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TWELFTH FEDERAL RESERVE DISTRICT FEDERAL RESERVE BANK OF SAN F R A N C I S C O Corporate Saving During the Postwar Y e a rs...................... Soil Bank Program to Reduce Plantings of District Field C r o p s ......................... 48 CORPORATE SAVING ... DURING THE POSTWAR YEARS business demand for plant and equip ment and resultant pressures in the nation’s capital market have once again focused attention on the sources of funds used in financing corpo rate expansion. During the postwar period gross corporate saving— retained profits plus depre ciation— has accounted for about three-fourths of total corporate outlay for plant and equipment and inventories. Corporations had to rely upon external sources of funds to finance the re mainder of their expenditures on plant, equip ment, and inventories and also had to raise funds externally to carry their substantially larger vol ume of accounts receivable and to add to their other types of assets. These external sources of funds consist of stock and bond issues, bank loans, accounts payable, and other types of lia bilities. Internally generated funds contributed somewhat less than three-fourths of the corporate outlays for plant, equipment, and inventories during the record upsurge in capital goods spend ing which began in mid-1955. The result was rec ord volumes of corporate security flotations and commercial bank loans to corporations and a sharp reduction in corporate cash and United States Government security holdings in 1956. Investment, whether it be in the form of ad ditions to productive capacity or the purchase of a new house by an individual, relies heavily upon saving to finance it. The nation’s saving can be looked at as arising from three principal sources : personal saving, which includes savings of consumers and noncorporate enterprises ; cor porate saving; and government saving (differ ence between receipts and expenditures). Per sonal saving is the most important of these three, having accounted for somewhat more than half of gross national saving in the postwar pe riod, while corporate saving has contributed about 42 percent of the total. An article on post war developments in personal saving was pub lished last year in this Review} This article, comr o w in g G 1 “ Postwar Developments in Personal Saving,” (April 1956), pp. 43-47. Digitized for 42FRASER M onthly Review, plementing the earlier one, reviews develop ments in corporate saving since W orld W ar II. A n analysis of saving is important not only for the information it provides as to the sources of investible funds but also because the relationship of planned saving to planned investment is crucial in explaining changes in business activity. For the economy as a whole, when plans to save ex ceed plans to invest, economic activity tends to be depressed; when planned investment exceeds planned saving, economic activity tends to ex pand. Sources and Uses of Corporate Funds Theoretically, net corporate saving can be de rived from either the income account or the bal ance sheet. The Department of Commerce esti mates of net corporate saving which will be used throughout this article are derived from income accounts— the difference between after-tax book profits and dividend payments. Comprehensive balance sheet data are not available. In the ab sence of a complete balance sheet breakdown, rough estimates showing the relative importance of changes in assets, liabilities, and equities of all corporations (excluding banks and insurance companies) can be obtained from data on sources and uses of corporate funds published by the Department of Commerce. Plant a n d equipm ent e x p e n d itu re s claim la rg est sh are o f co rp o ra te funds Chart 1 shows the sources and uses of corpo rate funds broken down for the periods 1946 through 1950 and 1951 through 1956. Let us look first at the uses of funds. The data indicate that of the total uses of corporate funds a large proportion— about 65 percent— was accounted for by gross physical investment, that is, ex penditures for plant and equipment and inven tories. Gross capital investment was relatively smaller in the period beginning in 1946 than in the later postwar period. This reflects problems April 1957 MONTHLY REVIEW of reconversion immediately after the Second W orld War, a decline in the demand for plant and equipment during the 1948-49 recession, and shortages caused by defense needs during the Korean conflict. Except for a decline during the 1953-54 recession, corporations increased their outlays during the latter portion of the post war period in order to maintain and expand their capital stocks. C Despite the upward trend in liquid assets, the ratio of liquid assets to current liabilities fell from 73 percent in December 1946 to 47 percent in December 1956. The early postwar high re flects a large wartime accumulation of liquid as sets. The liquidity ratio declined sharply from 1946 to 1948, rose sharply in 1949, declined steadily to 1952, and remained within a range of 3 percentage points from 1952 through 1955. The ratio at the end of last year was about 7 percentage points below the same period of 1955, the largest annual percentage point decline since 1949. The ratio of liquid assets to total corpo rate sales followed much the same pattern dur ing the postwar years as did the ratio of liquid assets to current liabilities. D epreciation a llo w a n ce s now most im portant so u rce o f funds Chart 1 also shows the importance of inter nally generated funds in meeting the postwar financial needs of corporations that have just been described. From 1946 through 1956, depre ciation allowances plus retained profits accounted for approximately three-fifths of total corporate 1 S O UR CE S AND USES OF CO RPORATE FUNDS V UNITED S T A T E S , 1946-50 AND 1951-56.?/ B IL L IO N S OF D O LLA R S P L A N T ANO EQUIPM ENT IN V EN TO R IES LIQ UID A S S E T S In contrast to plant and equipment expendi tures, inventories of corporations (measured in terms of book values ) increased more before 1951 than after. This difference is partly the result of price increases, which were more pronounced in the earlier part of the postwar period. Liquid asset holdings of corporations showed a definite upward trend during the postwar years. Corporations held somewhat less than $51.5 billion in cash and bank deposits plus United States Government securities at the end of 1956 compared with about $38 billion in 1946. Liquid asset holdings declined sharply— about $5.0 billion— during 1956, reflecting liquidations to keep investment programs going smoothly. h art OTHER A S S E T S SOURCES RETA IN ED P R O FIT S DEPRECIATIO N N ET NEW S E C U R IT Y IS SU E S MORTGAGE ANO BANK LOANS IN C R E A S E S IN O TH ER L IA B IL IT IE S 0 100 200 1 Excluding banks and insurance companies. 