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FEDER AL RESERVE BA)IK ST. HSVILLE LITTLE evie\> Volume 49 Number 7 Pause in Economic Expansion Continues P robability o f an A pp roa ch in g Upturn Mounts J.HE FIRST HALF of 1967 interrupted the upward trend of spending, production, and employment that began in 1961. This pause, however, came at an historically high level of output with a low level of unemployment, and it followed a period of intense total demand, pressures on productive capacity, and price inflation. Fiscal developments in the first half of this year were even more stimulative than in the last half of 1966, and monetary expansion was quite rapid. Such stimulative developments, unless offset by extremely high rates of private saving or sharp contractions in desired private investment, suggest an approaching re newal of last year’s excessive demands on resources and loan funds. The pause in economic expansion in early 1967 was indicated by slower growth or declines in spending, production, and employment. Despite declines in some price indexes, the general level of prices rose at an estimated 3 per cent annual rate during the first half of 1967. These recent developments contrast with previous trends. Spending and production expanded at a moderate rate from 1960 to 1964 with general price stability; the expansion then accelerated from 1964 to 1966, and prices rose sharply. Most of the recent more moderate growth in spend ing reflected higher prices. These price increases oc curred despite less intensive use of productive capac ity, and were chiefly a lagged, cost-push response to the excessive demands of last year. All prices do not rise immediately as demands increase. Some prices, such as most union wages, must wait until termination of contracts, while others are retarded by factors such as custom or public opinion. Increases in some prices, in turn, put cost-push pressures on other prices. Since the growth in spending was nearly matched by price mark-ups, output and sales of physical units ( real GN P) rose at an estimated 1 per cent rate in the first half of 1967, down sharply from a 6 per cent rate from 1964 to 1966. This measure, which is adjusted for changes in price levels, showed a slight net deTable I TOTAL SPENDING A N D 4th q tr. 1966 to 2nd q tr. 1967* Aggregate measures of spending and production in dicate a deceleration of growth in the first half of 1967 (Table I ), particularly in comparison with the rapid rates of growth from 1964 through 1966. Total spend ing measured in current dollars (nominal GNP) rose at an estimated annual rate of 4 per cent in the first half of 1967, about half the average rate for the two previous years. Page 2 4th q tr. 1966 to 1st q tr. 1967 1964 to 1966 1960 to 1964 C urre n t D ollars Total S p e nd ing (N o m in a l GNP) Total Spending Increases at a Slower Rate PRODUCTION (C om p o u nd e d A n n u a l Rates o f C hange) Final Sales (Total S p e nd ing less C hanges in Business In ventories) 3 .8 % 2 .3 % 8 .2 % 5 .8 % 8.4 8.4 7.7 5.8 2.8 2 .8 2.4 1.3 0.3 5.7 4.4 6.1 5.2 4.4 G e n e ral Price In d e x (Im p lic it Price D eflator) C onstant Dollars Total O u tp u t (Real GNP) 1.0 Final Sales 6.0 *estimate for second quarter 1967 - F in a l S a le s Total S pending Less Changes in Business Inve ntories R atio S c a l e Q u o r te rly T o ta l» a tA n n u a lR o t« $ Ratio S c a l e Bil lio ns of D o ll a r s _________________ S e a s o n a lly A d j u s t e d ___________ Bi I lio ns of D o lla rs 850 850 800 ^ 1 7 7 3 .5 7 50 750 m y 700 yy 700 650 661.0 650 +6% +6% 600 Current D jlla rs 600 ( 550 550 ------- 500 +5 7o Constant 1958 D ollars 4th q r. 4th qtr. 450 800 1 1959 1960 1961 41 1962 1 1963 J ♦ 1964 1965 r 1966 500 i * ♦.......- 450 1967 1960 to 1965. Sales at the wholesale level, which in part reflect business actions with respect to inven tories, rose slightly from February to April, but are little changed from their year-ago level. Manufactur ers’ shipments, down from their December peak, are only slightly more than a year ago. Business inventories, which have acted as a damper on total spending, may be approaching desired levels, at least in some industries. Wholesale and retail in ventories, for example, have declined since January. In contrast, manufacturers’ inventories, particularly of durable goods, have continued to rise. Much of this build-up, however, has been in work-in-process and may reflect rising new orders and production of de fense goods as well as unplanned increases in raw materials or finished goods. S o urce: U.S. D e p a rtm e n t o f C om m erce P e rce ntag es a re a n n u a l ra te s o f c h a n g e b e tw e e n p e rio d s in d ic a te d . They a re pre sen ted to a id in co m p a rin g m o stre c e n td e v e lo p m e n ts w ith p a s t" tre n d s ” ,a n d m ay no t b e r e ie v a n tfo r o th e r pu rposes. L a te st d a ta p lo tte d : 2 n d q u a r te r1 9 6 7 e s tim a te d cline from the fourth quarter to the first quarter, the first such decline in about six years. This decline was more than offset by the second quarter increase, ac cording to tentative estimates. Final Sales Strengthen, Countering Inventory Drag Attempts by businesses to reduce their inventories from undesired high levels reached in late 1966 were a chief factor contributing to the deceleration of total spending. Final sales, total spending less changes in business inventories, exhibited continued strength in the first half of 1967. This measure of economic activ ity may be a more dependable indicator of basic economic trends than total spending. These sales rose at an estimated 8 per cent rate in the first half of 1967, up from a 6 per cent rate in the last three quar ters of 1966. Part of this rise reflected price increases. Final sales, adjusted for price changes, have grown at an estimated 6 per cent annual rate since late 1966, compared with a 5.2 per cent rate during the preced ing two years. Retail sales, which primarily reflect consumer spend ing, rose at a 5 per cent rate from January to May, about twice as rapidly as in the preceding year but much more slowly than in the period from early 1965 to early 1966. Sales of nondurables increased quite steadily in recent months, while sales of durables declined. Sales to the Federal Government, as indicated by the national income accounts budget, have risen at a 20 per cent rate since the fourth quarter of last year, up from the already rapid 15 per cent increase in 1966 and the moderate 4.5 per cent average rate from Industrial Production Slows, Construction Holds Steady Largely in response to the earlier easing in sales and inventory build-ups, industrial production was weak through May. Production contracted at a 5 per cent rate from its December peak and is little changed from its level last spring. In contrast, this production rose at a 5 per cent rate from 1960 to 1964 and then accelerated to a 9 per cent rate from 1964 to 1966. The current level of industrial production thus remains relatively high. Production of durables showed the largest change, declining at a 5 per cent rate from January to May after growing at an 11 per cent rate from 1964 to 1966. The rate of new construction expenditures has re mained relatively stable since last summer. These expenditures declined markedly in the