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June 1957
Trade Credit: A Factor
in the Rationing of Capital
Variability in Agriculture
.
Current Charts and Statistics
.
.
page
3
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page
9
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page 15
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Subscriptions to the MONTHLY REVIEW are available to the public without charge. Additional
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is granted to reproduce any material in this
publication.
A Factor in the
Rationing of Capital
and credit
over the past two years in an environment of mounting requirements have aroused
much interest as to the identity of the potential borrowers whose demands have not
been fully met. Analyses of the many and
varied effects that have resulted from this
condition have been focused largely on the
ris<' of interest rates, the rationing actions of
lenders ( inclnding hanks and other financial
intermediaries) in choosing to accommodate
one demand rather than another, and the
comparative accessibility of the capital markets to various types of borrowers. Large
husiness units have been said to be exempted
from direct credit rationing because of their
financial strength, bargaining ability, and unrestricted access to the open market. Smaller
unjts, lacking these advantages, have been
clec;cribed as being limited in their opportunities for growth and even as having
suffered a reduction of the credit formerly
available to them. This characterization of
the credit rationing process probably involves
oversimplification for, in reality, a great many
other conditions must be considered to reach
a balanced appraisal of the influence of restricted credit on various kinds of business.
The emphasis that has been given in the
analysis to market access, the rationing actions of lenders in preferring one customer
rather than another, and the restraining influence of higher interest costs is altogether
appropriate. Another type of relationship,
however, deserves consideration in the broad
· treatment of capital rationing. This relationship consists of the practice among business
I!\UTED SUPPLIES OF CAPITAL
Month1y Review o June 1957
units and individuals of buying and selling on
open book or charge account. For example, a
business unit, finding it impossible to obtain
additional credit through its usual sources,
may supplement its capital by paying its bills
less readily and by collecting from its customers more promptly than before. Obviously,
such a practice could not yield additional
credit for all units, since one can gain only
at the expense of others. Yet the prevailing
system of business relationships and h·ade
practices makes it possible for some firms and
some industries to gain capital in this way.
The foundation of trade credit is the structure of industry in which goods gain in value
as they move from the raw material stage
through the successive refinements of fabrication to the retail trade outlet and thence to the
final consumer. Goods purchased by a business
gain in value by the application of labor and
capital. Thus, the individual business is likely
to receive less credit through accounts payable owed to its suppliers than it extends
through sales to its customers. But h·ade
practices and the credit policies of specific
firms and industries may alter this logical
relationship. A business unit may receive
more favorable credit tenns from its suppliers
than it grants to customers, and its accounts
payable, therefore, may be higher than accounts receivable.
Interjection of trade credit into the discussion of the process of credit rationing
raises a number of questions. First, is the
volume of credit extended through this
medium sufficiently large to be important in
the allocation of available credit? Second,
3
Trade Cred't
what are the broad groups which extend and
receive credit in this form and what is their
relative importance? Third, is trade credit
sufficiently flexible to be a significant factor
adding to the credit of some businesses during a period of credit restrictiveness? Fourth,
do small firms gain or lose capital through
trade credit? The ensuing discussion sets
forth the available statistical information that
applies to these questions.
Tr
The most comprehensive information on
the amount of trade credit outstanding is
supplied by the U. S. Treasury Department in
the publication Statistics of Income. The data
shown in the accompanying table exclude the
reports of banks and other financial institutions, for their operations are not germane in
this analysis. Since the figures are estimates
for all corporations that submitted balance
sheets with their tax returns, they exclude
unincorporated business units, individuals,
government units, and a few smaller corporations. Because the corporate form of organization is more typical of certain industries
than of others, inferences cannot be drawn
from these figures about the amounts of
credit extended and received by specific
industries. For example, unincorporated businesses are much more common in agriculture
and retail trade than in manufacturing; therefore, a much larger share of their operations is
omitted from the data shown.
Several aspects of these figures are of interest for the questions posed. These business
units at the end of 1952 held notes and accounts receivable of $53.4 billion and owed
accounts payable of $32.6 billion. This
volume of accounts receivable was almost
double the amount of loans to businesses held
by all commercial banks on that date and was
equal to 14 per cent of the assets of the
corporations. Since total notes and accounts
receivable exceeded accounts payable by
4
RECEI ABLES AND PA ABLES,
ON FINANCIAL
(In millions of dollars)
Industry group
Agriculture, forestry,
and fishing
Mining and quarrying
Construction
Manufacturing
Total trade
Wholesale
Retail
Miscellaneous
Service
Public utilities
Miscellaneous
Total
Notes and Accounts
Receivable
Accounts
Payable
1951
1952
1951
1952
371
1,430
3,171
24,493
15,125
8,518
5,749
859
1,176
3,591
79
260
1,438
3,389
27,414
15,830
8,517
6,368
945
1,284
3,741
71
335
963
1,352
14,685
9,360
5,516
3,293
551
859
2,876
40
197
968
1,382
16,210
9,817
5,631
3,609
577
890
3,098
34
49,436
53,427
30,470
32,596
SOURCE: Statistics of Income for 1952, Part 2, U. S.
