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Georgia Bankers Association Agricultural Conference
Atlanta, Georgia. February 20, 1968

We are indeed fortunate to live in a nation and an age in which
the production of food and fiber requires such a small portion of the total
labor force. Only 5 per cent of the nation's labor force was employed on
farms in 1966 compared with 21 per cent in 1930. The number of farm workers
declined from 10.3 million in 1930 to 4.0 million in 1966. This decline was
possible because of a great increase in productivity per worker. In 1930 one
farm worker was able to produce sufficient farm products for himself and 9
other persons, in 1965 one farm worker produced sufficient food and fiber
for himself and 39 other persons.
We might take a brief look at agriculture in the United States
compared with agriculture in the rest of the world to see how well we have
performed relative to other nations. Of the major industrial nations for
which data are provided by the OECD (Organization for Economic Cooperation
and Development), the United States in recent years had the lowest per cent
of workers employed directly i nagriculture. Employment on farms ranged
from 5 percent of the labor force in the United States to 75 per cent in
Turkey. More than 50 per cent of the world population lives in countries
where three-fourths of the people are engaged directly in agricultural
occupations. In Western Europe, one of the more highly developed areas

-2of the world outside the United States, about 20 per cent of the labor force
is engaged in agriculture and these nations still fail to produce sufficient
food and fiber to meet the demands of the population. As a result a sizeable
portion of their farm product needs must be imported.
Contributing to these gains in efficiency in the United States have
been major changes in the use of productive resources. Last November I had
the opportunity of participating in the National Agricultural Credit Conference
in which one presentation was entitled, "Can the Country Bank Survive?"
The speaker concluded that there is no clear-cut answer to this question,
largely because of the great changes In agriculture. Changes in some
communities have been so great during the past three decades that they have
totally altered the economic profile of the area and left doubts as to its economic
vitality. I do not share the pessimism implied in that speech. I believe
that many changes in rural communities are for the better. For example,
one change which i like is the rapid nonfarm employment growth in traditionally
rural areas. The November 1967 Monthly Review of the Federal Reserve Bank of
Atlanta points out that nonfarm employment outside the eighteen major
metropolitan areas of the Sixth Federal Reserve District rose at a faster rate
than similar employment in the major centers. Furthermore, manufacturing
employment outside these major metropolitan areas rose at substantially higher
rates than within the large centers.
To me, this growth of nonfarm employment opportunities in the
smaller cities and towns is a desirable change. When surplus workers in
agriculture can gain profitable employment in nearby towns and cities,

-3both the welfare of the individuals concerned and the welfare of the nation
is enhanced. There is growing evidence that as nonfarm employment
opportunities develop in rural communities that have been depleted of labor
resources by the rural exodus to the cities, some skilled workers return to
the rural environment of their youth.
The incentive of higher returns causes workers to move from
farm to nonfarm jobs. If higher returns are to be made i nnonfarm jobs,
the market for labor places a higher value on services there and nonfarm
products sell for more money. This production of a larger volume of goods
and services results in higher total output and greater welfare per person.
Furthermore, this process of labor movement from farm to nonfarm pursuits
does not damage rural communities if the workers continue to live in the
community. To the contrary, it appears that the larger incomes resulting
from the change in occupation will be reflected in greater community income
and welfare.
With the reduction in farm labor, agriculture has been reorganized
into fewer but larger farms. The number of farms declined from 6.3 million
in 1940 to 3.1 million in 1967. Average size of farms rose from 167 to 359
acres during the period.
Along with the changing structure of agriculture our concept of the
farmer is also changing. Once looked upon as one of the lesser-trained
members of society who perhaps could do nothing except farm, the commercial
farmer cf the future will probably be viewed as a successful businessman of

