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FEDERAL RESERVE BANK OF SAN FRANCISCO MONTHLY REVIEW IN T H I S I S S U E Prise Tag or the Nation's Health Liquidity and i n i lends Farmers and Their Pr®$p®ete JANUARY I 96 8 Prig© Tag the E3 Ndfi@wH § F1 © €s §#Sd . . . A larger, more affluent, and more urban-oriented population demands more medical care, and is paying more to g e t it. Liquidity and Muni lorais . . . Liquid short-term issues account fo r 25 percent o f D istrict bank municipal portfolios, as against only 17 percent elsewhere. Farmers and Their Pr@§p©e#s . . . W estern farmers look fo r higher crop and livestock production in 1968— and pray fo r higher prices. id ifw s William Suric© January 1968 MONTHLY REVIEW Price Tag On The Nation’s Health <*TT n the beginning is the end,” it’s true, X but science has done much to delay the inevitable hour for most of humankind. In the first half of this century in particular, the nation’s health measurably improved as med icine’s increased control over infectious dis eases caused a decline in the nation’s death rate from 17 to 9 per 1,000. In more recent years, with the increasing stability of the death rate, scientists have focused more on the quality of life rather than the actual length of life as the best overall measure of health. In other words, they have attempted to isolate the economic, demographic, and sociological factors that lead to concentra tions of illness in order to determine the adequacy of health manpower and physical plant for servicing the needs of the nation’s citizens. Information on the quality and quantity of health care has become increasingly avail able in recent years, beginning with the Na tional Health Survey of the mid-1950s. By now, under the impetus of Medicare and Medicaid programs, health information has reached flood stage. This material, aside from providing a profile of health conditions and resources, has also revealed areas of ineffi ciency and thus has fomented interest in mitigating the growing costs of medical and hospital care. Demand and zooming prices The national health bill tripled in dollar terms in the 1950-65 period, and thereby jumped from 4 Vi to 6 percent of GNP. Ex penditures have risen sharply in all cate gories, especially in the areas of hospital care and the construction of medical facil ities. Much of this of course has been due to higher prices, especially in the last several years. In 1966 alone the medical care price index rose over 6Vi percent, especially under the impact of zooming hospital costs; in fact, the daily service charge in hospitals has al most doubled since the start of this decade. Some of the factors involved in this up surge in medical prices are summarized in a recent health-care report requested by Presi dent Johnson. The increased demand for medical services, the relatively slow growth in the supply of physicians, rising wage costs in excess of productivity gains, and the in creased complexity of medical care generally —all have combined to create severe upward pressures on the price level. Much of the increased demand for phy sicians’ services is due simply to rising popu lation and income. The growing population has better health-insurance coverage than before and is also more affluent—an impor tant consideration since each 3-percent in crease in income tends to generate about a 1-percent increase in demand for physicians’ services. Demand is also increased by a shift 3 FEDERAL RESERVE BANK HI S. health spending accelerates and takes larger share of GNP Billions of Dollars in population structure in favor of those groups which are most likely to be found sitting in doctors’ offices—women, city dwel lers, and educated people. 4 Cost of Western health The West, being proportionally more af fluent, more educated, and more urbanoriented than the rest of the country, conse quently pays proportionally more for health care. According to a recent Labor Depart ment study of urban family budgets, the “average” American family of four paid $468 (5.1 percent) of its $9,190 budget for medical care in 1966, but the “average” Western family paid considerably more. The typical Los Angeles family spent 34 percent more than the national average of $468, and expenses in San Diego, San Francisco, and Seattle were 24 percent, 18 percent, and 6 percent, respectively, above the national fig ure. The medical-care budget measured here includes the family’s share for premiums for group hospitalization and surgical insurance plus out-of-pocket expenses for other medical services and supplies. The higher cost of Western medicine is not exactly new; the regional and national price indexes have risen roughly in tandem OF SAN FRANCISCO since the beginning of this decade. In mid1967 the national cost for medical care was 36 percent above the 1957-59 base, while the San Francisco and Los Angeles figures were 38 percent and 32 percent, respectively, above their base-period levels. Hospitals: focal point The nation’s hospitals are at the center of much of the controversy over the cost and quality of the nation’s health. The emphasis is quite