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FEDERAL RESERVE BANK OF SAN FRANCISCO
MONTHLY REVIEW
IN
THIS
ISSUE
Down the Ways
Up on the Farm
V F C R P -^ Z Model
JANUAR y
J 967
Down the W a y s
. . . Vietnam brings a revival of activity in the nation’s shipyards, but
the U. S. still ranks 14th in new m erchant-ship construction.
Up on the Farm
. . . For two straight years, the nation’s farm ers have achieved a b u n
dant prosperity. C a n they do it a g a in ?
VFCRP— ’67 Model
. . . Credit restraint will a g a in be in order for the Am erican firms and
banks w ho lend or invest ab road .
Editor: W illia m Burke
January 1967
MONTHLY REVIEW
Down the W ays
n the world’s shipbuilding competition
Japan stands alone at the head of the list,
with almost 35 percent of new merchant-ship
construction. Sweden, Germany, and the U.K.
follow, with about 10 percent each, and then
far behind— in fourteenth place to be exact—
comes the U. S., with less than 2 percent of
new construction.
It wasn’t always thus. In the 1942-45 pe
riod, under the pressure of heavy wartime de
mand, U. S. shipyards delivered over 5,000
ships to the American and Allied merchant
fleets. During that period, merchant-ship con
struction exceeded $ 12 billion and commercial
shipyards employed some 4 million people.
At their peak production rate, U. S. yards
could have replaced the entire U. S. prewar
fleet within sixteen weeks and the entire world
fleet in less than three years’ time.
Today, however, the situation is different.
The handful of commercial shipyards left
in operation, building ships slowly by
time-honored methods for a small but guaran
teed market, have failed to keep up with the
efficient yards built abroad since the begin
ning of the postwar period. The Navy’s $2-3
billion annual spending for repair and mainte
nance work is spread around to keep commer
T
cial yards operating, and the fourteen ship
ping lines which receive Federal operating
subsidies are required by law to buy their new
ships from American yards. But, despite a
ship-replacement program which has pro
duced 110 modern ships over the past decade,
one Congressional critic claims that “72 per
cent of the existing merchant fleet is com
posed of obsolescent, inefficient and uneco
nomic ships”.
All in all, U. S. yards today have only 45
merchant ships under construction or on or
der. In terms of tonnage, American yards
build less than Vi million tons annually, com
pared to the 4-5 million tons produced by Jap
anese shipyards and the 1 million tons or so
constructed each year by German, British,
and Swedish yards.
This feast-or-famine situation has an his
toric parallel. During World War I as during
World War II, the nation’s shipyards pro
duced millions of tons of merchant shipping,
but those ships were unable to compete two
decades later with the efficient modern ships
produced in the interim by efficient modern
yards abroad. And then as now, U. S.-flag
ships dominated the world’s sealanes in the
immediate postwar period but met much
FEDERAL RESERVE B A N K OF S A N
heavier going in the competitive seas of later
decades.
W ho rules the w aves?
The U. S. in 1945 operated 60 percent of
the world’s merchant-fleet tonnage and, even
though it sold off a substantial part of that
fleet over the next several years, it still ac
counted for 36 percent of the total in 1948.
Since then, however, the U. S. active fleet has
declined, from AV2 to 4 million tons in tankers
and from 8 V2 to 6 million tons in dry cargo
ships. Meanwhile, total world tonnage has
almost quadrupled for tankers and almost
doubled for dry cargo ships, so the U. S.-flag
share has now dropped to less than 8 percent
of the total.
On the other hand, the U. S. fleet is supple
mented— perhaps almost doubled—by those
“flags of convenience” which are under “ef
fective” American control. Registration data
are somewhat inexact for ships registered un
der Panamanian, Liberian, Honduran and
other convenience flags, but perhaps one-half
of such tonnage is owned by American citi
zens and perhaps almost as much by Greek
citizens. The system permits the smaller states
to gain revenue from the use of their registry,
and it enables shipowners to avoid restrictive
U. S. maritime laws and high U. S. taxes and
J a p a n d o m in a te s sh ip b u ild in g
scene, and U. S. lags far behind
M ill io n* of Groas Ton$
FRANCISCO
labor costs— albeit at the sacrifice of U. S.
subsidy payments as well.
West European flags are the most common
ly seen on the world’s sealanes today, but
Japan and the U.S.S.R. hope to attain domi
nance in coming decades. In 1965, the British
merchant fleet amounted to 20 million tons,
the Liberian flag-of-convenience fleet 17 V2
million tons, the Norwegian fleet 15 million
tons, the U. S. and Japanese fleets 10 million
tons each, and the Russian and Greek fleets
7 million tons each.
The U.S.S.R. today has 236 ships on order
from foreign shipyards, and it also has a sub
stantial shipbuilding capability itself. Accord
ing to present plans, its merchant fleet may
be twice the size of the American fleet by
1971. Japanese shippingmen meanwhile hope
to expand their fleet eight-fold by 1980, to
some 80 million tons.
