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September
Profits on Commercial Bonk
Time Deposits . .
.
Consumer Food DollarsWhere Do They Go? .
Current Charts and Statistics
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nEl AL
01 KANSAS
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page
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page 10
page 16
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l ESE
1961
V}J
JAN
T
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dclitional
copies of any issue may be obtained from the
Research D epartment, Federal Reserve Bank of
Kansas City, Kansas City 6, Missouri. Permission
is granted to reproduce any material in this
publication.
ro
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s on
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I
I
osits
ex ists among bankers, bank analysts, and public officials
as to th e profits to be gai ned by commercial
bank s on th eir tim e a nd sa vin g - deposits. Some
m mbcrs of th e banking co mmunity urge that
th e maximum permissible ra tes paid by banks
be rai sed or that th e authority to regulate them
be re cinded, while oth r argue that such a
policy would weaken the banking system by inducing severe competition. One group of bank
analysts argues, on the basis of statistical
studi es and deductive analyses, that these deposits have been unprofitable for banks and
that they cannot be profitable. Another group
exhorts the banking community to greater efforts to expand time deposits , presumably because such actions would be beneficial both for
banks as a group and the economy as a whol e.
This kind of fundamental cli . agreement indicates a need for continued study of th e profitability of tim e deposits at commercial banks.
Although important insights into some aspects of the problem may be gained by the use
of statistical studies of deposit profitability at
individual banks, it is necessary to employ deductive analysis to determine whether the existence of interes t-bearing time deposits can enhance the profitability of the banking system
as a whole. The followin g analysis ugge ts that
the banking ystem may indeed profit from the
existence of tim e deposit . lt also seeks to
enunciate the principles that govern the relation between rates paid on time accounts and
profits of the banking system. It should be emphasized that the discussion is directed toward
IDE DISAGR EE M ENT
Monthly Rev, w • Sept rnb r 1961
Some JJa,ic
ConJiJerationJ
a
the profitability of attracting time deposits for
the banking system as a whole, but does not
seek to establish principles which would guide
an individual bank in determining its own policies with respect to attracting time depo its.
An analysis of the profitability of time deposits for the commercial banking system intentionally ignores shifts of deposits between
banks which may result in gains for some and
losses for others. It seeks instead to determine
whether it is possible for the banking system as
a whole to obtain net profits by attracting time
deposits, reserving judgment on the question of
what the analysis implies for individual banks.
The character of such a deductive analysis
may be made clear by o utlining a simplified
approach that common ly is applied. Students of
this question often start by noting that banks
are required by law to hold cash assets equal
to specified percentages of demand and time
deposits. In addition, banks find it necessary to
hold cash reserves for operating purposes.
Analyses of banking data show that these two
types of requirements lead banks to hold about
18 per cent in cash reserves against demand
accounts and 6 per cent against time deposits.
With these percentages, the banking system
would obtain $12 of excess reserves if bank
depositors transferred $100 from their demand
to their time accounts. As banks invested these
excess reserves, thei r ea rning assets and their
deposi t liabilities would increase, and as th e
latter occurred, their required reserves would
3
Profits on Commercial Bank
grow until their excess reserves fell to zero. In
case the growth of liabilities occurred in demand accounts, the $12 of reserves would support $12--:-0.18 or $66.67 of demand deposits.
Banks would gain a like amount of earning assets. At the end of the expansion process, the
consolidated balance sheet of all commercial
banks would show $100 of additional time deposits along with a reduction of $33 .33 in demand deposits and an increase of $66.67 in
earning assets. If banks paid 3 per cent on time
deposits, meeting that cost would require earnings of 4.5 per cent on the new assets, net of
th e cost of acquiring and admini stering th e new
assets, and of servi cing the deposits. ff th e
grow th of b·ink li abilities should occur in time
deposits, ea rnin g assets wo uld incr ase by
$ 12--:-0.06 or $200 while time deposits would
in crease by $300. As in the previou s case,
banks would have to earn 4 .5 per cent net of
other costs on the additional assets to equal
a 3 per cent rate on time deposits.
This approach further states that if demand
deposits were transferred to savings and loan
associations in return for share capital, the associations might hold a reserve of about 5 per
cent of share capital and invest the remainder.
T hese investments would have to earn only
3.16 per cent on $95 of new assets in order to
cover a payment of 3 per cent on share capital,
plus whatever additional costs are incurred in
acquiring and managing the new assets. It has
been argued that banks do not lose assets by
these transfers since the demand deposits
transferred to the associations do not leave the
banking system, but are turned over to builders as mortgages are purchased and then move
on to workers, building material suppliers, and
sellers of land.