understandable, since each general hospital provides a focal point for community health efforts, a training ground for health personnel, and a center for medical research. In 1873, when the first count was taken, there were only 178 hospitals in the nation, and many of these were nothing but alms houses for the care of the indigent sick. To day, however, the count has reached 7,123 hospitals, of which 5,736 are non-Federal short-term general hospitals. The first burst of hospital building took place around the turn of the century, as the private fortunes amassed during the nation’s Industrial Revolution supported the con struction of facilities which made available new medical discoveries and new concepts of adequate medical care. By 1909 there were 4,359 hospitals in operation. During the Great Depression, hospital con struction practically ceased; in fact, 700 hos pitals closed their doors for lack of operating funds during that period. But the war period brought about a new awareness of health care requirements, culminating in another burst of hospital construction under the aegis of the (Hill-Burton) Hospital Survey and Construction Act of 1946. In 1965, Hill-Burton construction funds amounted to $600 million, or roughly one-third of that year’s total spending for hospital construc tion. The present decade has seen a massive upsurge in hospital building, most of which January 1968 MONTHLY REVIEW has occurred under non-Federal rather than Hill-Burton auspices. New hospital construc tion was no higher in the late 1950s than it was in the early part of that decade, but construction boomed thereafter, rising from $1.0 billion in 1960 to $1.9 billion in 1965. Over that period, non-Federal construction expenditures tripled to $1.0 billion. The Hill-Burton Act was designed initially to assist the construction—especially in rural areas—of public and non-profit hospitals as well as public health centers and related hos pital facilities. But, according to a recent evaluation survey, the emphasis now has shifted to the refurbishing of outmoded and inadequate facilities in the core cities of densely populated areas. The survey indi cated a total national need for 4.11 beds for each 1,000 population—but today only 3.79 beds are available overall and only 2.58 meet Public Health Service standards of adequacy. available for each 1,000 population, Califor nia had fewer than any other state, and other District States — Idaho, Utah, Washington, Alaska, Hawaii — were also somewhat short of beds. However, hospital occupancy rates are lower in the West than in the country as a whole; California’s rate, for example, is 72 percent as against a national figure of 76 percent. Despite the region’s difficulty in building hospitals as fast as it builds population, it has at least kept pace with the rate of con struction elsewhere. The West in 1966 ac counted for more than 17 percent of the value and 20 percent of the floor space of the nation’s new health facilities. Among other projects now in the planning or early construction stages, Phoenix has a $ 12million county hospital, Portland a $20-million medical center, Anchorage an $ 8-million hospital annex, and San Jose a massive $45million complex which includes a 175-bed Western hospitals: not enough? hospital and two medical office buildings. District states in 1965 accounted for 14.4 Hospital expenditures in the West run percent of total U.S. population but for only considerably above the national average; in 12.8 percent (94,732) of the nation’s general 1966, costs per patient day were $55.00 in hospital beds. In terms of the number of beds the West and $44.50 nationally. These costs tend to be higher because hospital stays in Western M e d ical-cere prices rise sharply, in West h o sp itals tend to be as elsewhere, under impact of zooming hospital costs shorter and more expen 1957-59 = 100 Index (Sept. 1967) 100 120 sive per patient-day, with 200 P United States heavier weighting of the more costly initial day. San Francisco 175 (The average length of hospital stay is 6.7 days in the West as against 7.8 150 days nationally.) More over, the lower occu pancy rates result in the 125 spreading of the fixed costs of hospital con Prescriptions and Drugs (U.S.) struction, maintenance, 100 1 1 1 l 1 ■1 1 1 I t i l and staffing over a fewer 1966 1962 5 FEDERAL RESERVE BANK OF SAN FRANCISCO Tomorrow’s Costs In the first paragraph of its recent report, the National Advisory Commission on Health Manpower recited some of the factors that called it into existence last year: the expectation that the health industry would become the nation’s largest employer by 1975, the fact that health costs are rising at twice the rate of other prices, the fact that the total health bill is already around $50 billion—and the “widespread discontent with the unavailability of professional health services, despite greater numbers of health workers and more medical facilities than ever before.” On the basis of recent trends, the commission estimated that hospital costs and physicians’ fees would at least double in the decade ending 1975, as against a 20percent