Vietnam rules the waves
American shipping and shipbuilding capa
bilities have come under increasing scrutiny
in recent months, because of the heavy pres
sures on trans-Pacific supply routes gener
ated by the conflict in Vietnam. About twothirds of the troops and fully 98 percent of
the supplies required for Vietnam have gone
by sea, although the Defense Department con
tends that cargo planes eventually will be able
to do the job of moving troops and supplies
to battle. By 1970, they may well be doing
so, since military air transport capacity will
then be equal to about 250-350 Victory-type
freighters. But this is 1967, and heavy re
quirements for shipping are evident right now.
Some of the 1,400 ships in the inactive
merchant fleet have been de-mothballed, even
though all of these are over 20 years old and
cost about $400,000 each to recondition.
Moreover, some of the 950 ships in active
service have been shifted from their regular
trade routes to the Saigon-West Coast run,
many of them under Defense Department
charter. To give some idea of the magnitude
January 1967
MONTHLY REVIEW
of shipping involved in a somewhat similar
operation, about 350 ships were needed dur
ing the Korean conflict to supply about 500,000 troops at the end of a 6,000-mile-long
supply line with some 20,000 tons of dry cargo
and 125,000 barrels of petroleum daily.
National emergencies of this type require
today, as they did twenty years ago, a sharp
increase in commercial shipbuilding and shiprepair activity. Employment in the nation’s
shipyards is roughly one-fourth higher than it
was in the earlier part of this decade, although
it is still only a fraction of what it was at the
World War II peak.
West Coast: ships and costs
West Coast commercial-shipyard employ
ment, which plummeted from 500,000 at its
wartime peak to 9,000 in 1950, has since in
creased to about 22,000-—roughly 9,000 in
Washington, 8,000 in Southern California,
and 5,000 in Northern California yards. In
the rest of the country, about 150,000 work
ers are now employed in ship-repair and ship
building. (Naval shipyards, which have gen
erally exhibited a much stabler employment
pattern, now employ about 24,000 civilian
workers in California and about 10,000 in
Washington.)
Over the past decade, East Coast yards
have built 138 merchant ships, whereas Gulf
Coast yards have built 40 and West Coast
yards only 26 ships. The relatively poor West
Coast performance reflects cost considera
tions that differ between the different coasts.
For example, a typical freighter that costs
$12.0 million to build on the East Coast may
cost as much as $12.6 million in West Coast
yards.
According to Maritime Administration
data, West Coast costs are about 5 percent
higher than East Coast costs and about 9
percent higher than Gulf Coast costs. No
trend is visible in the direction of cost equali
zation, since labor and material costs have
generally risen at the same rate in each region
of the country.
Of the 45 merchant-ship contracts awarded
during the last three years, the East was low
bidder 16 times, the Gulf Coast 25 times, and
the West 4 times. But the Maritime Adminis
tration contends that geographical cost differ
ences are “not sufficiently significant to justify
any remedies to equalize costs between the
coastal districts.” West Coast yards formerly
received a cost differential of this type, but
the legislation permitting this differential was
repealed by the 87th Congress.
U, S.: ships and prices
Construction work in U. S. private yards
centers around the Maritime Administration’s
20-year, 300-ship construction program,
which got under way a decade ago. About 110
of these up-to-date merchant vessels have al
ready been delivered to U. S. shipping lines,
which in return for operating subsidies are re
quired by law to buy their new ships from
high-cost American yards.
Ship prices, both here and abroad, have
roughly doubled since World War II. A
standard dry-cargo ship, mass produced in
World War II at $280 per ton, cost as much
as $1,000 per ton during the shipping crisis
generated by the Suez controversy. Prices
Merchant tonnage
expands rapidly,
except for ships under U. S. flag
M i l l i o n s of G r o s s T o n s
TANKER
FR EIG H T -P A SSEN G ER
80
60
Japan-Other
S o uthern Europe
40
Northern Europe
20
— U nit ed K in g d o m
— F l a g s of C o n v e n i e n c e ------
M
{948
— U ni t ed S t a t e s ( A c t i v e )
1965
1948
1965
FEDERAL RESERVE B A N K OF S A N
later dropped about 25 percent below that
peak, but about half of the decline has been
recovered since 1961.
U. S. prices have risen gradually during the
last several years. Shipbuilders have been try
ing to regain normal profit margins, since pre
vious assignments were relatively profitless
because of competitive pressures and because
of the limited amount of work available.
Moreover, they have recently encountered
difficulty in holding their labor force to meet
current commitments as well as growing Viet
nam requirements. Then again, rising wage
rates in other industries have put pressure on
shipbuilding wages and on shipbuilding ma
terial costs.
But foreign prices have also been rising in
recent years. Japanese price levels have in
creased sharply under the pressure of a mas
sive 9-million-ton backlog of orders. European
prices also have reflected rising backlogs; on
the other hand, European firms are strongly
price competitive, since they are contract hun
gry because of the increased capacity made
available by recent mergers and technological
improvements.
