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APRIL 1970 An Alternative Approach To Liquidity: Part Ill . . . . . . page 3 Cattle Feeding in the Tenth District: Development and Expansion . page 13 Subscriptions to the M ONTHLY R EVIEW are available to the public withoul charge . Additional copies of any issue may be obtained from the Research Department, Federal Reserve Bank of Kansas City, Kansas City, Missouri 64198. Permission is granted to reproduce any material in this publication. Part Ill An Alternative Approach To Liquidity By Robert E. Knight P rcvailing th eory throughout mo t o f th e po ·twar period has ·trc ·ed th a t c mmercia l hank s sho uld maintain adequate liquidit y primarily by holdin g sho rt -term secu riti es whi ch ca n be ·o ld readily with little loss of prin ipa l. Part I of thi s article, which appeared in the Decem ber 1969 Monthly Rei•iew, examined the postwar decline in bank liquidity as implied by standard indica tor s, and then turned to an analysis of the techniques of li ab ility management which larger bank have utilized in recent years -to augmen t th eir liquidity position s. First to be considered was th e market for negotiable certificates of depo sit. From a ve ry small ba ·c in 196 1, large denomination CD's grew rapidly lo become the ·cco nd mo ·t important money market instrument by vo lume. Major bank · soon learned th a t the supply of fund · offe red for CD's was very se nsiti ve to chan ges in offering rates and that their ability to influ ence flows of time deposits could constitute an important so urce of liquidit y. If additional funds were requi red to mak e loa ns or to meet deposit wi thdrawals, th e rate on C D' cou ld be ra ised; if fund inflows exceeded th e bank' · need , the rat e co uld be lowered. The abi lit y of bank s to acq uire fund s by issuing D's, however, is limit ed by Fede ral Re ervc R egu lation Q cei lin gs. When money mark et interest rates exceed tlt e maximum rat e payabl e, bank have difficulty a ttractin g Monthly Rev iew Ap1 ii 1970 CD's a nd have ge nerally experienced a runoff. During ·uch I eriod s , purcha ·ers wi thdraw money l o in vest in higlt -r yielding sec urities. Partl y because th e ' I) mar k ·t cannot serve as a so urce of liquidity at a ll times and partly becau ·c ri in g interes t ra tes have prompted ba nk s to eco nomize on their ho ldings of excess re erve , bank s have developed a lternative so urce · of liquidit y. The second art icl e in thi s cri es, which appeared in the February 1970 Monthly R eriew, co nside red bank borrowings of Eurodo llars. During 1969 , Eurodol!ar borrowings consti tut ed the most important nondcpo sit ource of fund to bank s. A lth o ugh tran fer of fund · to urodollar depo it · and borr wing · of Eurodollar · by U. . bank s have littl e effect on the rese rv e base of th e U . S. banking sy tem, th e ab ilit y of bank s to convert depo it s into borrow ings tend ed originally to red uce req uired reserves, making possible a n ex pan sion of ba nk cred it. Money mark et banks were also able to use Eurodollar so urces to meet a significa nt share of their CD losses. However, during th e fa ll of 1969, th e Board of Go ve rnor s became co nvinced th at la rge banks were using the urodo ll ar market to deflect the impact of restri cti ve monetary policie · to other bank ·. Marginal rcerve req uiremen t · on urodollar borrowin g · were impo ·ed. By requiring bank to hold a 10 per ce nt rese r e against add ition al borrowing , th e Board in creased th e co t of Eurodollar fund to bank , but did not prevent 3 An Alternative Approach to Liquidity bank s from seeking liquidit y from thi s source. Th e effects of th e marginal reserve requirements on mon etary and cred it expansion , howeve r , depend on th e depo sit shifts which occur. If ba nk s increase borrowings from Eurobank which hold re crvc as dem a nd deposit s in U.S . co mmercia l bank s, an ex pan sion a ry influ ence on ba nk cred it would occ ur but th e money supply would be red uccd . Alternati ve ly, if th e Eurodollar borrowings arc made possib le by a tran sfer of fund s from a U. S. bank tim e d eposit to a deposit in a Eurobank, the effect on both ba nk credit a nd th e money su pply would be contractionary. In thi s a rticl e, several additi o nal nondeposil ·ourcc · of fund s ·1rc co nsidered . These inclu de ·ho rt -term promi s ·ory no tes, Federa l fu nd s, a nd is uc ' of commerc ial paper. SHORT-TERM PROMISSORY NOTES The fear that money mark et rates might so meday ri se above th e maximum rates payable on certificates of depo si t , cutting off thi s so urce , prompted banks to search for alte rnati ve means to acquire loanabl e fund s. Earl y in September 1964 , First Na tio nal Bank of Boston announced that it would see k operat ing fund s by is ·uin g short-term promis ·ory notes . These un ·ccu red not · were negot ia bl e a nd were offered in maturiti es to uit large in ve ·tors. Several other large bank s shortl y followed suit , a nd Fir t Boston Corporation agreed to make a seco ndary market in the notes. The promi sso ry notes were designed to appeal to in vestors who might normally acquire large CD' s. Both negotiable and nonnegotiable notes were sold directly to corporations, state and local governmen ts, and wealth y individual s in denomination s of $ 1 million or more. Al though th e range of maturitie var ied from 30 day · to three years, the nego tiable notes typicall y matured within one year while nonn egotiab le notes matured in 60 clay or less. No specifi c assets were pl edged as co llateral for thi s type of borrowing , but th e notes were usua lly backed 4 by the ge neral assets of th e bank. Bank s were ab le to is ·ue not e a t rates cq ual to or be low those on C D 's of' comparab le ma turities. For purchaser , th e promi ssory no tes we re quite simi lar to CD' s; but for is uing bank , th ey pos ·cssed severa l di tinct adva ntages. Since the Board of Gove rn ors of th e Federal Rese rve System had rul ed for th e time being th a t notes wo uld not be co nsid ered a · depo sits, banks were not req uired to hold reserves or to pay FDI C insura nce fees on iss ues . In 1965, this sav ings was equa l to approxima tely 19 or 20 basis point . Co nside rab ly more important , however, was th e fact that notes were not subject lo Reg ulation Q cei lings prescribing the ma x imum rates pa yable on depo sit s. Thi s fea ture meant that if money marke t interc~t rat·:-, ever rose above th e cei lings, making th e sa le of C D 's impo ssible, banks co uld ' ub stitut c promi sso ry no tes to ave rt a runoff of fund s. As a res ult , note tended to represe nt a much more reliable so urce of funds th an the CD market. Relati ve ly few bank s issued promi sory notes and th e total amo unt outstand ing remained com para tively small. Acc urat e fig ures arc not available , but es timat es place the vo lu me o utsta ndin g in late 1965 a t about $500 milli o n. ;\ num be r of factors were rcspo n ·iblc for th e limited grow th or thi s new mo ney ma rk et in strum ent. Fir t , from 1964 thro ugh the fir st half of 1966 , mon ey marke t interest rates neve r rose signifi ca ntly above Reg ul a ti on Q ceilings so bank s were always able to iss ue CD 's. The need for substituting not es neve r became urgent. Second, New York State banking laws had been interpreted to mean that bank s were proh ib ited from issuing th e promi s ory notes. 