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FEDERAL RESERVE HANK DF library MAY 2 51971 i iHUHS Mfflmthly Review In this issue W este rn Banks' income W e s t© ™ C e n tra l Banking Farm Pr®sp©cts in * 71 April 1971 W estern Banks' Income ... Twelfth District banks reported only a modest increase In income in 1970, despite sharp gains in bank credit and deposits. W estern Central Banking . . . The San Francisco Reserve Bank expanded most of its operating activities in 1970, despite sluggishness in the regional economy. Farm Prospects in '71 . . . Conferees at the annual farm-outlook conference agreed that net farm income might drop in 1971— the second straight decline. Editors William Burke Apri! 1971 MONTHLY REVIEW Western Banks'7 Income T welfth District member banks reported rec An expansion in loan volume and an increase ord high levels o f income in 1970. The gain in the rate o f return combined to produce loan over the hefty 1969 income increase was rather revenue o f $3,320 million; however, this 8- modest, however— despite a significant expan percent increase was only one-third as large as 19 6 9 ’ s percentage gain. Loan portfolios ex sion in earnings assets— primarily because o f the high interest rates paid on the burgeoning vol panded at a slower pace in 1970: business loans ume o f time and savings deposits. increased just over 3 percent and mortgage fi Western banks’ aggregate net operating in nancing less than 1 percent, while consumer $724 million— loans declined nearly 2 percent. Income from only fractionally above 1969’s record high. Net Federal-funds sales (and from securities pur income after taxes, security losses and extraordi chased under resale agreement) rose by a steep come, before taxes, totaled nary charges, meanwhile rose 5 percent, to a rec 21 percent, but revenue from this source was ord $480 million. (In 1969, in contrast, income increased at least 17 percent on either basis.) more than offset on the expense side by an in crease in the cost o f Fed-funds purchases. Income performance varied widely among indi Despite four late-year reductions in the prime vidual banks, with the largest District banks generally showing the least favorable results. rate, which brought the rate down to 6 % per Income was depressed in 1970 mainly because o f a sharp rise in interest rates paid on time de posits. The banks’ high ratio (55 percent) o f time to total deposits made them particularly vulnerable to such increases in interest expense. In addition, unusually high extraordinary charges partly offset the favorable effect o f a decline in capital losses on securities. Loan revenues rise modestly ... In line with 1970’s moderately easier mone tary policy and an almost 10-percent expansion in total bank credit, operating revenues of- Dis trict member banks rose to $4,601 million, for a 10i/2-percent g ain over the p r e v i a (1 9 6 9 ) rec ord high. The composition o f revenue shifted back to a more traditional pattern, with the in crease in loan income accounting for just over 50 percent o f the total gain in contrast to 1969’s abnormally high 90-percent figure. cent by year-end, the average rate o f return on loans rose 37 basis points in 1970 to 8.32 per cent. Rates remained relatively high through September, reflecting a prime rate o f 8 y 2 percent in the first quarter and 8 percent in the second and third quarters. More important, as FEDERAL RESERVE BANK OF SAN FRANCISCO borrowers repaid loans made prior to 1969, carried relatively low rates o f return, whereas banks were left with a larger proportion o f their securities acquired in 1970, particularly in the total loan portfolios carrying the high rates o f earlier part o f the year, carried historically high 1969 and 1970. yields. In 1970, as a consequence, District banks’ ... and security income expands Treasury issues, 85 basis points on U.S. Agency average rate o f return rose 71 basis points on Revenue from securities (excluding tradingaccount income) rose 16 percent in 1970, to issues and 25 basis points on municipals. These higher yields gave banks a 4.79-percent rate o f $636 million, while income from trading ac return on total investments, compared with counts increased five-fold to $70 million. The 1969’s 4.17-percent figure, and contributed sig large increase in security income reflected a 25- nificantly to the large increase in security income. percent increase in District banks’ holdings o f Trust-department income rose