Japan: dominance
In their efforts to obtain high-quality mer
chandise at low cost, shipping men through
out the world have turned increasingly to Jap
anese shipyards. Japan, which accounts for
more than one-third of the world’s total con
struction, sent more than 5 million tons of
ships down the ways in 1965. Today it has
34 yards capable of building ships of 10,000
tons or over, and it is increasing its yard facili
ties by 20 percent annually. Two-thirds of
Japanese shipyard production is exported, and
this $700 million in overseas sales accounts
for one-tenth of the nation’s total exports. All
in all, it is a far cry from the Occupation pe
riod, when Japan was completely prohibited
from replacing its destroyed merchant fleet.
A number of factors account for Japan’s
FRANCISCO
domination of the world’s shipbuilding indus
try. Added together, they lead to such testi
monials as the following from one U. S. ship
owner, “I build in Japan because their work
manship is excellent; they are good to do busi
ness with, they deliver faster, and their prices
are the lowest in the world.”
Labor costs, which account for almost onehalf of the total construction costs on large
ships, are an important item in this equation.
The Japanese shipyard worker, with his mod
ern equipment, maintains a high level of pro
ductivity, and yet earns only a fraction of the
U. S. shipyard worker’s $3.15 average hourly
wage, so Japanese yards boast a major unitcost advantage right there.
The attractive prices made possible by such
cost advantages provide a very important
selling point too. Japan can offer a price as
low as $ 100 per ton, as against $ 175 for Euro
pean yards and $270 for U. S. yards. Con
struction costs per ton have dropped from
$200 to $73 over the past decade because
of a number of engineering innovations— for
example, prefabricated engine rooms and
deck houses, along with various design
changes which have cut steel requirements by
almost one-third.
Speed of delivery is yet another major sell
ing point. From time of keeling to time of
launching, a Japanese 50,000-ton ship re
quires less than half the six-month’s time re
quired in other yards. Japanese yards have in
vented or refined a host of construction tech
niques. Their specialty is building entire ships
in separate 250-ton prefabricated blocks with
groups of interlocking units welded together.
This technique permits work to proceed si
multaneously on all parts of the ship, instead
of in sequence, and thus cuts down on produc
tion delays.
Japan: mammoths
Japan’s most spectacular achievement is
the construction of giant ships in the 200,000-
January 1967
MONTHLY REVIEW
Under Whose Flag?
A subsidiary of an American oil com
pany recently ordered two 68,000-ton
tankers from Japanese shipyards for de
livery in 1968. The item is not especially
newsworthy, except that it typifies the
tangled skeins of the international ship
ping market.
The tankers will be built in Japan for
Liberian registry, as they will be owned
by a Liberian firm which is a subsidiary
of a Swiss firm, which in turn is a sub
sidiary of the foreign-operations sub
sidiary of the U. S. oil company. More
over, they are scheduled to haul crude
oil from Persian Gulf oil fields to U. S.owned refineries in Italy and Australia.
ton category. Earlier giants— the 17,000-ton
tanker of two decades ago and the 48,000ton tanker of a decade ago— were later out
moded by 100,000-ton giants. The latter,
however, have recently been superseded in
their turn through the development of new
construction techniques and of larger ship
building docks. Four Japanese yards now con
tain docks with 200,000-ton ship capacity,
and an even larger dock will be ready this
year.
The past year has witnessed the launching
of a 150,000-ton giant with a 1.2-millionbarrel crude oil capacity, but this was re
cently followed down the ways by a 210,000ton giant. At present, 61 ships in the 100,000ton class or over are under construction, and
a U. S. firm has recently ordered six tankers
in the 276,000-ton category.
These giant tankers are an entirely new
phenomenon, resulting from the spectacular
increase in world petroleum demand and the
spectacular economies available in moving
oil in bulk from Persian Gulf fields to West
ern markets. The mammoth ships are of
course restricted to special-purpose runs and
to specially-built ports. In fact, one major
firm plans to supply the European market
from a million-ton tank farm on the Atlantic
Coast of Ireland, since it considers the North
Sea and the English Channel to be too shallow
for these Japanese dinosaurs to enter.
Sweden: technique
Sweden, like Japan, has been a pioneer
in developing ship construction techniques.
As evidence of this, the U. S. recently nego
tiated for license rights on a number of Swed
ish patents after U. S. Navy Secretary Nitze
investigated the mechanized yard at Arendal,
Sweden.
The Arendal yard can produce a 70,000ton tanker in twelve weeks’ time with only 40
percent of the manhours required by the same
firm’s nearby conventional shipyard. The new
yard emphasizes prefabrication, but this of
course is now a standard technique. What is
unique is the use of a small work force with
very advanced equipment, operating under
cover along a straight production line.
