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SCME ASPECTS OF OUR AGRICULTURAL PROBLEM Remarks by Chas. N* Shepardson* Member, Board of Governors, Federal Reserve System, at luhcheon meeting of Agricultural Credit Conference, Arkansas Bankers Association, at Hotel Marion, Little Rock, Arkansas, on January IB, 1956. This country has just finished one of the most prosperous years in U s history. Gross national product, industrial production and personal in- C0111 e were all at record levels while consumer prices generally maintained an keel. ^ In spite of drought and flood in some areas, production of crops livestock was also at record levels. With bounteous production and a high lev el of consumer purchasing power, this should have been a top year for agri- cul ture. Vhi Instead, we saw agricultural commodity prices continue to decline le non-farm commodity prices rose at an offsetting rate. Pric The drop in farm es more than offset the bounteous production with the result that farm inc °me continued to decline in contrast to a material increase in non-farm in Qome. In many respects the farm picture is not too bad. 1955 As of January 1, > total farm assets were three times as large as in 1940 and total debt ^Presented only 11 per cent of total assets compared with IS.5 per cent in Net farm income for this last year was over two and one-half times the net farm income in 1940 and, due to the shrinking farm population, per capita income was approximately three times that of 1940. dually risen during the Farm land values have past year and are now about even with their post- Peak and two and one-half times their prewar level. Notwithstanding this very appreciable gain over the past 15 years, 0Ur Problem lies in the fact that agriculture has fallen steadily behind in - 2 th ® last five years and that farm commodities are now at a parity ratio of about 82 compared with a ratio of 107 in 1951. What, then, is the cause of our trouble? tv o things — Basicly, it stems from over-expanded production facilities compared to effective demand unrealistic pricing. During and immediately following the war, we had an ^normal demand for farm commodities and the American farmer responded magnifl cently i n for m G e ting that demand. New land, much of which is normally unsuited cultivation, was brought into production and, during a series of unusually crop years, it produced bountifully. The needs of the time also stimu- lated further progress in agricultural technology, and the increased productiv H y in terms of output both per acre and per man-hour have been tremendous. After the war, as other countries recovered, we found many of our foreign demands curtailed and surpluses began to accumulate. Vas This situation further aggravated by the continuation of a wartime incentive price struc- ture after the need for that incentive had disappeared. As a result, we find °Urselves with a burdensome volume of price-depressing surplus commodities. Perhaps we should consider some of the reasons for this discrepancy be tveen farm commodities and other consumer goods. itQms aVe Apparently, the demand for other than food is limited only by consumer purchasing power. the money, there is always something for which to spend it — If we bigger and Det ter houses, more household equipment and gadgets, a second or even third Car > more travel and recreation, and so on ad infinitum. is different. With food, the situ- The capacity of the human stomach is limited. Once we ©nough food for our bodily needs, we are not interested in any more regar( *less of price. Fortunately, we have little real hunger in this country. - 3 Mos to t of our people have enough food. In fact, with many of us the problem is ° much food rather than too little and the "battle of the bulge" is one of ° Ur major health problems. Consequently, the opportunity to increase domestic f °od consumption is limited to the rate of population growth. It is true, however, that many of OUT people have an inadequate pla ne of nutrition, not from the standpoint of quantity but rather from qual/e do need more health foods, especially in the form of meat, dairy and Poultry products. In this respect, increased purchasing power has improved the quality of our diet although there is still room for further improvement anci the efforts of meat, dairy and poultry producers to increase consumption of the se foods should be continued and intensified. The situation with other farm commodities, such as cotton, is differ- ent " tial Here we are confronted with a problem of competition. While the poten- outlet for cotton in the form of clothing and other items is much more e *Pansible than that for food, it is also subject to much more competition from ° the r fibers, both natural and synthetic. Furthermore, a big part of our c °tton production has heretofore gone to export markets. Developments in for- Production in recent years have curtailed that outlet materially, largely as a result of the competitive price situation. Obviously, then, we must continue to increase productive efficiency t0 t he end that we may be more competitive price-wise and we must either cur- tail Production or increase consumption, both foreign and domestic or probably b th These changes