at a somewhat U.S. Treasury issues for their own account, a 50- slower rate than in 1969. On the other hand, percent expansion in holdings o f U.S. Govern service charges on deposits increased, in contrast ment Agency issues, and a 6-percent expansion to a small reduction in the prior year, and other in municipal securities. In contrast, District service charges and fees rose 17 percent. Income banks in 1969 reduced their portfolios o f both from trading accounts (as noted above) and Treasury and other securities to meet heavy loan earnings from foreign branches— both o f which demand. are included in "other operating income” -— rose sharply. Many o f the securities liquidated in 1969 had C O N SO LID A T E D R EPO RT OF IN C O M E OF TWELFTH D IST R IC T M E M B E R B A N K S (millions of dollars) 1970p Operating income— Total Interest and fees on loans Income from Federal funds sold Interest and dividends on investments (excluding trading accounts) Trust department income Service charges on deposit accounts Other operating income Operating expenses— Total Salaries, wages and benefits Interest on deposits Interest on borrowed funds (including Federal funds purchases) Net occupancy expense, furniture, equipment, etc. Provision for loan losses Other operating expenses Income before income taxes and securities gains or losses Applicable income taxes Income before securities gains or losses Net security losses after taxes Extraordinary charges after taxes Net income Cash dividends paid 70 1969° 4,601.3 3,200.8 119.6 4,160.8 2,985.0 98.5 635.8 116.2 207.3 321.6 3,877.5 1,108.9 1,596.3 244.5 548.1 107.4 202.3 219.5 3,437.6 988.5 1.406.01 220.21 290.4 86.6 550.8 723.8 223.2 500.6 — 2.3 — 18.3 480.0 227.9 258.7 74.0 490.21 723.2 248.9 474.3 — 16.2 — 1.3 456.8 219.7 P ercen t ch a n g e + + + + + + + + + + + 10.6 7.2 21.4 16.0 8.2 2.5 46.5 12.8 12.2 13.5 11.0 12.3 17.0 12.4 .1 10:3 5.5 + + 85.8 — 1,307.7 5.1 + 3.7 + + + + + Prelim inary *1969 data adjusted for change in the member-bank universe. JAn estimated $100 million in interest on Eurodollars has been excluded from interest on deposits, and included in interest on borrowed funds and other operating expenses, to conform with 1970 reporting procedures. April 1971 MONTHLY REVIEW ... but expenses rise faster Western banks lag behind '69 pace In 1970, operating expenses o f District banks accelerated at a faster pace than revenues, rising with modest gains in net income M ill i o n s of D o lla rs 13 percent for the year, to $3,878 million. For the first time, the cost o f salaries, wages, pen sions and other employee benefits exceeded $1 billion. The cost o f employee benefits continued to rise at a somewhat faster rate than wages, as it has in other recent years. A major factor contributing to the 12-percent rise in wage expense was the expansion (4 ,1 5 2 ) in the number o f employees required to staff the 181 new branch offices opened in District states in 1970. The number o f member banks in the District decreased by 15, to 155, but the employ ment effect was minimal, since mergers accounted fo r m ost o f this reduction in the banking universe. passbook-savings rate heavily weighted total in terest expenses, since Western banks hold over $15 billion o f such deposits. The January revision in Regulation Q also permitted the payment o f higher rates on large- ... as interest expense sears Interest paid on deposits accounted for 40 per d en om in ation time certificates. N onetheless, cent o f District banks’ total operating expenses banks failed to recover any significant amounts o f CD money until after the June suspension o f in 1970. This expense item totaled $1,596 mil rate ceilings on 60-89 day maturities. Issuance o f lion, for a 1 3 l/2 ‘P ercent gain over the preceding large-denomination C D ’s expanded further in year’s figure. (In making this comparison, 1969 September and October, with the shifting o f data were adjusted to exclude an estimated $100 million in interest paid on Eurodollars, and this amount has been added to the reported interest paid on "borrowed funds.” ) This large increase in interest expense stemmed in part from a 20percent expansion in time deposits. Savings and consumer-type deposits began to increase in the second quarter and continued to rise throughout the rest o f the year, while large-denomination funds from bank-related commercial paper. T o wards the end o f the year, offering rates on large C D ’s were reduced in line with other