The final stage of an Arendal launching
typifies the new style. The ship emerges from
a covered dry-dock in sections. Hydraulic
jacks push the stern into the open, and hy
draulic doors close around the inner-end of
the completed section; the next section is then
assembled and joined to the first by a fastmoving welding machine, and so on. The ship
is fitted-out with wiring, plumbing, and en
gines as it emerges into the open part of the
dry-dock, the completed ship is then floated
in the dry-dock— not launched down ways
— and is then readied for sea trials within
another week.
U. S.: fast deployment
The Navy has not only turned to the Swedes
for advanced techniques, but it has also enlist
ed the aid of several technically oriented aero
space firms in developing a large fleet of high
speed transports— FD L’s, or Fast Deploy
ment Logistic Ships. It has awarded three
study contracts to aerospace firms to encour
age the spin-off of technologically advanced
techniques into the field of shipbuilding, and
FEDERAL RESERVE B A N K OF S A N
FRANCISCO
S h ip b u ild in g e m p lo y m e n t increases under pressure of reconversion work
. . . East Coast dominates industry because of construction cost advantage
N u m b e r of S h i p s B u i lt
A v e ra g e C ost Per S h ip |$ M illio n s )
T h o u s a n d s of E m p l o y e e s
i---------- 1---------- 1---------- 1—
Steel
Other
M aterial
E ast Coast
/
Labor
West Coast
/
J
Overhead
on the basis of these studies, it plans to award
a $1-billion contract this June for up to thirty
ships for delivery in the 1970-72 period.
The FD L program would be linked direct
ly to the C5A program as part of the Defense
Department’s policy of rapid logistic support
The C5A could fly troops to trouble spots any
where in the world within a matter of hours,
and the FDL could bring in ammunition, Crations, vehicles, tanks, and artillery within a
very short time. (Since trouble spots do not
always provide port facilities, each ship would
carry two helicopters, barges, and deck cranes
for unloading.) An FDL could cover the dis
tance between San Francisco and Saigon in
eight days travel—half the time required by
older ships and three days less than required
by modern ships now under construction.
The FDL program envisages the construc
tion of the first new and automated private
shipyard since World War II. It should in
crease the standardization of ships and in
crease the modernization of shipyards. In the
$ 150-million, 5000-worker shipyard now
planned, work would be performed as it is
on an aircraft production line— with the use
of numerically controlled machines, compu
ter control for inventory movement, and auto
mated welding techniques. In sum, the pro
gram envisages the application of total sys
tems planning, aerospace style, to ship con
struction.
U. S.: modernization
In another development, the Navy has
awarded the largest blocks of ship procure
ment contracts since World War II, in the
form of a $250-million contract for 17 land
ing ships and another $250-million contract
for 20 destroyer escorts. The technological ad
vances achieved through this and the FDL
program should help U. S. shipyards catch up
with foreign shipyards— for example, in the
greater automation of steel handling (the most
costly item in cargo-ship construction), the
increased use of building docks rather than
slip ways for more concurrent outfitting, and
the prefabrication of increasingly large ship
sections.
In yet another development, several Fed
eral agencies have recently advanced plans
for the construction of three or four more nu
clear merchant ships. The earlier resistance to
nuclear-powered ships has declined as the
technological advantages of such construction
have become more apparent, and also as the
cost differential in favor of non-nuclear ships
January 1967
MONTHLY REVIEW
has declined from 50 percent to roughly 20
percent. In fact, the operator of the first
American nuclear merchant ship, the SS Sa
vannah, is so impressed with its capabilities
that it has submitted applications to the Mari
time Administration for three more nuclear
ships for its foreign trade routes.
In other ways too, the U. S. maritime in
dustry has shown its recognition of the need
to expand and modernize. For one example,
the average general cargo ship today has onefourth greater cargo capacity than the early
postwar model. Moreover, major innovations
have included the introduction of high-capac
ity specialized bulk carriers, the introduction
of automated ship-control equipment, and
the increased use of standardized cargo con
tainers.
The 1,000 giant ships now sailing— 30knot ships in the 30-150,000 ton category—
today carry one-half of the world’s bulk cargo,
and each such ship requires no more crew
than is needed aboard an old-style 11,000ton Liberty ship or 16,000-ton T2 tanker.
Advances in the construction of mammoth
ships are more obvious than advances in ship
automation and containerization, but the cost
advantages from operating and loading tech
niques are now increasingly evident to mari
time industry leaders.
Yet with all these advances, the high costs
and long delivery delays of American ship
yards have helped prevent the development
today of an up-to-date merchant fleet. Thus,
in the Vietnam crisis, the Government has
been forced to eke out its needs by taking
some ships off their regular trade routes, by
chartering foreign-flag ships, and by taking
World War II ships out of mothballs. U. S.
shipyards have played only a small role in this
crisis— apart from their reconversion work
—since they are geared to produce only a rela
tively few vessels every year, and are able
to do this only because the Government pays
more than half of each ship’s construction cost
so as to equalize the differential between U. S.
and foreign yards.
H ow much su b sid y?
