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TWELFTH FEDERAL RESERVE DISTRICT FEDERAL RESERVE BANK OF SAN F R A N C I S C O Credit Demand Lusty in 1957 ............. 66 imercial Bank Financing of Intermediate-term Farm Investments 71 CREDIT DEMAND money and capital markets have remained relatively tight so far this year even though the rate of growth in over-all business activity has slowed down. This situation appears to pre sent something of a paradox, since it might seem reasonable to conclude that a slowing down in the rate of growth of business activity would probably be accompanied by some easing in credit conditions as well. Some light on this seeming paradox is cast by the more detailed ex amination which this article undertakes. T h e The relatively small amount of borrowing in total consumer and mortgage credit categories and in other types of bank loans has been rather widely discussed and publicized. Perhaps not quite so generally realized is the fact that the demand for funds by the United States Treasury and the raising of new capital by corporations and state and local governments have been of unusually large size, particularly in the first quarter. O wing entirely to the demand in these latter two categories, the total amount of loans in the first quarter in all five of the categories named was approximately $1.7 billion larger this year than last. Although the total demand seemed to m oder ate in the second quarter as a whole, both the money and capital markets remained under pres sure and interest rates in both markets rose rather sharply in the second half of M ay and early June. The rise in short-term rates reflected in part the effect of the Treasury’s having to raise $1.5 billion in new cash late in May. M ar ket reports indicated that long-term rates on both Federal and other types of securities rose primarily from pressure originating in the cor porate and municipal securities market. A l though the volume of new issues sold in April and M ay was below the level of the first quarter, the prospects of continued large demand in the capital market have contributed to the recent in creases in rates. A brief review of each of the principal types of demand for funds will provide a better under standing of the particular factors that have been 66 lu sty in 1957 responsible for the large over-all demand that has existed this year. Treasury and Capital M arket Borrowings Up Treasury's first-quarter requirements unusually large Because of the concentration of tax receipts in the first quarter of the calendar year, the Treasury typically is able to reduce its outstand ing debt considerably from the peak that de velops toward the end of the fourth quarter each year. Largely as a consequence of a rather rapid rise in defense expenditures in the early months of this year, the Treasury was able to reduce its gross debt outstanding by only $1.6 billion dur ing the first quarter, in contrast with a decrease of $4.5 billion in the corresponding period of 1956. In other words, this year holders of G ov ernment securities received $2.9 billion less in cash from redemptions, thereby limiting the funds which they had available from this source for new investment. In addition, there were changes in the composition of debt ownership, resulting from the cashing in of Savings Bonds, the demands for dollar exchange of the Interna tional Monetary Fund, and the demand for cash by holders of maturing securities which forced the Treasury to raise additional funds in the short-term money market. In both relative and absolute terms this was a large change from last year. Funds raised in capital market set first-quarter record The $5.2 billion of new capital raised through the sale of securities of corporations and of state and local governments during the first three months of this year was the largest quarterly volume on record and $1.5 billion larger than a year ago. Corporate securities accounted for $3.5 billion of the total, which was an all-time quarterly high and two-thirds more than in the corresponding period of 1956. This record vol ume no doubt reflects the higher level of ex penditures this year upon plant and equipment, June 1957 MONTHLY REVIEW which typically require considerable financing through the capital market. Such expenditures were estimated to be at a record high of nearly $37 billion (seasonally adjusted annual rate) in the first quarter of this year, which is $4 billion larger than in the corresponding period a year ago. Manufacturing companies accounted for over one-third of all corporate offerings in the first quarter, and their volume of $1.3 billion was twice that of a year ago. Nearly all groups of manufacturing industries shared in this marked increase in security sales, with the primary met als and the petroleum and petroleum refining groups having the largest percentage increases. The textile industry was the only group in the manufacturing sector that had a significant de cline in security sales from a year ago. Electric, gas, and water utilities accounted for nearly another third of the corporate security sales in the first quarter, with a total volume of $1 billion. Communication companies were third in importance with net proceeds amounting to $432 million. The financial and real estate category was the only m ajor industrial group which had a de cline in security sales from the first quarter of a year ago, with most of the decrease reflecting smaller offerings by sales and consumer finance companies. Their smaller need for funds this year stems from the first-quarter decline of $45 million in their outstanding instalment credit compared with an increase of $166 million last year. A lower level of residential construction this year has no doubt contributed to the smaller demand for capital funds by real estate firms. The $1.7 billion of municipal securities sold in the first ,quarter of this year was $260 million more than a year ago and the largest amount since the fourth quarter of 1955. These sales re flect the continuing growth in state and local spending as the public need for community facili ties of all types expands. The need for schools, highways, sanitary facilities, and many other types of public construction is so pressing that there is little opposition to proceeding with such programs. This is affirmed by the voter approval of $2.6 billion in municipal issues throughout the nation last November, the largest amount on record for a general election. These facts indi cate that municipal securities are likely to be of fered in substantial