AN ECGNOMEC ANALYSS OF THE EFFECT OF MONETARY POLICY ON THE BEEF ENBUSTRY. Thesis for the {Degree of Ph. 5. MECHiGAN STRTE UWERSW RECHARE LEGN 'FREMBLE - 1973 ‘ , , I .,... ;...|! l ‘ _ -,_..-.._‘. I S \lllml asllllllllllll ‘; ~ ~ ““2 ozmww l .4 ___'—————- will fiy’f’ ‘00 '1 i . 5m state University This is to certify that the thesis entitled AN ECONOMIC ANALYSIS OF THE EFFECT OF MONETARY POLICY ON THE BEEF INDUSTRY presented by Richard Leon Trimble has been accepted towards fulfillment of the requirements for Ph.D. Agricultural Economics degree in Major professor Date é//fl/7*3 Ito 0-7639 " alumna IV HUM; & SUNS' 800K BINDERY INC. , LIBRARY amntns ; srnlucrm. moment 5. ABSTRACT AN ECONOMIC ANALYSIS OF THE EFFECT OF MONETARY POLICY ON THE BEEF INDUSTRY By Richard Leon Trimble Recent increases in the price of beef have raised ques- tions concerning the reasons for these increases. An increasing demand for beef is believed to be the major force behind the rising prices, but the supply of beef may have also contributed. This study looked at the supply of beef to answer the question: Do the monetary and credit actions of the Federal Reserve System as it attempts to control rising prices in the general economy have an adverse effect on the supply of beef in subsequent time periods? If it does, then the restrictive monetary policies that were used three or four years ago may have contributed to the high beef prices currently being experienced. The long run supply of beef is determined by two major factors: 1) the number of animals in the national beef herd, and 2) the pounds of beef produced per animal in the beef herd (pro- ductivity). Both have been increasing over time, but many of the sources of past increases in productivity have been exhausted. Therefore, future increases in the supply of beef will be much Richard Leon Trimble more dependent on increases in the size of the beef herd than has been true in the past. The beef industry can be divided into two major functional subindustries, the feeder calf industry and the beef feeding indus- try. The feeder calf industry has maintained its traditional structure and method of production. Feeder calves are still pro- duced by a large number of small producers who use resources that have few, if any, alternative uses. These producers have increased their productivity to some degree by increasing calving percentages and decreasing death losses, but there have been no great techno- logical changes take place in the feeder calf industry. In contrast, the beef feeding industry has undergone vast structural change due to changes in the technology of cattle feed- ing. There has been a large decrease in the number of feedlots and a correspondent increase in the number of cattle fed per lot. The industry has increased the productivity of the beef industry by feeding an ever increasing proportion of all animals slaughtered. But, this source of productivity has been exhausted and will not be available in the future. To examine the effect of monetary policy on the beef industry, the investment in both the feeder calf and beef feeding industries was investigated. Ordinary least squares regression analysis was used to relate the cost and availability of credit to investment and disinvestment in the feeder calf industry during the period 1952 to 1971. This analysis found that a one percent- age point increase in the rate of interest resulted in a six percent Richard Leon Trimble decrease in the annual investment and an increase in the annual dis- investment of three to 14 percent. To see how restrictive monetary policies may have contri- buted to the current high beef prices being experienced, the effect on investment and disinvestment were traced through the beef produc- tion process. The interest rate during 1969 and 1970 was about 1.7 percentage points higher than it was in 1967 and 1968. This higher interest rate would result in a beef cow breeding herd that was from 802,400 to 1,392,300 head smaller in 1970-1971 than it would have been if the interest rate had remained at the 1967-1968 level. This reduction in the size of the beef cow herd would reduce the supply of steer and heifer beef in 1972 and 1973 by two to four percent. This reduced supply could have resulted in a 3.7 to 6.4 percent increase in the farm price of steers and heifers. Thus, restrictive monetary policies during 1969 and 1970 could have resulted in a farm price of fed beef that was one to two dollars per hundred pounds greater than it would have been in the absence of such tight money policies. The study also looked at the investment in the beef feed- ing industry during the period 1962 to 1972. The results of this analysis were quite mixed and inconsistent. General indications were that the cost of credit did not tend to limit feedlot invest- ment, but credit availability did limit investment. Thus, the effect of restrictive monetary policies on the feeder calf industry and the resulting supply and price of beef in subsequent time periods indicates that monetary policy did have an Richard Leon Trimble impact on the beef industry. This is not to imply that monetary policy has been fully responsible for the higher beef prices that have been experienced recently. It has not. But the tight money policies during 1969 and 1970 would seem to have contributed to the higher beef prices we have recently experienced. Considering the possibility that future increases in the supply of beef will depend more heavily on increases in the size of the beef herd, the impact of monetary policy on the beef industry may be greater in the future than it has been in the past. These findings suggest that policy makers should recog- nize this effect of monetary policy on the beef industry. The Federal Reserve System, Congress and the USDA should be aware of the effect tight money has on the beef industry and how this could alter the outcome of policies that might have been or will be designed to change the supply and price of beef in the future. In addition, these findings suggest that other agricultural industries may be adversely affected by restrictive monetary policies. Fur— ther, this raises a very basic question: Does restrictive monetary policy control inflation or create it? AN ECONOMIC ANALYSIS OF THE EFFECT OF MONETARY POLICY ON THE BEEF INDUSTRY By Richard Leon Trimble A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1973 ACKNOWLEDGMENTS I would like to express sincere appreciation to Dr. John Brake for his valuable guidance, counselling and friendship during my graduate program. He helped to make the experience not only bearable and rewarding, but at times even enjoyable. I would also like to thank Dr. Lester Manderschied, Dr. Leonard Kyle, and Dr. Milton Steinmueller for their assistance with the thesis project. My wife, Ann, deserves special thanks for editing and typing initial drafts of the thesis and her continuing encourage— ment throughout the seemingly endless educational process. ii TABLE OF CONTENTS Page LIST OF TABLES AND FIGURES ..... . ........ . . . . vii Chapter I. INTRODUCTION . . .................... 1 PROBLEM SETTING ................... 1 PROBLEM STATEMENT ............... . . . 4 Questions to Be Answered ............. 4 General Hypothesis to Be Tested .......... 5 RESEARCH OBJECTIVES . . ............... 5 PLAN OF STUDY . . . . . . . . . . . . ..... . . . 6 II. THE CHANGING NATURE AND STRUCTURE OF THE BEEF INDUSTRY 0 o o o g o o o o o o o o o o o o o o o o o o 0 7 PHYSICAL DETERMINANTS OF INCREASED BEEF PRODUCTION: 1930-1971 . . . ............. The Determinants of Total Beef Production . . . . . The Determinants of Cattle Herd Productivity: 1930- 1971 .................. 11 Implications of Findings Concerning Cattle Herd Productivity .......... . . . . . 15 RECENT CHANGES IN METHODS OF BEEF PRODUCTION . . . . . 20 The Feeder Calf Industry ..... . ....... 20 The Beef Feeding Industry ............. 27 Implications of Disproportionate Rates of Change . 31 SUMMARY ................. . ..... 33 III. THE THEORETICAL RELATIONSHIPS BETWEEN MONETARY POLICY AND THE SUPPLY OF BEEF ............. 34 INTRODUCTION ...... . ........... . . . . 34 MONETARY POLICY . . . ..... . . . . . . . . . . . 35 Definition of Monetary Policy . . . . . . . . . . . 35 Administration of Monetary Policy ........ . 35 The Initial Effect of Monetary Policy ....... 36 The Secondary Effect of Monetary Policy . . . . . . 38 Chapter How Monetary Policy Affects the Economic System . . Determinants of the Impact of Monetary Policy on Investments by Individual Firms ....... EMPIRICAL RESEARCH FINDINGS CONCERNING THE EFFECT OF CHANGING MONETARY AND CREDIT CONDITIONS 0N INVESTMENT . . . . . . ..... . . . . . . . . . . . Results of Studies Using Business Attitude Surveys . ..... . . . . . . . . Results of Econometric Studies ..... . . . I I IMPLICATIONS FOR THE BEEF INDUSTRY . . . ....... The Agricultural Industry ............. The Beef Industry ................. IV. MONETARY POLICY, CREDIT CONDITIONS AND THE BEEF COW INDUSTRY ...................... INTRODUCTION ..................... THEORETICAL ASPECTS OF AN INDIVIDUAL FIRM'S DECISION T0 INVEST IN A BEEF CON ........... Theory of Investment ............... Theoretical Considerations of a Beef Cow Investment Decision . . .......... A Consideration of Disinvestment ......... Smmmy. ........... . ......... SPECIFICATION OF ECONOMIC MODEL . . . . . . ..... The Investment Decision .......... . . . . The Disinvestment Decision ......... . . . The Full Effect of Investment and Disinvestment ................. TESTING THE ECONOMIC MODEL ........... . . . Definition of Variables .............. Equations to be Tested ..... . ........ Method of Testing ................. EMPIRICAL RESULTS ..... . . . . . . . ...... The Relationship Used to Explain Investment in the Beef Cow Herd ......... . . . . . The Relationship Used to Explain Beef Cow Herd Disinvestment ............... The Impact of Monetary and Credit Conditions on the Beef Cow Herd . . . . . . ..... . . . THE ECONOMIC IMPACT OF MONETARY AND CREDIT CONDITIONS ON THE SUPPLY AND PRICE OF BEEF . . . . . . iv Page 39 42 47 48 49 52 52 56 58 58 61 61 63 74 75 76 76 78 79 79 8O 82 89 89 9O 94 102 105 Chapter Page First Order Impact on Supply of Beef ....... 105 First Order Impact on Beef Prices ......... 107 Consideration of Second Order Impacts on Beef Supply and Price . . . . . . . . . . . . . 108 Summary . . . . . . . . . . . . . . . . . . . . . . 110 V. MONETARY POLICY, CREDIT CONDITIONS AND THE BEEF FEEDING INDUSTRY . . . . . . . . . . . ......... 