involve government policy and programs which it is not my ° - PUr Pose to discuss at this time. P]?0 They also involve problems of land use and 3uctive efficiency, which are the direct responsibility of the individual f armer. - K - The high level of living that we enjoy in this country is primarily a ^sult of our productive efficiency. Agriculture, along with other segments of our economy, has made tremendous strides in this respect, especially in the Pas t fifteen years. the In the main, this increased productivity has come through substitution of capital for human labor. land per farm worker> This c a Mechanization has resulted in n s for increased investment capital for building, livestock and machinery. Investment in these items has in- c a s e d nearly three times from an average of $6000 in 194-0 to about $23,000 at Present. 11 si the While these averages mean little when we consider the wide variety 2e and type of farms in the country, they do indicate the magnitude of change. At the same time, the increased use of mechanical power in place of h °rse or man-power and the increased use of fertilizer, insecticides, herbi- Clde gre 3 and improved seed has increased, the need for operating capital to an even ater extent. /Is a result of these increases, the capital required per w °rker i n agriculture now exceeds that required in industry and other off-farm aQ tivity. by Furthermore, this capital must usually be obtained and controlled individual. This means that his need for credit has been expanded Neatly and with it the need for wise counsel and guidance on the part of his banker. This is particularly true here in Arkansas and throughout the South. hll e crop land farmed per worker in the South has increased 20 per cent since 1940 This means that greater atten- > it has increased 33 per cent nationally. must be given to the improvement of productive efficiency. this In many cases will call for increased size of operation in order that the operator can - 5 hav ® a unit that will justify the use of modern methods and equipment. In ot her cases it may call for a change in type of farm enterprise to more effec- tively use available labor and facilities, in cases where it is impractical to increase the size of the unit to a level that will afford full utilization of available labor, it may necessitate a type of operation which will permit SQ asonal or part-time, off-farm employment. In this connection, it is interesting to note that industrial devel- °Pftent throughout the South is affording increased opportunity for such employIn most cases, it means improved methods and increased knowledge of °3ern technology if the farmer is to achieve the level of productive effi° l e n c y he must have. Many of these changes call for additional credit. While it is not to V| be expected that the banker will provide the necessary technical training, U is incumbent on him to assure himself that the prospective borrower is not 0r % honest and industrious but that he has the know-how to operate success- fUlly "the new or enlarged undertaking for which he is seeking credit. Many of these credit needs are for major expenditures on new equipfacilities or land improvements on which the returns will accrue over a Period of years and for which longer term credit than the normal seasonal ^ will be required. Some banks have been doing an excellent job in this or several years. Others, which are equally interested in serving their fieId f f rrn customers, have felt they were restrained from making such loans due to some !> T ie p gulatory restriction. In this connection, the Federal Reserve Board has recently stated in a letter to all Federal Reserve examiners that there is no Federal law or Elation which prevents commercial banks from making intermediate term loans - 6 for agricultural purposes and that such loans, made on a sound credit basis, are n °t to be considered as undesirable. Some bankers have attempted to meet this situation with annual renew- als Cri of short-term loans. It is entirely possible that such loans may have been ticiZSd by examiners if the terms of the note were not being met even though the lender and the borrower both understood that renewals might be necessary ° V Q r a period of years before the loan could be liquidated. Slbi It is also pos- e that some bankers may not have realized the needs or potential opportun- V for profitable service in this field. Lenders, of course, need protection against unforeseen developments in these longer term loans. This protection can be afforded with a loan agree- ^ t that embodies the necessary safeguards. It is much better that these 5af eguards be written down specifically and accepted by both parties so the b °rr 0Werj ls th ag w e l l as thQ lender^ k n o w s exactly what is expected. The borrower Us assured that the financing will be available in the amounts and on the ^nis Promised if he meets the terms of the agreement. Obviously, such credit, if it is to be used constructively by the bo Grower and safely for the lender, must be based on a sound and carefully anal yzed plan and backed by the knowledge and ability as well as willingness the operator to carry through the plan to a successful conclusion. to Vi be In appraising the