Treasury Department.
$20.8 billion, it is clear that a tremendous
amount of credit was extended to others in
the form of trade credit. The recipients of
this credit can be assumed to be those economic units which are not included in the
table, since credit extended and received in
this form among corporations would be included in the receivables of one firm and the
payables of another. It is noteworthy that in
each industrial group shown the volume of
trade credit extended exceeded the volume
received.
These magnitudes clearly denote that trade
credit is a factor of substantial importance in
reallocating capital obtained from other
sources by corporate business units. It is not
possible to identify the recipients of these
credits, but, as the figures pertain to almost
all corporations, the sum was received by individuals, unincorporated businesses, and
government units. The last of these is unlikely
to account for an important share because of
the financing methods used by government
units. Estimates of the indebtedness of individuals on charge and service accounts also
suggest that they did not receive an important
part. Unincorporated businesses, which typi-
Trade Credit
cally are small, appear to have received the
major part of this credit.
RATIOS OF RECEIVABLE AND ACCOUNTS PAYABLE
TO SALES, U. S. M
G CORPORATIONS
1952-56
RATIO
RATIO
50
50
Although trade credit represents a tremendous sum, and therefore is potentially an
important mechanism through which restrictions on credit may be reallocated, it does not
necessarily follow that this credit is sufficiently
flexible under restrictive conditions to afford
assistance to hard-pressed businesses. In order
to examine the responses of trade credit under
recent money market conditions, it is necessary
to turn to the evidence for manufacturing
corporations alone. This choice is necessary
because the estimates for all corporations by
the Securities and Exchange Commission for
recent years do not segregate other corporations from banks and finance companies and
because no estimate is provided for trade payables alone. Estimates for manufacturing firms
are prepared by the Federal Trade Commission and the Securities and Exchange
Commission and published in the Quarterly
Financial Report of Manufacturing Corporations. Revision of the sample in the second
quarter of 1956 made it necessary to adjust
the third quarter estimate to preserve comparability with preceding years.
, ES AND ACC..vu, ,
PAYABLE, U. S MAI
LE AND ACCOUNTS
-IG CORPORATIONS
R
1952-56
BILLIONS OF DOLLARS
BILLIONS OF DOLLARS
40
40
30
30
NOTES ANO ACCOUNTS RECEIVABLE
20
20
__...,.,,.-10
ACCOUNTS
PAYABLE
~
10
RECEIVABLES MINUS PAY.ABLES
0
0
1952
1953
1954
1955
1956
.SOURCE : Quarterly Financial Report of Manufacturing
Corporations, Federal Trade Commission and
Securities and Exchange Commission.
Mo!"l•hly Review •
June 1957
40
40
A
RECEIVABLES
TO
QUARTERLY SALES
30
30
20
20
TRADE PAYABLES
TO
QUARTERLY SALES
10
10
1953
1954
1955
1956
SOURCE: Quarterly Financial Report of Manufacturing
Corporations, Federal Trade Commission and
Securities and Exchange Commission.
The growth of notes and accounts receivable
and accounts payable from the first quarter
of 1952 to the third quarter of 1956 is shown
in the accompanying chart. Since the expansion of total sales normally would lead to
proportionate increases in trade credit, a
second chart is shown in which receivables
and payables outstanding at the end of each
quarter are expressed as percentages of the
volume of sales in the preceding quarter.
Most of the irregularities in the second chart
result from seasonal fluctuations of sales,
although there also is a clearly defined seasonal movement in receivables that results
from seasonal changes in sales.
From an examination of the first chart, it
is evident that the growth of trade credit in
the business expansion extending from the
third quarter of 1954 to the third quarter of
1956 exceeded the rise in 1952-53-also a
period of strong business expansion. Payables
showed no perceptible increase in the earlier
period but rose materially in the 1954-56
period. Yet, the rise in receivables exceeded
the growth of payables so that the difference
-net credit extended to others-increased from
$11,799 million to $15,639 million . The difference of $3,840 million, representing the in5
Trade Credit
crease in net credit extended, was distinctly
greater than the increase of $2,776 million
which occurred in the bank debts of manufacturing corporations. Thus, while there is
no reason to doubt that most of these firms
had access to bank credit, it is equally evident
that other firms benefited through improvement in the ability of manufacturers to carry
larger volumes of receivables.