-4 the community. Whether he is owner-operator, hired manager or tenant, in
order to gain control of the assets necessary for efficient farming, he must
have the qualifications of an accountant, be familiar with technical agriculture,
and know some commercial law and finance in addition to having the usual
libera! arts requirements of a trained man.
It is perhaps because of our past image of the farmer as the least
successful member of our community that we have in the past tended to measure
his success by the rung on the agricultural ladder which he attained. We
have never, however, looked upon other help such as the store manager,
the bank official, or the factory manager in this manner. We have viewed
these men as successful in the community even though they did not attain
ownership of the firm for which they worked. I predict that our farm operator
will similarly be considered a success whether he works in a professional capacity
as hired farm manager, as stockholder and manager, as owner with a perpetual
debt, or happens to be one of the few like the late Henry Ford the First who
operates his farm free of debt. It is possible and probable that all these operators
can earn sizeable net incomes and become leaders in their respective
The agricultural industry has now become highly commercialized
and specialized. Purchased inputs such as machinery, chemicals, seed and
breeding animals new constitute about three-fourths of total farm costs.
Operator and unpaid family labor is now a relatively minor cost item. Production
for home use as become insignificant as most, farm operations have become
fully oriented toward supplying the commercial market. Agriculture has thus
become an industry composed of a large number of commercial enterprises

operating at relatively small margins of profit. Its financial structure is
typical of other medium-size businesses. Sizeable losses can no longer be
absorbed in reduced returns to labor. Farmers can now go bankrupt.
With these changes in the structure of farming, capital and credit
have become increasingly important. From an average investment of $8,000
per farm in1940,assets per farm increased more than tenfold to $86,000 in
1967. Furthermore, the $86,000 investment per farm is the average for all
farms including part-time units. In 1966 almost 50 per cent of all farms had
product sales of less than $2,500, and operators of these farms had off-farm
income in excess of four times their net farm incomes. We cannot realistically
call these part-time units farms, if we exclude part-time farms from the total,
assets per farm probably approach $150,000. For example, small to mediumsize grain farms (180-259 acres) on better soils \n Northern Illinois, cooperating
with the Illinois Farm Bureau Farm Management Service, had
investment of $171,000 per farm in 1966.I'

The 61 large cooperating farms in

the same area had an average capital investment of $557,000 per farm.
The large capitalization necessary for efficient farming units is
producing major changes in our traditional concepts of farming and the
farmer. To demonstrate the type of change that we are likely to have, assume
that a typical farmer operates only an average-size commercial farm with total
assets of $150,000. Further assume that he has four children, one of whom

ii Summary:: Illinois Farm Business_Records, University of Illinois,

- 6 -

would like to succeed his father as operator of the home farm. How can the
transfer from father to son be handled? Despite the substantial inheritance
of $37,500 per child, once taxes are paid the prospective operator cannot borrow
enough on the assets to pay off the other three heirs. Second mortgages
might be used for settling the estate. However, the debt involved
totaling in excess of $112,500 is a sizeable amount for repayment within the
productive life of the average individual. At the rate of 6 per cent, interest
amortized on a 30-year basis, the interest and principal would account for
over 7,000 annually. This added to normal family living expenses, taxes
and other overhead, adds up to a sizeable load.
It appears to me that most commercial farms cannot pass on to the
current.operators' heirs under the same ownership pattern that exists today.
Thus, one of the first breaks that I see in our traditional concept of farming
is in the ownership pattern, in the past, we have envisioned in the agricultural
ladder an opportunity for all farm operators to ultimately become debt-free
owners of efficient farms. It is unlikely that this ladder will be able to operate
for future generations. As indicated earlier, savings in excess of $100,000 are
necessary for typical farm boys to become debt-free owners at current prices.
Furthermore, the optimum size of farms continues to rise. Within another
ten years, it is likely to require more than $200,000 to become a debt-free owner
of an efficient farm. We are thus approaching in agriculture the problem that
Henry Ford was confronted with when time came to turn over the Ford Motor
Company to his heirs. Agriculture, like the Ford Motor Company, is being