borrower's proposed plan, there are several points considered. First, is the unit large enough or can it be made large en u ° gh without prohibitive cost to provide an adequate living for the oper- ator and his family and still leave enough margin to repay the loan over a ^sonable number of years? Second, is the land adapted or adaptable to ~7 th e contemplated use? Use of land. Much of our present farm problem comes from the mis- In spite of years of concentrated emphasis on soil conserva- tion and proper land use, we still have vast acreages with a low or hazardous Cr °P potential that should be returned to grass or timber. Is the borrower's schedule of anticipated income realistic in taking due allowance for weather cycles and market fluctuations? The present difficulty of many wheat farmers and .cattlemen is in no small measure due to ^ Unwarranted optimism generated by the unusually good weather and abnor- mal ly high prices during the war and early post-war period. terra A sound plan for credit should make provision for years of uncontrollable adversity but should also require off-setting prepayments in years of higher than anticipated returns. qUot e It should also take account of the possible effects of as and acreage allotments and have sufficient flexibility of alternative nterprises to meet such conditions. The farm plan should be a living document, laying out the broad °utlines of the farm operation for the period ahead. the pr It must not be regarded borrower as a useless paper which he signs to get the loan and then °mptly forgets, A. properly prepared plan is a joint product in which the bo rr ref ower and lender are both vitally interested and which will, in fact, be erred to frequently. It should be subject to appraisal periodically, on actual achievements, and should be flexible enough to be modified y Mutual agreement if conditions require such change. Banks with agricultural representatives are ideally suited to mak- ftlosuch Vvt* loans and they appear to be increasingly interested in this develop• Other banks which are not staffed with agricultural specialists may ^od it somewhat more difficult. Banks with agricultural people and those Wl thout them should avail themselves of the assistance of county agents, SCS P^sonnel and other Federal and State agricultural people in developing such Plans. City banks can be of much assistance to their correspondent banks them to develop this phase of their farm lending service. In Edition to the technical assistance which the city banks can provide, they 1Tlay times be asked to participate in the larger loans for which the local resources are not adequate. Iliake a su A sound farm plan and loan agreement highly desirable, if not absolutely essential, basis for appraising °h Participations. It is of doubtful value to the individual or the community to ass ist him in continuing on an inadequate unit which shows little promise f be ing substantially improved and where the applicant runs the risk of see- his lifetime savings and possibly the land itself gradually dissipated. Th Se borrowers who cannot develop an economically profitable unit, either e ause °iv-i 4. of lack of physical and financial resources or because of insuffiC if Managerial capacity, should be encouraged to supplement their farm a " nin gs with part-time, off-farm jobs or, in some cases, even to consider full kittle, off-farm employment. This latter move often results in the m d i - ir:iu al improving his own position and at the same time allows the land to be ec ombiile3 into larger and more efficient units. With the present cost price Nation in agriculture, everything possible should be done to promote efficiency. - 9 Let" us look again Tor a moment at the general credit situation. 1 As mentioned earlier, our national economy has been running at nearly full capacIn many areas, demand has crowded capacity to the point that shortages haVe developed with a resultant inflationary pressure on prices. b e Q n fu This has rther augmented by a relatively high level of employment in most areas. ° s e c°nditions have stimulated a tremendous demand for available credit, reciting i n a need for some measure 0f credit restraint. With agriculture already suffering from a cost-price squeeze, some fear ha3 beon expressed as to the adverse effect on the farmer of any credit e ul, ° aint. As a matter of fact, the reverse would seem to be true. With immediate prospect for material improvement in farm prices, any further nGl> ease i n costs would only accentuate the squeeze. es in The cost of farm credit ents less than five per cent of total farm costs and even some increase '°st of credit would be a small price to pay for some restraint on the other 95 cent of his farm costs. Certainly, availability of credit is also a factor to be considered but -L is assumed that bankers will continue to meet the legitimate needs of farm v, D °rrowers for farmers generally are still in a strong credit position and J of credit needed for furthering productive efficiency. There is a real challenge to country bankers to meet this need and Q °utinue their financial leadership in the farm community. mee t this challenge. I am sure you
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