money- C D ’s jumped sharply in the last half o f the year. expense o f purchases less income on sales— market rates, but interest rates on passbook sav ings and savings-type certificates remained at the ceilings. ... and other costs rise The net cost o f Federal-funds transactions— ■ The average rate o f deposit interest rose 51 reached $89 million in 1970, or about $19 mil basis points in 1970, to 5.15 percent. Most W est ern banks raised their rates on passbook savings banks reduced their borrowings through Euro lion more than in 1969- During the year, District from 4 to 4 l/2 percent early in the year, follow ing the late-January increase in Regulation Q rate dollars and bank-related commercial paper and ceilings. District banks were somewhat slower in ing through Fed-funds purchases— that is, bor offering the new ceiling rates o f 5, 5 1 /? and 5 % rowing o f banks’ excess balances on deposit at returned to the more traditional form o f borrow percent (dependent on maturity) on consumer- the Federal Reserve Bank. Interest on other bor type time certificates, but most o f them eventu rowed funds, including discounting at the Fed ally adopted these higher rates also. But in par eral Reserve Bank, decreased from the year- ticular, the l/2-percentage-point increase in the earlier level. 71 FEDERAL RESERVE BANK Western banks increased their provision for loan losses by 17 percent in 1970. This was well OF SAN FRANCISCO lion IfS p a y high rates on deposits, but earn much more on securities in excess o f the expansion in loan portfolios, in dicating the usual upward trend in loan losses during periods o f slack economic activity. A rise in net occupancy expense meanwhile reflected the expansion in branch-office operations. "Other operating expenses,’ ’ which includes costs not specifically itemized, rose I 2 y 2 percent. Result-— small net income gain W ith the deduction o f operating expenses from operating revenues, District member banks’ net operating income (before taxes) came to $724 million— less than $1 million above the record set the previous year. Applicable income lion, compared with $89 million in 1969, when District banks first applied the new IRS formula for loan reserves. taxes amounted to $223 million— $26 million District banks recorded relatively low security less than a year earlier, due to the mid-year ex losses— $ 3 1/2 million gross— in 1970. (In con piration o f the surtax. Thus, net operating in trast, they took a $37 million loss in 1969 as they come after taxes showed a $26 million (5^2 sold securities to meet loan demand.) Thus, percent) increase over 1969- Nonetheless, total provision for Federal and state taxes was greater in 1970 than a year earlier, because the tax- after adjustment for the net effect o f security losses and for large extraordinary charges, D is trict banks posted a final net income figure o f $480 million— $23 million above the previous year’s record high. reduction effect o f transfers from capital reserves to bad-debt reserves on loans was only $10 mil SELEC T ED O PERATIN G RATIO S OF TWELFTH D IST R IC T M E M B E R B A N K S (percent) 1970p Earnings Ratios: Return on loans (including Federal funds) Return on U.S. Treasury securities (excluding trading accounts) Return on other securities (excluding trading accounts) Net operating income to capital accounts Net income (after taxes, securities losses, extraordinary charges) to capital accounts Cash dividends to capital accounts Interest paid on deposits to total time deposits Time deposits to total deposits 1969 Change 8.32 7.95 .37 5.42 4.71 .71 4.40 17.26 4.00 17.82 .40 — .56 11.44 5.43 5.15 55.49 11.25 5.41 4.641 55.59 .19 .02 .51 - .10 ^Preliminary ^ atio adjusted to exclude interest on Eurodollars. 72 Note: These ratios are computed from aggregate dollar amounts of income and expense items. Capital accounts, deposits Joans and securities items on which these ratios are based are averages of call data as of December 1969, June 1970, and December 1970, and as ol December 1968, June 1969 and December 1969. (Securities data for 1968 partially estimated.) April 197! MONTHLY REVIEW Small banks— large gains the rate to 4 % percent. (Reliance on the dis The largest District member banks— those with deposits o f $450 million and over— showed count window, however, has been light.) The a significantly different earnings pattern from Fed-funds rate meanwhile fell to a 3-to-4 per cent range and Eurodollar rates also moved