1 The in ab ility o f seve ral of the la rger money market banks to iss ue mark etabl e note un do ubtedl y slowed the development of a n acti ve eco ndary market. Fina ll y, ederal ReI / U lti mately the N ew York Sta te Banking Department re rmitt ed th e iss ua nce o f nonnegotiable notes in de nomi n atio ns o f $ 1 milli o n o r g rea te r. Federal Reserve Bank of Kansas City An Alternative Approach to Liquidity serve officials indicated that they did not feel it was appropriate for bank s to circumvent deposit regulation in thi s fashion . The future status of notes consequently remained uncerta in. During mid-1966 , the Board of Governors permitted a runoff of CD's to occur by allowing money mar ket intere st rat e to ri se above th e maximum rate · payab le on ce rtificates. To prevent bank s from ub tituting promissory notes for CD' on a large sca le, Reg ulati ons D a nd Q were immediately amended to mak e shortte rm notes subj ect to rese rve requirements a nd th e interest ra te restri ction s on deposits. The ·e ac ti ons made -ho rt -tcrm notes a o urcc of fund s which wa · n more reliab le th a n th e D 111arkct in times o f monetary stringc n ·y a nd largely removed th e in ce nti ve fo r bank s to iss ue notes . Alth ough shor t-ter m promi ssory note issues by bank s neve r became ve ry significa nt , th ey represen t one of th e ea rli er attempts to acqu ire liquidity by purchasing funds. In adopti ng the amendme nts to Reg ulations D and Q, th e Board specifically exe mpted from th e definition of deposits all funds obtained by bank s through th e issuance of notes if the notes had a n original maturity of more than two years and were exp ressly ubo rdin ated to th e clairn s of depo it or . Severa l bank · have utilized thi s loophole rece ntl y to a ·quire loa nable fund . Nego ti a ble cap ita l note in denomination s as ma ll as $ JOO and wit h maturitie of lightl y more th a n two years have been iss ued. The e capital note possess all of the advan tages which banks expected to realize by issuing short-term promi ssory notes. While the amount of fund s which banks have acq uired thi s way does not prese ntly appear to be large, th e Board of Go verno r has recen tl y proposed to limit th e ability of bank to acq uire fund by thi meth od. 2 FEDERAL FUNDS In rece nt years, th e Federal fund s market has become both a short-run a nd a cycl ical ource of liquidit y for bank s. Federal fund s are commo nly used to refer to re erve balances Monthly Review April 1970 at the Federal Reserve which have been borrowed or lent for short period s; but technically , any immedi ately availab le funds which have been lent for one bu siness day co uld be cl as ified as Federal fund s. The most important segment of thi s market allows bank s with excess rese rves rese rves above th e minimum required by law - to lend th em temporarily to bank experiencing reserve deficiencies. In th e impl est case, th e tran saction may be effected by having th e elling bank telephone the tra nsit department of its Federal Rese rve Bank to reque st that a given amo unt of re erve fund s be tran sfer red from it · ba lance to the rese rve accou nt of the pur ·has in g ba nk . The tran sfer wi ll occur immediatel y. O n the fo ll owi ng day , th e cntrie · will be revc r ·cd by th e borrowing ba nk . Payment of interest is generall y hand led eparately by iss uing a cash ier's check payable to th e lending bank. Federa l fund s tran sacti ons may be arranged di rectl y by the purchasing and selling banks, but in rece nt years interm ediari es have become increasingly important. In addition to several fund s brokers in New York City, large correspondent bank s often bring bu yers and sell ers togeth er. Loans typicall y are for overni ght , but they are frequently renewed. Most tran ·action · a rc unsec ured . An oth er import ant cgmc nt of th e market i th e lendin g of fund s to Governme nt sec urities dealers. A co mmon a rrange ment is for dea lers requiring short -ter m financing to sell securities to a bank with an agreement to rep urchase 2/ The Board o f Governors has been concerned that the iss uance o f th ese subo rdin ated o bliga ti o ns by bank s to acq uire depos it type fu nd s m ay impa ir the effect ive applicati o n o f R eg ul a ti o ns D and Q. On M a rch 2, 1970, th erefo re, th e Boa rd released prop osed ame ndments to both reg ul a ti o ns desig ned to di sting ui sh between deposi t type fund s and tru e capita l fund s. Und e r the propo a l. a capi ta l note or deben tu re issued after M a rc h 9, 1970, wou ld be exe mpt from rese rve req uireme nt s a nd int e rest ra te ce iling o nl y if it ( I ) ha s an o rig ina l ma turit y o f mo re th an fi ve yea rs; (2) is exp ress ly s ubordina ted to th e c laims o f deposi to rs a nd is un sec ured: (3) express ly sta tes th a t it wi ll no t be e lig ible as co ll a te ra l fo r a loa n by the iss uing bank: a nd (4) is is ued in d e no minati o ns not less th an $20,000. A lth o ug h th e Board's proposa l spec ifica lly lists evera l pos ib le excepti o ns to the proposed reg ul a t ion , th e ge nera l effect of adop ti o n wo ul d be to prevent ba nk s from escapi ng int ere t ra te cei lin gs o n depo its by i uing small de nomi nati on cap ita l no tes wi th m a tu rities o f just ove r two yea rs. 5 An Alternative Approach to Liquidity ----- ------- Chart l NET INTERBANK PURCHASES AND SALES OF FEDERAL FUNDS Billions ot Dollars Billions ot Dollars 5~2'..:.:..:'.___::~:_:_:.~.::..,...----,,------,------.---.----,----.---,,-------,-----,----, 5 4 4 Net Federo I Funds Purchased 3 3 2 2 195 9 '6 2 '64 '68 '66 '70 NOTE : Dat a are b a sed on purcha ses and sales of 46 larg e bank s. SOURCE : Federal Re se rv e Sys t em . them at a predetermined price on the following day or at the maturity of the contract. The bank purchasing the securities may transfer its excess reserves to the reserve account of the dealer' s bank , which in turn will cred it th e d ealer's account. On the following day when the dealer repurchases the securities, the tra n action will be reversed. The volume of Federal fund s lent Government sec urities deal ers by bank s is co nsiderably less than the amount traded between banks, but the amount at time s has approached $2.5 billion. The Federal funds market began to develop during the 1920's, but it largely withered during the 1930's and 1940's when banks held large amounts of excess reserves and interest rates were low. Since 1950 , trading has again become quite acti ve, a lthou gh compara ti vely few bank · have bee n fr equent participants. Estimates suggest that about 35 per cent of a ll Federal funds transactions are acco unted for by 46 large money market bank s. While a substantia l and fluctuating number of banks may enter the market to se ll , the group of banks which acco unts for the 6 largest volume of purch ases is relati ve ly small and stable. In 1950, the daily vol ume of Federal funds purchases averaged between $ 190 and $250 million; in 1953, betwee n $350 and $425 million ; and in 1957, between $620 and $680 m il lion. Subsequent growth in Federal fund s tran sactions from la te 1959 to the prese nt can be see n in Chart I . J Th e ave rage daily net purchases of Federal funds by the 46 large banks included in the series rose grad ua ll y from abou t $500 million in late 1959 to we ll over $ 1 billion by late 1965. The volum e of net purchases rose sharpl y with the monetary stringency 3/ The ac tual grow th in ne t Federa l fund s tran sact io ns may be co nsid e rably understated by th e chart. During th e ea rl y I 960's, es ti mates suggested th at to tal purcha se of Federa l fund s by th e 46 reporting banks inc lu ded in the se ri es acco unted fo r approx im a te ly fo ur-fifth s o f gross purc ha ses o f Federa l fund s. More recen t estima tes p lace th e proportion o f to tal purcha ses by th ese bank s between .30 and 40 per cen t. If th e ratio o f net to gross purcha ses had rem a ined th e same over thi s period, the grow th in net transact io ns would be und erstated by fully 50 per cent. H owever, as more banks have become int ermedia ri es, th e ratio o f net to gross tran saction s ha s undoubted ly fallen bu t by an undetermined amou nt. de ,IR Ba k f Kan nr, C ty An Alternative Approach to Liquidity Chart 2 SELECTED MONEY MARKET INTEREST RATES Per Cent 8 Per Cen-t , - - - -.------.----r----.---------,-- --,----.----~----.