volume for many months to come. Other Demands for Funds Less This Year All the other m ajor categories of demand for funds as indicated by the volume of loans showed reductions in the first quarter from a year ago, but the declines only partly offset the $4.4 billion increase arising from the Treasury’s needs and the sales of corporate and municipal securities. S/ovver growth in mortgage loans Total real estate mortgages outstanding in creased $2.6 billion during the first quarter, which was substantially less than the growth in the same quarter in 1955 or 1956 and $750 mil lion below the increase during the fourth quar ter of last year. The trend in housing starts on a seasonally adjusted basis has been generally downward since the spring of 1955, although there has been some increase since March 1957. Because of the important role played by F H A and V A loans with their fixed contractual inter est rates, the mortgage market has been some what more adversely affected by the change in credit conditions than have those security and loan markets in which interest rates may respond more readily to changing demand and supply conditions. Greater decline in consumer credit outstanding Total consumer credit outstanding typically declines in the early part of the year as charge accounts are reduced from their Christmas sea son peak, and some reduction in that portion of consumer credit used to finance instalment pur chases often occurs as well. Total consumer credit outstanding dropped $1.4 billion in the first quarter of this year compared with $900 million a year ago. Contributing to the drop this year was a decline of $300 million in instalment credit in contrast to an increase of $100 million last year. Part of this latter difference was at tributable to a somewhat smaller proportion of credit sales to total sales of automobiles this year. W hile total extensions of consumer instalment credit were high in the first quarter of this year, repayments were also high as a consequence of 67 FEDERAL RESERVE BANK O F S A N F R A N C I S C O the large increases in consumer credit during the last two or more years. Bank loans decline during first quarter Bank loans, excluding real estate and con sumer loans which were included in those broad categories already discussed, declined $600 mil lion in the first quarter of this year compared with an increase of $700 million a year ago. M ost of the difference between the two periods was accounted for by commercial and industrial loans. Their increase of $1.3 billion in the first quarter of last year was exceptionally large and exceeded the growth in the corresponding period of this year by $900 million. Commercial and in dustrial loans frequently decline in the first quar ter of the year, and consequently the $400 mil lion increase during that period this year re flected a substantial demand for business loans even though it was much smaller than the un usually large increase of last year. The firstquarter increase in business loans was more than offset, however, by declines of $700 million in bank loans for purchasing or carrying securi ties and $400 million in miscellaneous loans. One of the important uses of bank loans to business is to finance inventories. Businessmen increased their investment in inventories (after adjustment of book values to reflect changes in physical inventories) by $4 billion in the first quarter of 1956, and a significant proportion of the large increase in bank business loans during that period was probably used to finance those larger inventories. In the first quarter of this year, by contrast, investment in inventories de clined by $1.2 billion, which was no doubt partly responsible for the much smaller expansion in business loans. Owing to seasonal factors affecting their op erations, food processors, commodity dealers, and wholesale and retail firms typically reduce their outstanding loans at banks in the first quar ter of the year. The drop of $679 million in their loans this year at a sample of banks which regu larly report larger loans by industry was more than three times as large as a year ago, but roughly only 20 percent larger than in the same period of the three years preceding 1956. Sales finance companies increased their borrowing 68 from banks during the first quarter of this year compared with a decrease a year ago. H owever, they raised considerably less new capital through security sales this year than in 1956. But the combined total of their new funds raised through security sales and bank loans was larger this year than last, even though their holdings of instal ment loans declined slightly in the first quarter of this year compared with a small increase a year ago. All other groups of classified borrow ers, except the construction industry, increased their bank borrowing during the first quarter of this year, but by smaller amounts than in 1956. Second-Q uarter Credit Dem ands S m alle r Than in 1 9 5 6 Although the total demand for funds continued to be large in April and M ay, it diminished some what and reflected, in part at least, the leveling off in business activity that has occurred. Never theless, the volume of demand for long-term funds in the first five months of this year, rela tive to the supply, was so large that it tended to build up a cumulative pressure in the capital market. In particular, the Treasury's need to raise cash by the sale of a new issue in late May created pressure in the money market. Conse quently, both short- and long-term rates rose rather sharply in the last half of M ay and the early part of June. The Treasury's financial needs In contrast with the experience in the first quarter, the Treasury’s demand for funds in April and M ay was smaller than it had been a year ago. During those two months the total gross debt of the Treasury increased $400 mil lion in 1956 and $200 million this year. If special issues held by Government investment accounts are excluded, then the demand was $300 million less this year, which means that the demand on the money market was smaller by that amount this year. This view of the matter does not, however, highlight the truly significant difference in the Treasury’s position this year and last during the period from late March through May. The much higher rate of redemption of Savings Bonds this year compared with last, coupled with a rather June 1957 MONTHLY REVIEW rapid rise in defense expenditures so far this year, has required the Treasury to resort more often to the sale of public marketable issues to maintain its cash balance. During