increase in the overall consumer price index. By 1975, then, the average cost for a day of hospital care might rise from the current figure of $50 to about $100, and the nation’s total health-care expenditures consequently would jump from $50 billion to $94 billion. The commission uncovered substantial cost variations in a special study of twelve major hospitals scattered from coast to coast. Adjusted for geographical wage differentials, the cost spread ranged between $46 and $95 per day, with differences occurring in every area of hospital administration—housekeeping, food, nursing service, and so on down the list. After evaluating this and similar studies, the commission concluded that the health-care crisis is not simply one of numbers. “If additional personnel are em ployed in the present manner and within the present patterns and ‘systems’ of care, they will not avert, or even perhaps alleviate, the crisis.” Yet the commission argued that substantial improvements could be expected nationwide if a system of economic incentives or penalties were imposed to improve the levels of efficiency and quality of health-care institutions. If its suggestions are followed, the group foresees a slowdown in the rapid rate of rising costs for health services, an improvement in their quality, and a reduced need for major increases in Federal outlays. number of patient-days, with consequent higher costs. On a staff per patient-day basis, the Dis trict is ahead of the national average of 2.46 employees, with California reporting 2.65 personnel per patient-day. 6 Calling Doctor . . . The West, with 46,000 doctors (33,000 in private practice) boasts a greater concentra tion of physicians than the rest of the coun try. Four large lightly-populated states (Alaska, Idaho, Utah, Nevada) fall below the national average of 99 per 1,000 popula tion, but California (128 per 1,000) and the other four District States have a some what heavier concentration. Yet this area, like all other areas of the country, is worried about the shortage of physicians and support ing personnel, despite the rise in the nation’s doctor population from 233,000 in 1950 to 305,000 in 1965. The doctor shortage has become a subject January 1968 MONTHLY of increasing concern over the past decade, partly because of the declining trend of appli cations for medical-school admission, and partly because of the med schools’ failure to turn out graduates as fast as the patient popu lation demands. The problem is not eased by the long period of preparation required for the M.D.; on the average, a medical career requires 8 to 15 years’ preparation after high school. To remedy the situation, some medical schools have shortened their training period —for example, by eliminating some under graduate liberal-arts courses—and this year, 2 3-year-old interns may be seen staffing hos pitals in some areas. The med schools’ job of selecting students is made easier by the growing size of the age group from which applicants are drawn and by the increased financial aid available to students under the Health Professions Educational Assistance Act of 1963. These and other factors have helped to increase the number of medical-school grad uates to more than 8,000 in 1966, up some 36 percent from the 1950 level. The number should rise to 9,200 in 1975 as old medical schools expand and new schools are con structed. Moreover, the physician population should continue to benefit from the brain drain which has added so much to the Amer ican stock of professional talent in general; as early as 1960, foreign graduates accounted for 3 8 percent of staff physicians in hospitals unaffiliated with medical schools. Family doctors— and nurses The composition as well as the size of the physician population has created concern in health circles. Question: What happened to the family doctor? Answer: He became a specialist. At least the statistics so indicate, since only one out of every six were full time specialists a generation ago whereas four out of every six specialize today. But REVIEW some medical authorities claim that the pub lic would be better served if the “personal” physician (the general practitioner-pediatri cian-internist category) ministered to 75 per cent of his patients’ needs and referred only 25 percent of his cases to specialists. In other health categories — some 300 categories employing 3 million people — the concern today is not so much about future supply as about present wages and working conditions. After years of agitation over the low wages of health personnel, a break through occurred in 1966-67. Pay increases in California hospitals ranged from 10 to 36 percent, depending on category, between mid-1966 and the spring of 1967, with nurses garnering the largest gains. In San Francisco Bay Area hospitals, the average pay of a beginning staff nurse rose from $420 to $500 in July 1966, and then to $575 in April 1967. But since wages and salaries account for two-thirds of hospital costs as against two-fifths in manufacturing, these higher wages are quickly translated into larger patient bills and insurance premiums. Medicare's