spring of 1966, after rising sharply from late 1964. The current level is about the same as in 1965 and above the average for the early 1960’s. New housing starts, which fell sharply from December 1965 to September 1966, have risen noticeably since last fall. The May 1967 figure, 1.3 million units, is the highest recorded so far this year, but remains well below the average for the early 1960’s. Personal Incom e Continues Upward, Em ploym ent Slackens The general slowdown in economic expansion in late 1966 and early 1967 has had relatively mild effects on personal income and employment. Personal income grew at a 5 per cent rate from January to May, down from an 8 per cent increase during 1966. The rate of growth in early 1967 was about the same as the average from 1960 to 1964. Page 3 Employment remained generally steady through the first five months of 1967. Payroll employment has been about unchanged since January, after increasing 4.5 per cent in the preceding twelve months. Rising employment in Government and services was almost sufficient to offset declines in manufacturing and con struction. Total civilian employment declined at a 4 per cent rate from January to May, but there was an almost compensating decline in the civilian labor force, leaving the unemployment rate almost unchanged at 3.8 per cent of the labor force in May. All Civilian Employees on Nonagricultural Payrolls E s ta b lis h m e n t D a ta , S e a s o n a lly A d ju s te d C u m u la tiv e C h a n g e s While the level of employment has been substantial ly maintained, overtime work and pay have declined. Some employers apparently tried to retain experienced workers during the slowdown in anticipation of pos sible future labor shortages. Prices Continue to Rise Most prices continued to rise in early 1967, but at slower rates than in the first half of 1966 (Table II). Consumer prices have risen at a 2 per cent rate since January, down from a 4 per cent rate in the corre sponding period last year. Prices of consumer non durables (excluding food) have risen more rapidly than prices of durables. Prices of services have con tinued to rise sharply, offsetting a reduction in food prices. Wholesale prices have been declining since late last summer, reflecting a sharp drop in some agricul tural prices and a moderation in the rate of increase in prices of industrial commodities. The general price index of the national income accounts has continued to rise at an estimated 3 per cent annual rate. 1965 19 6 6 L a te s t d a ta p lo tte d : M a y Fiscal and Monetary Policies Become More Stimulative The pause in the real growth of the economy oc curred despite expansive Government fiscal actions. The high-employment budget deepened to an esti mated $9 billion deficit (annual rate) in the first half of 1967, compared with a $2 billion deficit in the last half of 1966. These deficits contrast sharply with the average surpluses of $12.6 billion for the period 1960 through 1963 and $4.3 billion for 1964 through mid1966. The high-employment budget is based on esti mated Government receipts and expenditures at a high-employment level of income. It is designed to measure the influence of current Federal tax rates and expenditure plans on total spending. Table II CONSUMER A N D W HOLESALE PRICE INDEXES (C om pounded A n n u a l Rates o f C hange) Ja n u a ry 1967 to M a y 1967 J a n u a ry 1966 to M a y 1966 1964 to 1966 1960 to 1964 C onsum er Price In d e x A ll Items 2 .4 % 4 .4 % 2 .3 % 1.2 % A ll C om m o d itie s 1.6 4.0 1.9 0.8 2.1 5.8 3.6 1.2 4.0 2.9 1.0 0 .7 Food - C om m o d itie s Less Food D urables 3.5 1.8 - 0 .2 0.5 N on d u ra b le s 4.7 3.7 1.9 0.8 2.0 Services 3.6 5.1 3.0 Rent 1.9 1.4 1.2 1.1 Services Less Rent 3.8 5.8 3.4 2.2 0 W h o le sa le Price In d e x A ll C om m odities - A ll In d u strials 1.1 2.9 2.7 0.6 3.5 1.7 0 Farm Products - 5.5 0 5.8 - 0 .7 Processed Foods and Feeds - 5.5 0.8 4.7 0.8 Page 4 1967 S o u rce : U .S. D e p a rtm e n t o f L a b o r The national in co m e ac counts budget reached an an nual rate of deficit estimated at $12 billion in the first half of 1967, the largest deficit since the recession period of 1958. Federal Government ex penditures rose to an esti mated $160 billion annual rate in the first half of 1967, con tinuing the sharp rise since 1965. These Government ex penditures represented 20.9 per cent of total GNP in the first half of 1967, compared with 18.7 per cent in 1964. F e d e r a l Government ex penditures rose at a 17 per cent annual rate from 1965 to mid-1967. Defense spend ing rose at a 24 per cent rate, In flue n ce of F e d e r a l B u d g e t P o licy M o n e y Stock S tim u lu s or R estrain t R a ti o S c a l e B i l li o n s of D o l l a r s July'59 1959 1960 1961 1962 1963 1964 1965 1966 19 6 7 S o u rc e : F e d e ra l R eserve B a nk o f St. Louis L a te st d a ta p lo tte d : 1st q u a r te r 1967 p r e lim in a ry ; l a s t th re e q u a r te rs 1 967 e s tim a te d b y F e d e ra l ♦ 1959 Ra tio S c a l e B i ll io n s of Do n t h ly A v e ra g e s o f D a ily F ig u i S e a s o n a lly A d ju s te d June'60 ♦ 1960 1961 1962 1963 1964 1965 1966 196 7 Percentages a re a n n u a l rate s o f c h a n g e b e tw e e n p e rio d s in d ic a te d . They a re p re se n te d to a id in c o m p a rin g m ost rece nt de v e lo p m e n ts w ith p a s t" tre n d s ",a n d m ay n o t be re le v a n t fo r o th e r p u rp o se s. L a te s t d a ta p lo tte d : Jun e e s tim a te d while other Federal Government expenditures rose at a 12 per cent rate. In contrast, personal consumption plus private investment rose at a 5 per cent rate over the same period. Monetary policy has been expansionary since late last year, as evidenced by the March reductions in reserve requirements on some time deposits, the lower ing of the discount rate in April, and—most import antly—the rapid increase in Federal Reserve holdings of Government securities (Table III). By thus pro viding for an increase in the reserve base, the Federal Reserve has fostered growth in money and bank credit, thereby stimulating private spending. Since the first of the year, both the money stock and total bank credit have grown at relatively high an nual rates, 7 per cent and 12 per cent, respectively, according to current estimates. In contrast to a year Table III MONETARY A N D CREDIT AGGREGATES ago, credit has been readily available to most bor rowers. Since rapid expansions of money and credit generally have their chief effect after a few months’ lag, the stimulative monetary actions of early 1967 may be just beginning to influence the economy. Spread Widens Between Short-Term and Long-Term Interest Rates Short-term interest rates declined sharply during the fall and winter months, but have risen in recent weeks. Long-term interest rates, in contrast, have been rising since early 1967 and may have reached or surpassed their 1966 peaks. The widening of the spread between short-term and long-term interest rates in the first half of 1967 apparently reflected expectations of borrowers and lenders that interest rates in general would be higher in the future. Long-term borrowers may have taken advantage of increased availability of funds to restore their liquidity, partly because of uncertainty as to the impact of future Treasury borrowing to finance the fiscal 