that o f other Western banks. The largest banks lower. posted a 1-percent decline in net operating earn During the first three months o f 1971, D is ings before taxes, compared with a 7-percent in crease for other District banks. Net income after trict banks continued to reduce their offering rates on large denomination C D ’s to bring them taxes, security losses, and extraordinary charges into line with declining money-market rates. increased less than 3 percent for the largest Banks further pared their interest expense on banks, whereas it rose almost 23 percent for deposits in late January and early February by other banks. The latter group recorded a more cutting the rate paid on consumer-type certificates favorable earnings performance because o f a to 5 percent on all maturities. Then, in mid- higher rate o f gain in loan revenue, very small security losses, and a net credit on extraordinary items. Income from securities rises faster than loan revenue Earnings in 1970 also varied widely by state. California, Oregon and Washington banks, in Percent C h a n g e the aggregate, showed declines in net operating income, whereas other District states reported moderate to large gains. (But California was the only state to post a decline in net income after taxes, security losses and extraordinary charges.) Large gains in aggregate net income, ranging up to 40 percent, were reported for Idaho, Nevada and Utah. 1971— major realignments Factors affecting bank income changed rapidly in the first quarter o f 1971. Loans fluctuated er ratically, displaying no sustainable strengthen Interest expense ing in bank-credit demand. Western banks low ered the prime business-loan rate five times, Percent C h a n g e from 6 % percent down to 5*4 percent, and many also announced reductions in rates on mortgage and consumer loans. A ll these forces combined to place downward pressure on loan revenues. In addition, declines in security yields tended to offset some o f the increase in revenue which resulted from rapidly expanding security portfolios. At the same time, banks’ costs for funds de clined. The Federal Reserve Bank o f San Fran cisco cut the discount rate three times in January and February— each time by 14 percent, bringing on deposits rises sharply FEDERAL RESERVE BANK OF SAN FRANCISCO March, as the prime rate dropped again, major so far this year, and realignments in related rates Western banks announced a reduction to 4 per have affected almost all items on the banks’ in cent on passbook savings, effective April 1. come statements. But Western banks’ interest Based on deposits as o f mid-March, this l/2- expense on deposits increased sharply in the first percentage-point reduction will save District member banks over $60 million in interest ex penses in the last three quarters o f the year. Changes in key rates affecting both revenue quarter, due to the extremely large (over $1 bil lion ) increase in passbook savings which still bore the old 4 ]/2-percent rate. and expense items have been unusually numerous Ruth Wilson SELEC T ED A SSE T A N D LIABILITY IT EM S OF TWELFTH D IST R IC T M E M B E R B A N K S (millions of dollars) A s of December 31, 1970 Gross loans and investments1 Federal funds sold1 Other loans Commercial and industrial Real estate Loans to individuals Agricultural U.S. Treasury securities2 Other securities2 Securities in trading accounts Total assets Total deposits Demand Demand IPC Total time and savings Savings Other time IPC State and political subdivisions Capital accounts 57,238 1,946 39,291 15,487 11,207 7,427 1,455 5,881 9,186 934 71,307 60,238 25,737 21,320 34,501 15,762 12,610 4,751 4,377 *1969 data adjusted for change in the member-bank universe. ’Including securities purchased under resale agreements. Excludes securities in trading accounts. NOTE: Totals may include items not shown. 