A part of the recent increase in notes and
accounts receivable of manufacturing corporations clearly is attributable to the expansion of sales, as can be seen on the second
chart where the receivables-sales ratio is
plotted. Throughout the period shown, there
is a slow upward drift in this ratio, but the
rise from the third quarter of 1954 onward
was more rapid than in preceding quarters.
The actual increase in receivables in the two
years was $7,442 million. If the ratio of receivables to sales had remained unchanged
through the period, the increase would have
been only $4,549 million. The difference $2,893 million - was the result of the increase
in the ratio from 40 per cent in the third
quarter of 1954 to 44 per cent at the same
point in 1956. This marked rise in the ratio
coincided with the period of credit restrictiveness, tempting one to assume that the two developments were closely related. Other plausible explanations deserve consideration, however.
One possibility is that the shift of demand
among industries from 1954 to 1956 led to
more than proportionate increases in sales in
the lines in which accounts receivable are
usually high in relation to sales. Such shifts
would have raised the ratio but would have
furnished no basis for assuming that restrictive credit was an influence. The data for each
type of manufacturing afford a basis for testing this hypothesis. The test consists of determining the ratio of receivables to sales that
would have occurred in 1954 if the distribution of sales among the several lines had been
6
the same as in 1956. That shifts of demand
were of negligible significance is denoted by
the fact that the ratio in 1954 is raised only
from 40.0 per cent to 40.6 per cent. Conversion to dollar terms shows the shift in demand to have accounted for only $348 million
of the total growth of receivables.
Another possible explanation of the rise in
the ratio of receivables to sales is that manufacturing companies have found it profitable,
both because of the rate of interest received
and as a stimulant to sales, to set up financial
arrangements under which equipment could
be sold on the instalment payment plan.
Widespread establishment of such plans
would materially affect the availability of
credit for certain purposes, but it could not
be taken uncritically as evidence of a response
to a lack of credit availability from other
sources. An alternative interpretation might
be that some firms which could not have obtained credit from other sources, even under
conditions of credit ease, are enabled by these
arrangements to buy equipment.
The extent to which purchases of equipment under instalment payment plans have
spread among industries is not known. Information on specific companies confirms that
the number of instalment plans and the volume of sales financed by this method have increased over the past two years. Such plans
as are known have been set up only in the
durable goods industries. Over the two years
ending with the third quarter of 1956, the
ratio of receivables to sales in the durable
goods lines increased from 44.0 per cent to
47.6 per cent. In the nondurable goods industries, the increase was from 36.3 per cent
to 40.5 per cent - a somewhat larger rise than
that in the industries in which the change in
financing might have been important.
Neither the shift of demand nor the growth
of instalment finance seems to have been of
major importance in producing the rise in the
ratio of receivables to sales in the 2-year
Trade Credit
period. It therefore appears that restrictions
on the availability of credit supplies from
other sources led some firms to increase their
use of trade credit.
The failure of the ratio to rise materially in
1952-53, under strong business conditions,
may be explained by a number of differences
between the two periods. On the basis of
several measures, the earlier period can be
judged to have involved less restrictive credit
conditions and the period of tightness was
much less prolonged. Business liquidity therefore was not reduced materially, as has been
the case recently, nor did business capital investment either in plant and equipment or invPntory in 19,53 exhibit the marked growth
that prevailed in 1954-56.
and other lenders and thus trade payables
cannot be isolated so as to determine the net
volume of credit extended or received.
In interpreting the figures in the accompanying table, this deficiency may be overcome partly by recognizing that, in the smaller
corporations, trade payables represent a
larger, and bank debts a smaller, proportion
of total payables than in the larger business
units. This observation is founded on the
evidence from manufacturing corporations,
for which appropriate data are available, and
on the large net extensions of b·ade credit
that are made by larger firms to other businesses, most of which probably are small
unincorporated concerns.
As the size of the unit increases, most of
the industries shown in the table display a
rise in receivables as a percentage of payables.
( Percentages of less than 100 indicate that
total payables exceed total receivables.) The
progression as size increases is clearest in
mining and manufacturing establishments.