A Broader Framework
While the analysis described above is commonly employed, it has the deficiency of assuming implicitly that the supply of bank reserves is fixed. Since the volume of bank reserves is controlled by the actions of th e central
4
bank, this assumption implies that the growth
or lack of growth of commercial bank time deposits does not affect any of the variables which
are significant in the formul ation of central
bank policy. Such a view is not acceptable, because the central bank scarcely would be indifferent to the marked variations in credit market
conditions--changes in interest rates and credit
availability- th at might accompany shifts by
the public between time deposits and other
forms of assets, given a constant volume of
bank reserves. For example, if inactive demand
deposits were transferred to time accounts, and
bank reserves were held constant, the banking
sy tern could increase it· loans and inve trncnts,
tending to lower interest ra tes an d increase
credit w ailability to private bo rrowers.
The assumption th at bank reserves rema ined
unchanged in the face of shifts between demand
and time deposits thus implies th at the central
bank does not consider the cost of credit in
formulating its policies. A more logical analysis can be developed by beginning with the assumption that the economy is operating at full
employment with stable prices. The central
bank then shapes its policies so that the existing level of interest rates is maintained, in order
th at the stability of employment and prices will
not be di srupted. Under such circumstances, the
central bank is concerned with changes in th e
composition of financial assets held by the public only when these changes affect market rates
of interest.
In applying this analytical frame of reference ,
the present discussion will consider commercial
bank time deposits as originating from three
sources- transfers from demand deposits, shifts
of securities from the public to banks, and
transfers of claim s from nonbank fin ancial institutions, such as mutual savings banks and
savings and loan associations. Additions to time
deposits resulting from increased current savings of the public are omitted from this classification since there is no known relationship between the aggregate volume of saving and the
Time Deposits
rate of interest paid on time deposits. Thus,
attention is focused on the distribution of the
public's holdings of fin ancial assets between
time deposits and alternative financial claims .
Each o f the major fo rm s in which the public
may choose to hold fin ancial assets has attributes which di stinguish it from other forms .
These attributes consist of differences in rate of
return , safety, liquidity, type of insurance protection , usefulness in making immediate payments, and- in the case of securities-flu ctuation s in market prices . T hese differences are
appraised by the publi c in ways that, given the
rate o f re turn on each type, dete rmine th e proportio n o f each that th e publi c chooses to hold .
If rates of return o n o ne ty pe arc raised while
rate, o n othe rs a rc un changed, th e public will
modify th e compositi on of thei r fin ancial assets
by increasi ng their hold ings of the higher-yielding assets and reducing th eir holdings of loweryielding assets. These shifts may be large or
small, depending upon how effectively the public considers one type of finan cial asset to substitute for others.
If banks are to earn profits from time deposits, two con ditions must be met. First, a
growth of time deposits must lead to an increase in ba nk assets. Second, the additi onal
asse ts mu st add more to bank revenues than interest payments and the admini stration of the
new assets and deposi ts add to bank costs.
BAN
ASSET GROWTH THROUGH
If banks gain time deposits by raising the
rates paid , the increase in time accounts comes
from transfers of demand balances, shifts from
securities, and tran sfers from claims on nonbank fin ancial in stituti ons. The effect which
each will have on total bank as ets m ay be discussed in term s of th e reaction of central bank
policy with rega rd to the volume of bank reserves. Unde r the rul e previo usly outlined, central bank policy will be geared to maintaining
a given level of interest rates.
Monthly Review • September 1961
Transfers from Demand Balances
A transfer of $100 in deposits from demand
to time account, when reserves on demand and
time deposits are 18 per cent and 6 per cent,
respectively, produces excess reserves of $12.
The transfer indicates that the public desires
$100 less of demand deposits, $100 more of
time deposits , and unchanged amounts of securities and claims on nonbank financial institutions. If interest rates are to remain unchanged, banks must be prevented from bidding
for securities with their excess reserves. Under
th e rule outlined , therefore, the central bank
wo uld sell $1 2 of securities, meeting the dem and s of th e ba nks and eliminating th eir excess
rese rve ·. Bank ea rnin g asse ts would inc rease
$1 2 fo r each $ I 00 growth of tim e deposits.
Transfers from Securities
Time deposi t growth through transfers of
open-market securities from the public to b anks
makes possible a much greater growth of bank
assets . For each $100 of time deposit growth,
banks would need $6 of additional reserves .
The existing level of interest rates would be
maintained if the $100 of securities sold by the
public were absorbed by $6 of central bank
purchases and $94 of commerci al bank purchases. Banks would acquire $94 of earning
assets and $6 of reserves for each $100 of tim e
de posit growth . If th e public chose to reverse
this process, banks would lose $94 of earning
assets and $6 of reserves.