1968 Federal deficit. (C om pounded A n n u a l Rates o f C hange) Decem ber 1966 to June 1967* 1964 to 1966 1960 to 1964 Federal Reserve H o ld in g s o f G o ve rn m e n t Securities 18.1% 9 .7 % 7 .7 % Total Reserves 10.3 4.5 3.8 Reserves A v a ila b le fo r P rivate Dem and Deposits 6.8 2.7 1.6 M o ne y Stock 6.9 4.2 2.6 M oney Stock plus Time Deposits 12.2 8.3 7.1 Bank C re d it (D a ily A ve rag e ) 11.6 9.3 7.9 6.8 13.4 9.3 21.9 2.2 5.9 Total Loans Total Investm ents *estimate for June 1967 Individuals and Firms Rebuild Liquidity Partly in response to last year’s credit squeeze, con sumers and businesses have been increasing their li quidity. The slower growth in spending has been accom panied by a higher rate of personal saving than has occurred in recent years. Personal saving rose to 6.5 per cent of personal disposable income in the first quarter of 1967 and apparently remained above 6 per cent in the second quarter. These saving rates compare with an average rate of about 5.4 per cent from 1960 through 1965. The more rapid flow of funds to com mercial banks, savings and loan associations, and other Page 5 Interest R ates and a 12 per cent average rate from 1960 to 1965. Time deposits at mutual savings banks rose at about a 10 percent rate in early 1967, up from a 6 per cent rate in the preceding two years. Total bank credit rose at a rapid 12 per cent annual rate in the first half of 1967. Loans outstanding grew at a 7 per cent rate, while bank holdings of market able securities rose at an extremely rapid 22 per cent rate (Table III). These diverse movements may re flect some weakening in loan demand as well as the desire of banks to increase their liquidity positions from the low levels of late last summer. financial institutions since late last year may reflect, in part, the increased rate of personal saving. A year ago, financial institutions sought funds quite aggressively. Rates on certificates of deposit (C D ’s) and savings and loan shares pressed against regulatory ceilings as these institutions tried to ob tain funds to meet intense loan demands, at a time when competing investments offered higher returns. In the first half of 1967, this situation was substantially reversed. Deposits flowed into financial institutions more rapidly, enabling these institutions to increase their liquidity. Total time and savings deposits at commercial banks rose at a rapid 17 per cent rate in the first half of 1967, compared with a 10 per cent rate during the first eight months of 1966, and essentially no growth during the remainder of the year. The lack of growth in total time deposits in late 1966 reflected a substantial run-off in large negotiable C D ’s from August to early December, offset by continued growth in consumer-type time and savings deposits. The large C D ’s, which generally rep resent business rather than personal funds, rose at a 21 per cent annual rate from 1964 to 1966. Beginning in mid-December, banks were again able to attract CD funds. The amount outstanding rose to its previous peak in early February, continued to advance through early April, but has shown little net change since the April tax and dividend date. Offering rates on large negotiable certificates of deposits have remained below the Regulation Q ceiling rate since the beginning of the year, particularly for C D ’s with short maturities. There have been selected increases in recent weeks, but rates generally remain below their earlier levels. Savings and loan shares increased at an 11 per cent annual rate in the first five months of 1967, compared with an extremely low 3 per cent increase during 1966 Page 6 Corporations apparently have concentrated their efforts to acquire funds by issuing new securities rather than by borrowing from financial intermedi aries. Business loan expansion, at an 11 per cent rate in the first half of 1967, has slowed from the exception al 17 per cent rate from 1964 to 1966. The rate of growth in business loans, however, remains well above the 7.5 per cent trend rate from 1953 to 1964. Commercial paper rose at an unusually rapid 40 per cent annual rate in the first five months of 1967, sur passing the 19 per cent annual rate from 1964 to 1966. New corporate security offerings have also been ex tremely large in early 1967. Firms are apparently bor rowing more than their current needs while funds are available, in order to avoid the type of liquidity squeeze experienced last year. Some of the new long term funds have been invested temporarily in short term instruments or have been used to refinance exist ing debts. Individuals’ holdings of liquid assets have also increased rapidly, and consumers have been in creasing their new debt at a much slower pace than in the past few years. Total consumer debt increased at a 4.5 per cent annual rate from November to April, compared with an 11 per cent rate a year earlier. Summary While sluggishness in total spending and produc tion has continued in recent months, levels of output and employment remain high. The rapid rates of in crease in prices of last year have only slightly mod erated. In many respects, the recent moderation of growth in spending represents a desirable change from the over-expansionary and inflationary situation of 1965-1966. Several factors point to the possibility of renewed rapid growth in total demand later this year. Fiscal and monetary developments, which are generally thought to influence total spending after some lag, have been highly stimulative this year. Final sales continued to expand rapidly in early 1967. As the inventory ad justment is completed, growth in total spending is likely to accelerate. Savings and liquid asset holdings of individuals have increased at greater than custom ary rates. This may be a reaction to recent economic and political uncertainties, a hedging which may be terminated at any time, leading to an acceleration in personal spending. Businesses apparently have been S UBSCRIPTIONS to this bank’s proceeding more cautiously in response to relatively large inventories and the deceleration in private spending, but remain optimistic about future expan sion. Banks, in particular, are increasing their ability to meet a recurrence of last year’s surging loan de mands by acquiring larger amounts of marketable securities. R e v ie w are available to the public without charge, including bulk mailings to banks, business organizations, educational institutions, and others. For information write: Research Department, Federal Reserve Bank of St. Louis, P. O. Box 442, St. Louis, Missouri 63166. Page 7 Farm Credit Developments In the Central Mississippi Valley T J.O GAIN a better understanding of how commercial banks are meeting the changing credit demands of agriculture, the Federal Reserve System conducted a farm loan survey in mid-1966. The survey covered 159 banks in the Central Mississippi Valley and 1,607 banks in the United States.1 It was designed to obtain specific characteristics of bank loans: original and out standing amounts, maturity, interest rates, purpose, and security. Various borrower characteristics such as age, tenure, income, asset and net-worth positions, type of operation, and location with respect to the bank were also sought. Comparisons are made in the first part of this article with the findings of a similar survey conducted in 1956. The second part of the article discusses the im pact of changes in agriculture on credit demands. 