1 Figures for 1956 are preliminary estimates. Sources: United States Department of Commerce, Survey of Current Business; Securities and Exchange Commission; and other finan cial data. funds. During the six-year period, 1946 to 1951, retained profits contributed a larger fraction than depreciation but since then the relative im portance of these two items has been reversed. Depreciation allowances have shown a steady annual upward growth, while retained earnings have fluctuated from year to year. The steady rise in depreciation allowances re sulted from increases in the stock of plant and equipment and from changes in revenue laws with respect to methods allowable in computing deductions for tax purposes. Emergency amor tization provisions written into the 1950 revenue law allowed corporations to write off over a five-year period about three-fifths of their plant and equipment investment certified for defense purposes. In 1954 the revenue laws were revised to make possible on a permanent basis a more rapid depreciation on all investment than had previously been allowed. However, the 1954 provision does not allow write-offs that are nearly as rapid as those permitted in the earlier certificate of necessity program. Net new security issues also contributed a sub stantial amount to help meet corporate needs for FEDERAL RESERVE BANK OF SAN F R A N C I S C O funds after W orld W ar II and were the most important external source. Bond issues ac counted for about 64 percent of a total of $63.5 billion raised through net new security issues from 1946 to 1956 and stocks accounted for the remainder. Net proceeds from issues of nonfinancial corporations during 1956 are estimated at a record volume of $8.0 billion. Bank loans have also supplied substantial quantities of funds and have been more impor tant since 1951 than in the preceding six years. Bank loans outstanding to corporations in creased by about $8 billion during the two-year period, 1955 and 1956, more than two-fifths of the total rise in corporate loans since the end of W orld W ar II. The increase during 1956 ex ceeded the 1951 record high. C hart 2 RATIO OF C O R P O R A T E S A V I N G TO C O R P O R A T E INCOME percent U N IT E D S T A T E S , 1 9 4 6 - 5 6 Corporate Saving-income Ratio Ratio o f c o rp o ra te net sa vin g to incom e show s w id e ra n g e o f variation The foregoing review of the relative impor tance of the various sources and uses of corpo rate funds during the postwar period provides a background for discussion of the factors that were responsible for changes in corporate saving during this period. As in the case of personal saving, the relationship between income and sav ing is also the crucial one in the corporate sector. Nearly all the fluctuations in the basic upward trend in gross corporate saving since W orld W ar II have been due to changes in retained profits, which, in turn, are primarily a function of income as measured by profits before taxes. Chart 2 shows quarterly ratios of net corpo rate saving (retained profits including depletion allowances) to net corporate income after taxes, both seasonally adjusted, since W orld W ar II. Tw o factors seem to stand out in the chart: the typical volatility of after-tax income retained by corporations and a generally lower net savingincome ratio since the third quarter of 1951 com pared to earlier postwar years. The range of var iation in the ratio runs between 66 percent dur ing the first quarter of 1947 and about 29 percent in the fourth quarter of 1953. Before turning to the major factors under lying movements in the proportion of income reDigitized for 44FRASER !946 1950 1956 N ote: AH figures are seasonally adjusted annual rates. Source: United States Department of Commerce, Survey o f Current Business. tained by corporations, a brief review of the two postwar recessions will illustrate the behavior of the net saving-income ratio since the Second W orld W ar. Both the 1948-49 and 1953-54 re cessions in gross national product are shown by shaded areas in Chart 2. The most salient factor is that the ratio declined sharply during the two recessions. In both cases the declines were the result of sharp drops in corporate profits and in creases in dividend payments. The earlier up turn in the 1953-54 recession reflects an early recovery in profits. It is also interesting to note that the downturns in the net saving-income ratio— reflecting downturns in profits— preceded the decline in gross national product. This tend ency of corporate profits to move in the same di rection as general business activity, but with a slight lead, is also evident in the period between the First and Second W orld Wars. C h a n g es in b e fo re -ta x pro fits accoun t fo r m ost o f variation in c o rp o ra te net savin g-in com e ratio Fluctuations in the corporate net saving-in come ratio are the result of changes in profits, corporate profits taxes, and dividend payments. Nearly all of the volatility in the ratio reflects changes in before-tax profits. Except that the April 1957 MONTHLY REVIEW movements were more extreme, corporate profits generally followed the pattern of over-all busi ness activity during the postwar years. Profits advanced sharply immediately after W orld W ar II, with the outbreak of the Korean W ar, and during the 1954 recovery and subsequent boom. Corporations suffered strong declines in earn ings during the 1948-49 and 1953-54 recessions and after the period of Korean scare buying1dur ing which profits had risen sharply. The large gains in corporate profits in several of the periods referred to above reflected dollar gains in inventories arising from price increases. This is shown by inventory valuation adjust ments which the Department of Commerce makes in order to convert reported changes in book value data to the value of the real change in inventories used in national income accounts. In ventory valuation adjustments averaged roughly one-fifth of before-tax profits during the period 1946-48, and they contributed about one-seventh to before-tax profits during the year of Korean scare buying, mid-1950 to mid-1951. The only postwar