-7forced into a different ownership pattern. Fewer and fewer farms can be
inherited in the traditional pattern of one of the heirs simply buying outright
the interest of the other heirs.
Fortunately, our universities are already pointing out possible
solutions to this dilemma.
One suggested route for agriculture is the formation of small
family-type corporations. Each heir to the farm, rather than requiring payment
in cash, would accept equity shares in the enterprise. The operator would
thus be part-owner and part hired manager. This arrangement, however,
is little different from the public corporation in which the chief executive
officer is asizeablestockholder. Furthermore, once incorporation is
accomplished, the farm is only one step away from a typical publicly-owned
corporation. Once stock is sold by the heirs to non-family purchasers, the
farm becomes a public corporation.
Perpetual debt is another possible solution to the farm capital problem.
This route would involve the sale of. long-term debt instruments as bonds,
mortgages, and debentures backed by the farm assets and annual returns from
operations. The farm would take on the appearance of a modern corporation
where large perpetual debts are routine. New owners would assume all debt
upon taking title to the farm as mortgage debt is currently assumed by
Another change underway is the development of closer ties between
agriculture and the food processing and marketing industries. Although not
directly relied to the farm capital problem, such arrangements offer opportunities

for the capitalization of agriculture through the corporate food processor or
farm supply Industry route. Examples of these arrangements may be found in
both livestock and crop farms. Poultry and egg operations have in many
instances been closely allied to the feed industry. The financing supplied
broiler producers by the feed industry has apparently been quite substantial.
!n many cases the producer has become essentially a hired manager. Other
ties include the feed industry and beef fattening and hog feeding operations,
beef fattening and meat packing operations, vegetable producing and
processing operations. AS! these arrangements are likely to involve financing
and perhaps some voice in the management of the farming portion of the operation. These trends toward integrating the farm and.nonfarm sectors of the
food industry are likely to continue as fewer producers are found in each line
of farm production and as agriculture becomes more specialized.
The country bank is vitally concerned with these changes in
agriculture. The larger commercial farms have greatly increased the role
of credit. Credit has, over the years, played a relatively minor role in
financing our agricultural plant. Most farms have largely been financed
internally. Much of the physical capital as land clearing, drainage, fencing,
and building was produced on the farm by the farm family. Only in the past
few decades has a large portion of farm capital been acquired through off-farm
purchases, and many of such costs were covered by savings of the farm family.
Since 1943 credit used by farmers has not exceeded 1 per cent of
total farm assets, end in the 6 years prior to 1954 the volume of farm credit
outstanding was less than 1 per cent of total farm assets.

In comparison,

-9credit used by manufacturing establishments has accounted for a much greater
DOrtion of total assets. During the period 1948 to 1967, inclusive, total
liabilities of a!! manufacturing corporations, excluding newspapers, on the
basis of book value never fell below 23 per cent of total assets. Furthermore, in
1957 debt. exceed 40 per cent of the assets of these firms.
Although the spread i ndebt-to-asset ratios of farms and manufacturing firms-remains quite wide, it has declined steadily since 1948. At that
time, debts totaling 31.2 per cent of assets in manufacturing were 4.3 times
the per cent of debts to assets in agriculture. Since then, the per cent of
debts to assets in both industries has risen steadily. However, the per cent
In agriculture rose at a faster rate than in manufacturing, and in 1967 the
per cent of debts to assets in manufacturing was only 2.4 times that in
agriculture. Agriculture is thus beginning to use credit in a manner similar
to the manufacturing sector.
Prior to the Great Depression of the 1930's banks were the only
institutional lenders of importance in the short-term farm credit field,
in the late 1930's the Production Credit Associations and the Farmers' Home
Administration (Farm Security Administration) had begun to supply
substantial quantities of short-term credit to farmers. As a result of this
increased competition the commercial banks' share of all short-term farm
credit by institutional lenders declined In the late 1930's and early I940's.