111 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . 111 IMPORTANCE OF THE BEEF FEEDING INDUSTRY . . ..... 111 Function of Beef Feeding Industry . . . . . . . . . 111 Influence of Beef Feeding Industry on Beef Supply . . . ............ 112 Greater Efficiency in Beef Feeding Industry. . . . 114 Economies of Size in Beef Feeding. . . . ..... 115 THEORETICAL CONSIDERATIONS OF THE BEEF FEEDLOT INVESTMENT DECISION . . . . . ..... . ...... 116 SPECIFICATION OF ECONOMIC MODEL ....... . . . . 118 TESTING THE ECONOMIC MODEL . ........ . . . . . 119 Definition of Variables . . . . . . . . . . . . . . 119 Equations to be Tested . . ............ 121 Method of Testing . . . ..... . . . . . . . . . 124 EMPIRICAL RESULTS . . . . . . . . . ..... . . . . 125 The Estimated Large Feedlot Investment Relation- ship Using the Number of Large Feedlots (BFLNO) as a Measure of Investment. . . . . 125 The Estimated Large Feedlot Investment Relation-. ship Using the Capacity of Large Feedlots (CAPBFL) as a Measure of Investment . . . . . 128 The Estimated Large Feedlot Investment Relation- ship Using the Cattle Marketed per Feedlot by Large Feedlots (CMPLBL) as a Measure of Investment . . . ..... . . . 130 Summary of Estimated Investment Relationship . . . 133 SUMMARY . . . . . . . . . . . . . . . . . . . . . . . 136 VI. SUMMARY, CONCLUSIONS AND IMPLICATIONS ..... . . . . 136 SUMMARY AND CONCLUSIONS ..... . . . . ..... . 136 Objectives of the Study ...... . ....... 136 The Beef Industry . ................ 137 Chapter Page Monetary Policy, Credit Conditions and the Supply and Price of Beef: Theoretical Considerations . . ........ . . . . . . . 140 Empirical Analysis and Findings .......... 141 IMPLICATIONS OF THE STUDY ........ . ..... 147 Policy Implications . . . ..... . . . . . 147 Implications for Further Research ......... 150 BIBLIOGRAPHY ....... . ..... . ..... . . . . . . 153 APPENDIX A . . . . .................... . . 169 APPENDIX B ................... . ...... 174 vi Table II-l. II-2. II-3. II-4. II-5. II-6. IV-] 0 IV—2. IV-3. IV-4. LIST OF TABLES AND FIGURES Selected price indexes, 1952-1972 . . . . . . . . . Total beef production, number of cattle and calves in January 1 inventory, liveweight production per head and factors associated with changes in productivity, 1930-1971 ............. Estimated relationships between cattle herd pro- ductivity and selected explanatory variables, various time periods ........ . ...... Beef cows by size of herd and regions, 1964 and 1969 O O O O O O O 0 0 O O O O 00000 O 0 . Farms with beef cows, by size of herd and regions, 1964 and 1969 . . ..... . . . . . . Number of cattle feedlots and percentage in two feedlot capacity groups by regions, 1962, 1967,1972. . . . . . . . . . . . . . ..... Number of cattle marketed and percentage by two feedlot capacity groups by regions, 1962, 1967, 1972 . ................... Budget of investment in a beef cow . . ..... Net present value of investment in a beef cow: initial investment considering both fixed and variable costs . . ........... . . . . . Net present value of investment in a beef cow: as an addition to existing herd considering only variable costs . . . ..... . . . . . . Estimated relationships between investment in beef cows (RBHEFK ) and selected explanatory variables, 1952-1 71 . ........ . ..... vii Page 14 22 24 28 29 68 71 71 91 Table IV-5. IV-6. V-l. V-2. V-3. A-1. A-2. A-3. B-l. Figure IV-l. Page Estimated relationships between beef cow disinvestment (NBECCULt) and selected explanatory variables, 1952-1971 . . . . . . . . . . 95 Alternative estimated relationships between beef cow disinvestment (NBECCUL ) and selected explanatory variables, 195 -1971 ..... . . . . . 100 Estimated relationships between number of large feedlots (BFLNO) and selected explanatory variables, 1962-1972. ...... . . ..... 126 Estimated relationships between capacity of large feedlots (CAPBFL) and selected explanatory variables, 1962-1972 ...... . . . . 129 Estimated relationships between cattle marketed per feedlot by large feedlots (CMPLBL) and selected explanatory variables, 1962-1972 . . . . . 131 Definition of variables for which data were available from secondary sources . . . . . . . . . . 169 Data taken directly from secondary sources ...... 172 Data used in analysis contained in Chapter Four . . . 173 Data used in analysis contained in Chapter Five . . . 174 Flow chart of beef producing industry ........ 60 viii Chapter I INTRODUCTION PROBLEM SETTING The price of food is a current topic of concern to many people. Food prices have been going up for a number of months and the immediate prospect for lower food prices does not appear very hopeful. The growing concern of the general public and policy makers over the food price problem has made national news headlines. Recent articles in two popular publications exemplify the feelings of consumers [66] and [125].1 The price of beef has created the greatest concern among consumers. While the price of food has been steadily increasing for some time, the price of meat and beef prices, in particular, have been increasing faster than food prices in general. Table I—1 demonstrates this fact. By comparing the Consumer Price Index for all food with the Consumer Price Index for beef and veal one can see that beef prices have been increasing faster than food prices during the past few months. As a result of consumer reaction to rising beef prices, government policy makers have taken action to slow the price rise. 1Bracketed numbers refer to items listed in the biblio- graphy. .mompu "mocsom m.~¢_ o.mm_ _.mFP m._~P m.mmp o.mmp m.m~F m.mm_ NNmF m.m_F m.N__ m.mp_ o.mop m.¢mp 8.9FF ¢.m_P m._NF _Nmp A.op_ o.F__ ¢.o__ m.m_F m.m__ m.o__ m.¢_F m.mF_ oum_ o.kpp m.wo_ m.oo_ P.mop m.¢_F m.opp m.mo_ m.mo_ mmmp N.moF m.No_ m.~o_ N.oo_ _.¢op ~.~o_ e.mo_ ~.¢oF momp o.oop o.oop o.oop o.oo_ o.oo_ o.ooP o.oo_ o.oo_ “no, m.mm o.mm w.¢m n.0m m.mm m._m m.mm m.om NemF m.om m.mm m.ma N.mw m.m~ m.mm m.¢m m.am “mm? m.mpp ~.~P_ m.mm ~.ow ¢.mm ~.¢m m.aw m.m~ Nmm_ Cucumm>wu mumuwmaa Ha: xcoa ucwawwam prdwwu mums: coca Hag Lam> mmxmucH more; mpmmw_o;3 mmxmvcH wove; cmsamcou AoopunanV xmucH women m>wpomammm mo mmmgm>< Pascc< H .Nkmp-mmmp .maxaucv mowra casuafimm ._-H w_aah The major changes have involved a relaxation of beef import restric- tions and allowing farmers to graze diverted acres. It was hoped that each of these changes would increase the supply of beef, and thereby, reduce the price. Many observers believe that the relaxa- tion of import restrictions will help little due to high beef prices on the world market. Also, the beef imported into the United States is normally used as processed meat. Therefore, it will have little impact on the price of fresh beef. Many experts feel that allowing farmers to graze diverted acres will have little effect on beef prices [69]. If it does affect the supply of beef, it will be an adverse effect in the short run as farmers hold back more heifers to take advantage of the diverted acres. In the longer run such action should result in larger supplies of beef. ' In addition to the attempts to increase the supply of beef, there have also been suggestions that action should be taken by the Federal Reserve System (FRS) to limit the demand for beef through its administration of monetary policy [32]. To do this the FRS would maintain a more restrictive monetary policy to control the rate of growth of consumer incomes and thereby aggregate demand. This reduction in aggregate demand would then be reflected in a reduced demand for beef. It is uncertain whether the FRS has adopted this position at this time, but there are indications that it has. Thus, it appears that policy makers have taken actions to slow the rise in the price of beef in the short run. But what are the effects of these actions in the long run? If we look at the attempts to increase the supply of beef, there seems to be little conflict between the short and the long run effects of the changes. The same cannot be said for the attempts to limit demand. The action of the FRS to limit the demand for beef in the short run may reduce the supply of beef in the long run. Tight credit and monetary policies affect many economic decision units besides the consumer. As the FRS assumes a tight money policy, this forces the interest rate up and reduces credit availability. In response to these changes, investments to expand beef production may be reduced. If so, the reduced investment would serve to reduce the supply of beef in the future and would thereby result in higher future beef prices. This is the essence of the problem to be investigated in this study. PROBLEM STATEMENT Questions to Be Answered The problem under investigation in this study can best be stated in the form of a simple question: "Do the monetary and credit actions of the Federal Reserve System as it attempts to control ris- ing prices in the general economy have an adverse effect on the supply of beef in subsequent time periods?" More formally the prob- lem may be stated in the form of an hypothesis. General Hypothesis to Be Tested_ The Null Hypothesis The null hypothesis can be stated: Monetary policy does not affect the supply of beef. The Alternative Hypothesis The alternative hypothesis can be stated: Monetary policy to control inflation in the general economy through its effect on consumer demand has resulted in reduced beef supplies in subsequent time periods. This implies that beef prices in subsequent periods become higher than they would have been in the absence of such restrictive monetary policy. To facilitate testing of the stated hypothesis there are a number of specific research objectives to be carried out in the study. RESEARCH OBJECTIVES Investigation of the research problem involves the follow— ing four specific research objectives: 1. To investigate the beef producing industry to determine: A. What changes have taken place during the past 20 years and what implications these have for the future supply of beef. 8. The critical links in the beef production process both historically and in the future. 2. To set forth the theoretical relationship between monetary policy and the supply of beef. 3. To construct one or more econometric models to test this theoretical relationship. 