74 A s of December 31, 1 9 6 9 * 52,144 812 38,630 14,988 11,138 7,550 1,446 4,725 7,428 549 65,391 53,604 24,959 20,683 28,645 15,247 9,512 2,765 4,176 C hanges from D o llar + 5,094 + 1,134 + 661 + 499 + 69 — 123 + 9 + 1,156 + 1,758 + 385 + 5,916 + 6,634 + 778 + 637 + 5,856 + 515 + 3,098 + 1,986 + 201 Percent 9.8 24.0 1.7 3.3 .6 - 1.6 .6 25.5 23.7 70.1 9.1 12.4 3.1 3.1 20.4 3.4 32.6 71.8 4.8 MONTHLY April 197! REVIEW W estern Central Banking n 1970, the Federal Reserve Bank o f San o f reserve requirements on bank-related com Francisco was responsive to a variety o f influ mercial paper, had a net effect o f releasing about ences from many financial markets and in wide $80 million o f reserves for District member geographic locations. The San Francisco office banks. I and its branches in Los Angeles, Portland, Salt Lake City and Seattle provided central-banking services in all o f the Pacific states (California, Oregon, Washington, Alaska, and Hawaii) and in several Mountain states (Idaho, Utah, N e vada, and most o f Arizona) . Telegraphic transfers o f funds using the San Francisco Bank’s facilities expanded rapidly (25 percent) as transfers exceeded the trillion-dollar mark for the third consecutive year. On an aver age day, the Bank’s five offices handled about 2,500 transfers, representing $6.6 billion in The Federal Reserve Bank o f San Francisco lowered its discount rate twice in late 1970, re flecting the year-long downtrend in moneymarket rates. The discount rate had held at 6 percent since April 1969— the highest level since funds. This activity included the transfer o f funds for the adjustment o f member-bank cor respondent and reserve-account balances, as well as for customer-account transactions. 1921— but was then lowered to 5 % percent in In 1970, a new computerized communications November and to 5^2 percent in early December. system became operational, connecting Federal Activity at the Bank’s discount window les sened considerably as monetary policy eased over the course o f the year. Twelfth District member banks borrowed $71 million in 1970, on a dailyaverage basis, in contrast to borrowings o f $123 million in the tighter conditions o f 1969- In deed, borrowings averaged only $36 million in the last six months o f 1970. District member-bank required reserves, on a daily-average basis, rose 2l/> percent in 1970— a rather modest increase in view o f the large build up o f total member-bank deposits in 1970. This reflected the concentration of deposit growth in the low-reserve time category, plus the September reduction, from 6 to 5 percent, in the reserves that member banks must hold against time deposits in excess o f $5 million. This action, although accompanied by the imposition Reserve banks and branches through a central system located in Culpeper, Virginia. The com puterized operation makes it possible to move money balances and data at a speed several times faster than the former wire network. In fact, the volume potential o f the new network FEDERAL RESERVE BANK OF SAN FRANCISCO Dise@unt»wind@w activity declines Reserve Bank check-processing as monetary policy eases in 1970 activity also grows during year Billions of Dollars Millions provides a capacity at least 12 times the present "paperless” billing and depositing services to operational load o f the Federal Reserve System. corporate customers o f participating banks. The San Francisco Reserve Bank processed Despite 1970’s sluggish business tone, coin almost 865 million checks in 1970— up i y 2 per and currency operations generally expanded in cent for the year. The dollar volume o f checks District states during the year. Currency received cleared increased 3 V2 percent to $193 billion. However, the San Francisco and Los Angeles and counted by the Bank’s five offices increased offices, in cooperation with a special bankingindustry committee, made a major effort to reduce the ever-increasing volume o f paperwork involved in check processing. The cooperating group agreed to establish by early 1972 (o n an experimental basis) automated clearing houses that will make it possible to provide automatic i y 2 percent in dollar volume and 61/2 percent in number o f pieces. The dollar volume o f coin handled rose 4 percent— but the number o f pieces dropped almost 11 percent because o f a shift in demand for the various denominations o f coin. At the San Francisco office, for example, there was a substantial increase in orders for VO LU M E OF O P ERA T IO N S 1968 C hecks c o lle c te d N oncash c o lle c tio n item s C oin co unted C u rre n cy co u n te d T ra n sfe rs o f funds U.S. S avings B onds ha ndled O th e r G ove rnm ent s e cu ritie s ha ndled $ 176,469 4,423 154 5,960 1,021,000 1,314 63,200 ar A m o u n t (M illio n s) 1969 $ 186,364 5,195 192 6,493 1,328,000 1,322 82,000 ------------------------ N um ber (Thousands) — 1968 1969 C hecks c o lle c te d N oncash c o lle c tio n item s C oin co unted C u rre n cy co u n te d T ra n sfe rs o f funds U.S. S avings B on ds handled O th e r G ove rnm ent s e cu ritie s ha ndled $ 756,525 825 