March, April, and May last year the Treasury did not have to sell marketable issues to raise new cash. This year the situation has been quite different. Late in March $3.4 billion of new issues were sold for cash, and $1.5 billion more were sold in late M ay.1 M oreover, on the refunding of more than $4 billion of issues in the early part of May, the holders of more than a fourth of the total de manded cash, which was an extremely high at trition rate. These factors forced the Treasury to make sales of marketable securities to raise new cash and placed much more pressure on the money market than occurred a year ago, even though the over-all debt position of the Treasury resulted in a somewhat curtailed need for funds compared with April and M ay of last year. Smaller increase in consumer instalment credit and bank loans The $259 million increase in consumer instal ment credit during April (latest data available) was less than that in the same month of 1955 and 1956. It was, however, $219 million larger than the increase in March of this year. The growth from March to April was concentrated in auto mobile paper and personal loans. Total consumer credit increased $512 million during April, which was the first monthly gain this year and was $51 million larger than the growth in April last year. However, the greater growth this year was concentrated in charge accounts and no doubt reflects the fact that Easter came on April 1 last year and April 21 this year. Bank loans and sales of corporate and mu nicipal securities in April and M ay behaved in a manner similar to that in the first quarter, that is, the growth in bank loans was less and the sale of securities was greater than in the correspond ing period of 1956. The $300 million expansion in total loans of commercial banks during April was only half as large as the increase a year ago. In the four weeks ending M ay 29, total loans of weekly reporting member banks dropped $698 1 Furthermore, as this article goes to press, the Treasury has just an nounced a new issue of $3 billion of Tax Anticipation Bills to be sold at the end of June. million compared with a decline of $53 million in the corresponding period of 1956. Business loans accounted for roughly half the decline in May of this year and loans on securities contributed most of the remainder. The $369 million decline in business loans was about $100 million larger than a year ago, and loans on securities increased last year. During April and M ay the growth in bank loans to wholesale and retail concerns, con struction firms, metal and metal products pro ducers, public utility and transportation firms, and sales finance companies was considerably less than a year ago, while petroleum, coal, and chemical producers borrowed substantially more. Second-quarter security sales estimated to be below first-quarter volume The volume of corporate securities sold in April and May to raise new capital was consid erably below the $3.5 billion first-quarter level, which is the largest quarter on record. However, it is estimated that sales in June will rise sub stantially to $1.4 billion and produce a quarterly total of $3.1 billion, which exceeds the sales in any quarter of 1955 and 1956. Municipal secu rity sales reached their peak so far this year in April when $750 million were sold. Although es timated sales of $425 million in June will be the lowest monthly volume in the first half of the year, if realized they will bring a quarterly total nearly as large as the $1,750 million sold in the first quarter of this year, which was the largest volume since the last quarter of 1955. If the estimates for corporate and municipal security sales in June are realized, then the de mand for funds from the capital market in the second quarter will total $4.8 billion, which is $400 million less than in the first quarter but $400 million more than in the second quarter of 1956. Data for total real estate mortgages outstand ing are available only quarterly, but it is a cer tainty that the growth in the second quarter of this year will be less than a year ago and may be less than the $2.6 billion increase in the first quarter of this year. Changes in the volume of mortgages outstanding tend to lag behind changes in housing starts. H ousing starts in the first four months of this year were significantly 69 FEDERAL RESERVE BA NK OF S A N F R A N C I S C O below the level of the closing months of 1956. Therefore, it is likely that the volume of mort gages outstanding will grow more slowly in the second than in the first quarter of this year. This brief review indicates that the over-all demand for funds, although larger in the first quarter of this year than in the same period last year, was probably somewhat smaller in the sec ond quarter of 1957 than in the second quarter of 1956. Yields on short- and long-term securities have risen sharply M arket reports indicate that the pressure of corporate and municipal security offerings upon the supply of funds became particularly notice able beginning with the second half of May. Con sequently, yields rose rather sharply during that period. These developments also spread to the market for long-term Government securities. In addition, the Treasury’s need for funds late in M ay contributed significantly to pressures in the short-term money market. The market yield on 90-day Treasury bills rose above 3.25 percent in late M ay and early June, whereas it had been below 3 percent in the first half of May. The new issue of Treasury bills dated June 6 carried a rate of 3.374 percent, the highest since the bank ing holiday period of 1933. The rate on the suc ceeding issue dropped to 3.256 percent, then jumped to 3.404 percent the following week. The yield on Government securities in the 3-5 year bracket was about 3.64 percent in early June compared with about 3.5 percent in the first half of May. Reserve position of banks tighter in second quarter O wing to the effect of seasonal factors, the reserve position of banks was easier in the first than in the second quarter of this year. The return flow of currency after the holiday season typically adds to bank reserves in the early part of each year. Required reserves also generally decline as deposits drop off following the yearend peak. The Federal Reserve System usually attempts to offset a considerable part of the effect of these seasonal factors through sale of securi ties in the open market so that the reserve posi 70 tion of banks will not be unduly easy in that one portion of the year. The offsetting effects this year, particularly