Transfers of Claims on Nonbank
Financial Institutions
The third source of time deposits is through
public shifts from claims on nonbank financial
institutions. A transfer of $100 would force
these institutions to release $5 of demand deposits and $95 of earning assets, assuming that
the institutions in question hold cash reserves
of 5 per cent. Ba nk time deposits would increase by $1 00 and demand deposits would fall
by $5 . T hese changes would cause a bank rese rve deficiency of $5 .10. These reserves could
be provided by central bank purchases of $5 .10
s
Profits on Commercial Bank
of financial assets and banks could acquire
earning assets in the amount of $89.90. The increased ownership of loans and investments by
the central bank and commercial banks combined then would just equal the amount of
earning assets liquidated by nonbank financial
institutions. If the process were reversed, banks
would lose $89.90 of earning assets and $5.10
of reserves and the central bank would sell
$5. IO of assets. Thus, banks would lose deposits-a finding that is contrary to the simplified analysis outlined above.
In summary, for each $100 of time deposit
growth, banks gain $12 in earning assets if the
source is inactive demand deposits, $94 if the
source is securities, and $89.90 if the source is
claims on nonbank financial in stitution s. This
is the result that would be obtained if the central bank responded to a redistribution of public financial asset holdings in the manner indicated earlier. If the banking system should advance the rate paid on time deposits compared
with the rates on alternative financial assets,
the gain in deposits would originate from all of
these sources, the proportion represented by
each source being determined by how effectively time deposits substitute for each in the
financial asset holdings of the public.
their amount. If banks paid no interest on time
deposits, there would be no economic reason
for people to hold them. But if rates were raised
from zero to 0.2 per cent, for example, it is
possible that a substantial amount of time deposits would be gained by banks. Individuals
who had strong preferences for this type of
asset at any positive rate of interest would shift
from other forms of asset holdings. Further increases in rates offered might, for a time, produce proportionate increases in deposits, but it
is logical to expect that at some rate of interest
the responses diminish , because the public
would become less willing to substitute time
deposits for other financial assets as their holdings of time deposits increased.
hart I is drawn on the basis of these assumption s. It shows that, given rates of interest
paid on other financial assets, time deposits
would rise rapidly when rates on these accounts
were raised above zero, but the amount of gain
Chart 1
HYPOTHETICAL
SHIP BETWEE
TIME DEPOSITS AND RATES PAID
Volume of Time Deposits
Billions of Dollors
100
80
60
It has been shown that bank assets will increase as time deposits expand, regardless of
the source of the deposit. But in order to form
a judgment as to whether the additional assets
increase total revenues more than the higher
time balances raise total costs, it is essential to
consider the probable relationships of revenues
and costs to various levels of bank rates of interest on time deposits. This can be done oniy
on the basis of inferences drawn from reasonable assumptions as to the conditions which
influence costs and revenues.
Total interest costs on time deposits are the
product of the rate paid on these deposits and
6
40
20
0
0
4
Rate Paid on Time Deposits in Per Cent
6
NOTE : The shape of the re sponse curve of time deposits to rates
paid shown above does not purport to be a precise representation
of the way in whi ch time deposits would change with varying rates
of interes t on time accounts . It is designed only to illustrate the
point that while the interest-s ensitivity of time deposit volume
may he fairly high at low rates of interest. it must he relatively
low at some high rate of interest due to the increasing reluctance
of holders of financial assets to substitute time deposits for other
finan cial assets as their holdings of the latter decline . Between
these extremes, there is a possibility of an inflection in the re sponse curv e, as rates on time deposits move from low levels
through levels at which time deposits become strongly competitive
with such other financial assets as savings and loan shares .
Time Depo 1t~
would diminish as further increases in these
rates took place.
The second consideration which establishes
the relationship between interest rates paid and
bank costs is that each increase in rates is applicable not only to the increment in deposits
which accompanies the rise in rates but to
previously existing deposits as well. This factin conjunction with the presumption that gains
in time deposits would become smaller as bank
rates were advanced-leads to the inference
that while bank co ts on time deposits advance
slowly as rates are first raised above zero, they
rise quite rapidly after some point is reached.
For example, suppose that the banking system would hold $20 billion of time deposits if
it paid 0.2 per cent on deposits and its interest
costs would be $40 million. H the rate were
raised to 0.4 per cent, and deposits rose to $30
billion , interest costs then would be $120 million. The increase of $10 billion in time deposits therefore would cost $80 million and the
rate paid to gain the $10 billion increment
would be 0.8 per cent per dollar of deposits.
If a further rise in rates to 0.6 per cent proChart 2
Intere st Payments on
Time Deposits
Billions of Dollars
6
5
4
2
0
0
20
40
60
80
Volume of T,rne Deposits on Billions of Dollars
Monthly R v w •
100
duced an increase to $35 billion, the cost of
the $5 billion increment would be 1. 8 per cent
per dollar of deposits.
This general relationship is illustrated in
Chart 2, which shows the way in which interest
payments on time accounts would rise with an
increasing volume of time deposits, given the
response of time deposits to rates paid as shown
in Chart 1. A circumstance th at would modify
the relation between total costs and the volume
of time deposits, however, is that banks might
become more efficient in the administration of
their assets as the size of banks increases.