4. To describe the effects of monetary policy on subse- quent supplies and prices of beef. PLAN OF STUDY The study is divided into five major parts. Chapter II describes the changing beef production process pinpointing the major historical changes and suggests the implications these changes have for future beef production. Chapter III presents the theoretical relationship between monetary policy and the supply of beef. Chapters IV and V look at empirical data concerning this theoretical relationship. Chapter IV examines monetary policy and how it affects the production of feeder calves while Chapter V explores the relationship of monetary policy to the beef feeding industry. The final chapter summarizes the findings of the study and their implications. Chapter II THE CHANGING NATURE AND STRUCTURE OF THE BEEF INDUSTRY The beef producing industry has been characterized by change, but the rate of change has been vastly different according to production process. The beef feeding industry has been a very dynamic industry while the cow-calf industry has maintained its traditional production methods. The following chapter will look at these changes and some possible implications for future beef production. PHYSICAL DETERMINANTS OF INCREASED BEEF PRODUCTION: 1930-1971 The ultimate result of the changes in beef production has been an increased beef supply. But, what factors have contributed to this increased supply of beef? The Determinants of Total Beef Production The total quantity of beef supplied in the United States in any year is a result of the number of cattle and calves slaughtered and the weight of these animals. Therefore, the quantity of beef supplied for any particular year is related to the number of animals held in farm inventories for production purposes and the number of pounds of beef each animal produces. Total quantity of beef 7 supplied (beef and veal slaughter), cattle and calf numbers, and liveweight of production1 per head for the years 1930-1971 are pre- sented in Table II-l. As one can see, each has an upward trend over time. Thus, it appears that the increased beef supply over time has been the result of increasing cattle numbers and increased pro- 2 of the cattle herd [140]. ductivity The functional relationship between quantity of beef sup- plied, cattle numbers, and herd productivity can be set out in a simply production function relationship: Quantity Supplied = F(cattle numbers and productivity). This relationship would be an identity if productivity was measured as the actual pounds of beef slaughtered, but it is not. 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N.mm F.mw m.m mm “.mpm mmweop mmmmp o.Pn ¢.nn P.¢ mm . m.mom mmmoor PymmP m.mm m.mm P.¢ mm ~.mom comma Nwmop c.wm ~.mn m.¢ ow N.mmm mmmom mmwmp F.nm m.¢n N.¢ ow o.mom Nummm mwmvp m.¢m ¢.P~ N.¢ mm m.mm~ mnppm mchp F.¢m m.wo p.¢ mm o.mwm comma mummp m.¢m F.wo ~.¢ mm P.mmm comma emOQF ¢.mm ¢.nm N.¢ ow m.om~ Nmmom nepmp Pump cum? mmmp moor mom? comp mmmF comp mmmr Nomp Pomp comp mmmp mmmp nmmp mmmp mmm_ 11 introduced into the relationship by changes in farm slaughter and inventory liveweights. But, by simple observation of the data in Table II-l, one can see that cattle numbers have increased faster than productivity3 during the period 1930 to 1971. The compound rate of growth of the cattle herd was 1 1/2 percent while productivity increased at a rate of 1 1/4 percent during the period. If we divide the period into two subperiods, 1930 to 1950 and 1951 to 1971, we can see that the differences in the rate of growth are even greater. During the period 1930 to 1950, the cattle inventory grew at a rate of 1 1/4 percent and productivity grew at a rate of 1 1/8 percent. From 1951 to 1971, the cattle herd grew at a rate of 2 percent while productivity grew at a rate of just over 1 1/8 per- cent. Thus, the contribution of productivity to increased quanti- ties of beef being slaughtered has decreased somewhat over time. But, what has this change in the relative importance of productivity taken place? What does this imply for the future of beef supplies? The Determinants of Cattle Herd Productivity: 1930-1971 There are, undoubtedly, many factors that have contributed to increased productivity of the beef herd. The most important factors which have contributed to increased productivity in the past have been [140]: 1. Increased calf crop percentage. 3 see [140]. For further discussion of the importance of productivity 12 2. Decreased death losses. 3. Increased number of animals held to mature size. 4. Increased number of beef cattle in the total cattle herd. 5. Increased average dressed weights. 6. Increased number of cattle fed. It is fairly easy to see how each of these factors has tended to increase productivity over time, but the relative importance of each is uncertain. To examine their relative importance we can functionally relate productivity to each of these factors: Y = F (x4, x5, x6, x7, x8, x9).4 Where: Y = Cattle herd productivity as previously defined. X4 = Calves born as percent of cows and heifers two years old and older in January 1 inventory. X5 = Total cattle and calf deaths as a percent of total January 1 inventory of cattle and calves. X6 = Cattle slaughter as a percent of total cattle and calf slaughter. X7 = Beef cattle as a percent of all cattle and calves. X8 = Average dressed weight of cattle slaughter. X9 = Estimated fed cattle slaughter as a percent of total cattle and calf slaughter. 4Table II-l presents the annual value of each of the above defined variables. 13 Table II-2 presents the estimated relationships between productivity and selected factors hypothesized to affect it for various time periods using ordinary least squares regression analy- sis. In general, the results are consistent with a priori expecta- tions. The two exceptions involve the change in sign of the regression coefficients of death losses (X5) and cattle slaughter (X5) between different time periods.5 It is apparent that X4, X7, and X8 have consistently con- tributed to increases in productivity over time, but such a conclu- sion concerning X5 and X6 would be more tenuous. The most interesting result of this analysis concerns the change in relative importance of each factor over time. If we compare the 1930-1950 period (period I) with the 1951-1971 period (period II), we can see these changes. Comparison of the size of the regression coeffi- cients indicates that calving percentage (X4) has remained quite important over time and may have become relatively more important in period II than it was in period I. Beef cattle as a percent of all cattle and calves (X7) and average dressed weight (X8) both 5There was no apparent reason for the unexpected results concerning X5 during the 1951-71 period. It could be related to the fact that decreased death losses resulted in increased inventory numbers which decreased the productivity measure, ceteris paribus. This would result in the positive relationship between death losses and productivity. The unexpected results with respect to X5 for the periods 1930-1971 and 1930-1950 may be due to the fact that increased cattle slaughter during the 1930-1950 period came from the breeding herd, rather than from increased numbers of fed animals as experienced during the 1951-1971 period. This would result in fewer calves being born and, thereby decrease productivity as it is measured here. .mpnmwcm> Ace mo mocmowwwcmwm Fmowpmwumum asp mcwcemucoo uwmm on can meuw_ .zpwemmchFoUwp—ze memgpxm o» man .mm:_m> h mew mwmmcpcoema cw mgmasszm 14 Aem._v Ame.v_ Aom.v AN_.FV km. em.me+ mo.FNF+ m_.~m+ mm.mp_P+ Ne.m~_+ Fem~-mmm_ AmN.NV Ame.v AQP.NV Ace.mv mm. oo.~m~- No.5mm+ ee.~e+ mo.~o_m+ mm.e~m+ PNmP-PmmF Ao_.PV Amw._v Apm.v Amm._v Amm.mv Am. Am.mem- op.+ mN.Pom+ me.o~+ mm.ommp+ mm.nmm+ _~m_-meF Aum.mv Awm.N-v Lee.-v Ame.ev mm. mo.o_- ma.mm~+ Rm.mm~- _m.kem- m~.moe+ omme-omm_ Ame.mv Aom.ev Aom.F-v A_e.-v Aem.mv om. No.km_- mm.+ am.eem+ mo.eop- N~.eom- Ne.me~+ ommp-ommp Ako.ov AeN.P-V Aeo._-v Amm.kv mm. Ne.o__- m~.mom+ oe.ee- mm.mmm- om.o~m+ PNmF-ommP Ame.ev Aee.kv Ame.e-v Akm.-v mamm.mv mm. Np.mm_- om.+ _o.mem+ ow.mpp- eo.me~- oe.m-+ _hm_-omm_ Acme Augmeez Am_pueu Agapem=m_m Ammo; Aaeeu same mpepmu RV cammmeov eemw RV mppgmu xv epmmov eweuv memzeee< Na Seepmeou x x x x x x to eeeema mmFmeLm> xgoumcmpnxm .mcowgma we?» mzowem> .mmFammem> xgopmcmpaxm umpompmm use zuw>wuo=uoca ecu; mpuomu cmmzuwa mawcmcowumpmg nonmawumm .N1HH mFDMH 15 seem to have decreased in relative importance in their contribution toward increasing productivity. To gain further insights into the increased productivity, we can also look at the effect of increased feeding of concentrates to cattle being fattened for slaughter. The increased number of cattle that are put through feedlots has allowed feeders to increase the rate of gain and the average dressed weight of slaughter cattle and thereby increase beef herd productivity. In the last equation shown in Table II-2, estimated fed cattle slaughter as a percent of total cattle and calf slaughter (X9) was substituted for X6 and X8 (since they are similar measures) for the period 1955-1971. Due to this substitution, the coefficients of X4, X5, and X7 were greatly reduced in size. This indicates beef feeding has been a very impor- tant determinant of productivity during the past 20 years. The previous analyses have shown that the increased supply of beef over time has resulted from an expanding cattle herd and gains in productivity. It has also been shown that productivity has become relatively less important in recent years. Further, it has been shown that there have been changes in the relative impor- tance of various factors that have contributed to productivity growth in the past. But, what does this say concerning the supply of beef in the future? Implications of Findings Concerning Cattle Herd Productivity The apparent reason for the decreased importance of cattle herd productivity over time is the fact that many of the factors 16 have reached their logical, biological, or economic limits. Techno- logical breakthroughs have not been forthcoming to allow productivity to increase. The data presented in Table II-l tend to confirm this idea. But, what will happen to the determinants of productivity in the future? Death Losses Death losses as a percent of total cattle and calf inven- tory have been declining very consistently for quite some time. But, this factor is reaching its logical limit. It may continue to slowly decline from its present level of 3.9 percent, but it cannot go much further. Zero is the absolute, and unattainable, limit. Therefore, this factor will contribute little to future increases in productivity. Number of Animals Held to Mature Size During the past 20 years, there has been a very rapid increase in the number