1 T h e selection o f banks for inclusion was on a stratified random sampling basis. A ll data for w hich no source is given were obtained from the Federal Reserve survey. In discussing the survey data, the term "C entral Mississippi Valley” is synonom ous w ith the Eighth District. Farm Loan Survey Based on the survey, 277 thousand farm borrowers had 450 thousand loans outstanding which totaled $1.2 billion at all commercial banks in the Central Mississippi Valley in mid-1966. This was 10 per cent fewer agricultural loans than in 1956, but the dollar volume was about 2.5 times greater. Average size of farm debt to banks per borrower in the region rose about threefold during the decade. Farm borrowers at Central Mississippi Valley banks had smaller average annual sales than such bor rowers in the United States as a whole. About 55 per cent of borrowers at commercial banks in the Valley states sold less than $10,000 worth of farm products annually while only 12 per cent reported sales in ex cess of $20,000. By comparison, less than 50 per cent of such borrowers in the nation had sales below $10,000, and more than 15 per cent had sales in excess of $20,000 (Table I). In the Valley states more than one-third of bank Table I PERCENTAGE DISTRIBUTION O F BORROWERS BY TYPE OF FARM A N D GROSS SALES AT CENTRAL MISSISSIPPI VALLEY BANKS (M id-1966) Type o f Farm Gross Soles U nd e r $5,000 $5,0009,999 M e a t A n im a ls 3 .2 % 4 .4 % D a iry 0.6 1.5 $10,00019,999 $20,00039,999 $40,000 and O ver N ot Reported 2 .4 % 0 .7 % 0 .2 % 1.7 % 1.3 0.5 0.1 0.4 Total Region 12.6% 4.4 Total U nite d States 17.1% 11.2 P oultry 0.4 0.1 0.2 0.1 * 0.4 1.2 1.3 Cash G ra in 4 .0 4.4 4.1 2.0 0.8 0.6 15.9 12.8 C otton 3.0 3.9 2.8 1.5 1.7 0.8 13.7 4.7 O th e r M a jo r Products 2.9 1.4 0.2 0.1 0.1 0.3 5.0 8.9 14.9 9.5 6.2 2.2 1.5 3.8 38.1 36.1 8.0 G e n e ral 0.4 0.2 * * - 8.5 9.1 Total Region 29.4 25.4 17.2 7.1 4.4 16.5 100.0 Total U n ite d States 24.0 25.5 23.5 10.3 5.0 11.7 N o t R eported * less than 0.05 per oent Page 8 100.0 T a b le II PERCENTAGE DISTRIBUTION O F O U T S TA N D IN G LO A N A M O U N T BY TYPE O F FARM A N D GROSS SALES AT CENTRAL MISSISSIPPI VALLEY BANKS (M id-1 9 66 ) Type o f Farm Gross Soles U nder $5,000 $5,0009,999 $10,00019,999 $20,00039,999 $ 40,000 and O v e r N ot R eported Total Region Total U nite d States M e at A n im a ls 1 .8 % 4 .0 % 3 .3 % 1.5 % 1.9 % 1.0 % D a iry 0.3 1.0 2.0 1.2 0.2 P oultry 0.1 0.2 0.4 0.3 0.4 * 0.2 1.2 1.6 Cash G ra in 1.9 4.1 4.3 4.0 3.1 0.6 18.0 12.3 1 3.5% 5.1 2 7 .7 % 11.0 C otton 1.0 1.8 3.0 3.6 5.2 0.9 15.5 4.5 O th e r M a jo r Products 0.9 0.8 0.6 0.2 0.8 0.1 3.4 9.0 G eneral 6.2 6.9 8.3 3.5 36.8 28.9 0.4 0.2 ♦ 5.6 * 6.3 N o t R eported - 5.9 6.5 4.9 12.6 19.0 21.9 16.4 17.7 12.4 100.0 7.9 14.1 23.4 19.4 28.1 7 .0 Total Region Total U n ite d States 100.0 * less than 0 .0 5 per cent borrowers operate general farms, ones on which there is no single product accounting for 50 per cent of gross sales. Almost one-sixth of all such borrowers operated farms having annual sales of less than $5,000. Of the specialized types of farms operated by bank borrowers, cash grain farms are the most numerous, accounting for 16 per cent of the total. Next in order are cotton and meat animal farms, accounting for 14 and 13 per cent of the total, respectively. The distribu tion of borrowers in the United States by type of farm does not differ greatly from the Valley states, except for cotton farmers, who account for only 5 per cent of the nation’s total. Total volume of debt to banks is fairly evenly dis tributed among the size groups of Eighth District farms. For example, the largest volume of debt to banks (21.9 per cent ) was owed by farmers having gross sales of $10,000 to $19,999, while the smallest volume (12.6 per cent) was owed by farmers with gross sales of less than $5,000 (Table II). In certain specialized types of farms, however, most credit was extended to farmers in the larger size groups. More than one-half the bank credit to cotton farmers and almost half that to cash grain farmers was owed by those with cash sales in excess of $20,000 per year. Nationally, farmers with sales of less than $5,000 owed a smaller proportion of the outstanding credit than did farmers in the Eighth District. Purpose and Security Information on the purpose of loans showed that most farm credit extended by Central Mississippi Valley banks was used to purchase equipment and farm land, and for current operating and family living expenses. Each of these categories accounted for more than one-fifth of all credit extended to farmers in 1966 (Table III). Other major purposes for farm credit in cluded purchases of feeder livestock, other livestock, and improvement of land and buildings, each account ing for 6 to 7 per cent of the total. Nationally, the share of credit extended for purchas ing feeder livestock and other livestock was well above that of the region. Credit for purchasing farm equip ment and real estate, however, represented a smaller proportion of the total in the nation than in the region. Changes in major purpose of farm loans from 1956 to 1966 reflect broad adjustments in the region during the decade. Credit for current operating and family living expenses declined from 33 per cent of the total in 1956 to 28 per cent in 1966. Bank credit for farm machinery and equipment increased from 14 to 20 per cent of the total as the general uptrend in farm mechanization and automation continued. Bank credit for purchasing farm real estate rose from 20 to 22 per cent of the total as incentive for farm consolidation and enlargement contributed to the rising demand for land. Credit to consolidate or pay debts declined somewhat relative to the total during the decade. Chattel mortgages are the most common collateral for farm loans in the Central Mississippi Valley, being used for 43 per cent of all credit outstanding. Next in importance are real estate mortgages, accounting for almost 30 per cent of the total. About one-sixth of all farm credit at banks was unsecured, 5 per cent of the Page 9 total was endorsed or had a co-maker, and 4 per cent was Government guaranteed or insured. equipment, consumer durables, and improvements to land and buildings. The long-term loans, 43 months and over, were primarily for the purchase of real estate. Nationally, a somewhat larger per cent of loans was concentrated in the short-term groups than in the region. For example, 39 per cent were made to mature in seven months or less, while only 12 per cent had maturities of 43 months and over. Nationally, more than 50 per cent of all farm credit by banks was secured by chattel mortgages, while only 20 per cent was secured by farm real estate mortgages. A slightly larger proportion of bank loans to farmers was unsecured in the nation than in the Central Mississippi Valley. During the decade, maturities of bank credit to farmers lengthened significantly. The proportion of notes maturing on demand or in less than 8 months declined from 45 per cent in 1956 to 30 per cent in 1966. A larger proportion of the loans outstanding in mid-1966 matured in each of the longer periods (8 to 13 months, 14 to 42 months, and 43 months and