These economie of larger-scale operations may
offset somewhat the ri e in intere t costs.
Revenues and Time Deposits
The two principal factors d tcrmining the relationship between bank rev nues and interest
rate are the volume of earning assets obtained
through growth of time deposits and the rates
earned on assets. As was shown earlier, the
gain in bank earning assets is always less than
proportionate to the increase in time deposits,
the exact amount of the increase being dependent upon the source of the time accounts. The
higher is the rate of return on bank assets, of
course, the larger will be the increment to bank
revenues accompanying a given growth of bank
asset .
hart 3 is drawn on the as umption that
banks earn 4.5 per cent on the earning as ets
they acquire when time deposits increase,
figured net of the costs of acquiring and administering the new assets. The bottom line of the
chart shows the relationship that would exist
between the volume of time deposits and the
net revenues from earning assets if time deposits
were derived entirely by transfers from demand
deposits. The top line is the relationship that
would exist if time deposits grew entirely
through transfers from securities. Since time
deposits are in some measure substitutes for all
other types of financial assets, the true relationship lies somewhere between these extremes, as
suggested by the dotted line in the chart.
7
Profits on Commercial Bank
Chart 3
HYPOTHETICAL RELATIONSHIP BETWEEN
REVENUES FROM EARNING ASSETS
AND TIME DEPOSITS
Revenue from Eorni ng Assets
Acquired as Time Deposits
Increase, in Bill ions of Dollars
6
4
Time Deposits Gained Entirely by
Transfers from Securities
~
.,,,..
2
.,,.,.
-- -.,,,..-
Time Depo sits Gained Entirely by
Transfers from Demond Deposits
0
0
20
40
60
Volume of Time Deposits In 8111,ons
80
100
of Dollars
NOTE : Linearity of the tim e deposit-revenue function, as shown
above , wou ld Imply perfec t substi tutability between bank earning
assets and earning assets held by nonbank Investors. Since this Is
presumably not the case, a more accurate repre se ntation would
show a fun ction concave to the horizontal axis. For the sake of
simpli city , this refinement is ignored in the chart and the accompanying textual expositio n.
Are Time Deposits Profitable for the
Banking System?
From a purely logical standpoint, it is quite
easy to specify the interest rate on time deposits
which provides maximum profits for the banking system as a whole. It is that rate at which
the addition to bank costs is just equal to the
addition to bank reven ues. (Starting from the
bottom of the cost curve shown in Chart 2 and
moving upward along the curve, it is the point
at which the slope or steepness of the curve is
just equal to the steepness of the dotted revenue
line of Chart 3.) At any lower interest rate,
banks would add more to revenues than to costs
if the rate were increased; increasing the rate
beyond this point would add more to costs than
to revenues.
It is perhaps clear to everyone that banks
could not indefinitely increase their profits by
raising rates paid on time deposits, even if banking regulations permitted them to do so. As
higher rate levels were reached, the additions to
bank costs from further rate increases would
become extremely large. But it is equally as
8
reasonable to contend that at very low rates of
interest on time deposits, an increase in rates
would produce only a small increase in costsone that would be more than counterbalanced
by the growth of bank revenues.
Suppose, for example, that the banking system could attract $45 billion in time deposits by
paying 1 per cent interest on time accounts and
$55 billion by paying 1.5 per cent. If 60 per
cent of the additions to time deposits were accounted for by transfers from nonbank financial
institutions, while 30 per cent represented transfers from securities and 10 per cent transfers
from demand balances, stable conditions in the
credit markets would be maintained if the
central bank permitted commercial bank earning asse ts t rise by about $8.3 billion. Bank .
would cover the additional $375 million in
interest payments in this case if the net return
on bank earning assets were at least 4.5 per
cent.
The required net return on bank earning
assets in this example, it will be noted, is considerably higher than the rate that was assumed
to be paid on time deposits. The margin of
difference is not, however, a fixed magnitude.
Generally speaking, the margin between rates
earned and rates paid must be large if time
deposits register a minimum respon e to an
increa e in rates and if the growth in time deposit volume originates mainly in transfers from
demand balances. When time deposits respond
greatly to an increase in rates paid and originate
mainly in transfers from securities or claims
against nonbank financial institutions, the
necessary margin is correspondingly less.
The precise rate on time deposits that would
yield maximum profits for the banking system
as a whole cannot, of course, be determined by
logical analysis alone. It is necessary to know
both the size of the increase in time deposits
and the source of the gain in time accounts
when bank rates on time deposits are raised.
This information is required not merely for one
change in time deposit rates, but for changes
Time Deposits
from all possible levels of these rates. No empirical study ever has sought to determine this
information, and it may not be possible to
ascertain it through statistical methods. It is
scarcely surprising, then, that conflicting views
exist on the question of whether the banking
system profits by attracting time deposits.