The construction differential subsidy is in
tended to aid shipbuilding by absorbing the
excess of the U. S. construction cost over the
cost of comparable construction in foreign
shipyards. Payment is authorized under the
terms of the Merchant Marine Act of 1936
— a pathbreaking piece of legislation for the
nation’s shipbuilders as well as the nation’s
shipowners.
Under the act, the Government and the
ship operator contract with a U. S. shipyard,
with the Government paying the construction
differential (and so-called national-defense
allowances) and the operator paying the bal
ance of the domestic construction costs. The
shipping line, in other words, pays what it
would cost to obtain a similar ship from a lowcost foreign yard. In the postwar period over
$600 million has been paid out for subsidy
payments on over 125 new ships plus a small
amount of reconversion.
The law as recently extended sets a 55-percent maximum on the construction differen
tial subsidy. (Through 1959, the statutory
limit was 50 percent.) Subsidy rates in recent
years have been consistently in the 50-55-percent range, and Government subsidy pay
ments have increased 20 percent since the be
ginning of the present ship-construction pro
gram in 1958.
As a reflection of the growing differential
between U. S. and foreign costs, an uptrend
in subsidy rates has become evident since the
beginning of the current construction pro
gram. In 1957 several bids implied subsidy
requirements of about 45 percent, but in the
1958-62 period subsidy rates were near 50
percent. Finally, this past spring, four new
shipbuilding bids implied subsidy rates of 5657 percent—which of course exceed the stat
utory ceiling.
FEDERAL RE S E RVE B A N K OF S A N
W h y subsidy?
The subsidy program came under sharp
attack in the report submitted by the Inter
agency Maritime Task Force in late 1965.
This Administration report noted that U. S.
yards have no competition, due to the legal
requirement that ship operators must buy in
this country in order to obtain operating sub
sidies. Thus, there is no realistic option to
build abroad for ships of U. S. registry, and
the expansion or replacement of the U. S.
merchant fleet must be carried out at U. S.
shipyards at double the price available else
where.
The task force noted that annual subsidy
payments amount to roughly $120 million for
ship construction and $32 million for ship re
pair— roughly five percent of total Govern
ment spending on shipyards— but it also noted
that payments are limited to only about five
of the twenty surviving private shipyards.
And with a 57-percent subsidy rate, the Gov
ernment would be forced to spend 57 cents
in this country in order to conserve 43 cents
in foreign exchange— “a high price for this
conservation.”
The task force thus proposed that the con
struction subsidy be restructured to improve
industry competition, and also to establish a
realistic ship purchaser’s option to build
abroad as an incentive to increased shipyard
productivity. The proposed program would
simply relate the amount of construction sub
sidy to the national requirement for shipyard
capacity. In the Task Force’s words, “Do
mestic shipping is the only mode of domestic
transportation required to purchase its equip
ment solely in the U. S.; we see American do
mestic airlines with British aircraft and rail
roads and truck operators with German equip
ment. This market advantage is denied to the
water carrier on the basis of a law passed in
1817 to develop shipyard capacity.”
The proposed program, like the current
program, envisions the continuation of ship
yard employment of about 150,000 and con
FRANCISCO
S u b sid y p a y m e n ts required to permit
U. S. yards to compete with foreigners
P er c en t
struction of about 21 merchant ships each
year for the next several decades. Unlike the
current program, however, the proposed pro
gram envisions a 10-percent expansion in
tonnage (instead of a 20-percent decline)
through the construction of more giant ships.
And, with an improvement in U. S. ships, it
expects U. S. shipping to hold its 9-percent
share of U. S. foreign trade, instead of drop
ping to 3 percent as it might otherwise do.
Defense Secretary McNamara previewed
the Task Force recommendation in testimony
before a House committee in early 1962. In
his words, “From a purely military point of
view the reserve fleet, plus vessels in service,
plus the construction program previously out
lined, appear adequate to our needs . . . I do
not wish to overstate the military requirement,
thereby providing an umbrella under which a
huge ship construction program for the mer
chant marine can be justified.”
Secretary McNamara reiterated this view
in early 1966. Whether the shipping require
ments arising out of the present crisis in Viet
nam will yet modify his view is a question
which 1967 may answer.
TTT.„.
„ ,
— William Burke
January 1967
MONTHLY REVIEW
V F C R P - 6 7 Model
The Government’s voluntary credit-restraint program will be continued in 1967,
in an effort to move toward international payments equilibrium “as fast as the con
tinued substantial costs of Vietnam will permit.” According to the revised program
announced in mid-December, the Commerce Department will tighten the formula
governing the overseas flows of corporate direct investment, and the Federal Reserve
Board will retain the 1966 ceilings on outstanding bank loans to foreigners but will
simplify the rules governing loans to foreigners by nonbank financial institutions.
The new guidelines for bank lending to foreigners are substantially the same as
last year’s rules. Banks are requested to limit the amount of such loans outstanding
to 109 percent of the roughly $9 billion outstanding on 31 December 1964— the
same ceiling and dollar base as in 1966.