achievements The need to expand the supply of medical workers and to increase their productivity Hospital building boom centered in non-Federal facilities Millions of Dollars FEDERAL RESERVE BANK has been highlighted by the impact of Medi care. In the program’s first year of opera tion, 4.4 million older Americans entered hospitals and the Social Security system paid $2.5 billion for their hospital care—and over $3 billion for their combined hospital and supplementary medical insurance benefits. In the first full year of the health-insurance pro gram, 12 million people (two-thirds of those eligible) used covered medical services; 4 million of them used sufficient services to meet the $50 deductible in the last six months of 1966 and more than 5 million fell into this category in the six months ended June 1967. Utilization of the health-insurance pro gram was concentrated among the elderly aged, among women, and among Western residents. During the first six months of 1967, when this benefit first became available, extendedcare facility admissions in the West averaged 22 per 1000 (Medicare) enrollees compared with 9 elsewhere. Availability of certified beds is a determining factor in the rate of admissions to extended-care facilities. Although the Medicare program has been generally deemed successful, some difficulties are inevitable in such a vast and complex new program. Both physicians and hospital ad ministrators have encountered problems in the initial stages of the program. W est short ©f b®dsBbut high in cost, in relation to population West Percent of U.S. 0______________ 5______________ 10______________ 15 — i— i— i— i— r— i— i— i— i— i— i— i— i— i— i— | i Hospitals Beds I Admissions ZD Full-Time Personnel | Hospital Cost POPULATION l OF SAN FRANCISCO Medicare's problems Hospital administrators object to the scale of reimbursement under the program, point ing out that the average reim b u rsem en t amounts to only 92 percent of the average cost. The Medicare formula is tied to costs specifically contracted by Medicare patients, which means that all services and facilities must be apportioned by actual patient usage. In contrast, hospitals traditionally have used a simplified internal rate structure whereby patients are charged on the basis of average per diem costs. Traditionally, too, where hos pitals do utilize more precise yardsticks, such as fixed-charge to cost ratios, they normally adjust them to account for such factors as the amount of standby facilities available. Hospital administrators also argue that the present Medicare allowance (cost plus 2 per cent) is insufficient to cover replacement of facilities and the necessary costs of expan sion. Moreover, administrators of non-profit hospitals argue that they fail to get the same consideration as proprietary hospitals, which are allowed a 7 Vi -percent return on thenequity capital. And they also contend that the existence of Federal Medicare payments discourages private individuals and corpora tions from continuing their traditional sup port of hospital operations. Physicians, meanwhile, object to the need to file certificates of necessity before admit ting their patients to hospital facilities. In addition, two out of every five doctors still refuse to take assignments — that is, accept the Medicare fee schedule — which means that they charge each patient directly and force the patient to file for repayment, thus creating difficulties for some patients because of the complex system of deductibles for different types of care. But the Medicare administration has attempted to meet these criticisms by reducing the burden of pre admission hospital certification and by ex perimenting with new hospital reimburse January I960 M ONTHLY REVIEW ment procedures. Medicare already has contributed to a marked improvement in some areas of med ical care because of the standards it has set for institutions that wish to qualify for Medi care payments. (Cooperating hospitals ac count for 9816 percent of the nation’s gen eral-hospital bed capacity). Rising standards are most evident in the nursing-home cate gory, where 1,800 agencies are now certified for Medicare payments as against the 250 agencies that would have qualified only four years ago. In addition to these obvious benefits —assuring health-care protection for the elder ly and contributing to the upgrading of med ical care — the program has helped to improve the measurement of medical costs. Medicare’s incorporation of out-patient cov erage, extended care, home-health care, and physicians’ home and office services into a single comprehensive package has improved public knowledge about the expense of health care, and it should thus help the public decide about the adequacy and the reasonableness of its future health coverage. Medicaid's problems Medicare is now, in most respects, a smoothly working program. The same, how ever, cannot be said for Medicaid—the stateadministered Federal-aid program which pays the medical costs of the medically in digent of all ages. (The program was inserted as something of an afterthought into the basic Medicare