0
The preceding analysis sought to provide a
broader framework for study of the profits on
time deposits than has emerged from recent discussions. Too often these treatments have
focused on a single facet of the question, which,
on the basi of implicit assumptions, provided
Monthly Review • September 1961
automatic answers. The foregoing discussion
implies that neither of the extremes of the debate on this issue represent positions which the
banking system can accept. To discontinue the
acceptance of time deposits seems very likely
to be inadvisable, but to pursue them at all
costs may be equally unwise. The findings of
this study do not conflict with existing statistical
studies, for tho e studies have been pointed toward the question of whether banks do in fact
make profits on their time deposit business. On
the other hand, those studies do not contradict
the above analysis, since they do not establish
that banks cannot make profits from time
deposits.
9
Where .:/)o Uheg {io?
EXPENDITURES for goods and
ervices- in both dolJar and real termshave expanded remarkably since 194 7. Personal consumption expenditures in 1960 were
a record $329 billion, of which approximately
$70 billion was spent for food products. However, consumers have not increased their food
expenditures in proportion to their increases in
personal income. As a result, spending for food
accounted for only 21 per cent of total consumer expenditures in 1960 as compared with
27 per cent in 194 7. Although consumers have
changed the proportions of the different foods
they buy, the total quantity of food products
purchased for consumption since 194 7 has increased at only a slightly faster rate than population growth.
Despite the smaller proportion of total income spent on food products in recent years,
the production and marketing of these products
still constitutes an important segment of our
economy. In addition to the farmers who pr(?duce our food supply, many firms arc engaged
in the vital roles of tran porting, proce sing,
packaging, wholesaling, and retailing of food
products. Since consumer expenditures for food
include both payments to farmers and to
agencies that assemble, process, and market
ON UMER
10
these products, it will b f interest t cxam in
trends in the allocation of consumers' food dollars to these components in recent years.
Two sources available for determining payments to farmers and marketing agencies for
food products are the consumer food expenditure series and the market basket series of the
U. S. Department of Agriculture. These two
series will be used in analyzing consumer expenditures for food products from 194 7 to
1960.
NSUM
E P
DITU E S
The consumer food expenditure series evaluates both the total retail cost and the equivalent
farm value of domestically produced food products bought by civilian consumers. The retail
cost is measured at the retail store level and,
therefore, does not include the costs of services
in restaurants and other eating establishments.
The services performed by the agencies that
assemble, proces , and distribute these food
product arc referred to a mark ting services,
and payments for these erviccs make up the
marketing bill. The marketing bill tends to reflect variations in total food marketed , variations in unit marketing charges, and changes in
marketing services consumers are buying with
Consumer Food Dollars
food products. Excluded from the series are
payments for food products not produced domestically, food consumed on farms where produced, and foods not sold to civilian consumers
in this country. Values for individual food
items are combined into six commodity groups
- meat, dairy products, poultry and eggs, bakery and cereal products, fruits and vegetables,
and other food products such as vegetable oils
and sugar.
Based on data from the consumer food expenditure eries, total retail cost of items included in the six commodity groups moved upward from approximate ly $37 billion in 1947
t $55 billion in 1960- a 49 per cent increase.
Approximately 29 per c nt of total ex p nditurcs for food products in 1960 went for mea t
pr ducts, 22 per cent for fruits and vegetables,
18 per cent for dairy products, 14 per cent for
bakery and cereal products, 9 per cent for
poultry and eggs, and 8 per cent for miscelChart 1
CONS
TURES
United States, 1947-60
BILLIONS Of DO L LARS
70
60 -
50
40
30
20
10
0
PAYMENT
TO FARMERS
'---'-----'----'---'----'---'--_,____.__.,___.___-.L._~
1947
'50
'52
'5 4
'56
'58
'60
*Excluded from the total retail cost Is the extra cost of serving
food i n eating establishments. These costs would have added
approximately 10 per cent to total reta il cost of food prod ucts.
SOURCE : U. S. Department of Agr icult ure .
Month y
• S
t mb r 1961
Where Do They Go?
Ianeous food products. The proportion of each
food group in relation to total food expenditures was approximately the same in 1960 as
in 194 7, with the exception of two commodity
groups. A slightly smaller percentage of food
expenditures was spent for poultry and eggs,
but a slightly larger percentage was spent for
miscellaneous food products.
Despite the substantial increase in retail cost
of food products since 194 7, dollar payments
to farmers for equivalent food products remained relatively stable during this periodranging from $18.7 billion in 1947 to $20.7
billion in J 960. Payments to farm ers for the
individual commodity groups al o shar d appro ximately the same stable r lationship during this pe riod as for all food products as a
whole. Payments fluctuated slightly from year
to year for individual commodity groups but
in general remained unchanged over the years.