1,415,600 760,133 505 28,186 1,032 $ 804,200 744 1,875,700 829,233 574 28,739 1,441 1970 $ 192,623 5,512 200 6,980 1,662,313 1,301 84,415 1970 $ 864,645 699 1,670,393 882,238 632 27,919 1,447 MONTHLY April 1971 quarters but a more than offsetting decline in the turnover o f dimes. REVIEW D e sp ite sBuf gish economyHcoin and currency operations generally rise The San Francisco Bank expanded its activity last year as the fiscal agent for the Federal G ov Billions of Dollars Millions ernment. In this function, it issues and receives government securities, and administers tax-andloan accounts for District commercial banks. Record high yields— and the publicity sur rounding those yields— sparked the interest o f small investors in U.S. Treasury bills through out 1969 and early 1970. At the January 1 2 auction, for example, 5,384 subscribers entered tenders for $ 1 3 1 million on a noncompetitive basis with the Reserve Bank, in contrast to 1,274 tenders and $47 million for the comparable weekly offering a year earlier. W ith the number o f subscriptions for the minimum $ 1,0 0 0 denomination increasing at every auction during January and February, the Treasury’s cost o f borrowing continued to mount also. W hen the Treasury raised the minimum to $10,000 in early March, public participation almost immediately declined. But the $ 1,0 0 0 minimum was retained for new issues o f Treas TeSeeprsijpiile tra n s fe rs of funds expand sharply during 1970 ury notes, and the public responded enthusiastic ally to three cash offerings during the year. Despite the unusual activity in Government Billions of Dollars Thousands securities during 1970, the total value o f mark etable issues handled increased only moderately (3 percent). A decline in the number o f pieces exchanged or transferred reflected the effect o f new book-entry procedures, while an increase in redemptions reflected the run-off o f the large volume o f Treasury bills purchased by the public in 1969 and early 1970. The number o f secu rities redeemed was up 2 2 percent over 19 6 9 but the dollar volume was off 2 percent, because o f the large number o f small-denomination issues purchased by the public that were redeemed as I960 1965 1970 they matured. 77 FEDERAL RESERVE BANK The redemption o f savings bonds exceeded new sales in District states by a wide margin again in 1970. Consequently, in order to increase OF SAN FRANCISCO Fiscal operations center around marketable securities in early 1970 the competitive attractiveness o f savings bonds, the Treasury boosted the rate to 5 ^ percent in August, retroactive to June 1 . The sale o f savings notes (commonly known as Freedom Shares) was discontinued at midyear. The volume o f food stamps processed by the Reserve Bank mushroomed in 1970, as additional counties in the District entered this program sponsored by the U.S. Department o f A gri culture. The Bank’s five offices handled 2 2 2 million stamps valued at $ 3 1 1 million— in both cases, about a 150-percent increase for the year. In its continuing supervisory function, the Reserve Bank staff examined all state-chartered member banks and their trust departments dur ing 1970. These included 31 banks, 270 branch offices, and 31 trust departments located in Cali fornia, Idaho, Nevada, Utah, and Washington. The staff also examined eight foreign-bank cor porations headquartered in District states. CO M PARATIVE STAT EM EN T OF C O N D IT IO N (Thousands of dollars) Decem ber 31, 1968 ASSETS Gold certificate reserves Special drawing rights certificates Federal Reserve notes of other banks Other cash Discounts and advances Total U.S. Government securities Uncollected items Bank premises Other assets Total assets LIABILITIES AND CAPITAL ACCOUNTS Federal Reserve Notes Deposits: Member banks— reserve accounts U.S. Treasury— general account Foreign Other deposits Deferred availability cash items Other liabilities Total capital accounts Total liabilities and capital accounts Decem ber 31, 1969 Decem ber 31, 1970 $ 1,286,391 —0— 106,948 22,756 7,000 7,694,527 908,061 8,741 340,492 $10,374,916 $ 1,639,536 —0— 102,147 19,016 700 7,925,956 977,154 8,736 324,689 $10,997,935 $ 1,046,032 49,000 112,833 31,811 -0 8,769,102 1,333,179 8,299 109,554 $11,459,810 $ 5,656,691 $ 5,950,144 $ 6,237,354 3,656,371 1,706 29,040 78,455 727,077 56,081 169,495 $10,374,916 3,780,382 118,043 17,550 66,350 807,268 84,283 173,914 $10,997,935 3,814,259 130,108 16,250 70,833 929,587 84,652 176,766 $11,459,810 MONTHLY April 1971 REVIEW At the close o f 1970, total assets o f the Fed in the System’s open-market account amounted to eral Reserve Bank o f San Francisco approached $ 8.8 billion at year-end, or 14 percent o f total $ 1 1 . 