of animals that are held to maturity. The change has involved a diversion of calves from veal slaughter to the feedlot [85]. But, as with death losses, this cannot continue to increase as it has in the past. It may continue to increase from its present level of 93 percent, but it is quickly reaching its logical limit of 100 percent. Beef Feeding There have been large increases in the number of animals fed, and it appears that there is room for expansion of beef feeding, 17 but this is misleading. As defined and presented in Table II-l, fed beef slaughtered as a percent of total slaughter compares fed beef with all other animals slaughtered. Most of the other animals slaughtered currently are mature animals that have been culled from breeding herds. Thus, while they may be available for feeding, the process of putting them through a feedlot will not add that many additional pounds of production. Therefore, while there appears to be some possibility of increasing the number of animals fed to increase productivity, it is not nearly as promising as it might initially appear. Beef Cattle in the Total Cattle Herd The makeup of the cattle herd has been rapidly changing over the past 20 years. Beef cattle as a percent of total cattle have been increasing rapidly and consistently since 1950. This is because the beef herd has been growing while the dairy herd has been decreasing. Future increases in this ratio will likely be much slower. The dairy herd has experienced a rapid decrease since the early 1950's due to large increases in productivity and a reduced demand for dairy products. But it appears to be reaching its equilibrium size [142, p. 82]. During this time of decline, many dairy farms were shifting from dairy to beef herds [142, p. 8]. Thérefore, the decrease in the number of dairy animals has provided an impetus to the growth of the beef cow herd. But, it does not seem possible that this will continue in the future. If the dairy herd has reached, or is quickly approaching, an equilibrium size, 18 there will be less enterprise shifting in the future. Therefore, any growth of the ratio of beef cattle to total cattle in the future will require substantially greater increases in the absolute number of animals added to the beef herd. Calving Percentage One of the most consistent contributors to the growth of productivity in the past has been the increasing calving percentage. This factor also holds promise of continuing to increase produc- tivity. Not only is there a possibility of expanding the calving percentage from the 90 percent experienced recently to something closer to 100 percent, but there is also the possibility of techno- logical advances that would provide for multiple births (i.e., calving percentage in excess of 100 percent). If such advances were to take place this could increase the calving percentage at a faster rate that has been experienced in the past. But, such advances are not expected to take place for some years; and widespread adoption of the new technology would take even longer. Thus, the future looks bright for improved calving rates, but this is subject to a great deal of uncertainty and is probably some time off. Average Dressed Heights Another factor that shows some promise for the future is that of increasing the average dressed weight of cattle slaughtered. While this is a viable possibility, there are two major problems. Increasing the average sale weight of cattle currently being fed is quite costly due to poor feed conversion by heavy animals [87]. Also, It) 1" [JIIIIIIIII III-II! 19 such cattle tend to produce fatter cuts of beef that may not be acceptable to the consumer. Therefore, feeding to heavier weights may require widespread feeding of different cattle breeds that pro- duce larger and leaner final carcasses. But, the economics of feeding such cattle is uncertain. It may not be any more economical to feed these to heavier weights than it is the traditional type of feeder animal. Thus, we again have uncertain prospects for increas- ing cattle herd productivity. Summary Analysis of past increases in the beef supply from a physical production standpoint indicate that the beef producing industry probably has exhausted some of the sources of increased productivity which it has enjoyed in the past. The ability to produce more pounds of beef from a given size of inventory may be greatly curtailed in the future. Therefore, to enlarge the supply of beef in the future may require much greater increases in the cattle inventory than it has in the past. In particular, there will have to be much larger increases in the number of beef cows in the cattle inventory to produce feeder calves which are fed to produce the type of beef demanded by consumers. This suggests that one should look at past changes in the methods of producing and feeding beef animals to gain further insights into past and future increases in the beef supply, a topic to which we now turn. 20 RECENT CHANGES IN METHODS OF BEEF PRODUCTION The Feeder Calf Industry Traditional Sources of Feeder Calf Supplies Traditionally, feeder calves have come from both the beef and dairy herds. In general, almost all of the calves produced by the beef herd that are not kept as replacement animals are put through a feedlot before they are slaughtered. In addition, a large part of the calves produced by dairy herds, which are not used for replacements or sold as vealers, also go through feedlots before slaughter. During the past 10 to 15 years, there has been a tre- mendous decrease in the number of animals that are slaughtered as veals. These appear to have been dairy calves that have been diverted from veal slaughter to the feedlot. But, the number of calves that the dairy herd can provide has about reached its limit. In fact, a dairy herd that continues to slowly decrease to an equilibrium size will provide fewer feeder calves in the future. Thus, it appears that the beef industry will necessarily have to increase the size of the beef breeding herd if it is to increase the supply of feeder calves in the future. Feeder Calf Production by Beef Herds Maintenance of Tradition In general, the method of producing feeder calves by beef herds has not changed a great deal over time. The beef cow herd has typically been characterized as a relatively small enterprise 21 which is normally of a supplementary nature. This is still the case today. Tables II-3 and II-4 point out this fact. Table II-3 shows the distribution of beef cows by size of herd for 1964 and 1969. However, the data are not directly compar- 6 The 1964 number of beef cows is on an able between time periods. all-farm basis while the 1969 numbers are for farms with gross sales of $2,500 or more. To lend comparability, the number of beef cows on farms with $2,500 or more in gross sales are included in Table II-3. It would seem reasonable that the majority of the farms and, therefore, beef cows that are not accounted for in the 1969 data would include beef cow herds in the smallest size group. If one compares only the change in beef cow numbers by size of herd for larger herd sizes, it appears that there has been some move- ment toward larger herds. Nevertheless, the majority of the beef cows are still in relatively small size production units, since a herd of 100 cows would not be considered an extremely large agri- cultural enterprise by today's standards. Table II—4 shows the number of farms with beef cows by size of herd. Again, the data are not comparable between years. But, if one compares the larger herd size groups, there seems to be some trend toward farms with larger beef herds. This is particularly true for the corn belt and lake states region. Yet, the trend toward larger production units in the beef cow industry has not been as pro- nounced as it has been in beef feeding, as will be shown later. 6Lack of data comparability is due to a change in the method of reporting by Census of Agriculture. 22 Table 11-3. Beef cows by size of herd and regions, 1964 and 1969. Size of Beef Cow Herd Region 1 to 19 20 to 49 50 to 99 1964 1969 1964 1969 1964 Number Northeast 143,215 89,396 81,156 96,735 32,222 Corn Belt and Lake 1,925,374 1,172,146 2,102,916 2,249,136 722,998 States Southeast 2,318,764 839,325 2,047,382 1,782,770 1,209,959 §$;§:§r" 718,500 439,947 1,689,675 1,476,247 1,451,791 Southwest 1,165,508 396,775 1,643,318 1,455,180 1,253,000 Mountain 179,167 97,005 469,469 382,230 691,188 Pacific 202,350 78,033 » 240,146 192,129 266,545 48 States 6,652,878 3,112,627 8,274,562 7,634,427 5,627,703 Percent Northeast 51.4a 33.6a 29.1 36.2 11.6 Corn Belt and Lake 38.0 21.7 41.5 41.7 14.3 States Southeast 29.6 13.2 26.1 28.0 15.5 Northern Plains 12.2 7.3 28.7 24.5 24.6 Southwest 15.2 5.5 21.4 20.2 16.3 Mountain 4.5 2.4 11.8 9.3 17.3 Pacific 10.7 4.7 12.7 11.5 14.2 48 States 20.4 10.0 25.3 24.6 17.3 aData not directly comparable since 1964 numbers are on an all-farm basis and 1969 numbers are for farms with $2,500 or more in gross sales (i.e., Class I-V farms only). Size of Beef Cow Herd 23 Total for 50 to 99 100 and Over Total Class I-V Farms, 1964 1969 1964 1969 1964 1969 Number 44,148 22,080 36,111 278,673 266,390 181,264 1,216,989 320,185 752,942 5,071,473 5,391,213 4,244,542 1,321,500 2,258,288 2,419,305 7,834,393 6,367,900 5,395,583 1,584,534 2,033,166 2,518,985 5,893,132 6,019,713 5,630,201 1,483,560 3,623,792 3,888,222 7,686,118 7,223,737 6,022,175 637,563 2,650,601 2,973,763 3,990,425 4,090,561 3,760,093 228,909 1,176,375 1,170,003 1,885,416 1,669,074 1,664,143 6,517,203 12,084,487 13,759,331 32,639,630 31,028,588 26,898,021 Percent 16.6 7.9 13.6 100.0 100.0 22.6 6.2 14.0 100.0 100.0 20.8 28.8 38.0 100.0 100.0 26.3 34.5 41.9 100.0 100.0 20.5 47.1 53.8 100.0 100.0 15.6 66.4 72.7 100.0 100.0 13.7 62.4 70.1 100.0 100.0 21.0 37.0 44.4 100.0 100.0 Sources: [166] and [167]. 24 eeo.mm~ mme.~mm._ _mo.oo mmo.Pm mmm.nm em_.em mee.mem mom.mum ~_o.mmm www.mom mmpeom we eme.mm NNm._m meo.e omm.e emm.m mew.m oeF.© mew.“ mm_.o_ mem.mm ueeeuea ANN.me mem.mm eem.__ Amm.op __F.m mew.m mmN.F_ mme.e_ mne.op mmw.mm eeaeeeoz mmo.NNF mwN.mNN eme.mF mme.m_ mam._m m_u.w_ www.6e meo.mm oem.mm emm.