Farmers' receipts from the sale of food products in recent years have remained near earlier
levels, primarily because lower farm prices have
been offset by a substantially larger volume of
farm products sold. Meat products accounted
for the largest proportion of farm value in 1960
-40 per cent of the total. Dairy products accounted for 21 per cent; fruits and vegetables,
15 per cent; poultry and eggs, 14 per cent; and
bakery and cereal products, 6 per cent. Other
food products accounted for approximately 4
per cent of the total. The importance of the
various commodity groups relative to farmers'
cash receipts has varied only slightly since
1947. Bakery and cereal products, however,
have tended to contribute a slightly smaller percentage of total receipts in recent years, while
other commodity groups have tended to contribute a slightly greater proportion of the total.
As might be ex pected from the upward trend
in retail cost and the relative stability of p ayments to farmers since 1947, the largest proportion of the increase in the retail cost of food
was due primarily to an increase in the cost of
marketing. T he food marketing bill rose from
11
Consumer Food Dollars -
$18 billion in 1947 to $34 billion in 1960-an
89 per cent increase. The substantial increase
in the marketing bill not only reflects increases
in the volume of food products handled, but
also increases in per-unit marketing charges
since 194 7. Although each factor responsible
for the increase in the marketing bill cannot be
determined precisely, it is estimated th at one
half of the increase was due to a rise in the
cost levels associated with each unit marketed,
one fourth to increased volume, and one fourth
to added marketing services. Marketing costs
for individual commodity groups of the consumer food expenditure eries trended upward
as they did for all food prod ucts as a whole
duri ng this period.
Th proportions contributed by each commodity group to the total marketing bill in 1960
were approximately 26 per cent for fruits and
vegetables, 22 per cent for meat products, 19
per cent for bakery and cereal products, 17 per
cent for dairy products, 5 per cent for poultry
and eggs, and 11 per cent for other food products.
In connection with the marketing bill and
payments received by farmers for food products, it is of interest to note the absolute and
relative contribution of the various commodity
group to the total of each of the two components. Payment to farmers for meat products,
for example, was $8.3 billion in 1960 and accounted for 40 per cent of total farm payments. The marketing bill for meat products at
$7 .5 billion, however, was only slightly less
than the farm payments, but accounted for only
22 per cent of the total marketing bill.
The consumer food expenditure series also
indicates the relative importance of the major
cost components of the marketing bill. Direct
labor costs made up approximately 48 per cent
of the total marketing bill for food products in
1960; intercity rail and truck transportation,
approximately 12 per cent; corporate profits
before taxes, 6 per cent; and other costs and
profits of unincorporated marketing firms, ap-
12
proximately 34 per cent. All cost components
increased from 194 7 to 1960. Direct labor costs
were 104 per cent higher in 1960 than in 194 7 ;
intercity rail and truck transportation costs
were 105 per cent higher ; corporate profits before taxes were 40 per cent higher ; and other
costs and profits of unincorporated firms were
77 per cent higher.
Labor costs have increased since 194 7 primarily because of rises in wages, salaries, and
fringe benefits to employees. The number of
workers employed in marketing food products
was only slightly higher in 1960 than in 1947,
but hourly earnings of employees were 94 per
cent higher and labor costs per un it of output
were 47 per cent gr a ter ov r this sam period .
lm prov m nts in utput per man-hour have
kept labor costs per unit of product from rising
as fast a average hourly earni ngs of workers.
Extensive technological innovations in the food
Chart 2
DISTRIBUTIO
SUMER FOOD
D
United States, 1960
BILLIONS
OF DOLLARS
40
MARKETING
BILL*
35
I
Other
I
I
30
I
I
I
I
25
I
I
I
1
PAYMENTS /
/
I
/
/
/
/
/
Fruits and
Vegetables
I
TO FARMERS
//
20
I
Bakery and
Cereal Products
15
Poultry
and Eggs
10
Dairy Products
5
Meat
0 .____.__ __.__ __,___ __.___ _ _ _ _ __
* Excl uded from the marketing bill is the extra cost of serving food
in eating establishments . Although approximately $5 billion would
have bee n added to the marketing bill in 1960, the relationship
between payments to farmers for i ndiv id ual commodity groups and
the marke ting bill would remai n approx imately the sa me.
SOURCE : U. S. Department of Agr iculture .
Where Do They Go?
Chart 3
RM FOOD
COM ONE
United States, 1947-60
BILLIONS OF DOLLARS
40
35
30
§
Other Costs
Transportation
Labor
Corporate Profits
25
M
20
15
10
5
0 ..__........___.__.__........___.__.__.....____.____,.....___._____.__L.......J
1947
'50
'52
'54
'56
'58
'60
*For domestic farm foods bought by U. S. civilian consumers .
SOURCE : U. S. Department of Agriculture.
marketing industry during recent years also
have resulted in increased employment of more
highly skilled personnel.