over), than a decade earlier. This lengthening of maturities is more in line with the expected flow of returns from additional farm investments. In this respect farm credit supplies have adjusted to demands as indicated by farm capital requirements and repayment capacity. Terms The practice of making short-term loans for financ ing current expenses is quite prevalent in both the region and nation. Loans with maturities of 7 months or less accounted for 30 per cent of all bank loans to farmers in the Central Mississippi Valley in mid-1966, and those with 8-month to 13-month maturities ac counted for an additional 37 per cent (Table IV ). Loans with 14-month to 42-month maturities were made chiefly for the purchase of nonfeeder livestock, Table III PERCENTAGE DISTRIBUTION O F FARM CREDIT O U T S TA N D IN G BY PURPOSE A N D SECURITY AT CENTRAL MISSISSIPPI VALLEY BANKS (M id-1 9 66 ) M a jo r Purpose o f Loan M a jo r S ecurity Unsecured Endorsed or C o-m aker C hattel M o rtg a g e Farm Real Estate M o rtg a g e G o v e rn m e n t G u a ra ntee d o r Insured O th e r Total Region Total U nite d States 1956 Feeder livestock 2 .8 % 0 .3 % 2 .8 % 0 .6 % ♦ * O th e r livestock 2.0 0.5 3.7 0.4 - 0.6 7.2 1.1 1.3 10.3 0.8 0.3 0.3 14.1 E q u ip m e nt C urre n t o p e ra tin g a n d fa m ily liv in g expenses 6 .5 % 10.2 2.1 18.1 2.1 * 0.8 33.3 A u to o r o th e r consum er d ura b les 0.2 0.3 1.6 0.2 - * 2.3 C on so lid a te or p a y debts 0.8 0.4 1.5 4.2 - 0.2 7.1 Farm re al estate 1.0 0.4 0.3 17.3 1.3 0.1 20.4 Im p ro ve lan d a nd b u ild in g s 0.8 0.3 0.5 4.2 O th e r 0.7 0.5 0.5 1.2 19.6 6.1 39.3 31.0 Total Region 0.1 5.9 - * 0.3 3.2 1.6 2.4 100.0 1966 Feeder livestock 2 .2 % 0.1 % 3 .7 % 0 .2 % - O th e r livestock 1.0 0.1 4.8 0.5 - 0 .2 % * 6 .4 % 15.6% 6.4 10.6 E q u ip m e nt 2.0 0.9 16.1 0.7 - 0.3 20.0 14.6 1.5 27.5 28.8 C urre n t o p e ra tin g a nd fa m ily liv in g expenses 8.4 2.0 14.0 1.6 _ A u to o r o th e r consum er dura b les 0.3 0.1 2.1 0.1 - * 2.6 2.2 C on so lid a te o r p a y debts 0.3 0 .7 1.0 2.1 - 0.2 4.3 4.6 Farm re al estate 0.2 - - 19.0 2.7 - 21.9 15.2 Im p ro ve lan d and b u ild in g s 1.4 0.4 0.4 3.6 0.1 6.7 4.8 O th e r 0.8 0.3 1.2 1.3 0.8 * 0.6 4.2 3.6 Total Region 16.6 4.6 43.3 29.1 3.5 2.9 100.0 Total U n ite d States 21.4 3.3 50.7 20.2 1.5 2.8 ♦less than 0 .05 per cent. Page 10 100.0 T a b le IV PERCENTAGE DISTRIBUTION OF FARM CREDIT O U T S TA N D IN G BY M AJO R PURPOSE A N D TERM OF LO AN AT CENTRAL MISSISSIPPI VALLEY BANKS 1956 M a jo r Purpose Demand Buy n o n fe e d e r livestock, e q u ip m e n t, consumer d u ra b le s, im p ro ve land and b u ild in g s 2 .3 % Purchase fe e d e r livestock, current o p e ra tin g and fa m ily liv in g expenses 1966 1-7 M onths 8-13 M onths 14-42 M onths 43 M onths & O ver Total Region Dem and 1-7 M onths 8-13 M onths 14-42 M onths 43 M onths & O ver Total Region Total U nite d States 8 .5 % 8 .6 % 7 .6 % 2 .4 % 2 9 .4 % 2 .6 % 6 .5 % 1 1.6% 1 0.7% 4 .3 % 3 5.7 % 3 2 .2 % 0.3 39.9 3.2 11.1 1.2 33.8 44.4 4.3 21.8 12.4 1.1 C on so lid a te o r p a y o ther debts 1.0 2.2 2.1 0.5 1.4 7.2 0.6 Buy fa rm re a l estate 0.9 2.4 5.7 2.4 9 .0 20.4 1.9 O th e r purposes 0.5 1.0 0.8 0.2 0.6 3.1 0.3 A ll purposes re g io n 9.0 35.9 29.6 11.8 13.7 100.0 A ll purposes U n ite d States Interest Rates Interest charged on bank loans tended to vary with the purpose of loan and the method of repayment. In the region, average effective rates varied by purpose from a low of 6.1 per cent for real estate loans to 8.2 per cent for automobile loans.2 As a general rule, in stalment loans with interest added on or discounted have higher effective interest rates than other loans. Included in this category are a large proportion of automobile and consumer durable loans, and a some what smaller proportion of farm equipment loans. In contrast, loans for purchasing feeder cattle, other livestock, other current expenses, and real estate are generally single-payment loans or instalment loans with interest charged on the outstanding loan balance. The effective interest rate on both single-payment loans and instalment loans, with interest charged on the outstanding balance, averaged 6.4 per cent. In contrast, the effective rate for add-on instalment loans averaged 10.6 per cent, and for discounted instalment loans 12.1 per cent. Other factors which apparently influence the rate of interest charged are origin of loan, amount of original loan, and gross sales and net worth of bor rower. Among purchased notes, those which originated with merchants or dealers had the highest rate, aver aging 8.5 per cent. Those obtained from the Farmers Home Administration, which are Government guar anteed, averaged 5 per cent, the lowest of any group. 16.9 1.4 1.0 1.0 0.4 1.3 4.3 4.6 1.8 5.7 1.6 11.0 22.0 15.2 1.4 1.3 0.3 0.9 4.2 3.6 100.0 8.6 21.8 36.5 14.4 18.7 7.4 32.0 33.5 14.8 12.0 100.0 Average interest rates declined steadily with in creasing size of notes. The average rate charged on notes of less than $250 was 7.2 per cent, while the rate on notes of $100,000 and over averaged 6 per cent. Rates charged were generally lower to borrowers with high gross sales, possibly reflecting the larger average size of loans. Animal, dairy, and cash grain farmers with sales of $40,000 and over per year were charged a significantly lower average rate than those with sales of $5,000 and under. For other types of farms, which are located primarily in Kentucky and Tennessee, rates did not decline as sales per farm rose. All rates in these states probably reached the legal maximum on such loans. Interest rates charged also declined as the net worth of borrowers increased. Rates varied from an average of 6.9 per cent for those farmers with a net worth of less than $3,000 to 6.4 per cent for those with a net worth in excess of $100,000. Interest rates were even more varied by net worth of farmers under 35 years of age. The rate varied from 7.1 per cent for those with a net worth of under $3,000 to 6.1 per cent for those with a net worth in excess of $100,000. The average interest rate on bank loans to farmers in the nation was 6.7 per cent, the same as in the Central Mississippi Valley (Table V). Interest rates in both Kentucky and Tennessee were lower, while in Arkansas the average was somewhat higher. Participation Loans 2 A ll rates w ere com puted to an effective rate basis, taking into account any com pensating balance requirements, as w ell as com pounding o f interest on all instalment loans including those w ith interest charged on the outstanding balance. Participation loans originated by Central Mississippi Valley banks represented about 4 per cent of total bank loans to farmers in mid-1966. A decade earlier Page 11 capital and surplus in excess of $2 million. T a b le V AVERAGE EFFECTIVE INTEREST RATES O N AGRICULTURAL LO AN S O U TS TA N D IN G AT CENTRAL MISSISSIPPI VALLEY BANKS (June 30, 1966) Approximately 50 per cent of the amount of all participation loans originating at respondent banks were made for current operating expenses. About 25 per cent were for purchasing stock animals, 12 per cent for feeder livestock, and 10 per cent for equipment. Per Cent Arkansas 7.1 Illin o is 6.6 In d ia n a 6.6 K entucky 6.1 M ississip p i 6.6 M issouri 6.7 Tennessee 6.2 Total Region 6.7 Total U n ite d States 6.7 such loans