Construction firms are a special case, for their
receivables appear to consist largely of uncompensated outlays on incomplete construction projects and therefore resemble the goodsin-process of manufacturing companies. Public
utilities employ bank credit in financing construction until the completion of projects, and
Trade Credit and C r r te Size
The distinct indication that trade credit
responds to restrictive general credit conditions that are sufficiently prolonged and intense makes it particularly interesting to examine the evidence as to the size of business
which extends and which obtains credit
through trade relationships. Data from the
Statistics of Income provide a classification
by industry and asset size, but payables are
not segregated into notes and accounts. Notes
payable are primarily debts owed to banks
RECEIVABLES AS PERCENTAGES
Asset Size
(In thousands of dollars)
Under 50
50 and less than 100
100 and less than 250
250 and less than 500
500 and less than 1,000
1,000 and less than 5,000
5,000 and less than 10,000
10,000 and less than 50,000
50,000 and less than 100,000
100,000 and over
oc
i
PAYABLES, NONFINANCIAL CORPORATIONS, 1952
Mining
Agriculture,
Forestry,
and
and Fishing Quarrying
52
45
64
71
60
52
94
67
0
224
47
48
85
85
95
99
91
114
103
143
Construetion
93
121
129
141
164
189
296
255
205
0
Manufacturing
73
96
95
97
106
114
122
133
121
121
~
Public
Utilities
Trade
68
91
103
80
93
86
67
87
84
95
63
91
108
111
119
117
108
121
100
109
Services
67
89
92
97
80
87
79
129
63
99
'
NOTE: Percentages of less than 100 indicate that total payables exceed total receivables.
SOURCE: Statistics of Income for 1952, Part 2, U. S. Treasury Deportment.
Monthly Review
June 1957
7
Trade Credit
·
their excess of payables is a reflection of their
construction activity rather than a measure
of their gain through trade credit relationships.
The information for manufacturing during
the 2-year period ending with the third quarter of 1956 allows a segregation of payables
into trade and bank sources on the basis of
size of corporation. When trade receivables
are compared with trade payables alone, only
firms having less than $250,000 of assets are
found to have payables in excess of receivables. During the 2-year interval, these
corporations showed comparatively little increase in receivables or bank debt but a
substantial gain in trade payables. Firms
having less than $5 million of assets reported
a gain in payables that was equal to 88 per
cent of the rise in notes and accounts receivable. Moderate increases in bank debt
were a source of additional funds. Corporations having more than $5 million and
less than $50 million of assets experienced a
gain of trade payables that was equal to only
about 23 per cent of the rise in trade receivables and, while bank debt increased, the gain
was well below that required to cover the
difference. By far the largest share of the
growth of receivables was in companies having more than $50 million of assets. Their
gain in accounts payable was equal to about
40 per cent of the growth of receivables, and,
although bank indebtedness increased, the
gain was not large enough to cover the
disparity.
In summary, the available evidence on
trade credit in relation to size of corporation
supports the view that smaller businesses
gain an important amount of capital through
trade relationships. If it is true that large
manufacturing firms have comparatively little
difficulty in obtaining bank credit, it is also
evident that the amount they obtained in
1954-56 was insufficient to cover the expansion in trade credit.
8
,..
The preceding discussion shows that trade
credit extended among firms in financing
sales is large enough to justify the assumption
that it is important in the reallocation of
credit obtained through bank loans and sales
of securities. The available evidence suggests
that much of this credit is extended to unincorporated businesses which, by their nature,
are probably small. The information on
corporations confirms that smaller companies
are the principal recipients. Such credit also
was found to possess flexibility that could not
be explained by the increase in the volume of
sales, shifts in demand, or the growth of
corporate instalment credit, lending support
to the conclusion that credit restriction
played a part in the expansion of trade credit
during the period from 1954 to 1956.
This conclusion does not necessarily lead
to the further inference that small firms
encounter little difficulty in financing under
conditions of credit restriction. Little is known
as to the terms on which larger credit supplies
are made available through trade channels.
Costs may be high, disadvantageous shifts in
the product handled may be required, or
other sacrifices may be necessary in order to
gain credit through these channels. Moreover, there is no basis for judging how far
trade credit can be expanded before the larger
businesses become highly resistant to further
increases. On the other hand, the existence of
a network of business credit relationships of
such magnitude and scope raises doubt about
the effort to judge credit availability solely
on the basis either of bank actions or access
to capital markets. Moreover, it demonstrates
the difficulties that might accompany any
effort to improve the availability of capital for
small businesses through direct restrictions
upon larger firms, which have wide opportunities to alter their provision of capital
through trade channels.
JAB LITY
,n
AGRICULTURE
events must be
considered in the decision-making process.
However, the uncertainty surrounding such
events may prevent these decisions from yielding the anticipated results. This uncertainty
varies with type of industry, region, time,
economic conditions, weather, and a host of
other factors.