~e_ pmmeeeeom mme.mmp omm.me_ mom.mF ome.o_ mmm.m~ Nmm._m mam.ee eme.em mom._e eme.en me_eea :LgHLOZ F_N.Nw_ mme.Nme emo.o_ _om.m meo.om Nmm.m_ eem.wm eme.oe meo.me emo.emm Smeaeueom mmeeem e_m.mmm nom.emm mmm.e mmo.N mou.m_ N_m._e www.me mmm.ma mme.ow_ emp.wem axes new “—6neeou nam.o_ woe.em NON am_ new Nee e_m.m new.m mae.m_ eo_.mm “meeeeeoz gmnfizz weep eom_ mom, eemp mom_ ewe, mom. eem_ emea_ eeem_ _euoe ee>o eee cop mm 66 gm me op om m_ as _ eoemmm ago: Zoo Comm mo wwwm .momp use eomF .mcowmwg new ego; we m~wm an .mzoo mmmn ewe: magma .etHH mFDmH 25 .mke_g eee Heepg ”mmoezom .Azpco mate» >1H mumpu ..m.wv mmpmm mmoem cw wees Lo comma zpwz ween; toe mew mgmassc mom, can mwmmn ELmCIFFm cm no men meansac comp mucwm mpnmgmaeou apuomswu poc macaw o.oo_ o.oo_ c.00— o.cop o.oop o.oop o.oo_ c.00— o.oop o.oo~ o.ooF o.oo_ o.oop o.oop o.oop o.ooF F.m P.n_ m.mm n.~— m.op m.m N.N ~.F m.m m.m o.wF m.m ¢.o N.m— F.¢F —.Fm o.mp m.wr o.P_ m.w _.¢ m.o v.“ m.m_ _.w N.mp _.¢ ¢.m m.~ ucmugwm n.mm o.mm N.NN m.nm ¢.nm m.Nm m.mm m.mp _.~N F.mF w.¢m o.¢N o.mm m.m~ o.m¢ m.me m.¢m ¢.Pm m.mm w.Om 0.0m em.e~ «.mm N.mm ¢.o¢ o.mo m.m¢ N.mn F.¢n em.mm mmuapm we oeeeeea cwmucaoz pmmzsuzom mcwmpm cgmcpgoz “mmwcusom magnum axe; new e_6eeeoo ammmspcoz 26 Reasons for Maintaining Tradition There has been a relatively small amount of recent research 7 Therefore, little is known about concerning the beef cow industry. why there has been little change from the traditional method of producing feeder calves. It is generally attributed to the fact that a beef cow operation is relatively low profit in nature and can only be a viable undertaking where there are large amounts of under- utilized roughage which can be used by beef cows at a very low 8 Therefore, beef cow operations have normally developed as cost. a supplement to some other major farming operation or as a part time farming operation or where the resource base was suited to very few alternative agricultural enterprises. Thus, the industry has developed and maintained its structure of a very large number of small production units. The increases in number of beef cows on farms have been due to both an increase in the average size of herd and the forma- tion of new herds which have resulted from a shifting of agricul- tural enterprises. The major shifts in enterprise have involved the replacement of beef cows on many farms that were previously dairy farms. Also, there has been some expansion of the beef cow herd in the southeastern region of the United States [53, 114, 123]. 7For a very recent comprehensive study of cattle raising in the United States, see [142]. 8Numerous studies are listed in the bibliography that have reached this type of general conclusion. In particular. see [8], [53], [98]. 27 Therefore, it appears that the beef cow industry has not experienced the trend toward increased concentration of production which has characterized other agricultural industries. This maintenance of the traditionally small beef cow herd may have important implica- tions for the supply of beef in the future, as will be pointed out later. The Beef Feeding Industry Recent Changes In comparison with the beef cow industry, the beef feeding industry appears to adopt changes much more readily. As was shown in Table II—l, there have been sizable increases in the feeding of beef in the past 10 to 15 years. The increases in beef feeding have been carried out by a decreasing number of producing units as shown by the data in Table II-5. The number of small feedlots (capacity of less than 1,000 head) has decreased during the 1962- 1972 period while the number of large feedlots (capacity of 1,000 head or more) has increased. However, the full extent of the changes that have taken place are not readily apparent with this analysis of change in number of feedlots. The change in number of cattle marketed by feedlot size has been more dramatic than the change in feedlot numbers, as illustrated by the data in Table II-6. The proportion of cattle marketed by large feedlots has increased from 37 percent in 1962 to 62 percent in 1972. And, this 62 percent was fed by only 2,089 producing units while the remaining 38 percent was fed by 151,347 28 .mmmpu ucm memFH "mmuezom mgoz go new: oooup mo Nuwumawo saw: moorummu;mo ucmogmn o. o.wm m.o~ m.ow w.m m.ow ¢.w N.mm m. w.nm F. m.mm F. m.mm ucmugma bee: coo.P twee: sewueeeu saw: mac—vow; mo vcmuema mmpeom «N ueeeoea :wmuczoz ummchaom mcpmpm cgmcugoz e_mm eeoo mmpmpm mxmg mwo.~ mmm.~ Nm¢._ nem.PmF wFN.Pom Num.mmm mmpmam mm mom pmm ewm mmm Nam mm¢.p owmwuma me mFN mop mo¢.~ mmm.~ nwm.m cwmucsoz com Nae omm mmn.P enm.~ omm.m ummzzuzom mm“ omm mwm evo.mm www.me wpn.mv mcwmpm cemzagoz mom com mop www.mw oem.mpp v¢m.m- upwm :Lou mu mm em Nun.wm mmm.mm o~¢.mm mmpmum mxmu Lonesz mnmp Romp Romp Nom_ momp mum? wee: to new: coo.F to xeeoeeeu ;“_z mee_emma ewe: coo._ twee: speueeeu new: mpo_emeu AI‘ cowmmm .Nsmp .mmmp .Nomp .mcowmme an manoem xuwumamu popvmme 03p cw mmmucwuemq new mpoficmmm mpuumu mo Longsz .m-HH wpnmp 29 .mmm—U ece mempu "meuesom e._e e.me e.em N.em e.em e.we eeewem Ne e.ee m.ee m.ee e.m N.m m.e eeewewa e._e m.e~ N.Ne m.e ~._N e.Nm eeweeee: m.ee N._e e.ee m.N e.e e.ep eeeeeeeem N.me e.ee e.m~ e.em F.me _.ee meewpa eeeeeeez N._P e.e e.e e.ee e.~e ~.ee ePee etee e.e m.“ N.m m.Fe “.me e.ee eeewem exwe uceueee etc: to ewe: eee._ .. ewe: oee.w eo eeeewewe :eez eee_eee: an eepexmmz,mhmueu mo uceueen Lees: zpweeqeo new: meopeeeu xn;mepexeez eppawu mo uceoeee mmm.ep eee.e me~.m e_N.eF mpm._P ee_.e eeewem NN ~om.~ eew.~ eme.m we ee_ ”we ewewewa ome.~ mee._ eeu eeN eoe New eeweeeo: mme.e Nee.~ New.F ewe New New eeezeeeem eew.e eee.~ men emm.~ eme.~ emN.~ eeewpa eteeeee: KN: emm emu ~e~.m eee.e mee.e epee eeee we, ee_ em Nem.F emm.F eee.F meewem eew: ewe: eee._ ee tense: Nee_ Nee_ Nee_ Nee_ Keep meme etc: ee ewe: eeo._ ewe: coo._ eeeee: ee eewewewe :eez weepeee: ea eeeeeewz e_eewe eo Lease: Leena zpwoeaeu sew: mpopeeem an eeeeeew: eeeewe ee eeeEez .Nnmp .nmmp .Nmmp .mcowmee An manoem xpwoeawo popeeem oz“ an emeuceueea ece eeuexges epppeu mo Lensez .oumH apneh 30 producing units. This supports the general idea that there is a much higher degree of concentration of production in beef feeding than there is in feeder calf production, or many other agricultural industries. In addition, there has been a trend toward geographic concentration of production. The northern plains, southwest, and mountain regions have increased the proportion of cattle they feed at the expense of the other regions. Reasons for Change There has been extensive research into why the changes in 9 beef feeding noted earlier have taken place. By and large, the research findings have attributed the trend of much larger feedlots to the economies of size characteristic of beef feeding operations.10 Economies of size have resulted in lower average costs of production and, thereby encouraged feedlot operators to expand their producing units. The reasons for the geographical concentration involve the availability and cost of productive inputs. The increases in cattle feeding in the southwest, as well as other areas, have largely been associated with the increased availability of feed grains, feeder cattle, credit, good climatic conditions and other necessary resources [126, 84]. 9For comprehensive studies of cattle feeding in the United States, see [121 and 60]. 10Numerous studies are listed in the bibliography that have reached this general conclusion. In particular, see [25, 59, 71, and 182]. 31 In review, one can see that unlike the feeder calf industry, the beef feeding industry has undergone change. It has moved toward fewer producers with more sizable operations while beef cow herds have maintained their tradition of small production units. This incommensurate rate of change between the two major sectors of the beef production system could have an important impact on the supply of beef in the future. Implications of Disproportionate Rates of Change To achieve economies of size in beef feeding, feedlot operators have had to undertake large capital investments. These capital investments have tended to lower average variable costs of production. But, this reduced average variable cost has come about at the expense of increased fixed costs as a result of the added fixed investment. This type of change has two effects on the beef production system. First, the lower average variable cost of production makes it possible for large feedlots to continue to feed animals during periods of low output prices that would force smaller feedlots to cease production [39]. Economies of size also allow larger feedlots to bid up the price of feeder calves above what a smaller operator would be able to pay. Since the larger feedlots have a lower cost per pound of gain, they can pay more for a feeder calf than small feedlots and still make a profit. As a result, the large feedlot has a demand for feeder calves that is at a somewhat higher level and more stable over time than that of the small feedlot. Therefore, 32 the aggregate demand for feeder calves should tend to take on the characteristics of the large feedlot's demand since large feedlots are becoming more dominant in the industry. Secondly, the increased investment in fixed productive inputs acts as a deterrent to the firms shifting from one enter- prise to another. In particular, the large feedlots with more specialized fixed inputs cannot easily shift from beef feeding to feeder calf production. During the cycles which the cattle industry has experienced in the past, there were often shifts in production between cow-calf and feeding operations depending upon the compara- tive advantages of each enterprise [14]. The net result of these two particular effects makes expansion of the beef cow herd more difficult now than it has been in the past. First, the increased price for feeder calves makes investment in heifers for herd expan- sion more costly. Secondly, the failure of producing units to shift from beef feeding to beef cow herds reduces the rate of expansion of the beef cow herd. Therefore, it may be more difficult to expand the beef cow herd in the future than in the past. In addition, the growth in the size of feedlots may be a partial explanation of the fact that beef cow herds have not recently experienced the cyclical nature of expansion and contraction which was characteristic of the industry prior to 1959. Why have beef cow herds remained relatively small? The answer would seem to involve the economies of size in feeder calf production. Either economies of size do not exist in feeder calf production, or the required investment has been great enough to 33 discourage large gains in beef cow herd size. While little research has been done in the economies of size of cow-calf operations, there are indications that economies of size exist in cow-calf operations, which may be significant [11, 188]. This suggests that the prohibi- tive