accounted for only about 2 per cent of the farm debt held by area banks. Principal reasons for the rise in participation loans involve both the size of loan request relative to lending limits of the bank, and the large demand for additional loanable funds relative to supply in a local community. Statutory limitations, based on size of a bank’s capital account, put a ceiling on the amount that can be loaned to one individual or business. Bank capital accounts have grown about 7 per cent per year during the past decade compared with an annual increase of 13 per cent in liabilities per farm. As a result, a greater proportion of farm loan requests have probably ex ceeded individual bank lending limits, thus increasing the need for correspondent banks to take these over lines. Basic shortages in local loanable funds relative to national conditions may also develop in the relatively isolated markets typical of many rural communities. These shortages may be temporary, reflecting a season al decline in deposits coincident with peak loan de mand. On the other hand, they may be of a long-run nature, suggesting higher marginal returns to capital in a local community than in the nation. In either case, the higher interest rates necessary for equating supply and demand for funds locally should attract outside funds into the market, provided financial institu tions are available to perform this function. Loan participations are a means by which banks can meet large local demand for funds relative to supply, there by improving the nation’s allocation of capital. Most participation loans in the Central Mississippi Valley originated at small banks. Approximately threefifths of the total originated at banks having total capital and surplus of less than $200,000, while only about 10 per cent originated at banks having total 12 Digitized forPage FRASER Farm Credit Trends Reflect Changes In Agriculture The previous portion of the article was limited to reporting borrower and loan characteristics of bank lending to agriculture and was based on Federal Reserve System surveys. The remainder of the article, however, is based primarily on USD A data and de scribes changes in the structure of agriculture and the impact of these changes on credit demand in both the region and nation. The terms and quantity of farm credit demand in the Central Mississippi Valley3 and in the nation re flect major changes in the structure of agriculture. Credit availability may, in turn, have facilitated struc tural adjustments in response to new technology and market conditions. During the past decade the financial structure of agriculture in the United States changed at a rapid rate. Total assets rose from $170 billion in 1956 to $256 billion in 1966, reflecting both steadily rising land values and rising capital inputs such as machinery, equipment, and livestock. At the same time the num ber of individual farms declined. With the trend to ward larger and fewer farms, the decade experienced an even sharper increase in assets per farm. Assets per farm more than doubled during the period, increasing from $37,600 to $78,700, a rate of 7.7 per cent per year (Table V I). Total farm debt advanced at a faster rate than assets, rising from $18.7 billion to $41.5 billion during the decade. Debt per farm more than tripled, rising from $4,150 to $12,750, an annual rate of 12 per cent, and debt relative to assets increased from 11 per cent to 16 per cent. Equity per farm rose at a 7 per cent rate. The changing financial structure of agriculture is associated with an increase in size and productivity of farms, and a decline in use of farm labor. Average size of farms in the nation rose from 265 to 351 acres, 3 In this section the term “ Central Mississippi V alley” refers to the states o f Arkansas, Kentucky, Mississippi, Missouri, and Tennessee com bined. Availability o f data necessitates use o f entire states w hich results in some deviation from the defi nition o f the Central Mississippi Valley used earlier in the article. a rate of gain of 3 per cent per year during the decade. As indicated by cash receipts, output per farm dou bled, and an almost equal rate of gain was achieved in net income. Despite major gains in farm size and out put, workers per farm declined from 1.7 in 1956 to 1.6 in 1966. The number of farm workers in the nation dropped from 7.8 to 5.3 million during the past ten years, an average annual decline of 3.9 per cent. The share of the nation’s civilian labor force in agriculture declined from 12 to 7 per cent. Generally, trends in the Central Mississippi Valley were similar to those in the nation. Total farm assets rose at a rate of 4 per cent per year, while assets per farm rose at a rate of 8 per cent. Liabilities rose at a 13 per cent rate. Debt as a proportion of assets rose from 10 to 16 per cent. Changes in size, output, and use of labor per farm in Central Mississippi Valley states were generally consistent with the national trend. The increase in acreage per farm of 2.4 per cent per year in the Valley states was somewhat below the national rate, and the increase in output of 6.7 per cent per year almost equaled that of the nation. On the other hand, the 4.2 per cent per year decline in farm workers exceeded the national rate. These data, both for the nation and for the region, indicate the capacity of agriculture to make changes as technological and market forces provide incentive for such developments. However, rates of change have varied widely among the Valley states. For example, in those states with lowest average acres per farm, namely Tennessee and Kentucky, the rates of increase in acres per farm were also below average, 1.9 and 1.4 per cent per year, respectively (Table V I). By comparison, the average rate of increase was 3.2 per cent for the three other area states and 2.9 per cent for the nation as a whole. Total number of farm workers declined at annual rates of 2.2 per cent and 2.6 per cent in Kentucky and Tennessee, respectively, compared to an average rate of 5.4 per cent in the three other area states and 3.9 per cent in the nation. More important than farm size from a welfare view point, however, is farm output. Measured either in terms of cash receipts or net income per farm, Ten- T a ble VI IMPORTANT AGRICULTURAL CH ANG ES IN CENTRAL MISSISSIPPI VALLEY STATES Arkansas C entral M ississip pi V a lle y U nite d States Illin o is In d ia n a 624,000 136,000 112,000 3,251,500 - 3 .4 - 2 .5 - 2 .7 - 3 .2 108 159 221 164 351 1.4 2.4 2.2 2.0 2.9 213,000 196,000 896,000 185,000 159,000 5,2 5 9,00 0 - 3 .4 - 2 .6 - 4 .2 - 4 .0 - 4 .4 - 3 .9 43,516 56,6 97 32,041 44,673 128,293 87,131 78,662 9.2 7.1 6.7 7.8 7.2 7.2 7.7 5,437 6,214 9 ,180 5,089 7,021 15,846 11,741 12,749 11.0 14.8 10.6 12.8 12.7 10.5 11.0 11.9 31,666 37,302 47 ,5 1 7 26,951 37,652 112,446 75,391 65,913 7.0 8.5 6.5 5.8 7.1 6.8 6.7 7.0 5,438 7,218 8,713 4,271 7 ,065 20,658 12,949 13,187 5.9 8.8 5.3 5.4 6.7 6.4 5.9 7.0 2,841 3,515 3,777 1,958 3,232 7,114 4,848 4,493 6.1 6.6 5.1 2.8 5.4 7.6 6.9 6.2 K entucky M ississip p i M issouri Tennessee 140,000 104,000 157,000 145,000 - 2 .6 - 5 .8 - 2 .2 - 2 .7 124 148 210 1.9 2.9 1.6 198,000 162,000 - 2 .2 - 6 .6 37,102 7.4 N u m b e r o f Farms Total 1966 A n n u a l Rate o f C hange 1956-66 78,000 - 4 .7 % Acres p e r Farm A v e ra g e 1966 