-- 1 10 - I0 ," 8 I\ I \ 6 6 Discount 4 4 Rate 2 2 J L l 1 J '6 2 1959 J 1 J 1 I ' 64 NOTE : Fed era l f unds and Tr eas ury bill ra t es are averages o f daily and weekly fi g ure s . respe c tively . Federal Re se rv e Bank of N ew Yo rk . SOUR CE: Fede r al Re serve System . during the latter half of 1966, sub sided in late l 967 and early I 968 , a nd agai n increased sharply. The chart also sh ows that net Federal funds sold by large bank s have a lmost a lways been sub stantial ly less th an purcha es, indicating that on balance the large bank · have acq uired fund s from sma ll er country bank s. Net a les of Federa l fund by the money market bank , moreover, have not grown proport ion a tely to purchases. The postwar growth o f th e Federa l funds market is due to a variety of factors which have affected both purcha ing and selling bank s. Since excess reserves are nonearning assets, the generally ri si ng trend of interest rates has caused many bank s to econom ize on their holdings of excess reserves by lending them in the fund s market. In addition, th e size of possible transaction in Federal fund s has declined sharpl y, opening th e market to a n increasi ng numbe r of bank s. Prior to 1966 sales or purcha ses in amounts as sma ll as $500 ,000 we re relatively uncommon ; the typi cal trade in vo lved a multiple of $1 million. Small co untry ba nk s have typica lly held excess reserves, but the size limitation on IW )ril 9/ _l_ '68 .t l .l l 0 '70 The di sco unt rate is fo r the transactions had largel y prevented them from entering the market. To assure them selves of a more steady supply of fund s, larger banks began in recent years to act as intermediari es for th eir co untry correspondent in buying and selling Federal fund . Today a les a small as $50 ,000 a re not un co mm o n a nd as banks ha ve gained greate r familiarity with the mark et , they have become more frequ e nt participants. The change in reserve computation procedures introduced in September 1968 by th e Federal Reserve has undoubtedly contributed to the expansion of the market by permitting banks to manage their reserve positions more closely. Bank s now calculate reg uired reserves on the basi s of depo sits held two week s earlier rather than on current deposit levels. An alternative to the Federal funds market for ba nk s acc umul a ting excess rese rves is th e purchase of short-ter m securities . However , if th e exces is ex pected to last only two or three days, the interest which could be earn ed on th e sec uriti es might not be suffici ent to pay th e cost of buying and selling. Chart 2 shows, moreover, 7 An Alternative Approach to Liquidity Chart 3 EXCESS RESERVES AT All MEMBER BANKS Mi 11 ions of Dolio r s 1200 M i 11 io ns of Do 11 ors 120 0 10 00 1000 80 0 8 00 600 600 400 400 200 200 1_ I 4 ' 56 I 8 I 0 '62 '64 1 66 I _L_)_ 1 68 0 '70 NOT E: Sh ade d ar eas r pr esen t periods o f bu siness cyc le co nt rac ti ons as d es ig nat ed by t he N ati ona l Bureau of Eco nomi c R sea r ch . SOURCE : Fede r al Rese rv e Sy ste m . that in recent years the return on Federal fund s has often exceeded that which could be earned on 3-month Treasury bill s. Similarly , a bank with a reserve deficit that is expected to reverse itself shortly has several po ssibilities. It may purchase Federal fund s, borrow at the Federal Reserve discount window , or sell Gove rnm en t ec uriti e . Whil e th e ed will generally lend to bank ex pe ri enci ng temporary re se rv e defici enci es, it doe not enco urage fr eq uent or large borrowings. Bank s using the discount window often or ex tensive ly, moreover, may be ubject to a Federal Reserve review of thei r portfolio policies. Bank s have often found this review uncomfortable. For these reason s banks have generally been reluctant to turn to the discount window to meet deficiencies. A sale of Treas ury bills, on the other hand , followed by a repurchase several day later, is often a more ex pen ive way to acquire fund s temporarily th an i th e Federal fund mark et. Until 1965 , it was genera lly ass umed that Federal fund would never trad e among bank s at a rate of interest which ex ceeded th e di count rate. No bank , it was maintained, would 8 acquire F ederal fund s when it could borrow more cheaply a t the Federal R eserve. During 1965 , however , a few money market bank s discovered that by offering rates slightly in excess of the discount rate, they were able to tap a large volume of funds on a relatively permanent basis. Since the Federal fund s rate was ge nera ll y greater than th e rate which cou ld be earned on money market ·ecurities, but le than th e rate whi ch co uld be earned on loan , some bank s - mainly smaller co untry bank became consiste nt lenders to th e Federa l fund s market , while a few others b ecame perma nent buyers. The bank s that borrowed the funds could use them to expand loans. For sellers of funds the market appears to have become an alternative to investm ent in money market securities. 4 The abi lity of money market bank s to acquire loanable fund from the Federa l fund s 4 / A co mpa riso n o f broad m ove m e nt · in interest rat !. a nd in net purc hase o f Fede ra l fund s, how n in hart s I a nd 2, ind ica tes tha t in rece nt yea rs w hen purc hase~ a re in c reas in g, th e effec ti ve ra te o n fund tend s to exceed the bill ra te. By o ffering hi g her ra tes, m o ney m a rk e t ba nk s a re ab le to induce o th er bank s to s ubstitut e Federal funds sa les for securit y ho ldings. Converse ly, when net purchases a re dec lining, th e bi ll ra te te nd s to e xceed th e ra te o n Fed e ra l fund s. Federal Reserve Bank of Kansas City An Alternative Approach to Liquidity market on a long-term basis constitutes a significant new tcchniq ue both for liability management and for bank liquidity. During recent period s of restrictive monetary policies, money market interest rates ha ve risen above th e maximum banks were permitted to offer on C D's and bank experienced a lo s of deposi t . By raising th e offering rate on Federal fund , those banks experiencing th e mo t severe los of dcpo its have been able to obtain a ignificant vo lume of fund s, partly offsetting th e con tractionary effect which would otherwi se occur in their loan and in vestment s. At times, borrowings of Federal fund · by omc bank - have exceeded required re ·crvc · by a ignificant margin. Wh en th ' n ·ed f r fund s becc mes le ·· ur •ent, the am unt acq uired can be redu ced and th e ·ffecti c rat· on transactions may fall. The Federal fund s market pro idc bank s with a partial means to satisfy both short- and long-run need s for liquidit y. In the short run, Federal funds are a so urce of liquidity to both buying and elling banks. Since the sell er must decid e daily whether to renew a transaction, Federal fund are perhaps econd on ly to exec reserves in providing liqui.dity. Bank s expe ri enci ng re ·erve defi ciencies wh ich arc expected to la t on ly a fcw day ·, on the other hand , may readily borrow fun I ·. By tran ·fcrring reserves, the banking ·ystcm i · able to adju t moothly to differences in the flow s of fund a nd to random shift s of dcpo its which arc lik ely to be offsetting at different banks. Such actions tend not only to create greater efficiency in the use of reserve but al so to distribute the effects of monetary policies more eve nly throu ghout th e banking system. Total reserves and the lending potential of th e banking y tern do not cha nge . However, by reducing th need to hold xccss re ·crvc ·, the F dcral fund market permit · bank · to increase dep ·it s and cred it m re th an would otherwise be lik ely to occur. In ge neral , bank wh ich ha e borrowed Federal funds in large amount on a longMonthly Review April 1970 term basis have used them to expand loans. In a sense, the market permit money market banks to borrow loanable funds from other banks. While such actions do not change the reserve base, th ey tend to shift the di stribution of total bank credit from country to money market bank . Nevertheles , if bank holdings of exce s re ervc were highly se nsi ti e to variation in th e rate of intere t on Federal funds, th e market would facilitate an expa n ion in actual bank credit. Chart 3 show s, however, that despite a downward trend , cyclical movements in excess rese rves have ge nerally been ·mall. Bank holdin gs of excess rese rve declined ·harply in 1969 a · intere ·t rate · in crea ·ed, bu t remained r ·markably ·tabl e during th e 1966 er ·dit crun ·h. B th peri d · r ·corded ·harp in crea · s in th e am unt of federal fund · trad ed. It would appear that the Federal fund s market has allowed bank to redistribute reserves and bank credit, but has not greatly facilitated aggregate bank credit expansion. 