Commercial banks as a group were about 13 percent under their ceiling at the
end of September, so they will have some leeway for loan expansion during 1967.
However, the Federal Reserve Board requested that they use up that margin at an
even pace throughout late 1966 and 1967. In addition, the Board asked banks to
use no more than 10 percent of their leeway in making loans not directly related to
the financing of either U. S. exports or the developing countries’ credit needs. At
the same time, the Board afforded special consideration to banks with foreign credits
of $10 million or less, so as to encourage their export financing efforts.
In the 1967 program, the three guidelines used last year for nonbank financial
institutions, such as insurance companies and private pension funds, will be replaced
by a single guide permitting a 5-percent increase in foreign credits and investments
by year-end. But certain types of assets previously subject to ceilings—for example,
bonds of the International Bank and the Inter-American Development Bank— may
be excluded under the revised guidelines.
In its 1967 program, the Commerce Department set revised investment targets
for the foreign subsidiaries and affiliates of U. S. firms. Corporations were asked to
limit their capital transactions for 1966 and 1967 to no more than 20 percent above
the average annual rate of spending (capital outflows plus reinvested earnings) re
corded in the 1962-64 period. This ruling may restrict the outflows of some firms,
since the guidelines issued a year ago permitted an increase of 35 percent, instead of
20 percent, for 1966 capital outflows.
The voluntary credit-restraint program has played an important part in improving
the U. S. international payments position since its initiation in February 1965.
Between the near-crisis period of fourth-quarter 1964 and the first three quarters
of 1966, outflows for direct investment remained close to a $3.2-billion annual rate,
but outflows in the form of portfolio investment and short-term credits dropped
sharply from a $5.6-billion to a $0.5-billion annual rate. Much of the 1966 improve
ment, however, can be attributed to general monetary conditions rather than to the
workings of the VFCR program.
FEDERAL RE S E RVE B A N K OF S A N
FRANCISCO
Up on the Farm
I
a s t year was the second straight year of
j abundant prosperity for the nation’s
farmers. Their net income during 1966 ex
ceeded $16 billion— fully one-fourth more
than it was two short years ago. Production
costs continued advancing, as usual, but net
income jumped sharply as a consequence of
an increased volume of marketings and an un
expectedly large increase in farm prices.
This performance may be difficult to repeat
in 1967, according to latest Agriculture De
partment reports. Production expenses again
are expected to advance. Gross receipts may
not rise, however; direct government pay
ments should drop, and receipts from market
ings should rise only modestly (despite a con
tinued gain in output) because of some easing
in farm prices which hitherto have been sharp
ly rising.
Western upsurge
Western farmers recorded a substantial
gain in 1966, to about $1.7 billion in net in
come, but their expenditures remained high
and their net income increased at only half
the national pace. Over the year, growers
recorded a 2-percent gain in crop marketings
as against a 6-percent gain elsewhere, but
stockmen, like their counterparts elsewhere,
posted a sharp 15-percent increase in receipts.
Western farmers failed to match the na
tional pace partly because they accounted for
only a small share of 1966’s most profitable
products and partly because they encountered
narrowing profit margins in certain Western
specialties. Hogs and soybeans, the strongest
pillars of the national farm prosperity, are
only minor sources of income for Western
farmers. Moreover, net returns from Western
cattle-feeding operations have failed to grow
as fast as gross receipts; the rising costs of
feed grains and the rising costs of cattle enter
ing feedlots are the major factors in this cost
squeeze. In addition, the West’s important cot
ton crop has suffered from reduced acreage,
lower yields, and lower market prices, and
these factors have been only partially off
set by rising government payments.
The income situation of Western farmers
continues to be beset by rising costs. Between
1961 and 1965, the last year for which de
tailed data are available, costs increased 20
percent in the West as against only 13 per
cent elsewhere, as a consequence of sharp rises
for such items as pesticides, debt interest and
taxes. Labor costs, which are more than twice
as important in Western operating budgets
than they are in other regions, increased 10
percent in this period in the West while drop
ping elsewhere.
N ew era daw ning
Nonetheless, the demands for farm prod
ucts nationwide have grown by enough to
more than offset these rising costs, and the
prospects for further increases in demand are
bright indeed. The post-Korean period of su
perabundant supply is coming to a close, and
a new era is now dawning, characterized by a
supply that is merely abundant and a world
wide demand that is accelerating rapidly.
C ash receipts e x p a n d , as livestock
boom sparks farm prosperity
January 1967
MONTHLY REVIEW
In the early post-Korean period, agricul
tural policy emphasized the control of farm
output and the expansion of foreign markets.
In 1954, Congress authorized acreage allot
ments and marketing quotas for most crops in
order to forestall an inventory buildup, and
at the same time it passed Public Law 480 in
a major effort to move surplus stocks into for
eign markets through foreign-currency sales.
For instance, the crop restriction program,
along with a sharp rise in exports, was re
sponsible for reducing U. S. cotton inventories
by 4 million bales in 1966.