in January, were less than a year ago, largely because the return flow of cur rency and the decline in deposits was greater than had been anticipated. Member banks had free reserves in January, that is, their excess re serves were larger than their borrowings from Federal Reserve Banks. In February, the reserve position shifted to one of net borrowed reserves, which means that member bank borrowing ex ceeded excess reserves, thereby restoring the type of reserve situation that had prevailed since August 1955. Net borrowed reserves increased further in March. The various pressures in the money and cap ital markets kept the reserve position of member banks fairly tight during April, May, and early June. During this period member bank borrow ing from Federal Reserve Banks exceeded the excess reserves of member banks by amounts ranging from a high of about $700 million on a weekly average basis to a low of about $300 mil lion, with the average for the entire period lying a little below the $500 million level. The Federal Reserve System confined its open market opera tions during this period to relatively small amounts, sometimes adding to reserves and sometimes diminishing them in an effort to sta bilize bank reserves without otherwise influenc ing money markets. In summary, the magnitude of the demand for funds so far this year seems to provide more convincing evidence of the continued strength of inflationary pressures than do various other indicators of over-all economic activity, such as trends in employment and industrial production. M oreover, the diminished demand for bank loans, real estate mortgages, and consumer credit may have tended to divert attention from the increased needs of the Treasury and the larger sales of corporate and municipal securities. A l though the total demand for funds was some what smaller in April and M ay than it had been during the first quarter, there was increased pressure upon the available supply in late May June 1957 MONTHLY REVIEW and early June and interest rates rose sharply as a consequence. The greater evidence of infla tionary pressures in the financial markets than in the markets for goods and services suggests that somewhat closer attention than usual to the diverse trends in the financial markets may be rewarding at present in short-range forecasting for the economy. Commercial Bank Financing of Intermediate-term Farm Investments intermediate-term loans important to the x\_ bankers and the farmers of the Twelfth Dis trict? They are, if number of loans is any cri terion. Although they are small in average amount, there were over 111 ,000 of these loans outstanding at Twelfth District banks in mid1956, and the outstanding balances totalled $213 million. F or the purposes of this article, intermediateterm farm credit may be defined on the basis of the m ajor purpose for which the loan was made. The words “ intermediate-term farm credit” sug gest a period of time or a maturity period, and we might also define the term as including all farm credit with a maturity period in excess of one year, except credit to purchase farm real estate. Practically all of the farm credit ex tended by commercial banks in the intermediate maturity zone (approximately one to five years maturity) is included, however, in loans made for the following purposes: the purchase of ma chinery, consumer durables, and livestock (other than feeder livestock), and the improvement of land and buildings. These are the purposes, therefore, used as the criteria for classifying intermediate-term farm credit in this article. ar e The common denominator of such loans is that the items purchased have a useful life of several years. Indeed, one of the problems associated with the financing of intermediate-term invest ments is that of permitting the borrower a repay ment period that is related to the useful life of the investment. Loans made for the purchase of machinery or consumer durables are undoubt edly familiar ideas to the readers of this article, and because the useful life of these items ex tends over a period of several years, they fall within the intermediate-term time period. Loans to finance the purchase of livestock such as milch cows, pigs, sheep, chickens, and all animals or insects which the farmer may need money to pur chase to grow for a profit, with the single excep tion of “ feeder” livestock, are also classified as intermediate term, because their useful life also extends over a period of several years. Feeder livestock, on the other hand, are those animals bought up by certain farmers in quan tity and fed grain for three to four months or longer until they are “ finished,” that is, grown and fattened to the point where, when slaugh tered, they will make acceptable steaks and roasts for the table of the meat-eating consumer. Feeder livestock loans are not included in the intermediate-term category because of their gen erally short maturities. Land can be “ improved” by grading and con touring in preparation for irrigation— a process which may cost several times the price of the un improved land. It may also need clearing of trees, rocks, or brush; sub-soiling, which sometimes involves plowing with special equipment to a depth of six feet or m ore; and, more rarely, rec lamation from the sea or tidal flats, construction of access roads, etc. It is generally considered proper that such loans should be liquidated over a period somewhat longer than “ short-term,” and yet these loans are of such a nature as not to require the longer-term mortgage financing gen erally associated with real estate security. Intermediate-term credit is not a new require ment of the American farmer. Operators of cer tain types of farms, such as dairy farms, have re lied quite heavily on intermediate-term credit. The importance of this type of credit, however, has increased with changes in agricultural pro duction techniques and the pronounced shifts in consumer preference for various agricultural products that have taken place in recent years. FEDERAL RESERVE BAN K OF S A N F R A N C I S C O Consumption of wheat per person, for instance, has been declining, and synthetic fibers have been making substantial dents in markets served al most exclusively by cotton not too many years ago. Such changes prompt some producers to shift to more profitable crops, and intermediateterm credit is often needed during the transition period. Intermediate credit is also used to finance the rising level of farm mechanization which is associated with the declining number of workers on our farms. The approximate