legislation). In Medicaid’s first year of operation, Federal payments to New York State alone were higher than the entire amount originally budgeted for the program in the nation as a whole. And in California, 1,200 of the state’s 23,000 doc tors received average payments of $70,000 apiece for their efforts during the program’s first 16 months of operation, according to the program’s administrator. Medi-Cal, the California version of the Medicaid program, became embroiled last fall in a controversy created by the State Administration’s attempts to make sharp re ductions in program costs. At the national level, meanwhile, Congress moved to restrain the sharply rising costs of the Medicaid pro gram by limiting projected payments in 1972 to $1.7 billion instead of the $3 billion pres ently estimated. The Senate bill would reduce the Federal share of the costs of medical aid to the needy on a state-by-state basis, while the House bill would bar Federal payments for persons with earnings above a certain income level. Controversies aside, medical authorities agree that good health benefits the commun ity as well as the individual, and that the community may well be expected to share in the costs of medical care. Yet as recent developments attest, there are limitations to the costs that the community can bear on behalf of medical attention. If costs continue to rise at their recent pace, health care may eventually absorb as much as 15 percent of the nation’s total resources as against the present 6 percent of GNP. One way or an other, the bill will be paid if the public so decides, but it will undoubtedly insist on maximum efficiency of health care in return for its agreement to meet that bill. Joan Walsh Publication Staff: R. Mansfield, Chartist; Phoebe Fisher, Editorial Assistant. Single and group subscriptions to the M onthly Review are available on request from the Admin istrative Service Department, Federal Reserve Bank of San Francisco, 400 Sansome Street, San Francisco, California 94120 FEDERAL RESERVE BANK OF SAN FRANCISCO Liquidity and SViuns Bonds n the last few years the composition of bank security portfolios has undergone a radical change. While banks have reduced the heavy over-hang of U.S. Government se curities accumulated during World War II, they have meanwhile increased their invest ment in obligations of states and political subdivisions (commonly called municipals). They have acted in this fashion because mu nicipals, with their tax-exempt feature, have recently offered a relatively attractive after tax rate of return in comparison with yields on those other securities in which banks are permitted to invest. Information on the maturity distribution of the municipal segment of bank portfolios has become more important as such holdings have increased. But, while data on the ma turity distribution of U.S. Government se curities have been available for more than a decade, detailed information on municipal holdings was not gathered (either nationally or regionally) until the mid-1967 Call Re port of Condition. In light of the sharp de cline in municipal bond prices in the latter half of the year, data from this survey are timely as a measure of the extent to which banks may be “locked-in” to long-term issues. I 10 One-half of the total As of June 30, 1967, Twelfth District member banks held $6.6 billion in state and local obligations. These issues accounted for 51 percent of District-bank security port folios on that date, as against 44 percent for member banks elsewhere — and as against only 20 percent in the District a decade ago. In every District state, municipals made up one-third or more of member banks’ invest ment in securities on the call date. (Arizona data include Twelfth District banks only.) Large banks, however, showed the strongest interest in such tax-exempt issues. The small est size-group of banks (those with under $2 million in deposits) had less than 3 per cent of their investments in municipals, while the largest deposit-size group ($275 million and over) had 53 percent in such holdings. In fact, over 90 percent of all municipals were held by this large-bank group. Most of the municipals held by District banks on the call date were for their own investment account. Only a small volume— 4.5 percent of the total—was held by the banks as dealers or underwriters. Banks in only four of the nine District states reported dealer-held municipals, but these banks were in the larger deposit-size groups ($50 million and over). However, the single observation date may understate the actual amount of dealer and underwriting activities, since the volume of securities held by banks for this purpose fluctuates widely, dependent upon the timing of flotations of state and local issues. Most liquid issues Municipals held for banks’ own invest ment account were reported under two major categories: (1) warrants and short-term bills with original maturity of one year or less, and (2) all other obligations, segregated into five maturity categories measured from the date of the June Call. The composition of bank holdings varied widely by deposit size MEMBER BANK HOLDINGS OF STATE-LOCAL GOVERNMENT OBLIGATIONS ___________________June 30. 