periods in which inventory losses re duced corporate profits were in the 1948-49 re cession and from mid-1951 through the end of 1952, the period following the second Korean upsurge in buying. C h a n g es in co rp o ra te pro fits fa x e s a n d d ivid e n d paym ents accou n t fo r rem a in d er o f variation in ratio Total corporate tax liabilities moved in the same direction as before-tax book profits, but not necessarily by the same proportion, during every year since W orld W ar II except for 1946. Cor porate tax liabilities fell in 1946 despite a rise in pre-tax profits. The expiration of the excess profits tax and a reduction in normal tax rates offset the effects upon tax liabilities of increased corporate earnings that year. In the four-year period 1946 through 1949, corporate tax liabili ties totaled $43.4 billion and amounted to about 39 percent of before-tax income. In 1950 there was an increase in corporate income tax rates. A new excess profits tax also went into effect that year and lasted until the end of 1953. Dur 1 For a detailed discussion o f corporate profits and factors underlying these changes during the postwar years, see “ Corporate Profits Since World War I I ,” Survey of Current Business, United States Depart ment of Commerce, (January 1956), pp. 8-20. ing these four years, marked by higher tax rates and larger pre-tax profits, total tax liabilities were about twice as large as in the preceding four-year period and averaged about 52 percent of book profits before taxes. Since 1954 corpo rate taxes have claimed about one-half of before tax profits. Corporate dividend payments generally fol lowed a slow and steady upward trend during the postwar years except for a bulge during the Korean upsurge and a sharp upturn in the past year. Corporate dividend outlays were at an an nual rate of about $12 billion in 1956 compared with $5.8 billion in 1946. The generally con sistent growth of dividend payments has affected the long-run relationship between net corporate savings and income. Dividends have increased steadily from quarter to quarter. Because this rise in dividend payments since the end of W orld W ar II has been greater than the increase in net income, net retained earnings have tended to de cline as a proportion of income. While dividend payments have exercised a downward pressure on the net saving-income ratio, their rise has been steady in contrast to wide short-term fluc tuations in retained earnings. These shifts in re tained earnings result mostly from sharp changes in before-tax earnings and occasional changes in tax rates. Manufacture a n d tra d e account for three-fourths o f co rp o ra te savin g M ajor postwar fluctuations in corporate profits and saving have been dominated by changes in the fortunes of manufacturing firms. From 1946 through 1955 retained income of manufacturing corporations, which accounted for about 56 percent of total corporate net sav ing, averaged 55 percent of net after-tax income compared with somewhat less than 53 percent for all corporations. Manufacturing corpora tions exhibited larger-than-average saving-income ratios during each of the ten years and the annual movements of the ratio were in the same direction as those for all corporations combined. From 1946 through 1948 manufacturers of non durable goods rang up larger dollar profits than those producing durables, but since 1949 the op posite has been true. This reversal reflects the 45 FEDERAL RESERVE BANK OF SAN F R A N C I S C O greater problems of reconversion in durable goods industries after the war and differences over time in demand for durable and nondurable products. Corporations engaged in wholesale and retail trade accounted for about 19 percent of total cor porate saving during the postwar years. These firms retained about 67 percent of their after-tax incomes. Changes in the proportion they saved generally followed the all-corporation ratio. Con struction firms showed the highest saving-income ratio of any industry group for the period 1946 to 1955, about 76 percent. However, since 1947 the ratio showed continued year-to-year declines, moving from 85 percent to about 68 percent in 1955. All other industry groups retained a smaller fraction of their after-tax profits than the com bined industry figure. The most notable trends in this group occurred among mining and agri cultural organizations. Agricultural corporations have had net dissaving since 1951 because of an nual losses from operations. Since 1951, mining corporations have, on the whole, allowed yearly declines in net saving to parallel continued an nual decreases in profits. In general, annual movements in net savings of transportation, com munications and public utilities, and service or ganizations followed the movements for all cor porations. C o rp o ra te investm ent e x c e e d s co rp o ra te saving during m ost p o stw a r y e a rs Except in 1949, annual corporate outlays for physical assets have exceeded gross corporate saving since W orld W ar II.1 This difference, shown in Chart 3, reflects net balances of ex ternal financing. From 1946 through 1956, gross corporate saving averaged roughly three-fourths of corporate investment in plant, equipment, and inventories, and external financing accounted for the remainder. The earlier discussion on the upward trend in internally generated funds suggests that corpo rations may be growing more independent of the capital market during the postwar years. Such a pattern would result in a downward trend in the importance of external financing since 1946, but 1 Excludes banks and insurance companies. Digitized for 46 FRASER no such tendency is evident from Chart 3. E x pansions in physical investment have generally been financed through increases in both internal and external sources, with the importance of ex ternal funds increasing relative to the rise in in vestment. Most of these external funds were ob tained through net new securities issues— the most important single source— and increases in bank loans. NET BALANCE OF CO R P O R A T E E X T E R N A L FI N AN C I N G U N IT E D S T A T E S , 1 9 4 6 -5 6 B IL L IO N S OF D O L L A R S 1946 1950 1956 1 Gross physical investment includes expenditures for plant, equip ment, and inventories. N ote: All figures are seasonally adjusted annual rates. Source: United States Department of Commerce, Survey of Current Business. Chart 3 shows that external financing declined during the two postwar recessions. During the 1948-49 downturn corporations