doubling of the dollar volume of these loans held by commercial banks between 1947 and 1956 indicates the con tinuing interest of District banks in intermediateterm bank credit. This rate of growth is roughly comparable to that of bank financing for other agricultural purposes. The extent of intermediate-term financing by banks varies between sections of the country, as do the terms under which the credit is extended. This is partly a result of differences in banking practices as well as geographical differences in the rate of farm mechanization and shifts in farm production. Even within a bank’s service area the use of intermediate credit by one farmer may be quite different from that of his neighbor because o f differences in the type of farm operated. This article points out some of these differences and ventures an explanation as to why they exist. The data were obtained from the survey of com mercial bank lending to farmers conducted in mid-1956 by the Federal Reserve System. This is the third article prepared from the results of this survey in the Twelfth District.1 loans in the District among the various inter mediate-term investment purposes. The out standing balances on livestock loans averaged close to $7,000 while, at the other extreme, loans for purchase of consumer durables averaged less than $900. This wide difference results in part from the generally higher net worth of borrowers financing purchases of livestock. About 85 per cent of the number o f livestock loans were to farmers with a net worth of $10,000 or more, whereas only a little more than half of the out standing loans for purchase of consumer dur ables were made to these borrowers. In terms of number, loans for purchase of machinery accounted for more than half of the loans, followed by those for purchase of con sumer durables. The importance of machinery loans is emphasized when we realize that roughly one of every four farm loans held by District banks was made for this purpose, as indicated in Chart 1. Other types of intermediate-term loans, although less numerous than machinery loans, also accounted for a sizable portion of all farm loans held by District banks. Chart 1 INTERMEDIATE-TERM OF A L L LOANS A S A PERCENTAG F A R M L O A N S O U T S T A N Dl NG v AND D 0 L L A R AMQU| N U M B ER D OLL AR A M O U N T Intermediate-term loans small and numerous Alm ost half the farm loans held by District commercial banks in mid-1956 were for inter mediate-term investment purposes, as indicated in Chart 1. These loans, however, accounted for less than a third of the dollar volume outstand ing. Hence, the average size was considerably smaller than for other types of bank loans to farmers. A s shown in Table 1, there was considerable variation in the average outstanding balance on 1 Earlier articles in the series were: “ Twelfth District Bank Loans to Farmers,” Monthly Review (November 1956), pp. 140-146 and “ Financing of Farmers’ Current Expenses by Twelfth District Com mercial Banks,” Monthly Review (January 1957), pp. 4-10. 72 •Outstanding on June 30, 1956. * Other than feeder livestock. The average outstanding balance on notes in the Twelfth District was considerably larger than in the country as a whole for each inter mediate-term investment purpose. This reflects the greater average net worth of farm borrowers MONTHLY REVIEW June 1957 T F arm L oans H eld b y for able 1 I n t e r m e d ia t e - t e r m I n v e s t m e n t P C o m m e r c ia l B anks, T w elfth D is t r ic t a n d U urposes n it e d S tates ( outstanding: on June 30, 1956) Purpose Purchase o f m a ch in e ry .. Purchase of other livestoc Im provem ent of land and buildings .............. Purchase o f consumer durables ......................... Total .................................... f-------------------------- Twelfth District-------------------------- ^ ,----------------------------------United StatesNumber Average Amount Number Amount in millions Percent (in Percent size (in millions Percent (in Percent of total thousands) o f to tal (in dollars) o f total af dollars) of dollars) thousands) o f total 63.0 $1,440 $ 90.7 42.7% 56.8% $ 781.4 4 6.3% 722.8 54.5% 58.9 27.7 8.6 7.7 6,854 447.2 26.5 234.0 17.7 43.3 19.8 $212.7 20.4 15.3 13.8 2,837 318.6 9.3 100.0% 24.2 111.0 21.8 100.0% 821 $1,917 138.0 $1,685.2 18.9 8.2 100.0% 153.4 215.2 1,325.4 11.6 16.2 100.0% Average size (in dollars) $1,081 1,911 2,077 641 $1,271 1 Other than feeder livestock. N ote: Because of rounding, figures may not add to totals. in the District. M oreover, the agricultural loan portfolios of District banks contained a higher proportion of these loans than did those of banks in the country as a whole, reflecting the relatively large number of loans in District banks’ port folios for purchase of machinery and consumer durables. In this District almost one of every two farm loans outstanding was for intermediateterm investment purposes, compared with one of three nationally. Such items as automobiles, trucks, farm equip ment, farm improvements, and livestock may have a productive life of several years. If the use ful life of the investment item is a consideration in determining repayment periods, the maturity of notes extended by banks for such purposes should be for a longer time pei^od than current expense loans. This turns out to be the case in this District as only 35 percent of the loans for intermediate-term investment purposes were due on demand or in a period of one year or less compared with 96 percent of the loans for cur rent expense purposes. There are two ways by which the repayment period may be geared to the useful life of such investments. One method is to write the original note for longer maturity periods, and another is to renew short-term notes periodically. Longer maturities on original notes In the District the repayment periods on the original note were generally longer than in the country as a whole. Only a third of the inter mediate-term bank loans outstanding nationally had maturity periods in excess of one year, com pared with two-thirds of the loans in the District. A s indicated in Chart 2 the demand and short term notes were quite large, and so were the notes written to mature over a period of several years. The smallest notes were those written with maturities o f somewhat longer than one year. This variation was due to the compar atively heavy lending for purchase of livestock on a demand or short-term note basis. The aver age size of these loans was considerably larger than for other purposes. Loans for the purpose of improving land and