Now, a decade later, the concern is not
about burdensome stocks but rather about ade
quate supplies to meet foreign and domestic
demand. Demand here at home has risen along
with population and income; demand abroad
has skyrocketed because of gains in purchas
ing power in some countries, major crop fail
ures in other countries, and sharp gains in
population everywhere. As a result, the U. S.
crop acreage harvested for export (including
feed for livestock) has jumped from 37 to 78
million acres between 1954 and 1965, and
one-fourth of the nation’s total crop output
has moved into export trade channels.
These basic demand factors have created
favorable conditions for the regional as well
as the national industry. The overall trend of
demand for Western products— cotton, wheat,
livestock, fruit, and vegetables— should be
strong in 1967 and thereafter well into the
foreseeable future.
Improvement in cotton?
Cotton, the District’s largest cash crop,
should fare better in 1967 by virtue of higher
output from higher yields, despite the con
tinuation of recent restrictions on acreage.
Efficient California and Arizona farmers,
unlike their counterparts elsewhere, relied
very little last year on the government pay
ments offered for taking more than the min
imum required acreage out of production. Out
of their total allotted acreage, cotton farmers
W e ste rn fa rm e rs re giste r g a in
in net income, despite rising expenses
elsewhere planted only 60 percent, whereas
Arizona farmers planted 77 percent and Cali
fornia farmers 85 percent of total allotments.
However, Western producers suffered from in
sect and weather damage as well as from re
strictions on the practice of skip-row planting.
With roughly the same acreage as before
and with more normal growing conditions,
Western cotton farmers expect to increase
their output in 1967. They also anticipate a
gain in marketing receipts; the price-support
loan level will be reduced but the market price
should be about the same as in 1966. More
over, government payments also may rise
since they are geared generally to the (rising)
trend of farm expenditures.
Scarcity in wheat?
Wheat, the major crop of the Pacific North
west, will be faced with the almost unknown
problem of scarcity rather than surplus. This
development is a consequence of the success
ful efforts of the past decade to limit produc
tion increases through acreage restrictions, to
channel commercial and government ship
ments into the export trade, and to encourage
the domestic use of wheat as animal feed.
Thus, between the 1961 and the 1967 crop
years, U. S. wheat inventories have declined
from 1.4 to 0.4 billion bushels.
FEDERAL RESERVE B A N K OF
In early 1966 it became evident that addi
tional supplies were needed to meet export
and domestic requirements. Thus, acreage
allotments for the 1967 crop were raised in
May and again in August, by almost one-third
overall, to 5.7 million acres in the District
and to 62.5 million acres elsewhere.
For the 1967 crop, moreover, farmers will
be permitted to plant all of their allotted acre
age instead of diverting one-eighth of the
acreage from wheat into soil-conservation use.
The new program retains the $1.25-per-bushel price-support loan level.
Livestock still boom ing?
The nation’s livestock producers hope to
match their extremely favorable 1966 record
in 1967. In 1966, marketing receipts soared
because of increased marketings and substan
tially higher prices. In 1967, prices are expect
ed to be lower than last year—although still
high by historical standards— and total re
ceipts thus may not rise so sharply as they did
in the preceding year or two.
Nationally, some increase in milk output is
expected after the recent sharp decline, since
milk producers should respond to the rising
trend of milk prices and to the decreasing at
tractiveness of a shift into meat production.
SAN
FRANCISCO
Increased production is also expected in pork,
poultry, and eggs. However, beef production
may decline as the marketing of cows is held
down in order to build up cattle herds. If so,
a supply problem may develop for Western
feedlot operators, since they rely heavily on
sources outside the District for cattle to be
fattened in feedlots.
Fruit-vegetable outlook
Western fruit producers will be hard put to
match their bumper 1966 crop. In the season
just past, Northwest orchards rebounded
sharply from their freeze damage of the pre
ceding year, and in California the cling-peach
crop was heavier and pears were much more
abundant than in 1965.
A bumper citrus crop is now in prospect,
but the West— which today accounts for only
one-sixth of U. S. output— may not play much
of a role in this market. Sharp increases are
expected in Florida, which supplies over 80
percent of the total crop, and in Texas, which
has sharply increased citrus acreage in re
cent years.
Nationally, producers of processing vege
tables may encounter a heavier demand from
processors in 1967, and this should redound
to the benefit of Western producers as well.
Livestock b o n a n z a sp a rk e d by rising output and sharply rising prices
boom centered elsewhere, since livestock play larger role outside District
1957*59 = 100
TWELFTH
DISTRICT
V <g< ta b l« sFruit*-
Poultry
Cofton
OTHER
14
Food G ra i n s
January 1967
MONTHLY REVIEW
The inventory of canned and frozen vegeta
bles is no larger than a year ago, despite sharp
increases in production last year.