were able to finance their total outlay for physical assets out of internally generated funds and also release resources to other sectors of the economy. In the 1953-54 recession, corporations showed rela tively little dependence on outside sources to meet their investment demands. Liquidation of bank loans and trade accounts payable accounted for much of the decline in total external financing during both postwar recessions. Comparison of external financing by corpora tions and individuals throws light on inflation ary and deflationary forces operating in the pri vate sector of the economy since W orld W ar II. April 1957 MONTHLY REVIEW In general, those years in which both corpora tions and individuals invested more than they saved were marked by price rises; the years in which an excess of investment over saving by one group was coupled with an excess of saving over investment by the other group were, on the whole, characterized by stable or declining prices. From 1947 through 1950, individuals as a group demanded external funds to finance their capital outlays; Chart 3 shows that, within this period, 1949 was the only year during which corporations did not turn to other sectors of the economy for investment funds. From 1951 through 1954 individuals saved more than they invested so that, on balance, they were able to provide funds— either directly or indirectly through financial institutions such as life insur ance companies and mutual savings banks— for corporate investment programs. During the 1955 upsurge in corporate demand for external funds, individuals also demanded external financing but at a much lower rate than during the earlier postwar period. Data for 1956 indicate that in dividuals tempered the inflation by again saving more than they invested. Sum m ary a n d outlook In summary, this discussion of corporate sav ing and corporate needs for funds has shown that internally generated funds have averaged about three-fourths of total corporate invest ment during the postwar years. These gross sav ings were typically volatile. Nearly all of the variations resulted from fluctuations in retained profits, while depreciation allowances showed a steady year-by-year upward trend. These move ments in retained profits are largely traceable to changes in before-tax corporate book profits— changes which, although of a greater magnitude, were in the same direction as movements in gen eral economic conditions. Variations in corpo rate profits taxes and dividend policies are the other factors which contributed to the fluctua tions in retained earnings. Manufacturing firms dominated major postwar movements in aggre gate corporate profits and saving. Plant and equipment expenditures claimed most of total corporate funds since W orld W ar II. This has been especially true since 1951. In contrast, the dollar value of inventory accumu lations was larger during the earlier than in the later postwar period. Price increases were a major factor during the earlier increase in in ventory book value— and in corporate profits. Receivables, like inventories, showed a larger in crease before than after 1951. Total liquid assets rose during the postwar period; but, despite this, the ratios of liquid assets to both corporate sales and current liabilities declined from early post war highs. Variations in the liquid assets-current liabilities ratio were within a range of three per centage points from 1952 through 1955. During 1956 this ratio was at a postwar low. Before 1952, retained earnings were the most important single factor contributing to total cor porate sources of funds. Since then deprecia tion, reflecting the effects of faster tax write-offs and the larger volume of investment, has become the major source of corporate funds. Net new issues— especially bonds— constituted the major external source of funds. Relatively speaking, bank loans are not a major source of corporate funds ; but it is significant to note that more than two-fifths of the total postwar rise in corporate bank loans occurred in 1955 and 1956. Corporate spending for physical assets ex ceeded gross corporate saving during each of the postwar years except in 1949. This means that, except for the early postwar recession, corpora tions have demanded external funds to meet their physical investment needs. There has been no noticeable tendency for corporations to be come more financially self-sufficient and thus less dependent on the capital markets since the end of the Second W orld War. These postwar developments in corporate external financing appear to be in line with a statistical study of cor porate savings during the interwar period which found that .. the amount of funds absorbed by corporations from the capital market has de pended primarily on the rate of corporate invest ment. Changes in the degree of dependence on external financing were associated with changes in the level of investment activity . . ,” 1 The outlook points to an increase in corporate demand for external funds during 1957. A c cording to the latest survey of investment in 1S. P. Dobrovolsky, Corporate Income Retention, 1915-43, (New York, National Bureau of Economic Research, 1951), p. 6. 47 FEDERAL RESERVE BANK OF SAN F R A N C I S C O tentions by the United States Department of Commerce and the Securities and Exchange Commission, businessmen anticipate increasing their new plant and equipment expenditures by 6.5 percent in 1957. Thus, if the past relationship between the rate of corporate investment and the demand for external funds prevails and if these planned capital expenditures are realized, cor porate pressures on money and capital markets will be stronger this year than last. Also, a sub stantial proportion of the anticipated increase in investment is accounted for by utilities, which generally rely more heavily on capital markets to finance their expansions than other kinds of industries. The intensity of this demand may, however, be tempered to some degree as a result of recent price increases and high costs of borrowing. Re cent advances in interest rates paid on personal savings accounts by commercial banks, savings and loan associations, and other personal sav ings institutions may possibly increase the supply of loanable funds. In fact, if the expected rise in business outlays for plant and equipment along with the continued demand for funds for other types of long-term investment, such as real es tate, are to be realized without inflation during 1957, there will have to be