buildings were also quite large, and it was this type of loan which was concentrated in the maturity periods of over two years. The maturity period of somewhat more than a year, on the other hand, was quite common for loans to purchase consumer durables, and the average size of these loans was smaller. Number of renewals small Associated with the longer maturity periods offered on intermediate-term loans, this District showed a lower level of renewals than in the country as a whole. Only 11 percent of the out standing notes in the District had been renewed compared with about 30 percent nationally. O f the renewals in the District, fewer were planned than were unplanned. This also is different from the national pattern, in which planned renewals were much more important in terms of number than the renewal of notes on an unplanned basis. The bulk of the planned renewals were written to mature in less than one year, and they were most common on loans for the purpose of pur chasing livestock. O ver a fourth of these notes were renewed on a planned basis. The practice 73 FEDERAL RESERVE BANK OF S A N F R A N C i S C O of renewing was most common for the operators of extremely large farms, with almost half of the livestock loans to these borrowers renewed on this basis. C hart 2 AVERAGE OUTSTANDING BALANCE ON I N T E R M E D I A T E - T E R M L O A N S -57 IN THE T W E L F T H D I S T R I C T , BY M A T U R I T Y AVERAGE SIZE t h o u s a n d s of d o l l a r s rity of over five years, however, were secured by real estate. There was considerable variation in the use of real estate for security depending on the pur pose of the investment. A s might be expected, it was the most usual collateral for loans made for improvement of land or buildings and was in frequently used to secure loans made for other purposes. Undoubtedly, size of loan is also re lated to the use of real estate as security. Never theless, purpose seemed to be the more important factor. Nota size and net worth of borrower correlated I __________________________ liiimii c D E F 6 MATURITY PERIOD •Outstanding on June 30, 19S6. Note: Maturity period groupings are as follows: A ) Demand; B) Under 6 months; C ) 6-12 months; D ) IS months; E ) 18 months; F ) 2 years; G ) 3 years; H ) 4-5 years; I ) Over S years. Loans with maturities not listed are classed under the nearest figure shown— for example, S-month and 7-month loans are included in “ 6 months.” The rate of unplanned renewals on machinery loans was relatively high for the very large and the very small farmers. This suggests that mech anization can progress too rapidly in some cases and that it is possible for either the very large or the very small farmer to overestimate his financial ability to meet scheduled repayments on machinery investments. Longer-term and larger notes secured by real estate A s the maturity period lengthened, there was a shift to a more permanent type of security with the use of real estate becoming increasingly com mon. F or loans with a maturity of six months or less, only about 2 percent were secured by real estate. O ver 90 percent of the notes with matu- 74 A s might be expected the larger the net worth of the borrower, the larger the size of note and also the greater the number of his notes held by the bank. It was also more common for the wealthier farmers to have loans outstanding for purposes other than intermediate-term invest ment. In general, however, those farmers who did borrow for intermediate-term investment had few loans outstanding for other purposes such as current expense. O ver 80 percent of the farmers with intermediate-term credit had no bank loans outstanding for other purposes. It is surprising that so many farm borrowers, as this survey seems to indicate, would restrict their bank bor rowing only to the intermediate type loans. Per haps loans of this type held by banks reflect to a greater extent &ie business relations between banks and merchants and dealers than between banks and farm borrowers since notes of this type were purchased heavily by banks from mer chants and dealers. The dealer, for example, is likely to sell a note to a bank other than the one that the borrower customarily deals with, in which case the bank would report no other loan to the customer. There is no offset for this pro vided in the survey. Credit variations and type of farm Three of every five farmers with outstanding loan balances in m id-1956 had at least one loan outstanding for intermediate-term investment purposes. However, Table 2 shows that there were differences in the relative importance of this credit that were associated with the type of farm operated by the borrower. These differ- June 1957 MONTHLY REVIEW ences are associated with variations in the pattern of income obtained by operators of different types of farms. F or instance, in the case of dairy farms, the flow of income from the sale of milk is quite regular throughout the year. About three-fourths of the operators of this type of farm who utilized bank credit had at least one loan outstanding for intermediate-term investment purposes. Operators of cash grain farms, on the other hand, receive the bulk of their income in a short period of time and probably have a greater need for bank financing for other purposes, particularly for operating expenses. Hence a smaller proportion of these borrowers, 52 percent, have loans outstanding for intermediate-term investment purposes. A n analysis of intermediate-term loans by tenure of borrower indicates that lending was heaviest to owner-operators of farms, with few loans to tenant farmers except those who operated cotton farms. Loans to these tenant cotton farmers accounted for 30 percent of the outstanding loan volume to all cotton farmers, compared the farm borrower. This conclusion is suggested by the net worth data, which indicate that 90 percent of the loans for which the age of the borrower was not reported also contained no information concerning the borrower’s net worth. Purchase of intermediate-term investment notes was a common practice of District banks, whereas in the nation as a whole direct loans to the farmer were more usual. This suggests that banks in the District are more active in the secondary financing of agricultural borrowers, par ticularly for the smaller loans, than banks in other areas. Presumably a large number of these ioans were for the purchase of automobiles and consumer durables. W here the loans were large, however, they were generally made direct to the farmer. In terms of the dollar volume outstanding, direct loans were more important than purchased loans, accounting for more than 60 percent of the total. ........................ ... . with less than 18 percent for tenant operators of other types of farms. The relatively large size of the loans to the tenant cotton farmers suggests that they are operators of large farms. The average interest rate on all intermediateterm investment loans in the District was 7.1 percent. This is somewhat higher than the national average rate of 6.7 percent and higher than for other types of farm loans in the District.1 Interest rates declined with increases in the orig inal size of the note both in the District and in —— lni, . ,., _ . 1 On p. 144 of the November 1956 issue of the Monthly Review, it 'Strict in eres rates Many purchased loans in a number of cases no information was obtained about the borrower. Apparently the bulk ■' of the notes had been purchased from machinery , , , , . . . • r dealers, thereby reducing the necessity for re.• , i , r i , •) j • r .■ i , portmg a great deal of detailed information about T R and e l a t io n s h ip B o r r o w in g in Type of farm Number ,------- o f borrowers--------, (in thousands) A ll Intermediatepurposes term General .................................... D airy ......................................... O ther m ajor product1__ _ M eat animals ......................... Cash g r a i n ................................ Cotton ...................................... P o u l t r y ................ ..................... N ot ascertained .................... A ll t y p e s ............................. 49.3 25.7 22.0 16.1 12.2 4.1 4.0 9.9 143.3 32.1 18.6 9,4 7.4 6.3 2.6 1.9 9.1 87.4 for the B is incorrectly stated that “ interest rates in the District averaged lower than in the country as a w hole. . . Actually, interest rates in the District averaged higher than in the country as a whole on loans secured by real estate— 5.5 per cent in the District. 5.4 percent in the nation. able 2 etw een T ype of I n t e r m e d ia t e - T T w elfth D F erm arm P urposes is t r ic t Am ount ,----------outstanding----------, (in millions of dollars) A ll Intermediatepurposes term $185.6 114.3 132.4 182.2 71.0 28.0 10.9 13.8 $738.4 ig er 1 an m nation $ 62.1 58.2 28,2 29.3 16.2 7.6 3.6 7.6 $212.7 Intermediate-term Average indebtedness investment as a per,--------- per borrower--------- * centage of indebtedness (in dollars) /--------for all purposes------ ^ A ll Intermediate- Number of Amount o f purposes term borrowers indebtedness $3,762 4,444 6,026 11,300 5,822 6,806 2,763 1,400 $5,152 $1,931 3,122 3,009 3,946 2,552 2,944 1,948 833 $2,432 65% 72 43 46 52 63 48 92 61 33% 51 21 16 23 27 33 55 29 1 Includes farms specializing in the production of such products as fruits, vegetables, nuts, etc. N ote: Because of rounding, figures may not add to totals. 75 FEDERAL RESERVE BANK O F S A N F R A N C I S C O the country as a whole. A s the average size of loan outstanding in the District was larger than that outstanding nationally, the difference be tween interest rates is often greater than is indi cated by these averages, as is shown in Chart 3. Loans to District farmers for farm improvement and to purchase consumer durables apparently were influential in narrowing this gap as interest rates on these loans declined comparatively rap idly with increase in loan size. A lso related to the narrowing of the spread in interest rates was the greater use of real estate as security. Loans secured by real estate usually carry lower interest rates than other loans and are often larger in size. Eleven percent of the intermediate-term loans in the District were secured by real estate compared with 7 percent of the notes nationally. A ll of this indicates that interest rates in the Dis trict are higher than in the nation as a whole, and, in fact, the difference is even greater than is apparent on the surface when the more minute comparisons by type and size of loan are con sidered. The use of real estate as security also influ enced the interest charges on various types of intermediate-term investment loans within the District. This again was more noticeable on the larger loans. In the case of farm improvement loans, for instance, almost two-thirds of them were secured by real estate and they tended to carry lower interest rates than loans for other purposes where the use of real estate was not as common. The difference in the ability of the various types of intermediate-term investment items to add to the income of the borrower may also be a factor affecting interest rates. In the case of farm improvement loans, for example, the income of the borrower is normally expected to increase sufficiently as a result of the invest ment to pay for it. Such loans differ considerably from most consumer durable loans in this re spect. Investment in consumer durables may be expected to generate little additional income from farming as such investments are related more directly to the personal comforts of the farm family than to the farm as a business. Interest rates on all intermediate-term invest ment loans within the District averaged higher 76 C hart 3 EF FEC TIV E IN T ER ES T RATE BY O R I G I N A L S I Z E OF NOTE TWELFTH DI STRI CT AND UNI TED S TA TE S 1 Outstanding on June 30, 1956. Note: Original size of note groupings are as follows: A ) Under $250; B) $250-499; C) $500-999; D ) $1000-1999; E ) $20004999; F ) $5000-9999; G ) $10,000-24,999; H ) $25,000-99,999; I ) $100,000 and over. than those charged on farm loans for other pur poses. A n important factor accounting for this difference is the common use of instalment re payments on intermediate-term loans with in terest charged on the original amount of the loans. This was a quite common repayment ar rangement in the District and applied to about half the notes or 27 percent of the dollar volume of loans outstanding. A s rates on these notes av eraged 9.7 percent, they account for much of the difference in interest rates on intermediate-term loans and bank loans to farmers for other pur poses. Rates on single payment intermediateterm loans average 6.1 percent and rates on other instalment loans averaged 6.2 percent as com pared with the average rate on all bank loans in the District of 6.1 percent. Conclusion N o very startling conclusions have emerged from this study of bank financing of intermedi ate-term farm credit in the Twelfth District. It was found that the banks are doing an adequate job of supplying their farm borrowers with loans June 1957 MONTHLY REVIEW for the purchase of automobiles, trucks, farm equipment and improvements, and livestock. Such loans are usually extended for longer peri ods in this District than elsewhere in the nation, and the number of renewals is consequently lower. Operators of smaller farms use inter mediate type credit more frequently and more exclusively than the wealthier owners and man agers of larger units. Tenants seldom use it, with the single exception of cotton farmers, who often manage large acreages. Use of intermediate credit also varies with type of farm, with a con centration occurring among those types which receive fairly regular income payments. Interest rates for these loans are higher in the Twelfth District than in the nation as a whole, and the leadership of the Twelfth in the practice of sec ondary financing is still handily illustrated by the figures for purchase of intermediate type obligations from dealers and merchants. 