Lenders are interested in the degree of
variability as well as in the amount of income
that can be expected from the enterprises they
finance. They are concerned with the differences between industries and with the different types of variability within each industry.
In this article, certain types of variability
within the agricultural industry will be discussed.
A study of variability in agriculture can be
approached from several viewpoints-for the
industry as a whole, on a regional basis, on an
individual farm basis, on a seasonal basis,
from the viewpoint of differences behveen
enterprises, and perhaps from many other
angles. Obviously, not all of these approaches
can be discussed in this article. Thus, an effort
will be made to analyze briefly variability for
the industry as a whole and to make some
regional comparisons that are of interest within the Tenth Federal Reserve District.
N ANY INDUSTRY, FUTURE
Monthly Review •
June 1957
Much of the variability existing within the
farm industry, among regions, and on individual farms is due to variations in production, prices, and costs. The accompanying
chart indicates fluctuations in agricultural
production, prices received by farmers, and
net income from agriculture in the United
States from 1910 to 1956. The chart indicates
that agricultural production was quite stable
when compared with prices or income, which
tend to be volatile and closely related.
The chart also shows that instability in
agricultural income for the Nation as a whole
VARIABILITY IN REALIZED NET INCOME, PRICES
RE.CE.IVED, A~
PRODUC ION
United States
INOEr-X---..-----...,;.;19'--'-47_•....;
4 9 ' - • ~ 1 0 . . : : . . , 0 ~ - - ~ - - INDEX
120
120
TOTAL FARM PRODUCTION~
100
100
80
80
60
60
40
40
20
20
~9""'.'10.............................,.._,2-'-'0u....,,,..'-'-'-........._•3w.o...............1...1....1....1.,.,.w40..i..uu....1...w..J....L.J.....L...1....1..L...L.J....J..~ 0
'50
'60
SOURCE: U. S. Department of Agriculture.
9
Yor·ob· ity ir
Agriculture
must be attributed largely to price fluctuations
rather than to fluctuations in production.
Agricultural production nationally is stable
because the resources used in agriculture do
not fluctuate sharply and there is enough
regional variation throughout the Nation so
that poor conditions in one area are likely to
be offset by good conditions in another area.
On the other hand, prices received are influenced largely by forces that are national
in scope. Thus, regional variations in prices
received are minor and do not tend to offset
each other.
At the opposite extreme, production variations cause significant variability in income on
the individual farm. Drought, floods, insect
infestation, disease, or any number of other
factors may cause production on the individual farm to vary sharply from one year
to the next. However, the amount of production variability on the individual farm is influenced by the degree of specialization, the
commodities produced, and the resources
used. A farm producing two or three commodities usually will have a more stable
production than a completely specialized
farm. Production will tend to be more stable
on a dairy farm than on a wheat farm. The
degree of stability will be influenced by
management, land, and the amount and kinds
of capital used. Furthermore, price fluctuations are an important factor in causing
variability on the individual farm.
Financial institutions, however, usually do
not lend throughout the United States or only
on an individual farm. Instead, they lend
funds to a number of farmers in a given
region. They expect some variability on the
individual farm, but they frequently attempt
to avoid region~ or areas that have a high
degree of variability. Consequently, farmers
in certain areas at times find it more difficult
to obtain credit than do farmers in other areas.
This may explain why farmers in the southern
Great Plains region sometimes have found it
10
relatively difficult to obtain credit, since the
belief prevails that income variability in this
area has been much greater than in many
other areas.
The U. S. Department of Agriculture
has collected and summarized data on yields,
prices, cash receipts, cash expenditures,
and net farm income for representative familyoperated farms in a number of major farming
regions for the years 1930 through 1951. In
subsequent sections of this article, these data
will be compared for the Corn Belt Hog-Beef
and Southern Plains Winter Wheat regions.
These regions were chosen for comparative
purposes, since the Corn Belt Hog-Beef
region usually is associated with farming areas
that have relatively low variability, while the
Southern Plains Winter Wheat region is associated with the high-risk areas. Analysis of
data indicates that there is less difference in
variability among these areas than commonly
supposed. Furthermore, prices, cash receipts,
and net farm income all fluctuate more
violently from year to year in each of the
regions than does the index of all crop yields.
This indicates that price fluctuations are more
important in causing variability of income in
the Southern Great Plains region than are
fluctuations in crop yields. This may not be
true, however, on some individual farms that
are highly specialized in the production of
one commodity and on which high-risk resources are used.
Data on the index of prices received by
farmers for the commodities they sell in the
two regions are shown in Table 1. The
average index for the period 1930 to 1951 is
useful as a guide for comparative purposes.