a higher rate of sav ing on the part of corporations, individuals, gov ernment units, or all three. Soil Bank Program to Reduce Plantings of District Field Crops w e lfth District farmers intend to plant fewer acres to major field crops in 1957 than T they did a year ago. This was revealed by in formation issued by the United States Depart ment of Agriculture based on reports from farm ers as of March 1,1957 and supplemented by De cember 1, 1956 planted acreage data for winter wheat and rye. The Soil Bank program was in strumental in bringing about this reduction. A smaller acreage, of course, does not necessarily indicate a reduction in output, as yields in the past have often increased sufficiently to offset the effect of a decline in acreage. However, produc tion conditions in 1956 were generally favorable, and yields were above average. Unless a marked gain in yields is obtained this year, a reduction in output is likely. S o il Bank influences farm ers' plan tin g plan s Farmers’ plans regarding the amount and types of crops to plant are being increasingly in fluenced by their growing participation in differ ent types of agricultural programs designed to control crop production. Farmer acceptance of acreage allotments and marketing quotas has been the usual means of limiting the acreage to be planted to certain crops. These controls will 48 be in effect in the Twelfth District again this year for wheat, rice, cotton, and sugar beets. Planting prospects for the current year, how ever, are further influenced by a new program, the Soil Bank. The experiment with the Soil Bank program, which started in 1956, will be given its first full year of trial in 1957, T o carry out the program this year, national expenditures of over a billion dollars have been authorized for two types of Soil Bank payments— acreage reserve and con servation reserve. The acreage reserve is designed to reduce the planting of “ basic” 1 crops below the acreage allotted for their production under the price sup port program. In 1956 the approved payments to District farmers totaled $2.7 million com pared with $61.0 million allocated for use in Dis trict states this year. Although the latter sum amounts to only about 2 percent of average an nual returns from crop marketings of District farmers in recent years, its importance for pro ducers of specified crops is much greater. For wheat growers the relative importance of the funds allotted for the acreage reserve program in 1957 varies from 17 percent of the value of wheat 1 Wheat, cotton, rice, tobacco, peanuts, and corn. MONTHLY RE VIEW April 1957 The conservation reserve differs from the acre age reserve in that essentially all land producing crops for harvest is eligible— not just acreage allotted for the production of basic crops. In ad dition, the contracts are for longer periods of time. Whereas acreage reserve contracts are for 1 year, conservation reserve contracts may range from 3 to 10 years. produced in Utah and California in 1956 to 8 percent in Washington and Oregon. Funds for cotton and rice are of somewhat less importance than for wheat. They amount to 6 percent of the value of California rice production, 9 percent of the value of cotton production in California, and 7 percent of the value of Arizona cotton produc tion in 1956. Among District states the largest amount of funds is earmarked for payment to California farmers, with the bulk of these funds allocated for payments to cotton producers, as shown in Table 1. Acreage allotments in the past generally have not been effective production controls for basic crops since yields tended to rise significantly. Furthermore, the acreage and production of sub stitute crops such as feed grains increased as acreage allotments for basic crops were reduced. This resulted in supply problems for these crops as well as for some of the basic crops. In an at tempt to control these responses, only minor re ductions in acreage allotments have been made this year for most basic crops. This diminishes the shift to alternative crops and deters a further expansion of their production. At the same time, participation in the acreage reserve program re duces the acreage devoted to the production of basic crops as only acreage allotment land may be placed in the acreage reserve. Moreover, land placed in this program is to be left idle, although acceptable conservation practices are permitted. The acreage reserve program, therefore, makes a positive reduction in acreage instead of induc ing a shift in acreage, which occurred when acre age allotments were reduced. T A l l o c a t io n o f and by A Incentive paym ents en co u ra g e participation in S o il Bank As an incentive to participate in both the acre age reserve and the conservation reserve, farm ers are offered payments to take their land out of production. The size of these payments varies from farm to farm depending on the value of the land, and they are less per acre under the con servation reserve program than under the acre age reserve program. Payment for participation in the acreage reserve will be made in the form of non-interest-bearing negotiable certificates which are redeemable for cash or, in some cases, for grain held by the Commodity Credit Corpo ration or for grain pledged to it under the price support program. When these certificates are re deemed for grain, a premium of 5 percent above face value is granted. Conservation reserve pay ments will be made in cash (sight-draft) and ad ditional payments may be received for establish ing a permanent conservation practice on the land. Up to 80 percent of this cost will be borne by the Government, but land for which conserva tion practice payments are received must be placed in the program for a minimum period of five years. There is a maximum annual payment able creage R S tates— T State C a lifo rn ia ....................................................................................................................... A riz o n a ............................................................................................................................ W a sh in g to n ......................................................................................... I d a h o ....................................................................................................... O regon .................................................................................................. U tah ...................................................................................................... N evad a ............................................................................................................................ T w elfth D istrict ................................................................................ 