A n n u a l Rate o f C hange 1956-66 231 4 .6 % N u m b e r o f Farm W o rke rs Total 1966 A n n u a l Rate o f C hange 1956-66 127,000 - 6 .4 % Assets p e r Farm Total 1966 A n n u a l Rate o f C hange 1956-66 $59,085 9 .5 % L ia b ilitie s p e r Farm Total 1966 A n n u a l Rate o f C hange 1956-66 $10,184 16.5% E q u ity per Farm Total 1966 A n n u a l Rate o f C hange 1956-66 $48,901 8 .5 % Cash Receipts p e r Farm Total 1966 A n n u a l Rate o f C hange 1956-66 $11,656 8 .6 % N e t Incom e p e r Farm Total 1966 A n n u a l Rate o f C hange 1956-66 $4,913 7 .1 % Source'. U SDA. Assets, liabilities, and equity per farm estimated for th e individual states. Real estate and livestock assets per farm calculated from USD A data. M achinery assets apportioned on the basis o f number o f tractors per state. Other assets apportioned to the states on the basis o f net farm incom e. Non-real estate debt b y non-reporting agencies apportioned on the basis o f such debt held by the reporting agencies. Page 13 nessee was lowest in the area, Kentucky second lowest, and both well below the national average. Further more, neither state gained in farm receipts or net in come at the national rate during the past decade. Net income in Kentucky rose at the rate of 6.1 per cent, somewhat above the area rate but slightly below the 6.2 per cent rate for the nation. Tennessee, with rates of increase of 5.4 per cent in cash receipts and 2.8 per cent in net income, continued to fall further behind the area and the nation in both measures of farm produc tivity. The change in farm size and productivity was rapid in Arkansas and Mississippi in contrast to the relatively low rates of change in Tennessee and Ken tucky. The number of farm workers declined more than 6 per cent in each state, 50 per cent faster than either the area or the nation. Acres per farm in Arkansas increased more rapidly than in the nation, while Mississippi equaled the national rate of increase. Assets and liabilities per farm also rose at greater than average rates. In turn, the high growth rates of farm size and capitalization were reflected by rapid gains in productivity. Cash receipts increased 8.6 per cent an nually in Arkansas and 8.8 per cent in Mississippi, far exceeding the gain of any other Valley state and well aboVe the national average of 7 per cent. Net income growth was similarly higher in Arkansas and Mississip pi with rates of 7.1 and 6.6 per cent, respectively, compared with 6.2 per cent for the nation. The significance of these changes from the viewpoint of farm credit agencies is their impact on the terms and quantity of credit demanded. For example, real estate loans are generally in great demand in states where farm size is increasing rapidly. Larger farms usually require more expensive specialized machinery. An increase in farm size is commonly associated with machinery efficiencies, thus reducing total machinery costs per unit of output. More intensive farming on small farms is likely to require a relatively large quantity of short-term and intermediate-term credit for current operating expenses, and for purchasing livestock, machinery, and equipment. From a social viewpoint, credit may be looked upon as a catalyst which facilitates farm adjustments in response to changing market forces. If farm credit agencies are able to tap freely the loanable funds market and make loans to farmers at competitive rates, farm adjustments are likely to occur faster than in the absence of freely functioning credit agencies. The problem of how much of the nation’s stock of credit should be allocated to agriculture will likely re solve to the greatest social benefit under free markets Page 14 for loanable funds, given appropriate credit institu tions. One might expect capital to flow to the sections of the economy where returns to capital are greatest. Returns to capital in agriculture relative to returns in other sectors of the economy would thus determine the volume of credit obtained by farmers. Production resources for the individual farm are basically acquired in three ways—outright ownership, renting, or custom hiring. Those operators who prefer to expand through the ownership route can move with greater speed with the use of credit. For example, by using mortgage credit requiring a one-third down payment, an operator can purchase three times as much land as he could purchase with cash. Similarly, larger quantities of other production resources such as machinery, livestock, and fertilizer can be obtained quickly via the credit route. Commercial Banks are Major Supplier of Production Credit Commercial banks have historically been the lead ing institutional supplier of non-real estate farm credit. Prior to the Great Depression of the early 1930’s, banks were the only institutional lenders of importance in this field. By the late 1930’s, the Produc tion Credit Associations (PCA’s) and the Farmers Home Administration (F H A ) had become important suppliers of such credit. The former supplied about 13 per cent and the latter 30 per cent. Commercial banks supplied the remaining 57 per cent of the $1.5 billion non-real estate loans reported by institutional lenders. Following W orld War II, commercial banks were in a highly liquid condition and eager to acquire addi tional loans. Their holdings of non-real estate farm credit increased rapidly as demand rose, and by 1956, banks’ share of the total had increased to 76 per cent of the $4.4 billion outstanding to reporting lenders (Table V II). The share held by the PCA’s rose to 15 per cent of the total, and that held by the FHA de clined sharply to less than 10 per cent of that held by reporting lenders. During the decade ending in 1966, the total volume of farm production loans outstanding at lending insti tutions increased sharply from $4.4 billion in 1956 to $11.0 billion in 1966. Nationally, the share of farm credit held by banks declined from 76 to 70 per cent of the total. In the Central Mississippi Valley states, how ever, the banks’ proportion dropped more sharply from 72 to 57 per cent of the outstanding amount. Banks in Illinois and Indiana did somewhat better, with declines from 83 to 79 per cent, and 73 to 66 per cent, respec tively. Restrictions Have Been Harmful Table V II NO N-R EAL ESTATE DEBT HELD BY PRINCIPAL REPORTING LENDERS IN CENTRAL MISSISSIPPI VALLEY STATES Much of the decline in (1956-1966) the share of farm produc Total O u ts ta n d in g Per C ent H eld By: tion loans held by banks in (Thousands A ll O p e ra tin g P roduction C re d it Farmers Home the Central Mississippi Val o f dolla rs) B anks1 A ssociations A d m in is tra tio n ley states can probably be 1956 1966 1956 1966 1956 1966 1956 1966 tra ce d to restrictions on Arkansas $57,560 $200,555 6 6 .6 % 5 1 .3 % 11.5% 4 0 .6 % 2 1 .9 % 8 .1 % banking at the state level. Kentucky 82,000 219,130 74.6 51.6 17.8 43.3 7.6 5.1 During the decade shares M ississip pi 49,066 140,333 50.3 54.3 23.2 32.5 26.5 13.2 M issouri 173,115 71.2 377,357 79.2 12.5 23.9 8.3 4.9 held by banks in Kentucky Tennessee 67,152 198,337 7 3.7 45.3 18.9 49.7 7.4 5.0 and T e n n e ss e e dropped C entral from 75 to 52 per cent and M ississip pi V a lle y 428,893 1,135,712 72.4 57.3 15.6 36.2 12.0 74 to 45 per cent, respec 6.5 Illin o is 286,096 645,480 79.0 83.3 13.5 17.6 3.2 