nature of the investment requirement may be the reason for the maintenance of relatively small beef cow operations. SUMMARY For the most part, this analysis of the beef industry sug- gests that increased beef production in the future may be more difficult to achieve than it has been in the past. A large part of past increases in beef production has been due to increased produc- tivity. But, it may be more difficult to achieve increased produc- tivity in the future. In addition, it may be more difficult to expand cattle numbers in the future than it has been in the past. So all in all, future increases in the supply of beef may come much more slowly and with greater difficulty than they have in the past. Chapter III THE THEORETICAL RELATIONSHIPS BETWEEN MONETARY POLICY AND THE SUPPLY OF BEEF INTRODUCTION The previous chapter described the historical changes that have taken place in the beef producing industry. That analysis pointed out the possible bottlenecks that have developed or may develop in the future. The major findings pointed out that the expansion of the beef cow herd is critical to growth of the supply of beef in the future. In addition, it was pointed out that future growth of beef feeding facilities may also be important, but rela- tively less important than expansion of the beef cow herd. The opening remarks of this study hypothesized how one factor may have inhibited the expansion of the beef industry in the past. This factor was monetary policy and the effects it has had on the cost and availability of credit to the beef industry. This chapter will set out the theoretical relationship between monetary policy and the beef industry. To do this we will look at the theoretical and empirical research which has been carried out concerning other sectors of the economic system and apply similar reasoning to the agricultural sector and the beef industry in particular. 34 35 MONETARY POLICY Definition of Monetary Policy Before we can explain the theoretical relationship between monetary policy and any facet of the economic system, we must define what we mean by monetary policy. There are undoubtedly many defini- tions of monetary policy. One of the most simple and concise has been set forth by Samuelson [135, p. 55]. By monetary policy we mean primarily Federal Reserve actions designed to affect the tightness and easiness of credit con- ditions, and the behavior of the total supply of money and money substitutes (that is, the supply of currency, checkable bank deposits, various categories of time deposits, and other liquid instruments). Administration of Monetary Policy The administration of monetary policy is the responsibility of the Federal Reserve System. There are a number of tools the Federal Reserve can use in regulating the supply of money and credit conditions. The primary tools of the Federal Reserve include open market operations, reserve requirements, the rediscount rate, various interest rate regulations, security margin requirements, and moral suasion [187]. While the Federal Reserve has all of these major tools which it can use to manage the nation's money supply and credit conditions, the most important tool on a general day-to-day basis is open market operations. In practice, most of the other policy tools have less actual impact on the economic system or are used less frequently to implement changes in monetary policy on a 36 short term basis, but act as a body of rules and regulations within which the monetary system must operate. Open market operations by the Federal Reserve involve the buying and selling of government securities in the money market. This buying or selling of government securities is the primary method of controlling the supply of money and credit conditions in 1 As the Federal Reserve goes to the market and the short term. offers to buy and sell government securities, it acts to change the existing market prices of government securities and thereby the yield of such securities. Since government securities are substitutes for other forms of investment, the open market activity also affects the market prices and yields of investment alterna- tives in the money markets. This participation of the Federal Reserve in the open market has both an initial and a secondary effect on the economic system [135]. The Initial Effect of Monetary Policy The initial effect of monetary policy on the economic system results from the Federal Reserve's open market activities. As it enters the money market to buy or sell securities, it changes the security prices and yields immediately. This in turn causes 1The Federal Reserve both buys and sells government securities in the money markets as it services the nation's banking system. Therefore, monetary policy implementation through open market operations is a result of the net effect of these day-to-day buying and selling operations. Future use of the terms buy and sell refer to the net effect unless otherwise specified. 37 other participants in the market to change their supply and demand bids on government securities and other securities as well. For example, if the Federal Reserve is attempting to reduce the money supply it would go into the market and sell government securities. This selling of securities in effect increases the supply of securities and forces the security prices down and the yield on securities up. In essence, this selling of securities by the Federal Reserve has forced the public to trade their holdings of cash and demand deposits for government securities thus reducing the money supply. It has also changed the yield on these securities and thus the credit conditions that exist in the money market. But the effect is not limited to the securities bought and sold by the Federal Reserve. Since the market price of government securities has fallen and the yield has increased, investors holding other types of securities such as corporate bonds, mortgages, etc., will sell some of these alternative forms of investments and buy govern- ment securities. As a result, the prices of other types of invest- ments will fall and their yields will go up just as yields on government securities did. Thus, the effect of the Federal Reserve's actions to reduce the supply of money tends to spread throughout the money markets. It not only reduces the money sup- ply, but it also changes the credit conditions that exist in the money markets and throughout the economic system. This is the initial effect of the Federal Reserve's actions. But there is also a secondary effect due to the fractional reserve banking 38 system that exists in the United States, which has a greater impact on the economic system. The Secondary_Effect of Monetarngoligy The lower security prices and increased yields that have resulted from the Federal Reserve's actions will force more people to invest idle funds not previously invested. Most of these funds will come from the banking system and act to reduce demand deposits. As a result, there will be fewer dollars in the banking system to meet reserve requirements. This reduced amount of reserves will pyramid the secondary effects of the reduced money supply. Since commercial banks have been forced to reduce their holdings of required reserves, this encourages them to reduce the amount of loans they have outstanding. Therefore, the supply of loanable funds has been reduced which tends to force up the cost of credit. This is the secondary effect of the Federal Reserve's action to reduce the money supply. In so doing, it has also changed the credit conditions that exist in the economy. A change in credit conditions does not simply mean an increased loan cost or interest rate. It also affects the banking system's psychology of loan making. If loanable funds are scarcer now than they were previously, a bank may not only increase its interest charge, but it may refuse to loan as many dollars as it has in the past, i.e., it will ration credit. The reasons for such actions by a bank may be quite varied, but most of it is attributable to the lack of loanable funds in the whole economic 39 system. Therefore, there has been not only a change in the interest rate or cost of credit, but also a change in credit availability-- all of which have previously been termed "credit conditions." Thus, one can see how the Federal Reserve's administration of monetary policy has both an initial and a secondary effect on the supply of money and on credit conditions in the economic system. But how does this affect various sectors of the economic system? How Monetary Policy Affects the Economic System We have seen how monetary policy affects the supply of money and credit conditions. Now let us look at how these changes affect the rest of the economic system. The previous example used a decrease in the supply of money. Let us continue with this example to see its effects on various components of the economic system. Investment The change in credit conditions resulting from the Federal Reserve's actions decreases investment in the economy. This results for two reasons. First, the interest rate that firms must pay is higher. Therefore, as a firm looks at all alternative investments it has, fewer will be profitable at the higher interest rate. Hence, fewer investments will be undertaken by firms. Secondly, in addition to a higher interest rate, there are fewer loanable funds in the economic system. Therefore, as firms apply for loans to finance the profitable investments that remain 40 after considering the higher cost of financing, there are a greater number of loan refusals by banks due to external credit rationing. Loan applications may be viewed with greater skepticism, because there is greater risk at the higher interest rate, and loans are refused to firms. Therefore, this credit rationing acts to decrease investment as does the effect of an increased rate of interest. Thus, aggregate investment in the economic system has decreased, or it has failed to increase as fast as it would have in the absence of the restrictive actions of the Federal Reserve. This, in turn, affects other components of the economic system. Employment, Gross National Product, Consumption and the Price Level The reduced level of investment which results from the Federal Reserve's restrictive monetary policy is reflected through decreased plant and equipment expenditures. Firms planning expan- sions or thinking of starting new operations are forced to abandon these plans due to their inability to acquire sufficient capital or to acquire it at a cost that will make the investments profit- able. This, therefore, results in a decreased need for people to work in the plants and operate the equipment. Thus the action of the Federal Reserve lowers the level of employment in the economy. Due to the reduced expenditures for plant and equipment and the employment of fewer workers, the output of real goods and services is less. Therefore, gross national product fails to grow at the rate it would have with a less restrictive monetary policy. 