1 eserve w elfth F unds by D C rops is t r ic t ,---------------------------------Funds which may be allocated1-------- — ----------- --------W heat R ice C otton Total $ 2,781,000 $3,038,300 $20,333,200 $26,152,700 .... ____ 11,122,700 11,122,700 9,090,000 .... ____________ ___ 9,090,000 7,820,000 _____ ____ 7,820,000 4,158,000 _____ ____ 4,158,000 2,241,000 _____ ____ 2,241,000 .... .... .... .... $26,090,000 $3,038,500 $31,455,900 $60,584,400 1 The allowance for peanuts is not indicated because plantings in this District are small. N ote: The final allocation of funds may vary somewhat from that indicated here as funds for a particular crop not utilized in one state may be allocated to another state. Source: General Services Administration, Federal Register, Subchapter D — Regulations Under Soil Bank Act, Appendix 1, December 29, 1956. 49 FEDERAL RESERVE BANK OF SAN F R A N C I S C O of $5,000 that may be made to an individual pro ducer. This, in effect, limits the acreage that a producer may place under the conservation re serve program, although exceptions are per mitted. A maximum limit was also necessary for the acreage reserve program. The payment rates un der this program were set at a level which will compensate farmers for loss of income resulting from placing the land in the acreage reserve. To prevent all acreage allotment land from being placed in this program, the maximum national expenditures for 1957 were set at $750 million. Each state receives a share of the available funds, determined in part by its proportion of total acre age allotments for “ basic” crops. Each producer with an acreage allotment is eligible for a portion of the funds made available in his state. H ow ever, the funds made available to the individual producer are not sufficient for him to place all of his allotted acreage in the program. In the case of wheat producers, for example, a maximum of 50 percent of a farmer’s acreage allotment or 50 acres, whichever was larger, was permitted at the start of the sign-up for the program. This maxi mum limit was later relaxed somewhat as some producers did not place all of their eligible land in the program. These unobligated funds were made available to those producers who wished to place more than the maximum acreage in the acreage reserve. Because of these limitations on participation, the Soil Bank program will reduce total District crop acreage only slightly. Nevertheless, this program apparently will have a considerable ef T A creage A l l o t m e n t s for T w elfth D able fect on the acreage for particular crops, espe cially wheat and rice. Planting estimates are not yet available for upland cotton but the relative net reduction of acreage for this crop from that planted in 1956 will probably be less than for wheat and rice, in spite of the relatively large volume of funds available for distribution to Dis trict upland producers. This arises from the changes in the District acreage allotments for these crops, which are shown in Table 2. These allotments are an important consideration in de termining the acreage eligible for participation in the acreage reserve program. The upland cot ton acreage allotment for District states was in creased 46,000 acres (4 percent) from that per mitted in 1956, while acreage allotments for wheat and rice were reduced slightly. According to information as of early March 1957, 133,000 acres of upland cotton land had been offered by producers for the acreage reserve. This is con siderably less acreage than in the case of wheat, but payment rates are much higher per acre for cotton. In addition to upland cotton, acreage allotments are in effect for long staple cotton. However, the District allotment of acreage for production of long staple cotton is about double that allotted in 1956. This is a result of increased shipments of this type of cotton to Iron Curtain countries by our major supplier, E gypt; and, consequently, it has been deemed advisable to expand domestic production. Furthermore, long staple cotton acreage is not eligible for partici pation in the acreage reserve program. The conservation reserve will have less of an effect on planted acreage of major field crops 2 is t r ic t F ie l d C r o ps by S t a t e s , 1956 and 1957 (in acres) L o n g staple , -W heat-------- , ------- Rice--------„ ,—Sugar beets—^ ,— Upland cotton----v , ,—cotton—, --------- Total- State 1956 1957 1956 1957 1956 1957 1956 1957 1956 1957 1956 1957 ......................... 30,813 34,175 ... ................................... 2,039,846 2,028,625 W ash ington ................ 2,009,033 1,994,450 California ..................... 455,719 436,142 299,820 299,674 182,530 206,041 782,405 810,445 291 616 1,720,765 1,752,918 Ida h o ............................ 1,159,816 1,156,480 .......................... 80,054 89,367 ... ................................... 1,239,870 1,245,847 O re g o n ......................... 819,522 819,060 ............................. 17,805 19,877 ... ................................... 837,327 838,937 A rizon a .......................... ... ... 229 229 ............... 343,640 360,892 18,433 36,657 362,302 397,778 U tah .............................. 314,994 314,303 ............................. 30,614 34,175 ... ................................... 345,608 348,478 N evada .......................... ... 563 2,324 3,320 ..................................... 2,324 3,883 T w elfth D i s t r i c t ..................... 