1967 ______________ Dollar Amount Percent of Rank State (thouands) Total Securities 1 California 5,191,438 53 2 Washington 490,293 48 3 Oregon 349,918 46 4 Utah 175,475 54 5 Arizona 170,828 41 6 Idaho 104,241 43 7 Nevada 84,446 38 8 Hawaii 57,967 46 9 Alaska 30,143 36 Twelfth District 6,654,749 51 Source: F e d e ra l Reserve B an k of San Francisco— Schedule J, “ Sup plem ental In fo rm atio n on O bligations of S ta te s and P o litic a l Sub d iv isio n s," Call R eport of Ju n e 30, 1967, MONTHLY January 1968 REVIEW W e s te rn banks held m ore short-term municipals than other banks . . . largest banks account for bulk of holdings— and for bulk of liquid issues OTHER U.S. DAri>anf TWELFTH f* r cen’ DISTRICT 0 TWELFTH DISTRICT TOTAL TWELFTH DISTRICT BANKS BY DEPOSIT SIZE -Maturing a fte r 20 Years- - 1 0 - 2 0 Years - 75 5-10 Years ' " ifi^ ' 50 25 -O therMaturing within One Year —Warrants and BiIIs — __ 4 Million Dollars = 100% and by geographic location. For all District banks, warrants and short-term bills made up 15 percent of total municipal holdings, as against a 9-percent figure for banks else where. However, the District figure was heavily weighted by the relatively high ratio (16 percent) of short-term issues held by the largest banks ($275 million and over in deposits). Short-term issues constituted from 0 to 6 percent of the municipals held by the other deposit-size groups. Geographic diversity was also noticeable in the survey data. One sparsely populated state, Alaska, had the highest percentage of warrants and bills in its municipal portfolio (24 percent), while another relatively small state, Hawaii, held no short-term issues. Some of the diversity can be attributed to differences in the volume and timing of issues among the states and their local subdivisions. Here again, the one-day observation date may distort somewhat the extent to which District banks invest in short-term taxexempt issues. According to the broadest measure of liquidity—the total of warrants and short term bills plus other municipals maturing within one year—District banks were in good shape on the call date, since short-term ma turities then accounted for 25 percent of their municipal portfolios. The comparable figure for member banks elsewhere was only 17 percent. In each deposit-size category, the larger the ratio of municipals to total securities, the higher was the percentage of short-term maturities held. The smallest deposit-size group, with less than 3 percent of its securi ties in state-local issues, had no short-term obligations. But the largest bank group, with 53 percent of all its securities in tax-exempt issues, had 26 percent of such issues matur ing within one year. Those District banks which have invested most heavily in statelocal obligations thus are also the banks most concerned with maintaining a high degree of liquidity in their municipal holdings. Banks in six of the nine District states held 20 to 30 percent of their total municipals in short-term maturities. The remaining states (Nevada, Oregon and Washington) held 12 to 18 percent of their total holdings in short term issues. Least liquid issues For all District member banks, municipal obligations were distributed among the 1-5 FEDERAL RESERVE BANK year, 5-10 year, and 10-20 year maturity categories on a roughly equal basis, with one-fifth to one-fourth of the total in each category. The pattern of equal distribution prevailed generally for banks in most of the deposit-size groups, the major exception be ing the smallest size group, which held 12 percent of its municipals in obligations ma turing in 1-5 years and the remainder in 5-10 year maturities. Banks in most District states also followed the general District pattern. Notable exceptions were Alaska, with a heavier weighting in 5-10 year maturities; Hawaii, with a higher percentage of 10-20 year obligations; and Utah, with a higher proportion of intermediate-term issues. Only the largest banks invested any ap preciable amount in municipals with matur ities of over 20 years, but their holdings were sufficiently large to bring the District average to 7.5 percent of total municipals. All other OF SAN FRANCISCO deposit-size groups held less than 3 percent in such long-term issues. However, banks in four states had 5 percent or more of their total obligations in over 20-year maturities. As of that single point of time, then, Twelfth District member banks managed their investment in state-local obligations with careful consideration for their liquidity requirements. Indeed, the contrast with other areas was striking, in view of the 25-percent (as against 17-percent) concentration in short-term issues. Thus, this rapidly growing segment of banks’ investment holdings can be seen as furnishing needed liquidity to supple ment that provided by bank-held short-term U.S. Governments. In addition, the break down reveals a structuring of municipal hold ings to provide an orderly distribution among intermediate and longer-term maturities. Ruth Wilson Reserve Requirements 