The index is shown for the years in which it
was lowest and highest to indicate how
violently prices have fluctuated during the
22-year period being analyzed. However, if
a meaningful analysis of variability is to be
Variability in Agricuh.1re
LOCATION OF MAJOR FARMING REGIONS ANALYZED
SOUTH DAKOTA
~
~
MINNESOTA
___6
T
ARKANSAS
SOURCE: U. S. Department of Agriculture.
NOTE: Heavy colored line indicates Tenth Federal Reserve District.
made, it is necessary to know more about
variation than the average, the low, and th e
high.
1
A useful device for measuring variability is
the coefficient of variation. This coefficient
permits measurement of both the amount and
Ta'>le 1 INDEX
D BY FARMf
(1947-49=100)
Farming Region
Southern Plains
Winter Wheat
Hog-Beef Fattening
Average
1930-51
Low
High
Coefficient
of Variation
56
54
18
17
109
106
53.2
54.8
SOURCE: U. S. Department of Agriculture.
Monthly R vi w •
1'.m
19';7
the frequency of variation. If no variation had
occurred during the period studied, the coefficient of variation would have been zero.
If the variation had been large and had occurred frequently, the coefficient of variation
would have been large. Wide variation that
occurred infrequently would not influence
the coefficient of variation as much as a
somewhat smaller variation that occurred
much more often. It should be noted that the
coefficient of variation for prices received by
farmers did not differ significantly for the
two regions.
11
Variability in Agr cultur
---
----~ALL CROPS
Table 2. IN
(1947-49=100)
Farming Region
Southern Plains
Winter Wheat
Hog-Beef Fattening
Average
1930-51
Low
High
Coefficient
of Variation
73
93
24
42
129
123
47.4
21.8
SOURCE: U. S. Department of Agriculture.
Crop production usually fluctuates more
widely than livestock production. Consequently, an index of crop yields should be a sensitive indicator for measuring stability in
agricultural production. Table 2 includes data
that are useful in comparing variability in the
index of yield for all crops for the two regions
sh1died.
There is considerable difference between the
high and low points reached by the index in
both regions. However, it is interesting to note
that variation in crop production was not as
large as variation in the index of prices received by farmers. This indicates that crop
yields from 1930 to 1951 were more stable,
even in the so-called high-risk region, than
were the prices farmers received.
This higher degree of stability in yields than
in price, even when relatively small regions
are studied, also is shown by the coefficients
of variation. The coefficients for the indexes
of yields of all crops are smaller than those
for the indexes of prices received by farmers.
It also is interesting to note that the coefficient of variation for the index of yield in the
Hog-Beef Fattening region is substantially
lower than that for the Winter Wheat region,
although the coefficient for the latter is relatively low. These low coefficients for crop
yields indicate that crop production in these
areas was more stable than were prices received, cash receipts, or net income.
R
Cash receipts vary with production and
price changes. Data in Table 3 indicate that
12
from 1930 through 1951, the effects of production and price variations tended to be
additive, since the coefficient of variation for
cash receipts in each of the regions was larger
than for either prices received or crop yields.
Although productivity also should include
production of livestock and livestock products,
comparable data were not available for these
commodities. However, it probably can be
safely assumed that production of livestock
and livestock products in these regions is more
stable than crop production.
Empirical evidence also seems to verify that
production and price variations during this
period tended to be additive. In general, both
production and prices were low during the
1930's, while both tended to he high during
the 1940's and early 1950's. This probably can
be attributed almost exclusively to coincidence, since the strong demands and inflationary pressures during the latter part of this
period coincided with good yields.
Differences in cash receipts per farm between the low and high years, along with the
coefficients of variation for each of the
regions, indicate that the Southern Plains
Winter Wheat region has a higher degree of
variability than the Hog-Beef Fattening
region. The difference in the coefficient of
variation, however, is surprisingly small. It
also should be noted that the representative
farm in the Hog-Beef Fattening region had
substantially larger average cash receipts than
the representative farm in the Winter Wheat
region. This is explained by the fact that on
the representative farm in the Hog-Beef
Fattening region, relatively large numbers of
feeder livestock were purchased and sales of
le 3 r c:u
Farming Region
Southern Plains
Winter Wheat
Hog-Beef Fattening
Average
1930-51
Low
High
$6,228 $1,180 $16,868
9,316
2,245 22,410
SOURCE: U. S. Department of Agriculture.
Coefficient
of Variation
77.9
74.6
these animals were reflected in the cash
receipts. On the representative farm in the
Winter Wheat region, a larger proportion of
the products was raised on the farm and the
sale of these products was reflected in cash
receipts. Thus, cash expenditures on the representative farm in the Winter ·w heat region
also were substantially lower.