3.4 tively. Banks in each of In d ia n a 137,194 307,591 72.5 65.5 22.9 31.4 4.6 3.1 these two states were above U n ite d States 4,358,576 10,957,426 75.9 70.0 14.8 23.5 9.3 6.5 the area average in share of production loans held i Excluding loans guaranteed b y C om m odity Credit Corporation. in 1956, and each dropped well below the average in 1966. Both states have rel Banks Hold Smaller Proportion of Farm atively low maximum interest rate limits which are Mortgages particularly effective in the case of single-payment Commercial banks have historically held a relatively farm loans. Interest rates rose during the decade, and small proportion of outstanding farm real estate debt. by 1966 market rates generally had exceeded per In the late 1920’s, banks held about 11 per cent of missible rates on single-payment loans in these states. such debt in the nation, and by the late 1930’s their share had declined to less than 8 per cent. Following Rates charged farmers in Kentucky and Tennessee W orld War II these loans began to increase rapidly, averaged 6.1 and 6.2 per cent, respectively, in midand in 1956 such holdings had increased to 15 per cent 1966, well below the 6.7 per cent average for all area of the total. During the past decade the proportion banks and significantly lower than rates on similar declined slightly to 14 per cent. In 1966, banks in the loans in the next lowest state (Table V). It is apparent Central Mississippi Valley held a larger share of total that once market rates on farm loans reached the maxi farm real estate debt than banks in the nation. Count mum permissible rates in Kentucky and Tennessee, er to the national trend, the share held by area banks banks found more profitable opportunities in which rose from 21 to 23 per cent during the past decade to invest their funds, such as instalment and discounted (Table VIII). real estate loans. Consequently, more thorough screen State restrictions on interest rates may have also ing of farm credit requests developed. An additional hampered bank lending on real estate security in handicap probably prevailed for Tennessee banks Tennessee and Kentucky. In both states farm lending where rates paid on time deposits were limited to 4 at banks, as well as life insurance companies, declined per cent. As returns from alternative investment oppor relative to other farm lenders as generally rising inter tunities rose above this permissible maximum rate, est rates permitted higher alternative returns for funds. bank funds from this source tended to rise at a slower Most of the decline at banks and insurance companies rate. All industries, including agriculture, were ham was picked up by Federal Land Banks, which are pered by this diversion of funds from normal credit limited to farm real estate financing. supply agencies. Instead of providing low-cost credit to farmers, these limitations may have restricted the movement of credit into agriculture. They have probably been a factor in the slower rate of growth in farm size and the lower level of income per farm in these states. Summary A study of data on bank loans to farmers in the Central Mississippi Valley shows that bank credit to agriculture has responded to the changing credit de mands of the industry. The volume of credit extended Page 15 T a b le V III FARM M O R TG AG E DEBT HELD BY PRINCIPAL LENDERS IN CENTRAL MISSISSIPPI VALLEY STATES (1956-1966) Total O u ts ta n d in g (Thousands o f d o lla rs) 1956 1966 Per C ent H eld By: Federal Land Banks 1956 1966 Farmers Home A d m in is tra tio n 1956 1966 Life Insurance C om panies 1956 1966 A ll O p e ra tin g Banks 1956 1966 O th e r Lenders1 1956 1966 Arkansas $150,635 $425,449 1 0.2% 14.1« 7 .1 % 4 .6 % 4 2 .6 % 4 7 .6 % 12.6% 1 8.1 % 2 7 .5 % 15.6% K entucky 164,289 358,775 10.4 21.6 3.0 4.6 25.8 19.1 35.1 33.9 25.7 20.8 M ississip pi 184,541 388 ,71 5 17.4 18.5 11.2 9.5 28.1 38.5 12.1 20.5 31.2 13.0 M issouri 270,658 747,693 13.4 15.4 4.7 3.8 39.0 27.1 18.9 18.0 2 4.0 3 5.7 Tennessee 139,072 373,155 12.6 21.8 5.8 7.6 16.7 8.4 31.6 29.0 33.3 33.2 C entral M ississip pi V a lle y 909 ,19 5 2,293,787 13.0 17.7 6.3 5.6 31.6 28.6 21.4 22.7 27.7 25.4 Illin o is 385,566 9 6 8 ,37 7 20.2 23.0 1.1 1.1 39.1 31.5 13.8 16.9 25.8 27.5 In d ia n a 301,595 749,742 12.9 21.2 1.5 1.2 36.2 25.7 19.9 16.1 29.5 35.8 8,962,239 2 1,195,527 16.5 20.0 3.1 3.0 25.4 22.7 15.0 13.8 40.0 40.5 U n ite d States 1 Individuals and other nonreporting lenders. Source-. Agricultural Finance Review, U .S.D .A. Data as o f January 1. to farmers by banks in the area was 2.5 times greater in mid-1966 than a decade earlier. Loans for increasing the size of business and thereby the level of operating performance constituted a larger proportion of bank loans to farmers. Although seasonal credit is still quite prevalent, the average maturities have been length ened to terms more in line with the expected flow of returns from new investments. Nationally, a larger proportion of loans in 1966 were made with short-term maturities than in the region. Conversely, a smaller share of bank loans to farmers in the nation had maturities exceeding 43 months. Interest rates on bank loans to farmers averaged 6.7 per cent in both the region and the nation. Rates tend ed to vary with size of loan, purpose of loan, net worth of borrower, and origin of note. Local banks are depending more on correspondent banks than a decade earlier for assistance in meeting farm credit demands. Participation loans rose as a share of the total. Much of the gain probably reflected an increase in overlines which cannot be handled completely by the local bank because of statutory limitations and safety considerations. Changes to farmers agriculture. during the in the terms and quantity of bank credit reflect in part the changing structure of Assets and debt per farm rose sharply past decade in both the nation and the Digitized for Page FRASER 16 Central Mississippi Valley states. Average farm size and production also increased while the use of labor declined. Average rates of change did not vary greatly be tween the Central Mississippi Valley and the nation as a whole. Significant differences are found, however, among the five Valley states. Slower-than-average rates of growth in farm size occurred in Tennessee and Kentucky where the size of farms was already well below average. In contrast, greater-than-average rates of change occurred in Arkansas and Mississippi, boost ing net income per farm in Arkansas above the na tional average and that in Mississippi to about 80 per cent of the national level. Changes in the structure of agriculture have had an important impact on the terms and quantity of farm credit demanded. Credit availability may in turn have facilitated adjustments in response to new tech nology and market conditions. Commercial banks have historically been one of the leading sources of non-real estate farm credit. Their share of the total declined somewhat during the past decade. The relative decline was much greater in the Central Mississippi Valley states than in the nation. This greater decline in the area may in part reflect re strictions on banking in two states where the share held by banks declined the most. C W l if t o n il l ia m B. L u t t r e l l E. P e t t i g r e w
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