1 2 The Federal Reserve Board raised reserve requirements on member-bank de mand deposits by about $550 million in late December, in an attempt to curb inflationary pressures and to bolster the international position of the dollar. The addition to required reserves will bring a corresponding decrease in the funds that banks might otherwise use for lending or investing in securities. The Board’s action, which takes effect in two stages this month, will lift the reserves required against each member bank’s demand deposits (in excess of $5 million) from 16 Vi to 17 percent for reserve city banks and from 12 to 12Vi percent for other member banks. This is the first such increase since September 1966, when the reserves required against time deposits (other than savings) in excess of $5 million were raised from 5 to 6 per cent. Moreover, it is the first increase in reserve requirements on demand deposits since November 1960, when requirements on banks other than reserve city banks were raised from 11 to 12 percent, as a partial offset to the reserves re sulting from the permission to count vault cash as reserves. Twelfth District banks should account for about 14 percent of the total esti mated increase in member-bank reserve requirements. This is slightly greater than the District banks’ share of net demand deposits nationwide. In contrast, District banks accounted for 20 percent of the September 1966 increase in reserves required against time deposits, reflecting the relatively high proportion of time deposits held by District banks. January 1968 MONTHLY REVIEW Farmers and their Prospects he U.S. Department of Agriculture re laxed earlier restrictions on output dur ing 1967, and production responded with a 5-percent gain for the year. But despite this rise in output, led by a 16-percent rise in food grains and a 12-percent gain in feed grains, cash receipts of the nation’s farmers declined as government payments fell and as prices weakened in response to the in creased output. Since production expendi tures meanwhile continued to advance, net farm income fell somewhat below the pre vious year’s level. Little, if any, improvement in farm income is anticipated by the Department of Agricul ture in 1968. Farm output may show little change, but some shifts may occur in the composition of output. Following the recent sharp gain in grain production, acreage allot ments for the 1968 wheat crop have been reduced and the acreage-diversion program for feed grains has been restored to the 1966 level. However, this reduced output of grain crops may be offset in part by a heavier cotton crop. The livestock sector, on the other hand, may record a modest increase in output, partly because lower feed-grain prices should stimulate the output of enterprises feeding livestock and poultry. At the same time, some increase in livestock prices may de velop. Given a modest gain in output and mar ketings and some improvement in prices, the gross flow of cash to farmers should rise dur ing the year. Moreover, given a modification of the Federal grain program, direct govern ment payments should expand. But the con tinuing advance in production expenses may offset most, if not all, of the increase in gross income, and thus may hold net farm income close to the 1967 level. T Western farming: '67 Western farmers, like their counterparts elsewhere, suffered some easing in net income during 1967; preliminary data point to a drop of perhaps 5 percent in Twelfth District net income. Meanwhile, cash receipts and total output showed little change, despite drastic changes in the output of individual products. Unfavorable growing conditions plagued farmers more than usual in 1967. Cool and damp weather during the spring of the year delayed plantings of many crops and dam aged the deciduous fruit crop extensively, particularly in California. In addition, un favorable growing conditions and insect damage sharply reduced the prospects for the District’s important cotton crop. But unfavorable weather for some crops proved almost ideal for others: the cool, damp weather improved barley and wheat yields significantly, and the delayed arrival of cold weather in the fall permitted harvest of the late-planted processing tomato crop. IMcifi®iil3 fa rm e rs s u ffe r s decline in cash receipts 1955 I9 60 1965 13 FEDERAL RESERVE BANK Prices weaken as output rises in both crop and livestock sectors 1957-59 = 100 Diverse production changes also occurred in the livestock sector of the farm economy. Marketings of cattle from District feedlots were considerably below the year-earlier level, primarily as a result of fewer sales by California feedlot operators. In contrast, poultry and egg production was substantially higher—hatchings of both broiler chicks and turkey poults were above the 1966 figures— and milk supplies were also more abundant. 