5 billion, compared with $ 1 1 . 0 billion at System holdings. The average yield on those the end o f 1969. This increase reflected the securities reached 6.48 percent— up from 5.89 Bank’s larger holdings o f Government securities in the Federal Reserve System’s open-market ac percent in 1 9 6 9 The Bank’s net expenses rose from $28 mil count, offset in part by reductions in several lion to $ 3 1 million during the year, primarily other asset items. For example, discounts and because o f a slightly larger staff and higher advances declined, and the gold-certificate ac salaries and benefits. Dividends o f $ 5 million count also declined; a small part o f the latter were paid to member banks, and over $ 1 million represented a transfer o f funds to the new ac was transferred to surplus to bring this to the level o f paid-in capital stock. Remaining net count for Special Drawing Rights. The Bank’s total current earnings rose from earnings o f almost $500 million were paid to $474 million in 1969 to $53 6 million in 1970, the U.S. Treasury as interest on Federal Reserve mostly because o f a $74-million increase (to notes, for a $ 6 0 -million increase over the 19 6 9 $524 m illion) in earnings on the Government- figure. securities account. The Bank’s share o f securities Donald Alexander C O M PARATIVE PROFIT A N D LO SS STAT EM EN T (Thousands of dollars) 1968 Total earnings Net expenses Current net earnings Net addition ( + ) or deductions ( —) Distribution of net earnings: Net earnings before payments to U.S. Treasury Dividends Interest on Federal Reserve notes Transferred to surplus Total 1969 1970 $ 390,669 24,594 366,075 + 1,131 $ 474,309 27,666 446,643 — 26 $ 535,554 30,705 504,849 + 1,501 367,206 4,889 356,754 5,563 367,206 446,617 5,146 439,261 2,210 446,617 506,349 5,241 499,683 1,426 506,349 Publication Staff: Karen Rusk, Editorial Assistant; Janis W ilson, Artwork. Single and group subscriptions to the Monthly Review are available on request from the Administrative Service Department, Federal Reserve Bank of San Francisco 400 Sansome Street, San Francisco, California 94120 79 FEDERAL RESERVE BANK OF SAN FRANCISCO Farm Prospects in O ptimism was somewhat lacking at the U.S. production expenses. Last year, expenses rose Department o f Agriculture’s annual out about 6 percent in the W est and 5 percent else look conference this February, at least in part where, roughly in line with the trend o f the past because o f the general belief that net farm in decade. Production outlays continued to account come might decline again in 1971, for the second for a larger proportion o f gross income in the year in a row. Perhaps to emphasize this point, W est than elsewhere because large-scale Western the "Poor People’s A d H oc Committee on Rural farming requires greater reliance on nonfarm Poverty” staged a demonstration at the meeting inputs such as hired labor. to call the conferees’ attention to the problems o f the rural poor. But other farmers, too, were having problems. Higher demand, higher prices For 1971, the U.S. Department o f Agricul Net income o f Western farmers dropped 3 ture foresees a strengthening o f domestic de percent in 1970 to below $1.9 billion. Elsewhere in the nation, net income declined 2 percent to $14.0 billion. Despite a drop in the number o f farms, net income per farm also fell in both the mand for farm products, on the basis o f rising West and the nation as a whole, as all District states except Oregon, Nevada, and Hawaii suf fered declines. Receipts rise, but net declines population and per capita income as. well as an expansion o f various food-distribution pro grams. Moreover, the U SD A envisions an in crease in export demand, because o f the general expansion o f foreign economies as well as de veloping shortages o f cotton and food and feed grains in some overseas markets. U SDA analysts also see a continued rise in Western producers in 1970 posted a 1 -percent retail food prices, although perhaps not so great increase in crop marketing receipts, to $4.1 bil as last year’s 5^-percen t increase. Their expecta- lion, and a 4-percent gain in livestock receipts, to $3-3 billion. Farmers elsewhere recorded a 5 -percent increase in crop receipts, to $15.5 bil