5 COMMERCIAL PAPER Another method which commercial bank s have used to acquire loanable funds is the 5/ During th e monetary restraint o f 1969, a . ignificant inn ova ti o n occurred in t he ·edera l fund~ market. T enco urage maj o r c ustomer · to maintain larger depos it s than might otherwise be necessa ry, severa l la rge bank s ag reed to c hannel a port ion of th e excess fund s he ld by corporati o n~ and weal th y individuals int o th e Federal fund s market. For exa mpl e, if' a corporation's clepo it balance on a give n clay exceeded th e amo unt required to meet c lea rings a nd co mpe n~a ting balance req uirement s, the bank wou ld se ll the excess in the Federal fund s market. Since th e Federal funds rate wa among th e highest of money market rates, the return which could be earned o n uch transac ti ons gene rally exceeded the amount th e investor co uld earn o n o ther short-term investments. In return fo r the serv ice th e c ustomer would agree ei th er to maintain a larger deposit in the bank or to sp lit the profits derived from the sa le o f funds with the bank. Such practi ces are simi lar to those in which large banks reg ul arly place excess correspo nd e nt ba lance he ld by sma ll er bank in the Federal fund s market. T he Boa rd of Governors, however. took a dim view of th e practice o f ex tending access to the rederal fund s market to no nfinanc ia l co rporati o ns. In the eyes o f so me, this was eq ui va lent to paying in terest on demand depos it , which is prnhibite I. In Sep tember 1969, th e Boa rd proposed to bring within th e scope o f R egu la tions D a nd Q m~mber bank lia b iliti e on all Federa l fund s transa tion except th ose with a bank and it s ub idiarie . variou gove rnment imlitutions, o r ~ec urit y dea ler in ·o m e cases. The amendrnenb, which became effect ive in February 1970, c losed th e Fede ra l fund mark et to th e c usto mers o f bank s. 9 An Alternative Approach to Liquidity sale of commercial paper through their holding companies , affiliates , or subsidiaries. Commercial paper is essentially a short-term promissory not e, often unsecured. In 1966, money market interest rate s rose above th e ceilings bank s were permitted to offe r on time d epo it s, and it became apparent that bank might attempt to sub stitute sales of short-term promi ssory note for CD's to avert a loss of fund s. The Board of Gov ernor promptly amended Reg ulation Q and D to pro vide that fund s obtain ed from bank iss ue of short-term not es would be subj ect to th e same restriction s as depo sits. A s a res ult , bank th e m se lves a rc not permitted to offer rat es in exec ·· o f R eg ul a tion Q ce ilin g · o n iss ues o f sh rt -term n tcs. Thi s pro vision ha s large ly I rcdud cd th e possibility in rece nt yea rs for bank s to i s ue short-term notes direct ly during period s of re stricti ve mon e tary policy . 6 However , bank holding companie , th e ir nonbank subsidiaries , and subsid iaries of member banks were not covered exp licitly by these restriction s, and during 1969 commercial pape r issue s by the se bank related organizations provided an important source of liquidity to bank s. The issu es of commercial paper have been design ed to appeal to hort-term in vc tor . Mo st place ment s ha ve bee n direct but several have been sold through d ea ler ·. Since commercia l paper ra te during much of 1969 were be low tho se on F ed eral fund or E urodollar s, the i sues represe nted a re latively attractive method of acquirin g additional fund , Th e amount of commercial paper issued by bank related organizations grew rapidly. From about $800 million in May 1969, the amount outstanding rose to over $6 billion in March 1970. (See Table 1.) The technical aspect s of these tran saction s hav e differed widely among organization s. Normally most of the fund acquired through com- 6 / The Boa rd 's 1966 ame ndments, howeve r , exempted no tes issued with an o ri g in a l ma turit y o f m o re th a n tw o yea rs and ex press ly s ubo rdin a ted to th e c laims o f d e pos it o rs. During 1969 and ear ly 1970 severa l _ban_ks were ab le to skirt the intent o f the a mendm ents by 1ss u111g s ubo rd111 a ted cap ita l no tes with maturitie just ove r two yea rs. 10 Table 1 COMMERCIAL PAPER ISSUED BY BANK AFFILIATES* (Billions of dollars) Amount Outstanding Dote 1969 ~y28 June 25 July 30 August 27 September 24 October 29 November 26 December 31 $0.81 1.25 1.86 2,21 2.48 3.64 4 .07 4 .21 1970 ~ uory 28 February 25 Morch 25 5.43 5.97 6.08 ''' In clud es com m erc ia l p per issued by a b a nk holdinii comp a ny or o ther bank aff ilia te s a nd report ed _by _weekly r e port1_ng b a nk s . Figures exclude dir ec t financing ac t1v1t1es of corporat1onswh1ch own banks . SOURCE : Feder a l Re serve Bank of New York . mercial pape r sales by holding companies have bee n used to purchase loans or investment s from the portfolio of the bank. A s a re sult, banks are able to obtain additional fund s for lending. In th e case of commercial pape r issued by ba nk sub idiari es and other affiliate s, th e proceed · a rc often u eel to finan ce a sep ara te ·1etiv it y suc h a · ' t finan ce or mortgage ·crv ic in g compa ny with ut placing any additional drain on th e ba nk' s own fund s. Some bank , how eve r, have arranged for loan applicants to borrow direct ly from the bank affiliate rath er than from th e b an k. Under any circum lance , the effects of th ese transactions are similar. Demand deposit s may initially decline as purchasers pay for the commercial paper, but will increase as the bank uses th e fund s to make loan s. Total d epo its, bank reserves, and the money s upply , therefore, arc not lik e ly to change. How ever , an ex pan sion in bank (or bank related) credit is mad e po ibl e in an amount equal to th e volume of co mmercial pape r old . 7 Since th e Board of Governors believed that s uch sa les of commercial paper were tending to fru trate the re triction s governing the payFederal Reserve Bank of Kansas City An Alternative Approach to Liquidity ment of interest on deposits, in October 1969 th e Board proposed to make th e sale of commercial paper by bank holdin g compan ies or their nonbank affi liates subj ect to Reg ul ation Q interest rate cei lings if th e proceeds of th e i sue were used to supply fund s to th e bank. Howeve r , the Board sub sequently i ued a new proposal de igncd to mak e member ba nk hold a 10 per cent reserve requirement aga in st funds rece ived from the is ua nce of commercial paper by an affi liated corporation or trust to th e ex tent such fund s arc cha nn eled to th e ba nk .8 Th e initial propo al would la rgely have preve nted bank rela ted orga nization · from ob ta ining fund s for bank u ·c by i ·suin g com mercial paper whenever mo ney mark ·t int eres t rates e cceckd Reg ul a ti n Q ce ilin gs, but th e modified ame nd ment simpl y increase · th e cos t of ·uch fund ·. - und s obtained by ba nks through th e sale of loans or sec uriti es to affiliated organi za tion s will be subj ect to th e reserve requirement if the organization obtained th e fund s by issuing commercial paper. Howeve r , if bank s were to direct customers to borrow from th e nonbank affiliates directly , th e tran sactio n might not be subject to re erve requirements. /\ final decision co ncerning adoption of the ame ndm ent ha · ye t to be an nou nced. /\I thou gh the initi al proposa l wa released on Octobe r 29, 1969, the sa le of bank related co mmercial paper has co ntinued to mount stead il y. Since No ve mber , commercia l paper iss ued by ba nk 7 / These co nc lu sio ns are based o n th e assumptio n that purchasers o f the co mme rcial paper make payment by drawing on existing demand depos its. H owever, if payment is m a d e with a maturing C D , the tran sfer of fund s from time to demand depos its will increase required rese rves . Neve rth e less, by p ursuing a line o f rea so ning imilar to th at deve lo ped in Pa rt I o f thi s se ries. it ca n be shown the sho rt -run effect wi ll rem a in expa nsio nary. On ba la nce, both th e mo ney s uppl y (narrowly defined) and bank (a nd bank re la ted ) c red it will increase. 