4,759,084 4,720,435 300,049 299,903 341,816 384,198 1,128,369 1,174,657 18,724 37,273 6,548,042 6,616,466 Source: General Services Administration, Federal Register, September 24, 1955 and January 31, 1957; United States Department o f Agriculture, Grain Market News, November 16, 1956; California State Director of the Commodity Stabilization Service. Digitized for50 FRASER MONTHLY REVIEW April 1957 tionally, a 70-year low in corn acreage is fore cast, which is 5 percent less than in 1956. This compares with a 9 percent rise in District corn acreage from last year. The over-all decline in District field crop acre age results from a substantial reduction in acre age devoted to the production of food grains. These declines more than offset gains in feed grain and sugar beet acreage. Contributing heav ily to the reduction of food grain plantings is the participation of District wheat and rice farmers in the acreage reserve program. Eighty-six per cent of the 869,000-acre reduction forecast for District wheat acreage results from participation in this program. For rice, the quantity of land offered for participation in the program exceeds the reduction in indicated acreage. Hence, some downward adjustment in planting estimates will be required as it is expected that all District rice land offered by farmers will be accepted in the acreage reserve. Among District states the heaviest commodity participation in the acreage reserve program is in Washington where, as of early March, 219,626 acres of wheat land, 11 percent of the eligible than the acreage reserve. Up to February 15, 1957, contracts for annual and conservation practice payments in the District during 1957 totaled only $1.3 million compared with $61 mil lion originally authorized under the acreage re serve program. Farm ers' p la n s in d ica te reduced field c ro p a cre a g e For the District field crops included in Table 3, a reduction of about 400,000 acres or 2 percent from the acreage planted in 1956 is in prospect this year. This is a somewhat smaller decline than the 3 percent reduction indicated for the country as a whole. The difference in acreage re ductions between the District and the nation is accounted for largely by the expected changes in corn acreage. There is no acreage allotment for corn production in the Twelfth District. Hence, the reduction in acreage allotments in 1957 for commercial corn producing areas does not di rectly affect District plantings. Furthermore, the acreage reserve program for corn has no direct effect on District corn acreage as only acreage allotment land is eligible for this program. Na T a ble 3 E x p e c t e d 1 9 5 7 F i e l d C r o p A c r e a g e 1— T w e l f t h D i s t r i c t a n d U n i t e d S t a t e s Indicated acreage F o o d grains W h ea t, all2 ........................................... W h eat, spring2 ................................ ......................... W h eat, w inter3 ................................ ......................... R y e 3 ......................................................... F eed grains B arley .................................................... ......................... Sorghum s .............................................. Beans, dry e d i b l e ..................................... ......................... Flaxseed .................................................... H ay, all4 .................................................... Peas, dry field ......................................... ......................... Potatoes Potatoes, l a t e ....................................... ......................... Sw eet p o t a t o e s ......................................... ......................... Sugar beets ......... ................................... ......................... ■ "\ Twelfth United D istrict States (in thousands of acres) 47,848 991 11,071 3,711 36,778 1,440 4,414 Actual acreage . . _, ^ Twelfth United District States (in thousands of acres) Percent change 1956■57 Twelfth United D istrict States 5,671 1,598 4,073 292 233 58,196 13,693 44,503 1,598 4,562 — 15 — 38 — 9 — 16 4- 3 — 18 — 19 — 17 — 10 — 3 4,221 1,413 449 326 448 49 6,514 321 14,712 44,648 78,557 21,503 1,460 5,862 73,627 361 + 9 + 5 + 9 + 11 6 + — — + 309 16,008 43,514 74,410 26,490 1,466 5,839 72,766 355 312 12 378 171 1,068 282 912 67 306 12 344 166 1,084 291 831 4,597 449 — 31 « — 4 + + 1 2 0 + 10 9 3 5 23 e e — 1 — 2 + — — + 3 1 3 10 'A s indicated by farmers on March 1, 1957. ! Does not include durum. 3 Based on December 1 estimates. 4 Harvested acreage, ‘ Arizona and California. e Less than 0.5 percent. Source: United States Department o f Agriculture, Agricultural Marketing Service, Crop Production, March 18, 1957. 51 FEDERAL RESERVE BANK OF SAN F R A N C I S C O acreage, have been offered for coverage under this program ( Chart 1 ), The rate of participa tion is not as high, however, as in California and Utah where about 31 percent of the eligible wheat acreage has been offered. Participation of California rice producers in the acreage reserve program is also quite heavy, with a little more than one out of each five eligible acres being offered under the program. Not all of the reduc tion in District wheat acreage can be attributed to the acreage reserve program since the expected acreage reduction for wheat is in excess of the indicated participation in the acreage reserve program. Evidently some producers plan to shift a portion of their 1956 wheat acreage to the pro duction of other crops, probably feed grains, or to leave it fallow. Acreage increases for each of the District’s major feed grains are forecast for 1957. The growth of cattle feeding operations in the Dis trict is probably a factor prompting this rise. Moreover, the reduction in national corn acreage expected in 1957 may be an additional incentive to expand District feed grain production as the District relies on outside supplies for a portion of its requirements. The indicated rise in sugar beet plantings in the District stems from a 1956 amendment to the Sugar Act, which permits domestic producers to share in the expanding national market for sugar. This has resulted in a rise in acreage al lotments for District producers from a year ago with large increases indicated in the major pro ducing states of California and Idaho. The output from this year’s reduced field crop acreage will depend heavily on weather condi tions and water supplies. Crop production last year was favored by generally excellent growing conditions except that some replanting of dam aged wheat acreage was necessary as the result Digitized for 52 FRASER C h art 1 LAND O FF ER ED FOR A C R E A G E R E S E R V E PROGRAM J / AS P E R C E N T OF A C R E A G E A L L O T M E N T S BY S T A T E S - T W E L F T H D I S T R I C T CALI FOR IDAHO NEVADA OREGON UTAH WASHINGTON TWELFTH DISTR ICT W HEA T .. Il R IC E U P L A N D COTTON PERCENT 1 As of M arch S , 1957. Sources: General Services Administration, Federal R egister; United States Department of Agriculture, Commodity Stabilization Serv ice. of freezing weather. In addition, water supplies were plentiful in most of the important irrigated sections of the District, particularly in the north ern part. This year, however, the run-off from the snow pack in the northern section is ex