In areas where cash receipts fluctuate
widely, variation in cash expenditures also
may be desirable if the variation between the
two is direct. In years when farmers' cash
receipts are large, they are able to make
larger cash expenditures.
The data in Table 4 indicate that cash
expenditures in both regions tended to be
more stable from year to year than did cash
receipts during the period studied. The difference in the Hog-Beef Fattening region was
small, however, while the relatively low
variation in expenditures in the Winter Wheat
region caused a substantial difference in
variability behveen cash receipts and cash
expenditures in that area. Statistical analysis
verifies that cash expenditures fluctuated
directly with cash receipts in both regions.
In analyzing variability in agriculture, it is
important to give consideration to the relationship between cash expenditures and cash
receipts. If cash expenditures are low in relation to cash receipts, a higher degree of
variability can be tolerated from year to year
than if cash expenditures absorb a high proportion of cash receipts. In the Southern Plains
Winter Wheat region where the coefficient of
variation was highest for cash receipts,
Table 4. ("
Farming Region
Southern Plains
Winter Wheat
Hog-Beef Fattening
ITUR
Average
1930-51
$2,812
5,134
Low
High
$1,320 $ 5,691
1,506 13,438
SOURCE: U. S. Deportment of Agriculture.
Mon•h y Rev· w
Ju ,e 1957
Coefficient
of Variation
46.6
69.88
Farming Region
Southern Plains
Winter Wheat
Hog-Beef Fattening
Average
1930-51
$3,931
4,884
Low
High
$-516 $15,498
-364 13,300
Coefficient
of Variation
103.2
84.1
SOURCE: U. S. Department of Agriculture.
average expenditures were 45 per cent of
average receipts during the 1930-51 period.
In the Hog-Beef Fattening region, which had
the lowest variability in cash receipts, average
cash expenditures were 55 per cent of average
cash receipts. These data tend to verify that
cash expenditures in the Plains region were a
lower per cent of cash receipts from 1930-51
than they were in the Hog-Beef Fattening
region of the Corn Belt. This low ratio of cash
expenditures to cash receipts in the Winter
Wheat region would cause variability to
result in less risk than would exist in a region
where cash expenditures are a large proportion of cash receipts.
f"
r
Agencies extending credit to farmers
probably are more interested in the size and
stability of net farm income than in any other
economic factor. The major requirements for
making safe loans are satisfied if a farmer's
net income is large enough to assure his
ability to retire the loan and stable enough to
be certain that he can make dependable repayments.
Data in Table 5 indicate that the average
net incomes on family-operated farms in the
two regions were large enough to provide for
debt repayment capacity if the debt was not
too large and the maturities were satisfactory.
The average net farm income was lower in
the Southern Plains Winter Wheat region
than in the Hog-Beef Fattening region. This
region also had the highest variability in net
farm income. It is desirable from a credit
viewpoint to have a high average income with
low variability. Consequently, it appears that
13
/nriab·l,ty
the Winter Wheat region is in a less favorable
position, since it has a slightly lower average
net farm income and a higher degree of
variability.
Two factors should be considered in an
analysis of this type. First, the coefficient of
variation is quite high in both regions and,
as was pointed out previously, the representative farm in the Hog-Beef Fattening region
was substantially larger than the representative farm in the Winter Wheat region. Thus,
the analysis may be less representative of the
average farm in the Hog-Beef Fattening
region than is the case in the Winter Wheat
region where large farms tend to predominate.
Secondly, the net loss in the year of lowest
income was not significantly different between the two regions. However, income in
the year when it was highest was su~stantially
higher in the Winter Wheat region than it
was in the Hog-Beef Fattening region. This
would lead to the conclusion that the higher
coefficient of variation in the Winter Wheat
region is accounted for largely by the fact
that net incomes in this region show more
fluctuation at the higher levels than do net
incomes in the Hog-Beef Fattening region.
Observation of net income data for the individual years for these two regions tends to
confirm this. On the other hand, the coefficient of vadation does not indicate
whether the good and bad years tend to be
grouped or to alternate. In general, observation of the data indicates the years tended to
be grouped somewhat more in the Winter
Wheat region. The difference between the
two regions in this respect, however, was not
substantial.
14
in
Agriculture
The idea prevails that farming in certain
regions, particularly in the Great Plains area,
has a high degree of variability, while in other
regions such as the Com Belt, variability is
much less. This idea has become so thoroughly
entrenched that at times it has been more
difficult for farmers in these regions of high
variability to obtain credit than it has been
for farmers in other regions.