8/ The Board's proposa l s pecifica ll y sta ted: "T he main purpose of th e pro posed amendments is to app ly a I 0 per cent rese rve require ment to fun d received by member bank s as th e re ult o f iss u ance o f ob liga ti o ns com mo nly described as co mmercial paper by a corpora t ion o r t rust that ( I ) majority-c o nt ro ls th e member bank. (2) is majorityco ntrolled by perso n who a lso maj o rity-control the member ba nk , or (3) is co nt ro lled by trustee fo r th e benefit o f s hare ho ld ers o f th e m e mber bank . " Monthly Review • April 1970 related organization s has increa ed $2.3 billion, or by nearly 65 per cent. Th e Board a lso anno unced o n October 29 that it co nsid ered obligation s is ued by subsid iaries of member ba nk s to be subj ect not only to rese rv e requirement s but also to th e interest rate res triction on deposits. Almost immediately, howeve r , th e Boa rd relaxed it position by temporaril y suspendin g intcrc t rate ce iling a nd by granting Rese rve Ba nk s the ri ght to wa ive penalties for rese rve deficiencies resultin g from the October 29 announcement to th e extent that the amount of co mmercial paper i · ·ucd by member bank sub ·idia ri c · did no t exceed th e am o unt out ·tandin g n cto ber 29. /\ ·curate stati sti cs o n th e a 111 o un t of su ·h ·0 111mcrcia l paper affc ·tcd a r n t readily ava il able, but th e tot al i believed to be co nsid rab ly le s than that iss ued by holdin g com pan ie and th eir sub idiaries. CONCLUSION During rece nt years bank s have increasi ngl y turn ed to liability so urces of liquidity to mak e loans and to meet depqsit withdrawals. In period s of com pa rati ve ly easy mon etary policy mo ney ma rket bank have been ab le to obtain a la rge amount of funds by iss uing nego ti a bl e certifi ca tes of deposi t a nd to a lesser ex tent by borro wing Eurodollars and Federa l fund s. During the restrictive policies of 1969 a nd early 1970 th ese ba nk tend ed to rely on commercial paper , Eurodollars, Federal fund s, capital note iss ues, sale of loan s and securiti es, and borrowings at the discount window as sources of liquidity. In this article the Federal fund s market and bank issues of commercial paper and promissory notes were considered. The Federal fund s market ha s se rved both a a short- a nd longrun o urcc of liquidity for ba nk s. By borrowing and lending reserves, th e banking ystcm i ab le to adju t smoothly to difference in th e flows of fund and to random shifts of deposit whi ch are likely to be offsetting at different bank . The funds mark et has also allowed so me 11 An Alternative Approach to Liquidity money market bank s for ex tend ed period s to acquire fund s which have been used to ex pand loan s and to meet d eposit withdrawals. Since tran saction s in Federal fund s, howeve r , do not affect th e size of the reserve base of the banking system, they do not increase potential bank credit ex pa nsio n . Ba nk s have a lso bee n a ble to acquire loanable funds by se lling capita l not es and by issuing commerc ia l paper throu g h sub sidia ri es and affi li ates. In eith er case depo sit w ill initi a ll y d ecl ine as purchasers pay for th e sec uriti es, but 12 will increase as bank s use th e funds to make loans. Since fund s obtained by th ese method s ha ve not been subject to rese rve require ments in th e past, an expansion of bank (and bank related) credit has been possibl e in an a mount eq ua l to the vo lume of comm ercial paper a nd ca pital notes so ld. The concluding ar ticl e in thi s se ri es will exa min e additional ources of liquidity a nd will asses th e significa nce of bank liability manageme nt during the recent period of monetary restraint. Federal Reserve Bank of Kansas City Cattle Feeding in the Tenth District: Development and Expansion By Gene L. Swackhamer and Blain e W . Bick el B eca u e of the importance of th e cattle indu stry to the Pl ain s states, there have bee n many fine studi e ofthisindustry. However, due to the exte nt and rapidity of change · in ca ttle feeding, cont inued ·tud y is necc ·sa ry. In a n attempt to bd tcr id entify preva ilin g practi ces a nd problem s, ·1 survey of large-sca le feed ! ts in th e enth Federa l Reserv Di stri ct was made. An we rs were sought for such qu estions as: Is there ev idence of overexpansion of feed lot capacity? The shortage o f what resources appear to be most limiting to future growth? Are new a nd ex pa nding feedlots adequately capitalized? Although it is doubtful that th e final word can be given to the e q ues tion s, the information in thi s and sub seq uen t art icl es i desig.ned to be beneficial to read ers int rested in ca ttle industry development ·. The li vestoc k indu stry ha · grown in importance in th e Tenth Federal Reserve Di stri ct, and Di trict states account for an increasing share of th e Nat ion 's cash receipts from the sale of cattle and calves. In 1958 , farmers and ranchers in th e seven states compri sing the Tenth Dist rict I received over $3 billion from the sale of livestock and products - nearly 16 per cent of total cas h receipts from li vestock and product in the United State ·. Of thi amount, $2.4 billion repr ese nt ed receipt s from the sa le of mea t a nimal · (22 per ce nt of th e I/ Co lorado, K a nsa s, N eb raska. Wyoming, a nd m ost o f Oklahoma. th e no rth e rn ha lf of N ew Mexi co . a nd th e wes tern t ier of M isso uri co unties. Monthly Revi e w • April 1970 U. S. total) , a nd $1.85 billion of thi s amount wa s from th e sale of cattle and calves (25 per cent of th e U. S. total). Thu s, in 1958, farmer s a nd ra ncher in Di stri ct state were receiving one of cach four dollar · dcrivcd fr o m the sa le of ca ttl e a nd ca lves. incc 1958, chan ge has been dramatic. I arm income data for 1968, th e mo t recent ava ilabl e givin g com mod ity a nd state detail, revealed th at gross cash rece ipts to Di stri ct states from lives tock and products exceeded $5.4 billion , or 21 per cent of th e U. S. total. Cash receipts from the sale of meat anima ls exceeded $4. 7 billion (31 per cent of th e U. S. total), and recei pts from cattl e a nd calves exceeded $3 .9 billion (3 5 per ce nt of th e U. S. total). In th e IO years 1958-68, ca h receipts from cattle a nd ca lve· a lmo ·t doubled in Di ·trict ·talc ·, a nd th e re lati ve hare of Di stri ct producer rose from 25 per cent to 35 per ce nt of the U. S. tota l. Since dema nd for li ve ·tock and products also grew durin g th ese yea rs, th e shift in relati ve importa nce of th e cattle indu stry to th e Plain s states did not com plete ly represe nt gain at oth er areas' expense, but th e tran sition has been rapid , an d the trend toward continued relative gain s see ms likely. The mag nitud e of th e shift ca n be seen further when it is rea li zed that, of th e $3 .9 billion grow th in ca ttl e a nd ca lf rece ipt s in th e United Sta tes during the 1958-68 decade, $2. I billi on - or 53 per ce nt - acc ru ed to Tenth Di trict prod ucers. Te nth Di stri ct states have always been a major so urce of tocker and fceder ca ttle, but 13 Cattle Feeding in the Tenth District: the growth illu strated in the preceding numbers represe nts th e e tablishment of a large-scale cattle-feeding industry. Now , nearly one-third of all cattl e on feed in th e Nation are in Tenth Distri ct states, compared with onl y one-fourth lO year ago. The rat e of growth is twi ce th at of th e remaind er of the United States. A co mpari son of number on feed on Janua ry I for rece nt yea rs