the aggressive disposal program pursued. Net realized losses for the first five months of the fiscal year beginning July 1, 1957, however, were 17 percent below a year earlier. Whether this can be interpreted to mean that losses, too, have turned down is questionable. The current inventory holdings of the Commodity 9 Credit Corporation are down only moderately from the peak and tend to dampen the pros pects of an appreciable reduction in realized losses until greater success is attained in bringing production more nearly in line with domestic and foreign market requirements. Soil Bank Acreage for 1958 The extent of the reduction in fall-sown grains, mainly winter wheat, was not impres sive. The total acreage of wheat land placed in acreage reserve for 1958 was reported to be 3.9 million acres, or less than half of the acreage banked for 1957. Some spring wheat acreage will probably be consigned to the acreage reserve, but the total acreage with held from wheat seems likely to fall consider ably short of the 12.8 million acres of last year. Early reports indicate that the acreage of cotton land placed in reserve for 1958 is run ning somewhat higher than had been antici pated. A temporary suspension in the accept ance of agreements was announced late in January to facilitate proper administration of the program. The sign-up period for spring-planted crops opened January 13 and is scheduled to dose March 8. A feature of the program this year, which is being observed with a great deal of interest, is the procedure whereby entire farms may be placed in the Soil Bank on a bid basis. The operator of a farm submits a bid of a specified amount per acre, for which he will place all or a portion of his farm in the Soil Bank. This procedure is being tried on a test basis in four states this year, namely, Illinois, Maine, Nebraska and Tennessee. Early re ports indicate that the new approach has pro voked a great deal of discussion, but no indi cation is available as to its probable acceptance on the part of farmers. The spring planting intentions of farmers, which will be released next month, are being awaited with much interest. This report will indicate whether or not producers of agri cultural products plan to hold a tight rein on production in 1958. NOTES Among articles recently published in monthly business reviews of other Federal Reserve banks: “ What’s Wrong with Carloadings?” Fed eral Reserve Bank of Chicago, January 1958. “ Survey of Foreign Monetary Policies in 1957”, Federal Reserve Bank of New York, January 1958. (Copies may be obtained by writing to the Federal Reserve bank named in each case.) 10 Additional copies of the MONTHLY BUSINESS REVIEW may be obtained from the Research De partment, Federal Reserve Bank of Cleveland, Cleveland 1, Ohio. Permission is granted to repro duce any material in this publication.
@FedFRASER