41 The economy's rate of growth, as normally measured by economists, has been reduced. Consumption is also reduced in the economic system for two reasons. First, the reduced supply of money and more restric- tive credit conditions makes it more difficult for consumers to purchase what they desire. This is not only due to the fact that they may have fewer dollars to spend, but they have more difficulty obtaining loans for consumer goods. These loans also carry a higher rate of interest discouraging their use. Secondly, the reduced level of employment means more jobless consumers will reduce their consumption. For these two reasons, aggregate consumption in the economic system is reduced. Thus far, we have shown that a restrictive monetary policy reduces investment, employment, gross national product, and consump- tion. These reductions are the result of decreased demands for vari- ous products and services. This reduced demand for various products tends to lower the prices of various products and services in the economic system. Hence, the level of prices in the economic system is reduced, or fails to increase at the rate they would have in the absence of the restrictive monetary policy. Therefore, restrictive monetary policies are shown to be a tool for controlling price levels. This discussion of how monetary policy affects the economic system could just as easily be reversed to the case of an expan- sionary monetary policy. Results would simply be reversed. This type of theoretical reasoning has been used as the rationale for the use of monetary policy to aid the economic system in achieving 42 the goals of full employment, price level stability and economic growth. As such, there is wide acceptance of this theoretical argument for using monetary policy to aid in achieving these three goals of economic policy. But there is much less agreement con- cerning the actual effectiveness of monetary policy. In particular, there is a large amount of disagreement over the effect monetary policy has on investment. Some economists feel that monetary policy has no effect on investment while others feel it has. Therefore, some feel money "matters" and others feel money "does not matter." While the effect of monetary policy on the whole economic system is not the focus of this study, its effect on investment certainly is. Therefore, if monetary policy is formulated to move the economic system toward these economic goals, we would like to know how this will affect investment in the economic system in general, and the beef producing industry in particular. To facili- tate further investigation we can set forth the factors that theoretically act to determine the impact of monetary policy changes on investment by individual firms in the economic system. Determinants of the Impact of Monetary Policy on Investments by Individual Firms I‘ There are many factors that act to determine how individual firms react to changing monetary conditions. The most important factors have been set forth by Crockett, gflLJEL. [62] and Maisel [95]. These include: 43 1. Size of firm. 2. Ability and/or willingness of firm to absorb a higher cost of credit. 3. Proportion of investment made that requires credit. 4. Amount of credit required per unit of investment. 5. Institutional characteristics of credit market serving the firm. 6. Degree to which traditional lenders are influenced by monetary policy. Given these major determinants, let us look at how each affects the impact of changes in monetary policy and credit conditions on invest- ment by individual firms. Size of Firm The size of firm acts to determine the impact of changing credit conditions in at least two ways. First, larger firms will have more alternative sources of obtaining credit. A small firm may be limited to obtaining credit from one or two small banks whereas a much larger firm may be able to deal with a greater number of larger banks or even participate in the money markets on its own, something a small firm is unable to do. Secondly, a large firm may have much greater bargaining power when negotiating credit terms with traditional credit sources. A large firm may do a much bigger volume of business with a particular bank than does a small firm. The large firm can then use this as leverage in obtaining more favorable credit terms than a small firm could obtain. 44 Therefore, one would expect the impact of monetary policies to be greater on small firms than on large firms. Ability of Firm to Absorb Higher Credit Cost This relationship is very straight forward in nature. If a firm is planning an investment that has a relatively high expected rate of return considerably above the firm's cost of credit, an increase in the credit cost will not have a great impact. For example, if an investment has an expected rate of return of 40 percent, an increase in the cost of credit from seven to nine percent will have little effect on the decision to invest. But, if the expected rate of return is 10 percent, the increased cost of credit might cause the firm to at least reconsider its invest- ment decision, and possibly force it to abandon the planned investment. Thus, we can see that firms considering investments with low rates of return or high risk will experience the impact of monetary policies to a greater degree than firms with projects offering much higher rates of return or lower risk. Proportion of Investment that Requires Credit The larger the proportion of an investment that requires credit, the greater the impact of monetary policy on the firm making the investment. If a firm is planning an investment that requires 80 percent of the cost to be financed by credit, a change in the cost and availability of that credit will have a large impact on the decision to make the investment. The amount of credit 45 available may be insufficient to meet the needs of the firm or the increased financing cost for 80 percent of the investment may make the project unprofitable. But, an investment proposal that requires only 20 percent of the cost to be financed through credit will be affected to a much lesser extent. Amount of Credit Required Per Unit of Investment The impact of monetary policy on a given firm will also depend on the credit required per unit of investment. Assume we are looking at two similar firms that have plans to make investments in the near future. One firm plans to invest in a series of small projects, while the other firm is planning one large lump sum investment project. If a restrictive monetary policy creates a relative shortage of credit, the first firm may be able to undertake part of the projects in the proposed series of investments; but the reduced credit availability may force the second firm to abandon the one large proposed investment. Therefore, the larger the amount of credit required per unit of investment, the greater the likelihood that monetary policy will influence the investment decision. Institutional Characteristics of Credit Market Serving the Firm If the credit market serving an individual firm has institu- tional characteristics that prohibit the free flow of capital and credit, this will tend to amplify the effect of monetary policy changes on the firm. These institutional characteristics may mani- fest themselves in the form of rules and regulations or tradition. 46 But, regardless of reasons, they can cause an increased impact on the firm's decision to invest. For example, if certain rules pre- vent institutions in the money market from paying above a certain interest rate, these institutions will be unable to attract funds in the money market. In turn, the firms served by these institu- tions will experience a greater shortage of credit than other firms being served by institutions who do not have rules and regulations that deter the free flow of capital and credit. Monetary Policy Influence on Traditional Lenders This factor is much like the previous factor in its effect on the impact of monetary policy on a firm's investment decision. If traditional lenders with which the firm has done business in the past react a great deal to monetary policy changes, this can amplify the effect of changes in credit conditions. If traditional lenders are more inclined to serve certain firms under tight money conditions and other firms when conditions change, this can influ- ence all firms to a great extent. For example, if a firm's tradi- tional sources of credit tend to service other industries during tight credit periods, then this firm will face a limited supply of credit from its traditional source. This will force the firm to either reduce the amount of investment undertaken or to find alter- native credit sources. This process of finding alternative sources of credit can be quite costly in terms of both time and money and may act to prohibit such searches for alternatives. 47 Total Impact of Monetary Policy In review, we can see that, theoretically, the impact of changes in monetary policy and credit conditions depends on a number of factors. Some of the determinants are characteristics of the firm while others are related to the credit market serving the firm. Therefore, the firm may be able to alter some of the condi- tions, but it is unlikely that it can alter all of them to improve its position relative to changes in monetary policy. Therefore, monetary policy changes and changing credit conditions could have a large impact on some industries and firms while it has a much smaller impact on others. But, the discussion thus far has pre- sented only the theoretical arguments. To substantiate or refute these arguments, let us look at some of the empirical evidence. EMPIRICAL RESEARCH FINDINGS CONCERNING THE EFFECT OF CHANGING MONETARY AND CREDIT CONDITIONS 0N INVESTMENT As noted earlier, all economists do not accept the theoreti- cal relationship between monetary policy and investment which has been set out here. One possible reason for this is the fact that investment did not respond to the low interest rates that were prevalent during the 1930's [23]. In addition, early empirical investigation tended to refute the idea that credit conditions have an effect on investment decisions. More recent work has found evidence to support the hypothesized relationship. 