furth er reveal th e d ra mati c increase in fed-beef production. Numbers of cattl e on feed in th e Tenth District increased by 129 per cent betwee n 1960 and I970 , compared with a 68 per cent in crease for th e remaining major feeding tates. New Mex ico , Okl ah ma, a nd Ka nsas led Di ·trict ·ta lc · in percen tage in crea ·cs d urin g th e pas t dccaclc with each xhibitin g increases in execs · of 200 per ce nt. In absolute numbers, Nebraska led Distri ct sta te with an increa e of 822,000 head , followed by Kansas with 617 ,000 , from January I , 1960 , to January I , I970. Change was accelerating at a much faster rate at th e end of th e 1960' s th an when the decade began. Ninetee n per ce nt more cattl e were on feed in Di strict states on Janu ary 1, 1970 , th an on Janu ary I , 1968. The increase in Kansas was 46 per ce nt ove r thi s same twoyea r peri od. Na ti ona lly, the ame trend wa · ev ident - with th e 22 major feed ing sta te · (which include a ll Tenth Di stri ct states exce pt Wyo ming) showing an 18 per ce nt increase since 1968; a nd with Texa leadin g with a 75 per ce nt increase. Betwee n 1960 and 1970 , Texas ex peri enced a phenomenal 471 per ce nt increase in numbers on feed. Increases in the traditional feedin g states of th e Corn Belt have been mu ch slower. During th e 1960' s, Illinoi s ex peri enced onl y a IO per cent increase in cattl e on feed , while Iowa - the mos t impo rtant feeding talc in th e Co rn Bell - increased 47 per ce nt. Ind iana, Michiga n, an d Ohi o had increases ra nging from 88 lo 52 per ce nt but, in absolut e numbers, th ese three states togeth er represe nted a n increa e of onl y 353,000 head during th e 10-year span. 14 An examination of commercial cattl e sla ughter and fed-cattle-and -calves-mark eted data reveals a similar picture, as would be ex pected. Commercial cattle slaughter in Di strict states has ri se n from 4.9 million head in 1958 to 9. 6 million head in 1968 - represe ntin g a gain in relative sha re of the tota l U. S. laughter fr o m 2 1 per ce nt to 27 per ce nt. A ve ry di tinct regional shift in fed-beef producti o n has occurred and indications are th at furth er co nce ntrati on in th e Western and South ern Pl ain s is co ntinuing. FACTORS INFLUENCING CATTLE FEEDING IN THE TENTH DISTRICT In any atlcmp t to atalog th e imp rt ant fa tors th at have influenced th e growt h of th e fed-cattle ind ustry in the Pl a in state , ce rtain to be includ ed would be th e development of grain sorghum , ex pan sion of irrigation , growth in co nsumer demand , shifting of population into th e So uthwest , new technology-induced feeding practices, accom panying economies of size in dry lot and confinement feeding, ava ilability of q uality feeder cattle, fa vorabl e cli mate fo r co nce nt ra tion in feedl ots, new interstate hi ghways and refri ge rated tru c kin g, a nd co mmunit y support. Ju ·t co mpiling a list of important indu stry determinants is not sufficient for a nswerin g th e questions po ed earlier. Much more mu t be know n. Meas ures of resource limitati ons and dema nd stabil ity must be derived before a n evaluation of overcapacity, und ercapita liza tion , or co nti nued growth can be mad e. The sequence of eve nts th a t have, over time, brought about th e relocation of th e " beef belt " fro m a Ka n as City-C hi cago line to an Amarill o-Om aha pl a ne, i le importa nt th an projection o f lik ely future developments or change th at will influence th e fed-b eef indu stry. Thus, severa l importa nt re ources cri tica l to th e fed -cattl e ind ustry wi ll be d i cus eel in d ividuall y. Federal Reserve Bank of Kansas City Development and Expansion Feed Grain Production Without the development of higher-yielding hybrid grain sorghum s and economically fea sible well and reservoir irrigation systems, the expansion of cattle feeding in the Plain would have been much slower. Were it not for these factors , it is doubtful that large- calc ca ttle feeding would even exi st in many of the area where it now dominates the loca l economy. The production of high-quality feed grain and the d eve lopm ent of feeding tec hnology caused a realignment of relati ve co t co nsid era tion s. In the 1960' , it became eco nomi ca ll y fea ·iblc t fini sh ca ttl e f r nnrkct in the Plain s. Ran c hers had an alternative to th e trad iti o nal movement of sto kers and feeders into the om Belt for fini hin g. A , th e demand for grain-fattened cattle (fed beef) grew, the appeal of producing feed grain in th e feeder cattle growing areas increased . New technology on confinement feeding and climatic conditions favorable to open-air feedlot s (low annual rainfall and cool evenings) further facilitated the development of large-sca le cattle feeding. Water was perhap the mo t critical reso urce in th e development of catt le feeding. Dryland farmin g in most areas of the Western and Southern Plain s requiredjudieiou ad here nce to a fallow sys tem and re ulted almost exclu ively in th e production of grass and hard winter wheat which was not considered to be an animal feed grain. But, as can be seen in Chart l, irrigation has become extensive. This map shows the total pasture and cropland acreage irrigated per county as reported in the 1964 Census. In contrast to the findings of a 1956 study of Census data that revealed a decline of 323,000 irrigated acre · in District state from 1949 to 1954 , irrigat ed acreage has increased 2,673,000 acre s since J 954, invalidating the conclu ions of th e 1956 study . 2 2 / " Dev elopmen t and inancing of Irrigation," M o nthly Review, Federal Reserve Bank o f Kan sas Ci ty, June 1956, pp. 9-15. Monthly Review • April 1970 One of the resources critical to the continued growth of large-scale cattle feeding in the Plains states in the I 970's will be water. Already, population growth, industrialization, and existing agricultural needs are putting pressure on available supplie . Some areas are experiencing falling water tables and recharge failure ·. Water ha s never been a free good in the thirsty Plain s, but agriculture may find the cost ri sing eve n faster in future years. Although available data suggest a large rese rve of untapped resources, many wat er specialists are haunted by the fact that irrigated eco nomies thr ug hout hi st ry lnve not ex hibited c pecially good I ngevi ty . The st·1bility of ca ttl ' feeding in th e Pl a in · in future years will be grea tl y dependent upon continued production of abundant, high -q uality grain orgh urn and other feed grains. A one measure of overcapacity, a ratio of fed-cattle to feed-grain production was calculated for all counties in District states. The logic of this measure is that areas of feed grain deficiency are more likely to experience rising costs of production in future years as feed is imported. Chart 2 shows th e net surplu s or deficit of feed grains in thou sa nd of bushel s for a four-state area in 1968 for (I) counties with insuffici ent local grain production to meet the needs of large feedlot , and (2) for counties contiguous to deficit counties. Shaded counties consumed more feed grain than they produced by the amounts shown. Net surpluses, after allowance for their own feeding needs, are shown for adjacent counties. Numbers were omitted for all counties that had adequate grain production in 1968 to meet th e needs of their large lots. Thi was done to facilitate identification of d eficit areas. Other District ·tate were omitted becau c of incomplete data. A can be ecn from thi map, most deficit area could draw an adequate amount from neighboring countie without incurring much additional expense. Several modifying comments about thi analysis are necessary. Computation were made 15 Cattle Feeding in the Tenth District: Chart 1 IRRIGATED CROP AND PASTURE LANDS M 0 N ....... A \. ~ I ,, l', <( IR RIGATED ACREAGE ,..... "' ' J .. ••· 1 .1•••,. I 1964 J. . .. . .. I a M L...' -- j I N D D D D D 100 ,00 0 AN D OV ER so .ooo - 99, 999 2s.o oo - 49, 999 , o .ooo - 24 ,999 UNDER 10, 0 00 G "'" '' /"'"' I •• I I i o W A I • ' "'•f'I