Increased transportation costs since 194 7
refl ect a larger volume of products handled
during this period and a general ri e in rates
for agricu ltural products. Although rail rates
in recent years have had a tendency to stabilize
somewhat on mo t agricultural commodities,
they increased from 194 7 to 1959 by 78 per
cent for livestock, 45 per cent for meat products, 25 per cent for fruits and vegetables, and
63 per cent for wheat. Although similar data
for truck rates are not available, the competitive nature between rail and truck carriers and
increases in costs of truckers would suggest a
similar upward trend in truck rates since 1947.
orporate profits before taxes have tended
to rise since 194 7, but at a somewhat lesser
rate than the increase in the total marketing
bill. Corporate profits after taxes in 1960 were
unchanged from 194 7 levels. Profits after
Monthly Review •
taxes were $1 billion in 194 7, declined to $600
million in 1951 and 1952, and have gradua11y
risen since then to $1 billion in 1960.
Other costs and noncorporate profits - the
residual component of the marketing bill - increased somewhat less than labor and transportation costs from 1947 to 1960. Included
in other costs are fuel, electric power, container , depreciation, transportation other than rail
and truck, rents, interest on borrowed capital,
taxes other than on income, and similar costs.
eptember 1961
K T
ASKET SERI
The market basket series al o reflects the
retail cost and equivalent farm value of dome tically produced food products, but only for a
fixed quantity f pecificd c mm diti s. Commodities within the "basket" arc tho c that w re
considered as average food purchases of urban families in 1952. The market basket is
primarily concerned with measuring changes in
farm and retail prices and farm-retail spreads
for a fixed quantity of food commodities. It
differs somewhat from the consumer food expenditure series in that it makes no allowance
for changes in the composition of farm marketing and for changes in the services perfm med
by the marketing system. However, the trend
in the fa rm-retail spread likely will reflect some
of the change in services provided by the marketing system. The farm-retail spread is often
referred to as the marketing margin, or marketing charge, and is generally expressed as a per
cent of the retail cost of the food basket. The
equivalent farm value of the food basket often
is expressed as an estimate of the farmer's
share of the consumer's food dollar. Values for
individual food items are combined into six
commodity groups corre ponding generally to
those in the consumer food expenditure series.
Data from the market basket series also indicate an increase in the retail cost of food products since 194 7. The retail cost of the market
basket was $1,052 in 1960 after trending upward from $911 in 1947-a 15 per cent in-
13
Consumer Food Dollars
Chart 4
ASKET
THE F
United States, 1947-60
DOLLARS
1400 - - - - - - - - - - - - - - - - - - ,
1200
RETAIL
COST
1000
800
MARKETING
CHARGE
600
200
FARM
VALUE
0 L._..l.---'-----'--'---L-----'-------'-__.___.___,___~~~
'60
'58
'54
'56
1947
'50
'52
SOURCE:
U. S. Department of Agriculture .
crease. Retail costs for individual commodity
groups trended upward from 194 7 to 1960 for
meat products, dairy products, bakery and
cereal products, fruits and vegetables, and mi scellaneous food products, ·but trended downward for poultry and eggs and fat and oils.
Payments to farmer for the equivalent food
products in the market basket trended down ward during this period . Farm value in 1947
was $467 compared with $408 in 1960-a 1 3
per cent decrease. Generally lower farm prices
since 19 51 were primarily responsible for the
decrease in farm value and have tended to
mitigate the rise in retail costs in recent years.
Farm values for individual commodity groups
generally were lower for all groups except
fruits and vegetables and mi scellaneou food
products. These two groups trended slightly
upward in value during this period.
The marketing charge increased from $444
in 194 7 to $644 in 1960 - a 45 per cent increase. Marketing charges for individual com-
14
modity groups were up substantially for all
groups except poultry and eggs and fats and
oils.
00
The market basket series often is used to
show the proportion of the consumer's retail
dollar received by farmers and the various elements of the marketing ystem. rn 1960, th e
farmer's share of the consumer's food dollar
was 39 per cent and, consequently, the share
going to marketing firms was 61 per cent. The
farmer's hare of the food dollar declined
gradually from a record 53 per cent in 1945 to
38 per cent in 1959 and increased for th e first
time <.Jurin ) the postwar era in 1960. The perce ntage of the co nsum er' s dollar r c ived by
farmer , however, varied widely among different food products, generally depending upon
the amount of transportation, processing, packaging, and handling required in making the
raw farm product into a form demanded by
consumers. During the period from 1956 to
1960, the farmer's share for poultry and eggs
averaged 61 per cent; for meat products, 54
per cent; for dairy products, 46 per cent; for
fruits and vegetables, 29 per cent; for fats and
oils, 29 per cent; for bakery and cereal products, 19 per cent; and for miscellaneous product , J 7 per cent.