WorldWar II, commercial banks were in a highly liquid condition

andeagerto acquire additional loans. As a result their holdings of short-term

farm loans rose rapidly. By 1952 the banks1 share had increased to 76.8
per cent of the 64 billion outstanding to reporting lenders. The share of
short-term farm loans held by banks turned down, however, in 1952, and the
relative cemme continued through 1967.
Looking at rates of growth during the past ten years, banks have
more than doubled their short-term farm credit outstanding, while the growth
of such credit held by the PCA's has more than tripled, in dollar amount,
however, such holdings by banks continued to increase faster, rising $4.4
billion compared with a gain of 01.9 billion for PCA's. These data all point
to the fact that PCA's are rapidly becoming a major competitor to banks
In supplying non-real estate credit to farmers.
Commercial banks have historically held only a small portion
of the farm real estate debt. At the beginning of 1967 ail operating banks held
only 14 per cent of ail farm mortgage credit, a slightly smaller per cent than
1 years earlier.
Let's take a look at some reasons why the banks' share of farm
credit has declined. It is quite obvious from the data that a number of banks
are about "leaned up," given the set of conditions under which they are
currently operating. A Federal Reserve System survey of bank credit to
agriculture in mid-1965 indicated that 39 per cent of ail farm banks in the
nation had loan-to-deposit ratios in excess of 60 per cent, and 1 per cent
of such banks had loan-to-deposit ratios exceeding 70 per cent. Given the
legal requirementsfor guaranteeing certain public accounts and the

especially these with 70 per cent loan-to-deposit ratios, are short of liquid
Further confirming the "loaned up" thesis is the fact that one-sixth
.of all farm banks in the nation reported difficulty in meeting farm financing'
requests from their own resources. About one-eighth of all banks in the
Eighth Federal Reserve District similarly reported difficulty in meeting farm


redit requests.

In the absence of a nationwide banking system we attempt to take
care of these local fund shortage and cverline problems through correspondent
banking. Individual overline requests have probably been handled through
the banking system with greater efficiency than over-all local liquidity
Most large correspondent banks indicate an eagerness to participate
with their customers in-handling cverline demands of farmers. However, the
over-ail liquidity shortage problem is apparently more difficult to solve.
Loanable funds and debt instruments do not move through the banking system
as. freely as we would like. Federal funds, certificates of deposit, and other
instruments move quite freely among the larger banks and provide an
opportunity for liquidity adjustments. Federal funds also move quite rapidly from
the smaller to the larger banks. However, it is the smaller banks in the areas
which are chronically short on credit that may have difficulty in financing
farm credit demands. Nevertheless, ! believe that more cooperation within
the banking system toward the solution of this problem would be profitable.

_ 12 _

In addition to correspondent banks, a number of country banks
have made use of the Farm Credit Banks for distributing funds to rural
areas. The Federal Intermediate Credit Banks were originally designed for
this purpose. These banks already have the corporate organization, the capital,
and the trained farm credit specialists to do the job. I understand that they
currently discount for about 70 commercial banks and commercial bank affiliates.
itappearsto me that in them we have an Ideal arrangement for channeling
loanable funds from the money market centers to the rural credit-deficit
areas. More recently, however, I hear that the Intermediate Credit Bank
System is reluctant to take on the discounting for large numbers of
commercial banks. 1 understand that they would prefer that the commercial
banks set up their own agricultural discount system. ! believe that the setting
up of a new credit discount system for rural banks would be a second-best
alternative. In fact, it would probably weaken the present farm credit discount
system. According to my estimates, commercial banks hold about 60 per cent
of all outstanding FICS debentures. Commercial banks thus represent the
source of the major portion of Intermediate Credit Sank funds. If a new
system is set up designed primarily for commercial banks, it seems likely
that the current system will have greater difficulty selling its debt instruments
to commercial banks.
! thoroughly agree with those who argue for some type of bank
discount system for rural banks in credit-deficit areas. 1 would also
suggest that an early solution be obtained to this problem of whether a
new;..; system is organized or whether full cooperation is obtained with the

-13current Intermediate Credit Bank System.
In conclusion, we have a very efficient agricultural industry in
the United States. Apparently, farmers are receiving credit at competitive
rates. Commerciai banks, however, have declined somewhat from their
earlier poster; as the predominant supplier of farm credit. Several factors
may have restrained the rate of bank credit growth to farmers. Some banks
located in rural communities may have chronic shortages of loanable funds.
In such cases, outside assistance is highly desirable. 1 believe that the
best section lies In fully utilizing existing institutions. However, if total
cooperation cannot be achieved, other farm credit discount facilities may be