lion, and a 2 -percent gain in livestock receipts, to $25.8 billion. Western producers, unlike their counterparts elsewhere, sharply reduced the phy sical output o f both crops and livestock. Despite this, they managed to boost their marketing re ceipts because o f rising crop prices and a second straight year o f high red-meat prices. Net income nonetheless declined because o f a 80 continuation o f the long-run uptrend in farm April 1971 MONTHLY REVIEW Westerners eut output, but benefit expansion in acreage may alter the U S D A ’s from rising crop and livestock prices earlier forecast o f a 1971 decline in farm income. Meanwhile, livestock receipts are expected to hold near the record 1970 level. Mixed picture for the W est Western farmers expect a smaller gain in crop receipts than their national counterparts, partly because o f a smaller ( 3 percent) anticipated in crease in crop acreage, and partly because o f the difference in structure between the regional and national farm economies. On the national scene, increased output and higher prices are expected for feed grains, soybeans, and wheat— but wheat is the only one o f those crops that plays a prom inent part in the Western economy. In this region, the production o f field crops should exceed the year-ago level. A modest in crease is expected in acreage planted to wheat, judging from plantings o f winter wheat and tion is for some weakness in farm prices but for an offsetting increase in marketing margins. A slowdown in retail prices may be unlikely, as marketing margins are not very responsive to price reductions at the farm level. For example, the farm value o f the food market basket dropped 8 l/ 2 percent between late 19 6 9 and late 1970, but retail prices continued to rise, reflect ing higher costs o f packaging, plus greater-thanproductivity increases in marketing employees’ wages. Gross farm income nationally is expected to set a new record in 1971, as an increase in crop marketing receipts more than offsets a decline in government payments. An expansion in crop output is anticipated, plus some advance in prices consequent to the recent reduction in carryover stocks. According to the March survey o f planting intentions, farmers nationally will have 4 per cent more acreage in production than a year ago. Am ong other things, farmers are now planting considerably more spring-wheat acreage than had been expected earlier in the year. Thus, if mark eting conditions remain strong, the continued planting intentions for the spring-wheat crop. (Last year’s sharp increase in wheat production by California farmers, undertaken to make up for a feed deficiency, will probably not be re peated this year.) A 7-percent increase is now expected in cotton acreage— contrary to January planting reports— as anticipated strength in the export market more than offsets the cutbacks planned by some large farmers because o f the new ceilings on government payments to indi vidual producers. Westerners post stronger goin in livestock than in crop receipts B illio n s of D o lla rs FEDERAL RESERVE BANK OF SAN FRANCISCO In addition, Western farm receipts should be Pr@duefi@ffi @ip@ms@§ rls© boosted because o f a projected increase in the faster In W est than elsewhere output o f deciduous fruits— especially grapes, Percent Change pears, and apricots. Also, there may be a modest 0 25 50 75 increase in output o f canning tomatoes, despite heavy inventories o f tomato products. But clingpeach producers may limit their individual har vests, because o f a large carryover from the 1970 canning pack and large supplies o f fruit coming from new acreage. The marketing o f Western livestock and live stock products should rise modestly in 1971. The number o f cattle on feed is about the same as a year earlier, but prices are now substantially higher than before. In addition, beef prices increase occurs in the production o f milk, eggs, and turkeys— all important Western products. On the basis o f the trends outlined above, marketing receipts o f Western farmers should expand in line with the national increase. M ore over, net income may match the 1970 level, de spite the U S D A ’s original forecast o f a decline, should be bolstered later in the year as the na if the advance in production expenses is kept tion’s supply o f pork products declines. Cash within bounds. receipts should also be boosted if the anticipated 82 Donald Snodgrass
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