By individu al food group , the percentage
of the con umer's food dollar going to farmers
may vary considerably from one period to another. For example, the farmer's percentage of
the consumer's food dollar for pork varies with
the cyclical as well as the seasonal pattern of
hog production. From 1956 through 1960, the
farmer's share of the consumer's dollar for pork
ranged from a cyclica l high of 60 per cent during th e April-June quarter of 1958 to a low of
43 per cent during the October-December
quarter in 1959. During each of the year from
1956 to 1960, the farmer's share of the consumer's dollar for pork generally was seasonally higher in the April-June quarter and lower
Where Do They Go?
in the January-March quarter. Since marketing
charges tend to be relatively stable, a decline in
farm prices caused by seasonally heavy marketings usually will reduce the farmer's percentage
of the consume r's food dollar.
The percentage of the consumer' dollar received by farmers is not necessarily an indication of the farmer's fin ancial well-being. Farmers could, and in many cases do , get all of
the retail food dollar by selling directly to the
consumer. However, it is likely that in many
instances additional nonfarm processing, while
resulting in a lower share of th e retai l price to
farmers, may mean expanded con umer mar-
Monthly Review • September 1961
kets and a larger return to farmers than might
otherwise be possible.
In conclusion, the retail cost of food products increased from 194 7 to 1960 primarily
because of increased costs associated with processing and marketing food products. A smalJer
proportion of food dolJars now goes to farmers, with a larger proportion going to agencies
th at process and market food product . Despite
the general rise in food costs since 194 7,
prices of food products have risen less than
consumer incomes. Thus, the percentage of
consumer expenditures for food products has
decl ined substantially since 194 7.
15
CONSUMER AND WHOLESALE PRICES
INDEX
--,--....--,---.
= 100
- .---,
-1947-49
INDEX
r-~
1140
140
,2f~·
INDEX
INDUSTRIAL PRODUCTION AND
INDUSTRIAL PRICES
-,--,- - , -
I ND EX
.,..
r
1957=100
120
-l
100
120
100
l,oo
80
J
80
60
140
140
r
j 120
,20
I
12 0
I
PRICES
WHOLESALE
100
COMMODITIES
ALL
80
L
r
-r
140 1
-,----r--r
T"
120
CONSUMER
A LL
100
],oo
L
L
j__J_
l_
ADJUST ED
1
l.
l
60
l
140
1947 - 49 = 100
120
1
PR ICES
ITEM S
80
PRODUCTION
SEASONALLY
PRICES
COMMODITY
100
100 ~
I
80
80
.l
1947
'49
' 51
'53
'55
'57
'59
80
80
1947
'61
BANKING IN THE TENTH DISTRICT
'49
' 51
'53
'57
'55
'61
'59
PRICE INDEXES, UNITED STATES
I
Loans
District
and
States
Reserve
City
Member
Banks
Deposits
Country
Member
Banks
+2
Colorado
+ 3
Ka nsa s
- 2
Misso uri *
+1
Ne b raska
New Mexico *
O kl a homa *
Wyoming
+s
+s
+9
+1
*: I +4
**
+10
+6
+13
- 1
+1
t
+ 13
+ 6
~:1 **
July
1960
t +10
+4
*Tenth Dis trict portion only.
t Less than 0.5 per cent.
16
,,
Country
Member
Banks
1961 Percentage Change From
July June
1960 1961
Tenth F. R. Dist.
.
Reserve
City
Member
Banks
Index
+ 8
June July June
1961 1960 1961
+3
+6
+2
July
1960
+1
+s + 9 +3 +8
+s +4 +s +9
+ 2
+4 + 3 +1
+s +1 + 3 + 9
**
**
t
- 2
June
1961
J ul y
19 60
126 .6
Consumer Price Inde x
( 1947-49 = 100 )
128.1
127.6
Wholesale Price Index
( 1947 -49 = 100 )
118.6
118.2
11 9 .7
Prices Rec'd by Farme rs ( 1910- 14 = 100 )
237
234
236
Prices Paid by Farmers
300
JOO
298
( 1910- 14 = 100)
r Revised .
TENTH DISTRICT BUSINESS INDICATORS
District
and Principal
Metropolitan
Areas
Tenth F. R. District
Denver
Value of
Departme nt
Store Sales
Value of
Check
Payments
Percentage change- 1961 from 1960
Yea r
to date
Year
to date
July
+ 8
+1
+4
+ 14
+13
+ 8
+4
+1
- 3
July
Wichita
+ 8
+ 3
- 1
Kansas City
+1
0
+ 1
Omaha
+ 8
+s
+s
+ 20
+ 21
+ 16
+ 11
- 11
- 10
+1
+2
- 6
- 2
+ 10
t
+ 8
- 1
+ 8
Oklahoma City
- 1
+1
**
**
+ 1
+s
Tulsa
* * No reserve cities in this state.
July
1961
-4
@FedFRASER