pected to be considerably smaller, while the run off prospects in the southern section of the Dis trict remain below normal. Little difficulty is ex pected in areas that were able to build up reser voir supplies of irrigation water from last year’s run-off, but localized irrigated areas in the south ern section of the District may experience water shortages near the end of the growing season. Based on the reduction in acreage and the pros pects of less favorable production conditions, the output of field crops in the District may be ex pected to be somewhat less than a year ago. FEDERAL RESERVE BANK OF SAN F R A N C I S C O April 1957 BUSINESS INDEXES — TWELFTH DISTRICT ( 1 9 4 7 - 4 9 a vera g e = 100) T o ta l n on a gri T o ta l C a r c u ltu r a l m f’g lo a d in g s E le c t r ic e m p lo y e m p lo y ( n u m ber)* m ent C o p p e r5 pow er m ent I n d u s tria l p r o d u c tio n (p h y s ica l v o lu m e )’ Y ear and m o n th Lum ber P e t r o le u m 3 C ru d e R e fin e d C e m e n t Lead® R etail D e p 't s to re fo o d sales p rices a. < (v a lu e )2 W a te rb o rn e fo r e ig n tr a d e ’ - » E x p o r ts I m p o r t s '55 102 97 105 120 130 137 134 143 152 102 52 77 100 94 97 100 101 100 96 104 104 30 18 31 104 98 105 109 114 113 114 122 129 64 42 47 103 100 100 113 115 113 113 112 114 190 110 163 86 85 91 186 171 140 131 164 195 124 72 95 68 121 137 157 200 308 260 308r 444 132 132 133 133 134 134 135 135 136 137 138 150 150 150 152 153 152 153 153 154 156 159 99 103 105 107 105 102 101 107 102 100 106 124 128 131 122 126 132 131 131 130 132 131 111 112 113 113 114 115 114 114 115 116 116 126 150 175 183 204 215 207 212 256 242 234 323 395 397 519 427 559 500 459 563 401 435 139 139 160 160 105 96 131 127 116 117 .... . .♦ .... 1929 1933 1939 1948 1949 1950 1951 1952 1953 1954 1955 1956 95 40 71 104 100 113 113 116 118 111 121 110 87 52 67 101 99 98 106 107 109 106 106 105 78 50 63 100 103 103 112 116 122 119 122 129 54 27 56 104 100 112 128 124 130 133 145 15S 165 72 93 105 101 109 89 87 77 71 75 77 105 17 80 101 93 113 115 112 111 101 117 118 29 26 40 101 108 119 136 144 161 172 192 210 102 99 103 112 118 121 120 127 134 1956 February M arch April M ay June July August September O ctober Novem ber D ecem ber 119 116 117 119 121 120 117 112 110 111 112 106 105 105 105 105 105 105 104 104 104 103 128 128 122 129 125 132 128 136 128 135 132 145 149 160 173 161 160 171 168 163 146 139 79 76 82 74 82 75 84 78 81 79 72 129 131 140 135 135 110 123 122 127 123 123 204 219 203 211 215 212 212 209 217 216 210 1957 January February 10S 115 102 131 74 125 220 211 4 BANKING AND CREDIT STATISTICS — TWELFTH DISTRICT ( a m o u n t s in m il l i o n s o f d o l l a r s ) M e m b e r b a n k reserves a n d rela ted ite m s C o n d it io n ite m s o f all m e m b e r banks* Y ear and m o n th L oa n s U .S. an d G ov ’t d i s c o u n t s s e c u r it ie s D em a n d T o ta l d e p o s its t im e a d ju s t e d 7 d e p o s its 1929 1933 1939 1949 1950 1951 1952 1953 1954 1955 1956 2,239 1,486 1,967 5,925 7,093 7,866 8,839 9,220 9,418 11,124 12,613 495 720 1,450 7,016 6,415 6,463 6,619 6,639 7,942 7.239 6,452 1,234 951 1.983 8,536 9,254 9,937 10,520 10,515 11,196 11,864 12,169 1,790 1,609 2,267 6,255 6,302 6,777 7,502 7,997 8,699 9.120 9,424 1956 M arch April M ay June July August Septem ber O ctober N ovem ber D ecem ber 11,476 11,669 11,837 12,030 12,157 12,173 12,423 12,384 12,504 12,804 6,731 6,730 6,566 6,482 6,396 6,439 6,491 6,468 6,431 6,383 11,112 11,530 11,144 11,262 11,392 11,356 11,581 11,747 11,867 12,078 9.103 9,099 9,139 9,294 9,233 9,286 9,305 9,326 9,235 9,356 1957 January February March. 12,488 12,556 12,576 6,505 6,356 6,177 11,812 11,279 11,129 9,587 9,690 9,794 Bank ra tes on short-term b u s in e s s loa n s3 F a ctors a ffe ctin g reserves: Reserve b ank c r e d it4 _ — 3.20 3.35 3.66 3.95 4.14 4.09 4.10 4.50 + + +— + + — 4.31 + + 4.44 + — 4.57 + + — 4.65 4.74 — + + C om m er c ia l10 T reas u ry m M o n e y In c ir c u la tio n ’ _ Bank d e b its 1ndex 31 cities*’ « R eserves11 ( 1 9 4 7 -4 9 100)’ 34 2 2 13 39 21 7 14 2 38 52 0 110 192 ■ 930 -1 ,1 4 1 -1 ,5 8 2 -1 ,9 1 2 -3 ,0 7 3 -2 ,4 4 8 -2 ,6 8 5 -3 ,2 5 9 + 23 + 150 + 245 + 378 + 1,198 + 1,983 + 2 ,26 5 + 3,158 + 2.328 + 2.757 + 3 ,2 7 4 6 18 31 65 — 14 + 189 132 + 39 + — 30 + 100 — 96 175 185 584 1,924 2,026 2,269 2,514 2,551 2,505 2,530 2,654 42 18 30 102 115 132 140 150 168 172 191 71 82 22 5 6 4 3 5 0 17 - 178 270 233 405 143 315 454 417 143 303 + + + + + + + + + + 188 371 217 341 240 247 466 312 209 451 35 + _ 7 47 + 32 + — 8 — 103 — 59 — 2 38 + 38 + 2,516 2,578 2,498 2,404 2,519 2,565 2,640 2,542 2,579 2,654 183 190 182 186 197 201 184 197 197 202 33 41 37 - 558 816 170 + + + 249 494 170 _ 2,548 2,517 2,495 208 202 202 - — + 144 139 9 1 Adjusted for seasonal variation, except where indicated. E xcept for departm ent store statistics, all indexes are based upon data from outside sources, as follow s: lumber, California R edw ood Association and U.S. Bureau of the Census; petroleum, cement, copper, and lead, U.S. Bureau of M ines; electric power, Federal Power Com mission; nonagricultural and manufacturing em ploym ent, U.S. Bureau of Labor Statistics and cooperating state agencies; retail food prices, U.S. Bureau of Labor Statistics; carloadings, various railroads and railroad associations; and foreign trade, U.S. Bureau of the Census, 2 D aily average. 8 N ot adjusted for seasonal variation. 4 Los Angeles, San Francisco, and Seattle indexes com bined. 6 Com m ercial cargo only, in physical volume, for Los Angeles, San Francisco, San D iego, Oregon, and W ashington customs districts; starting writb July 1950, “ spe cial category” exports are excluded because of security reasons. 6 Annual figures are as of end of year, m onthly figures as of last W ednesday in month. 7 Demand deposits, excluding interbank and U.S. G o v ’ t deposits, less cash items in process of collection. M on th ly data partly esti mated. 8 Average rates on loans made in five m ajor cities. ■ Changes from end of previous month or year. 10 M inus sign indicates flow of funds out o f the District in the case of commercial operations, and excess of receipts over disbursements in the case of Treasury operations, 11 End of year and end of m onth figures. u Debits to total deposits except interbank prior to 1942. D ebits to demand deposits except U.S. G overnm ent and interbank deposits from 1942. £— Preliminary. r— Revised. 52A
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