Food as culprit
The recent and future shifts in the farm
sector may not appear crucial to the business
outlook; after all, the farm sector alone ac
counts for only 4 percent of GNP. However,
the recent sharp rise in farm and food prices
has affected family budgets everywhere—and
in a very visible manner— and thus has given
rise to pressures to obtain greater-than-guidelines wage boosts in forthcoming labor nego
tiations. In this respect, the farm sector may
play a major role in the 1967 business situa
tion.
Over the past 1Vi years, the food compo
nent of the consumer price index has risen over
8 percent— twice as much as the increase for
all other items (including sharply rising serv
ice prices). In the same period, while the industrial-commodity component of the whole
sale price index was gradually rising, farm
and food prices shot up 12 percent before
tapering off this past summer and fall. The
controversy over these increases became so
sharp that when Agriculture Secretary Free
man suggested that farm prices would shortly
decline, he was roundly criticized by farmers
everywhere.
Yet, despite this, Secretary Freeman was
eventually proven correct about the course of
consumer meat prices. These have dropped
about 2 percent since last spring, after rising
17 percent in the preceding twelve-month
period. But other components have continued
to put pressure on the consumer’s food budget;
after rising moderately in 1965 and early
1966, bakery prices thereafter have risen 5
percent and dairy products have jumped 8
percent.
Farmers contend, as they have for some
time, that rising marketing costs are the cul
prit in the food price increase. Between 1951
and 1965, when the farm value of the food
Farm value of food budget rises,
but not as sharply as marketing bill
B illio n s of D o lla r s
market basket was rising from $20.5 billion
to $25.5 billion, marketing costs (labor, trans
portation, and other processing and selling
costs) jumped from $29 billion to $52 bil
lion and thereby sharply boosted the final
price to consumers.
Superabundance to abundance
In any case, farmers and consumers alike
are moving into a new era—from a period of
superabundance calling for supply manage
ment to a period of simple abundance calling
for supply expansion to meet sharply rising
worldwide demand. The market for U. S.
products has been rising in this decade by
about 2Vi percent annually, after growing
only sluggishly during the preceding decade.
Thus, fully 4 percent of the food and fiber
consumed last year has come out of the stocks
accumulated from previous surpluses, and the
one-sixth of the nation’s farmland taken out
of production since 1950 looks increasingly
attractive as a production resource.
All in all, the future is bright for the re
gional as well as the national industry. The
sharp increases in income of the recent past
may not be repeated, but the continued
strength of demand seems assured for the
foreseeable future.
— Donald Snodgrass
FEDERAL RESERVE B A N K OF S A N
FRANCISCO
Western Digest
Banking Developments
Bank credit expanded by $207 million at District weekly reporting banks during
November. The November increase— which followed two months of contraction in
credit— was about evenly divided between loans and investments. . . . Business bor
rowing was the major factor contributing to the loan increase; mortage loans and
consumer loans both registered small declines for the month. An expansion in
Treasury security holdings accounted for the increase in investments, since holdings
of short-term municipals sharply declined during the month. . . . Weekly reporting
banks recorded an increase in demand deposits adjusted in November, but this was
more than offset by a sharp reduction in U. S. Government demand deposits. Total
time and savings deposits also declined. District banks paid out a record amount of
Christmas Club accounts, and these withdrawals substantially exceeded a seasonal
increase in state-local government time deposits.
Employment and Unemployment
Nonfarm employment dipped slightly in California and Washington during No
vember, mostly because of declines in construction and some manufacturing indus
tries. Over the month, nonfarm jobs dropped from 6.18 to 6.16 million in California,
and from 1.03 to 1.02 million in Washington. . . . Aerospace activity remained high
in these states, as employment rose slightly to 556,000 in California and 95,000 in
Washington. At those levels, California employs one-eighth more aerospace workers
than a year ago, and Washington employs fully one-half more. . . . Unemployment
(seasonally adjusted) dropped to 4.9 percent in California in November. Both re
gionally and nationally, joblessness dropped back to last spring’s level after drifting
upward during the summer and early fall months. But the national rate, at 3.7 percent
in November, remained substantially below the California rate.
Construction Activity
Construction activity was briefly spurred in November by the start of two par
ticularly large projects— a water tunnel in Los Angeles County and an office building
in San Francisco—but the one-month gain could not be interpreted as a reversal
of the downward trend of recent months. The non-housing sectors of the construction
industry have continued to post respectable gains over year-ago levels, but not enough
to offset the housing slump. Residential awards were off 28 percent in the District,
and 12 percent elsewhere, between the first eleven months of 1965 and the compara
ble period of 1 9 6 6 ... . This year, reductions in awards for heavy construction are ex
pected in the light of the Administration’s recent cut in allotments for the Federal high
way program. In fiscal 1967, District state allotments will be reduced 18Vi percent
($137 m illion)... . Housing’s satellite, the lumber industry, showed improvement in
November, as increases of $1 to $3 per thousand-board-feet were posted for various
categories of lumber. Declining production and a temporary rise in orders accounted
for the modest price advance at Northwest mills, but no real improvement in con
sumer demand was evident, in view of the continued weakness in the residential con
struction sector.
@FedFRASER