14 Government granary Government payments, although less im portant in the Twelfth District’s farm econ omy than elsewhere, must be considered in assessing farm-income prospects. Cash re ceipts from Western farm marketings rose from $4.8 billion to $6.5 billion between the late 1950’s and 1966, but this rise was com pletely offset by advancing production expen ditures. Yet net income rose by about $250 million—just about the same as the increase in government payments. Several changes in 1968 government pro grams may boost payments to farmers sub stantially, with most of the gains nationally going to producers of feed grains for divert OF SAN FRANCISCO ing acreage to acceptable soil-conservation practices. Since feed-grain sales account for only 7 percent of District marketing receipts, the change in this particular program should have only a minor impact on the direct flow of cash to District farmers. But if program participation is large enough to boost prices at the national level, it will tend to push up the costs of District farmers, as outlays for feed account for one-fifth of total production expenditures. District wheat growers mean while should receive a modest increase in payments because of the increased value of wheat marketing certificates. On the other hand, a reduction in pay ments to District cotton producers should offset the higher payments anticipated as a result of participation in the feed-grain and wheat programs. Reductions are scheduled in both the acreage to be taken out of cotton production and the payment rate for such diversion. Western cotton farmers, being efficient producers of high-quality cotton, generally do not participate as heavily in the acreage-diversion program as growers else where, but their income from the program is still quite sizeable, exceeding $100 million in 1966. W e a th e r causes severe damage to Western deciduous-fruit crops Thousands of Tons 1962 1964 1966 MONTHLY January 1968 Western farmings “68 Overall, District farmers hope to see some increase in net income in 1968, especially in view of a rising flow of gross cash receipts. With more normal growing weather, an in crease in deciduous fruit production can be expected. In addition, some rise in cotton production is indicated if pests can be ade quately controlled. Wheat production will undoubtedly decline because of a reduction in cultivated acreage but, even with that, total output of all District crops is likely to rise. Output prospects for the livestock sector are more uncertain, although abundant feed sup plies should encourage rising production of livestock and poultry-feeding enterprises. And, if farm prices improve as is generally expected, Western farmers may be able to post an increase in cash receipts. Production expenditures meanwhile should continue their inexorable advance. But the REVIEW increase should be smaller than it was in 1967, when many crops had to be replanted and unusually heavy applications of pesti cides and insecticides were required. More over, further mechanization of harvest opera tions and a more normal pattern of harvests should reduce peak labor requirements in California in 1968—in contrast to last year, when farmers attempted to import large num ber of Mexican nationals to help with harvest operations. Much of course depends on the behavior of the non-farm economy, which is not only the major market for farm products but is also a supplier of such increasingly impor tant inputs as insecticides, pesticides, and machinery and equipment. Hence, price pres sures in the non-farm economy will be of importance to agriculture insofar as they tend to boost farm production expenses and thereby reduce net income. Donald Snodgrass TWELFTH ©1STI8CT BUSINESS Condition item s of all member banks (m illions of dollars, seasonally adjusted) Year and Month 1959 1960 1961 1962 1963 1964 1965 1966 1966: Nov. Dec. 1967: Jan. F eb. M ar. Apr. May June July Aug. Sept. Oct. Nov. Loans and discounts U.S. Gov’t. securities Demand deposits adjusted Total tim e deposits 15,908 16,612 17,839 20,344 22,915 25,561 28,115 29,858 6,514 6,755 7,997 7,299 6,622 6,492 5,842 5,444 5,267 5,444 5,468 5,889 6,483 5,634 5,852 5,265 5,832 5,742 5,885 5,867 5,609 12,799 12,498 13,527 13,783 14,125 14,450 14,663 14,341 14,800 14,341 12,502 13,113 15,207 17,248 19,057 21,300 24,012 25,900 25,318 25,900 26,134 26,425 26,892 27,128 27,168 27,460 27,687 27,859 28,008 27,993 28,433 29,538 29,858 30,274 29,923 29,980 29,811 29,729 30,071 30,313 30,473 31,034 30,951 30,964 14,437 14,376 14,855 14,571 15,035 15,181 15,189 15,617 15,632 15,633 15,588 Bank Bank ra tes: debits 22 SM SA ’s short-term (billions $) business loans 501 535 618 642 634 638 644 645 654 658 681 712 719 709 728 738 5.36 5.62 5.46 5.50 5.48 5.48 5.52 6.32 6.62 6.28 6.00 5.95 5.92 Total nonfarm employment (1957-59 = 100) Industrial production (1957-59 = 100) Electric power consumption (1 9 6 3 = 1 0 0 ) 104 106 108 113 117 120 125 132 100 112 122 134 135 135 136 136 136 136 136 136 137 137 138 139 139 135 140 141 136 143 141 145 143 145 144 149 152 147 Lumber 109 98 95 98 98 107 107 103 89 97 98 96 99 102 92 93 94 94 91 98 Refined Petroleum Steel 101 104 108 111 112 115 120 123 125 120 123 119 121 124 131 131 130 134 126 133 92 102 111 100 115 130 138 140 142 141 142 135 123 137 133 133 129 129 136 144 148 15
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