77 FEDERAL RESERVE BANK OF S A N F R A N C I S C O BUSINESS INDEXES — TWELFTH DISTRICT* (1 9 4 7 -4 9 ayerage = 1 0 0 ) Total Car Dep’ t nonagrl- Total m f’g loadings store cultural Electric em ploy em ploy (n u m sales Copper3 power ber)1 E xports m ent (value)* m ent Industrial production (physical volum e)1 Year and m onth Lum ber Petroleum3 Crude Refined C em en t Lead3 1929 1933 1939 1948 1949 1950 1951 1952 1953 1954 1955 1956 95 40 71 104 100 113 113 116 118 111 121 116 87 52 67 101 99 98 106 107 109 106 106 105 78 50 63 100 103 103 112 116 122 119 122 129 54 27 56 104 100 112 128 124 130 133 145 156 165 72 93 105 101 109 89 87 77 71 75 77 105 17 80 101 93 113 115 112 111 101 117 118 29 26 40 101 108 119 136 144 161 172 192 210 102 99 103 112 118 121 120 127 134 1956 April M ay June July August September October Novem ber Decem ber 117 119 121 120 117 112 110 111 112 105 105 105 105 105 104 104 104 103 122 129 125 132 128 136 128 135 132 160 173 161 160 171 168 163 146 139 82 74 82 75 84 78 81 79 72 140 135 135 110 123 122 127 123 123 203 211 215 212 212 209 217 216 210 1957 January February M arch A pril 108 115 115 110 102 102 101 101 131 130 132 132 120 127 140 79r 88 88r 82 125 138r 133r 134 220 211 221 ---- Retail food prices i> < W aterborne foreign trade3’ * Im ports "5 5 102 97 105 120 130 137 134 143 152 102 52 77 100 94 97 100 101 100 96 104 104 30 18 31 104 98 105 109 114 115 114 122 129 64 42 47 103 100 100 113 115 113 113 112 114 190 110 163 86 85 91 186 171 140 131 164 195 124 72 95 98 121 137 157 200 308 260 308 444 133 133 134 134 135 135 136 137 138 150 152 153 152 153 153 154 156 159 105 107 105 102 101 107 102 100 106 131 122 126 132 131 131 130 132 131 113 113 114 115 114 114 115 116 116 175 183 204 215 207 212 256 242 234 397 519 427 559 500 459 563 401 436r 139 138 138 138 160 159 159 159 105 96 100 103 131 127 133 127 116 117 116 117 237 265 421 417 .... BANKING AND CREDIT STATISTICS— TWELFTH DISTRICT (a m o u n ts in m illio n s o f d o lla r s ) M em ber bank reserves and related i terns Condition item s of all m em ber banks* Year and m onth Loans U .S. and G ov't disco u n ts securities Total Demand tim e deposits adjusted7 deposits 2,239 1,486 1,967 5,925 7,093 7,866 8,839 9,220 9,418 11,124 12,613 495 720 1,450 7,016 6,415 6,463 6,619 6.639 7,942 7,239 6,452 1,234 951 1.983 8,536 9,254 9,937 10,520 10,515 11,196 11,864 12,169 1,790 1,609 2,267 6,255 6,302 6,777 7,502 7,997 8,699 9.120 9,424 1956 M ay June July August September O ctober N ovem ber Decem ber 11,837 12,030 12,157 12,173 12,423 12,384 12,504 12,804 6,566 6,482 6,396 6,439 6,491 6,468 6,431 6,383 11,144 11,262 11,392 11,356 11,581 11,747 11,867 12,078 9,139 9,294 9,233 9,286 9,305 9,326 9,235 9,356 1957 January February March April May 12,488 12,556 12,576 12,649 12,694 6,505 6,356 6,177 6,520 6,315 11,812 11,279 11,129 11,622 11,210 9,587 9,690 9,794 9,839 9,995 1929 1933 1939 1949 1950 1951 1952 1953 1954 1955 1956 Ban k rates on short-term business loans1 Factors affecting reserves: Reserve bank credit* _ — 3.20 3.35 3.66 3.95 4.14 4.09 4.10 4.50 + + + + + + — — 4.44 + — 4.57 + + — 4.65 4.74 _ + + — — + C om m er cial10 34 2 2 13 39 21 7 14 2 38 52 0 110 192 930 -1 ,1 4 1 -1 ,5 8 2 -1 ,9 1 2 -3 ,0 7 3 -2 ,4 4 8 -2 ,6 8 5 -3 ,2 5 9 22 5 6 4 3 5 0 17 - 233 405 143 315 454 417 143 303 33 41 37 35 56 — 558 816 170 445 261 Treas ury10 Money In circu lation* Bank debits Index 31 cities3- « Reserves11 (1 9 4 7 -4 9 100)* 23 150 245 378 198 983 265 158 328 757 274 6 18 31 65 — 14 189 + + 132 39 + 30 100 + — 96 175 185 584 1,924 2,026 2,269 2,514 2,551 2,505 2,530 2,654 42 18 30 102 115 132 140 150 154 172 189 + + + + -+ + + + 217 341 240 247 466 312 209 451 + T 47 32 8 103 59 2 38 38 2,498 2,404 2,519 2,565 2,640 2,542 2,579 2,654 181 185 195 198 182 195 195 200 + + + + + 249 494 170 430 209 144 139 9 31 54 2,548 2,517 2,495 2,560 2,526 206 200 199 202 200 + + + + +1 +1 +2 +3 +2 +2 +3 __ — + — — — — + + — — — — + 1 Adjusted for seasonal variation, except where indicated. Except for department Btore statistics, all indexes are based upon data from outside sources, as follow s: lumber, California Redw ood Association and U.S. Bureau of the CensuB; petroleum, cement, copper, and lead, U.S. Bureau of M ines; electric power, Federal Power Commission; nonagricultural and manufacturing em ploym ent, U.S. Bureau of Labor Statistics and cooperating state agencies; retail food prices, U.S. Bureau of Labor Statistics; carloadings, various railroads and railroad associations; and foreign trade, U.S. Bureau of the Census. a D aily average. * N ot adjusted for seasonal variation. 1 Los Angeles, San Francisco, and Seattle indexes com bined. 6 Com m ercial cargo only, in physical volume, for Los Angeles, San Francisco, San Diego, Oregon, and W ashington customs districts; starting witb July 1950, “ spe cial category” exports are excluded because of security reasons. 8 Annual figures are as of end of year, m onthly figures as of last W ednesday in month. 7 Demand deposits, excluding interbank and U.S. G o v ’t deposits, less cash items in process of collection. M onthly data partly esti mated. * Average rates on loans made in five m ajor cities. • Changes from end of previous m onth or year. 10 M inus sign indicates flow of funds out of the District in the ease of commercial operations, and excess of receipts over disbursements in the case of Treasury operations. 11 End of year and end of month figures. u Debits to total deposits except interbank prior to 1942. D ebits to demand deposits except U.S. G overnm ent and interbank deposits from 1942. p— Preliminary. r— Revised. 78
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