r O'. :::, I- /--•.,... l z 0 ]"""• """ N a:. SO U RC : 16 1964 U. S. Ce nsus of Ag ri cultu re, Vo l. I . U . S. Depar t men t o f Comme rce. Bureau of th e Ce ns u s. Federal Rese, v e Bank of Kansas City Development and Expansion Chart 2 FEED GRAIN SURPLUS OR DEFICIT AFTER A LOWANCE FOR NEEDS BY LARGE FEEDLOTS Selected Counties and States (Thousand Bushels) 142 63 9 C 806 -16 18 -.V•.. on the bas i of numbe r of cattl e fed o nl y in large- ca le feedl o t · ( I ,000 head a nd over). T he e lot were a urn ed to turn ca ttl e 2 I / 2 tim es per year , to average 70 pe r ce nt ca pacity , and to feed a n average of 15 pound gra in per animal pe r day for 140 d ays. The 1968 prod uction of corn , sorghum gra in , barley, a nd oats Monthly Review April 1970 348 ,. IIP' ON were to ta led to obtain a n e timat c of feedg ra in upp ly. The numbers hown on C ha rt 2 thu relat e only to the need of cattle fed in lot of I ,000 head or more ca pacity. Th e gra in need · of a ll other li vestock were ignored, and thi s und o ubt edly has led to a n und ersta te ment of th e tota l feed-grain d e17 Cattle Feeding in the Tenth District: ficiency-surplu s picture. Counties showing a d eficit on the basis of large feedlots only would obviously have a greater d eficit if the need s of all other li vestock were included. Lik ewi se, counties with a urplus actually have le s excess grain than shown. Although the omi ssion of oth er pecies and catt le fed in small lots a n important consideration , it is not lik ely to eriou ly di stort th e picture of re ource needs. The area where deficit s a re prese ntl y shown will probably fir st ex peri ence the press ure of limited feed-grain sup plies. Further ex pa nsion in these areas will be dependent upon co ntinu ed in c rea ·e in feed-gra in produ cti o n or in suffi cie nt feedin g effi cie ncy to justify importin g feed g rai n ·. The ava ilability o f feed grain s would ap pear to a lready be a constra int o n co ntinued feedlot ex pan ion in so me section of western N ebraska , so uthwes tern Kan sas, northeastern Co lorado, and much of Oklahoma. Feeder Cattle Supply Another critical input to th e cattle industry is the supply of quality feeder cattle. Production o f calves has increased modestl y in each of the last two years at about a I per ce nt a nnu a l ra te. Whil e th e production of beef ca lve ha in creased from 30 ,670 ,000 head in 1967 to a calcu la ted 3 1,95 1,000 in 1969, th e produ c ti on of calves from nonbeef cows and heifers 2 years of age and older d ecli ned from I 3,018,000 in 1967 to an estimated 12,444,000 head in 1969. A lso contributing to the total supply of available feedlot replacement stock has been the reduced slaughter of calves and of nonfed steers and heifers which has permitted these animal s to move into finishing programs. F uture gain from reduced slaughter of nonfini shed cattle will be small , however , since thi s route to mark et has bee n dimini shing rapidl y. Live cattle imports have added marginally to to tal supply and may increase further if replacement d emand re main s stron g. Beca use of th e rapid g rowth in demand for fed beef and the more modest expansion of 18 feeder cattle upplies, th e d e mand for replacement animal · has ri sen and feeder catt le price have strength ened. With de ma nd for fed beef anticipated to rema in strong , 3 co ntinued press ure for quality feeder cattle is likel y in th e 1970' s. At the sa me time, th e ab ili ty of ra nchers to ex pand calf production at th e rate of replacement demand is li mited . Es ti mated ca lvin g rates have continued to rise a nd , nationally , it i estimated th at th e cal f crop is eq ui va le nt to 89 per ce nt of all cows a nd heifers 2 yea rs and o lder. Co ntinu ed improvement in th e ca lvin g rate i a nti cipated, with each I per ce nt ga in ba ·ed o n c urrent ·ow num be rs adding abo ut 444,000 head of cat tic t the a a il ab le feeder ·uppl y. In 1969, Iowa led th e Nation with a calvin g r te o f 95 per ce nt. Kansas and Colorado had ca lvin g rates of 94 per cent; Nebraska a nd Oklahoma , 90 per cent; and Texas (t he largest so urce of feeder cattle), 88 per cent. In the absence of sig nifica nt tech nological developments in beef-cattle reproduction , additional supply from improved calving alon e will be insuffi cient for expected feedlot needs. Continued expansion of cowherds, li vecattle imports - or a combination of th ese will be nece sary. The 1949-69 trend of beef - ca lf producti o n is depicted in C hart 3. Three d egrees of growth have been indicated based upon th e indi vidual sta te 's 1949-69 rate of increase weighted by its relative share of total U . S. calf production. States were ranked on the basis of this derived index and divided into the indicated group s. Crosshatched states have exhibited the fastest relativ e contribution to total numbers -and account for 37 per cent of the I 969 beef-calf crop. It is primaril y the e tales that have hi storically produ ced " Okie" feed er cattl e (cro breed con i ting of beef, dairy , and Brahma n bloodlines) . Although in 3/ For a discu ss ion o f th e demand for beef ca ttl e, the reader is referred to "Eco nom ic Growth a nd th e Beef Industry," M on th ly Rev iew, Fede ral R ese rve Bank of Kansas C ity , Februa ry 1970 . R nk f Ko ,.,m tty Development and Expansion Chart 3 BEEF-CALF PRODUCTION TREND, 1949-69, AND DISTRIBUTION BY STATES, 1969 ~ Fast W✓.@ Moderate ~ Steady Figures show state's percentage of 1969 Beet Calf Crop . SO URC E. Co mpil ed from West ern Live stoc k M ar k e tin g Inf o rm a t io n Pr o 1ec t d a t a . r cent year · there ha · been much more di ·cussion about co nfinement ca lf production a nd Corn Belt cowherd , Southccntral and Southwe tern tales will remain major producer - of feeder calves well into the 1970' s. Livestock Slaughter With surp lus feeder livestock available, the incentive to produce feed grains and market fed beef was strong in the Central and Southern Pl ains. Once large-sca le cattle feeding became estab li hcd, upply-oricntcd li vestock-slaughter firm s were quick to move to the area of production. The tran sportation economic due to carcass weight red ucti on, reduction in procurement costs , a nd reduced brink from handling and hipping were significant factors in encouraging relocation of the meatpacking mM t ly VI w A r l / du stry. Other change such a · improved refrigeration, new tcchniq uc of automation, slaughter specialization by species, changing con um er markets, and geographical d ispersement of livestock production further expedited regional decentralization of the livestock-slaughter and meatpacking industry. Aggregate figures of number of employees or number of large livestock-slaughter facilities in the Tenth District for the 1958 and 1963 censu period s do not accurately reflect the changes occurring within the e tatc . During a period when most state were experienci ng sub stantial redu ction s in plants and employees, many of the terminal and river market meatpackers in the Plain s were moving to new location s till within th e Tenth District. Since the 1963 Census, new regulation requiring Federal 19 Cattle Feeding in the Tenth District: inspection have caused many previously nonfederally inspected plants to change their status, thus further complicating interpretation of indu stry data. Other measures such as new construction , value added in meat slaughter or value of beef shipments, annual slaugh ter in million pounds of liveweight or rated capacity in head per hour clearly show a regional gain in th e Tenth Di strict. Although the Tenth Di trict contai ned only 19 per cent of all federally inspected livestock-slaughtering establishments in 1969 , the area accounted for nearly 30 per cent of all co mmercial cattle ·laught ered in the U nitcd State ·. New beef slaught er, breaking, and fabricating facilitic · arc still being built in th e S uthwe ·t in respo nse to th e regional shift in cattle feeding and rapid expansion of large-sca le feedlot . Although th e danger of overcapacity should be of concern