In general, an analysis of the data indicates
that less difference in variability exists among
the regions studied than is commonly believed. Furthermore, several factors tend to
offset the advantage of a higher degree of
stability in one region as compared with
another. For example, cash expenditures in
the Winter Wheat region tended to be substantially smaller in relation to cash receipts
than they were in the Hog-Beef Fattening
region. Thus, more variability can be tolerated
in the Winter Wheat region than in the HogBeef Fattening region. Also, net farm incomes
in the lowest years were almost as low in the
Hog-Beef Fattening region as they were in
the Winter Wheat region. However, in the
years when they were highest, net incomes in
the Winter Wheat region tended to be
significantly higher than in the Hog-Beef
Fattening region. This indicates that much of
the additional variability in the Winter Wheat
region can be accounted for by wider fluctuations in the years of high income. From a
lender's viewpoint, it appears that the effects
of variability in the Winter Wheat region
during the 1930-51 period were but slightly
more severe than in the Hog-Beef Fattening
region.
DEBITS TO PRIVATELY HELD DEMAND ACCOUNTS
TENTH DISTRICT AND UNITED STATES
MAJOR DISTRICT CENTERS
BILLIONS OF DOLLARS
BILLIONS OF DOLLARS
200
QUARTERLY AVERAGES OF MONTHLY FIGURES
SEMILOG
SCALE
180
MILLIONS OF DOLLARS
MILLIONS OF DOLLARS
2000
QUARTERLY AVERAGES OF MONTHLY FIGURES
2000
SEMI-LOG SCALE
160
140
KANSAS CITY, MO.
120
UNITED STATES*
~
1000
1000
DENVER
100
8
~
4(
TULSA
800
800
7
80
OMAHA
6
600
600
TENTH DISTRICTt
~
5
OKLAHOMA CITY
*
t
4
,, ..
ALL 11!: PORTING CENTERS
'54
'53
'55
300
1952
'57
'56
WICHITA
300
3
1952
400
400
ALL REPORTING CENTERS EXCEPT NEW YORK CITY
'53
'54
'55
'56
'57
NOTE: On a semi-logarithmic graph, equal slopes indicate equal rates of change.
PRICE INDEXES, UNITED STATES
BANKING IN THE TENTH DISTRICT
District
and
States
Reserve
City
Member
Banks
Index
Deposits
Loans
Country
Member
Banks
Reserve
City
Member
Banks
Country
Member
Banks
- 2
Colorado
-1
-5 -11
Kansas
-2
-5 -4
- 2 1 -5
New Mexico*
Oklahoma *
Wyoming
-2
+6
Missouri*
Nebraska
Mar.
1957
Apr.
1956
114.9
Consumer Price Index
(1947-49=100)
119.3
118.9
Wholesale Price Index
(1947-49 = 100)
117.2
116.9
113.6
Prices Rec'd by Farmers ( 1910-14= 100)
241
237
235
Prices Paid by Farmers (1910-14 = 100 )
296
295
284
April 1957 Percentage Change From
Mar. Apr. Mar. Apr. Mar. Apr. Mar. Apr.
1957 1956 1957 1956 1957 1956 1957 1956
Tenth F. R. Dist.
Apr.
1957
-1
Value of
Department
Store Sales
*Value of
Residential
Building Permits
Percentage change-1957 from 1956
-2
t
+1
+3
+4 +3
+1 +4
-3
+ 1
+2
+9
+s
+6
-1
+2
+4
Denver
+11
+9
+1
+2
t
Wichita
+s
+a
+6
Kansas City
+1
+6
+10t
-3t
-18+
Omaha
+3
+1
+a
-2
-34
+3
+4
+3
-22
+13
+7
-4
+5
-12
+16
-42
-50
+1
+2
+3
Areas
-1
+1
+1
**
+8
**
**
+8
-1
-1
-1
+5 +4 +s
+4
+4 +4
+12
**
**
+2
**No reserve cities in this state.
June 1957
Apr.
+3
-1
*Tenth District portion only.
tless than l per cent.
Value of
Check
Payments
+2
+1
** +4
District
and Principal
Metropolitan
+4
**
**
TENTH DISTRICT BUSINESS INDICATORS
Tenth F. R. Dist.
Okla. City
Tulsa
Year
Year
to date Apr.** to date
Apr.
Year
to date
-1
+13
-10
-1
+164
+8
+1
+44
-11
+it
-32
*City only.
tKansas City, Mo., only. :!:Kansas City, Mo., and K.<ms.
**April increase partially reflects later Easter date this year.
15
\
@FedFRASER