to the industry , the ymbiotic relation of packer and feeder has, to date, been beneficial to both. With co ntinued growth in demand for fed beef anticipated, cattle feeding in the Central and Southern Plains should continue to expand in the 1970's. Other Factors to Consider An important determinant of feed lot location is the climate. The generally warm, dry weather throughout part of Colorado, Kan as, New Mexico, and Oklahoma facilitate year-around beef production with a minimum of shelter. Lower rainfall produces less runoff and stream pollution from feedlots. Management is the key factor that ties all the other resources together into a successful bu si ness. Program s that include the study of feedlot management such as at Kan a State University and Tcxa A & M Univcr ity help provide the Plain · area with the nccc sa ry perso nnel. Price changes, types of cattle, di cases, and dea th losses are ome of th e many probl ems facing feedlot management. Scientific developments in market news dissemination, cros breeding , and disea e control have eliminated 20 some problems; and the application of computers to the development of rations and to recordkeeping has enhanced the effectiveness of feed lot management, but there are many deci ion which still rely on kill, judgment, and experience. The avai lability of competent and experienced feedlot managers is rapidly becoming a major consideration in new feedlot development. LOCATION OF LARGE FEEDLOTS Large cattle feedlots in Tenth District states have increased from 581 in 1964 to 874 in 1969. Thi represe nts a 50 per ce nt increase in five year , c mparcd with an in crca ·c of 5 per c ·nt for th c 22 maj r cattle feeding ·tal cs <luring th e sa mc peri d . The in crease r r 111aj r feeding state ·, after excl uding District states, was only 25 per cent; so, clear ly, recent expansion ha been in the Central and Southern Plains. Nebraska has had an absolute increase of 159 large feed lots in th e last fi ve years , compared with 112 for Iowa, 93 for Texas , 70 in Kan sas, and 39 in Co lorado. Arizona , California, Illinoi s, Oregon, Pennsylvania, and Washington experienced a decline in the number of large feedlots. Table I shows th e relati ve changes for Di trict State and the rcmaini ng major feeding talcs for selected year . /\n analysi of di stribution by size reveal that much of the increase in recent year ha been in th e large-lot categoric . Lot of from 1,000 to 7 ,999 head capacity accounted for 77 per cent of th e 1962-69 increase in the Tenth District. Twenty-three per cent of the increase in District lots since 1962 was in categories of 8,000 or more head capacity. Of the new feedlots in the 22 major feeding state between 1962 and 1969 , Tenth District state account for 59 per ce nt of tho c between 1,000 and 7,999 size and 39 per cent of all those over 8,000 ca pacity . Ju t as farms have increa cd in acreage over time , mo t large feedlot have grown by incremental addition . Only in recent year have many new feedlots opened with initial capacitie Fedcrol Res rve Bank of Kansas City Development and Expansion Table 1 NUMBER OF CATTLE FEEDLOTS BY SIZE GROUPS FOR TENTH DISTRICT STATES Feedlot Capacity (Head in Thousands) 1,000-1,999 2,000-3,999 4,000-7,999 8,000-15,999 16,000-31,999 32,000+ Total 1962 1967 1969 1962 1967 1969 1962 1967 1969 1962 1967 1969 1962 1967 1969 1962' 1967 1969 1962 1967 1969 Co lorado 31 Kansas 24 11 Missou rit Nebraska 202 New Mexicot 10 13 Oklahomat Wyom ing District Totol 9 33 31 20 252 285 18 19 8 5 17 21 8 19 12 11 * 30 28 15 28 16 29 24 10 9 16 17 17 12 20 23 14 30 15 21 8 75 12 113 120 14 24 57 60 11 15 16 5 14 7 8 8 17 14 6 6 7 5 10 6 4 6 4 4 3 4 6* 13 17 5 4 5 80 3 3 - 3 53 16 312 6* 94 120 100 126 33 32 416 489 34 29 54 50 13 19 40 49 17 387 404 133 223 227 65 110 126 39 62 66 0 30 44 0 3 916 931 362 497 497 184 300 318 101 170 187 20 77 99 3 19 34 1432 1919 2066 462 529 527 229 270 119 190 192 62 l 08 121 20 47 55 3 16 28 895 11 53 1193 300 22Sta t Total 762 Remainder 32 32 274 6 537 766 873 ,:, Es tima ted . t Numbers are for en tir e state. of IO ,000 head or more. T here wa s a surge of new large lot s opened in the 1968-69 period, but th e rate appears to have slowed in 1970. Analy sis of feed lot numbers since 1967 revea ls that , of 147 n ew lot s in th e 22 m ajo r feedin g sta tes, 108 are in th e Tenth Federal R ese rve Di st ri c t. N eb ras ka showed a n in crease o f 73 and o lo rad o and Kan sa s 26 eac h , whi le Mi sso uri , N ew Me x ico, Ok la ho ma , and Wyomin g rep o rted a d ec lin e in large lo t ·. Th e ga in in Distri ct states was unifo rmly distributed a mon g lot size ca tego ri es, but still acco unted for three- fourth s of all new lots over 4 ,000 hea d capacity. The geographic location of large feedlot s is dep icted in Chart 4 , w hi ch includ es est im ates o f max imum o ne-tim e capacity for large lots by co unti c . The influ ence of irri ga tion a nd feedg ra in produ c tion , a shown in prior figu res o n feed lot loca ti o n , ca n be see n in C ha rt 4. The heavies t co nce ntra tion s arc in d eve loped irri gation a reas where feed g ra in s arc re latively abundant. Expans io n will lik ely co ntinue in th e deve loped areas a t a fas ter pace th an in a reas w ith Ii mited gra in a nd wate r re sources. Monthly Review April 1970 CONCLUDING COMMENTS Expansion of cattle feeding in the Central a nd Southern Plain s during the I 960 ' s was both rapid and s ub stantial. ~he rate of grow th int ensifi ed as th e de cade closed. Co ntinu ed ex pan sion in the I 970's see m s prob a bl e sin ce th ose factor s th at gave ri ·c to a fed-ca ttl e in d ustr y arc still reaso na bl y prevalent. More pre s urc o n ava il ab le reso urce , particu la rl y rep laceme nt feede rs, feed grain s, wa te r , c redit , a nd management a re a lso lik e ly. As th ese constra int s to ex pan sion mate ri a lize, production costs wi ll ri se - pl acing margina ll y efficient feedlots und e r greater profi t stress. If th e economy does not cool too much in the ea rly I 970's, fed-beef demand sho uld re main good and moderate indu stry ex p a nsion should co ntinu e. Under th ese co ndi tion s, ge nera l overexpa nsion is not li ke ly a nd a n in d ust ry "shakeo ut" would be unlik e ly. Shou ld th e demand for fed beef d e teri ora te due to slower grow th of emp loyment a nd / or in comes, some large feed lots will lik e ly be hard pressed to maintain brea keve n capacity leve ls at lowe r fed- bee f pri ces. The fed-catt le indu stry appears to be mark21 Cattle Feeding in the Tenth District: Development and Expansion Chart 4 MAXIMUM ONE-TIME CAPACI TY OF LARGE FEEDLOTS IN SELECTED STATES AND COUNTIES As of End of 1969 (Thousands of Head*) ~-G l~,. , .... I 4 .0 . i;·.~·r-N 270 .4 11 . 0 E 13 5 . 9 C 12 .0 45 .0 ""u~ 58 . 8 -·;0_; ·1~· ~ 1. 2 ¼,,,,, .,,.,;; ~ - 18 . 1 10 . 3 132 .0 " ; ·;~;: I / 32 . 9 . 6 . 2 ""'"-lll k.M'T~/.:;;;;.... .,. r 150.II 70 .4 J 48.0 l l<>U,- I ..L.1 ~ • 1.1 ,... ._ , . .-,: :..n ·_,,- J,ovo 37.1 130.0 / 47.8 / 1.9 -~-i«x----= t "'x,,-L.,,.- I 2 . 3 I 61.6 11.0 / ~ u -;- I .oo,;_ I T 1 X A s Th a bove fi gures are unoffici al es tim a t es ga th e r ed fr om a number o f sou r ce s a nd surv ys . Erro r s and omi ss ions may have oc cu rred b ca u se o f t h e ra p1d 1ty o f c h anges 1n t he ca ttl e -f eed in g indu stry . Alt houg h th e re are a f w l arge f ed lo t s 1n Wy oming. New M ex ico . a nd M1 ssour1, th ey a re not s ho w n on thi s map becau e o f in omp let e 1nl o rm at 1on . ing tim e in th e early month · of 1970. Fewe r new co mmitm ents are being mad e beca u e of th un ava il ab ility of credit , the hi gher co t of repl ace ment ca tt le, a nd uncertainty a bout ge neral economic deve lopments. A pause at thi s time 22 ·hould be a hea lth y expe ri ence cna bli ng th e fed beef indu stry to exa min e a nd co n o lidat e th e cx pan ion of recent yea r . A ren ewa l of new con truction at the 1967-69 rate do e not appea r lik ely this year. Federal Reserve Bank of Kansas City
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