48 Results of Studies Using_Business Attitude Surveys A number of studies using business attitude surveys were conducted during the period from the late 1930's to the early 1950's. In general these surveys found that business firms did not consider the interest rate or cost of capital funds when making investment decisions. If firms did consider these factors, they were usually of less importance than other factors affecting the decision. A later survey conducted by Crockett, gt_al, in 1967 cover- ing 8,876 firms found that financial market developments had greater influence on business investment than that found by similar surveys conducted in 1949 and 1955 [18]. They concluded that monetary con- ditions existing in 1966 had tended to reduce business fixed invest- ment and inventories in 1966 and 1967. But the magnitude of the effect was quite small. The estimated reduction of investment was in the range of .67 percent to 1.33 percent of the investments that actually took place. While these survey results seem to refute the hypothesized relationship between monetary policy and investment, they have been criticized by White [179, 180] on numerous counts. The major flaws in the survey studies included nonresponse, nonrepresentation of small firms in the surveys, method of asking questions that encouraged negative responses, and greatly biased samples in some cases. White therefore suggests that the results of the surveys may vastly under- estimate the effect of monetary conditions on investment decisions. 2For a review and critique of such studies see [179]. 49 Thus, we seem to be left up in the air concerning the hypothesized relationship. Further evidence may help settle the question. Results of Econometric Studies There have been many econometric studies of investment behavior using various theories. Excellent surveys of such studies are contained in Jorgenson [79] and Mann [103]. A number of these studies have attempted to test the impact of monetary policy and credit conditions on investment behavior by firms in various indus- tries. The investigations have attempted to relate measures of investment that are appropriate for an industry to factors that should theoretically influence it such as previous investment, profits, capacity utilization, internal funds, some measure of the cost of external finances, and other variables. The particular concern of this study is to look at the effect of changes in the cost of external finances, which reflect changing monetary policy and credit conditions, on the investment behavior of different industries. Residential Construction One of the industries for which the evidence overwhelmingly supports the hypothesized effect of monetary policy on investment is the housing industry. Studies by Liu [89], Maisel [95], and Muth [117] have found that the rate of interest (measured in various ways) does affect investment in residential construction. In addition, Maisel derived a number of measures of credit availability [95, 50 p. 494]. These measures included mortgage offerings by private holders to the Federal National Mortgage Association and savings available for mortgages. He also found that credit availability had an impact on housing starts. The magnitude of the effect of monetary policy on housing starts has been estimated by Maisel to account for about one-third of the changes in housing starts. This indicates that monetary policy is quite important in determining investment in the housing industry, much more so than the survey studies previously reviewed. Also, the relationship appears to be widely accepted by experts that have studied the situation. This wide acceptance has been reflected by the fact that some of the institutional rules concerning the capital markets serving the housing industry have recently been changed to remove some of the problems of credit availability [16]. Commercial Construction Bischoff [5] and Hambor and Morgan [62] have found invest- ment in nonresidential construction to be related to monetary condi- tions in a manner similar to the findings concerning the housing industry. The results were not as dramatic or conclusive as those for residential construction. Both studies found that measures of the cost of capital significantly affected investment in such items as office buildings, stores, restaurants, and garages. Hambor and Morgan also found credit availability to be an important consideration, but Bischoff did not find capital rationing to be an important determinant 51 affecting investment decisions. Thus, we again have some evidence that changes in monetary policy and credit conditions do influence investment decisions. Business Investment There have been a number of studies concerning the fixed business investment by both manufacturing and nonmanufacturing firms. The studies used various measures of the cost of capital and found evidence to support the hypothesized relationship between credit conditions and investment decisions.3 None of the studies explicitly considered the effect of credit availability. The general findings support the relationship suggested here, but there were exceptions. Liu found that the interest rate was not statistically related to the investment in durable equipment by manufacturing firms. Evans found similar results for the railroad industry, but the other five manufacturing industries studied proved to react in a manner consistent with a priori expectations. Thirteen manufactur- ing industries were studied by Evans and Resek. They found the majority of the industries responded in the manner expected. In the regression models used, only four or five industries appeared to react in an unexpected way, and none of these regression coeffi- cients were found to be statistically significant. Thus, we have again found considerable evidence to suggest that the hypothetical relationship between monetary conditions and 3Examples of such studies include de Leeuw [23], Jorgenson [79], Evans [38], Resek [127], and Liu [89]. 52 investment may be quite valid. Various studies have found the rela- tionship to exist in numerous industries and types of investment. It appears the evidence is much stronger in the housing industry than in some manufacturing industries, which is in line with our discussion of the factors that determine the impact monetary policy may have on a firm. Residential construction fits the mold of an industry which monetary policy should have an extreme impact on; whereas firms in manufacturing industries do not. IMPLICATIONS FOR THE BEEF INDUSTRY If we look at the agricultural industry in general, and the beef industry in particular, in light of the theoretical and empirical findings concerning the relationship between monetary conditions and investment decisions, we may be able to provide further insights into the problem described in Chapter One. Com- paring the characteristics of firms in the agricultural industry with the factors which influence the impact monetary policy has on a firm or an industry suggests that the farming sector may be influenced a great deal by monetary policy. Thegfigricultural Industry Agriculture has always been characterized as an industry composed of a large number of very small production units. His- torically these small farms have been characterized as being very low profit operations. Therefore, the first two items in the list 53 of factors that influence the impact monetary conditions have on a firm seem to apply to the agricultural industry. In addition, the last two items appear to characterize the credit market serving agriculture. First, the locational nature of the farming industry dictates that firms be located in rural areas. The commercial banks that have developed to serve rural agriculture are generally quite small. Therefore, the farmer may not have access to a large commercial bank for the credit he desires and needs. The development of the Farm Credit System which provides credit to agriculture through Production Credit Associations and Federal Land Banks has aided the farmer in obtaining credit, but it has not been a panacea. Problems still exist in the credit markets serving agriculture. Evidence of this has been the recently adopted "seasonal borrowing privilege" by the Federal Reserve System [4, 112]. The idea behind the rule change is to allow banks that experience large seasonal movements in deposits and loans to borrow from the Federal Reserve System during periods of seasonal strain. Most of the banks which will qualify are rural banks serving agriculture. Hopefully this will improve the agri- cultural credit market. Secondly, the traditional lenders in agriculture appear to be influenced by monetary conditions to a large extent. It has been observed that when the economy experiences a "tight money" situation some of the traditional agricultural lenders tend to desert agri- culture for other sectors of the economy. Some commercial banks and life insurance companies seem to react in this manner. In addition, 54 those small rural banks that do not desert agriculture encounter greater problems when attempting to obtain funds for their larger customers through correspondent banking relationships. Also, there is some feeling that rural bankers use credit rationing at high rates of interest. They simply do not wish to make loans when interest rates get "too high," whatever "too high" might be.4 Thus, we again have conditions which suggest that the credit market serving agriculture may tend to amplify the effects of changes in monetary conditions. The one area for which agriculture may not seem to fit the theoretical mold we have set forth involves the use of credit in the farming operation. Agriculture has long been thought of as an industry which financed its growth and expansion internally. Farmers have been characterized as great savers. They have his- torically used savings from current income to generate funds for future expansion and growth rather than use credit for such pur- poses. But indications are that this has changed over the past 20 years. Brake [9], Melichar [111], and others have investigated agriculture's increased use of credit over time. One of the reasons 4It has been observed that many rural banks make a practice of carrying excess reserves or pay less than the maximum rate on saving accounts and continue to make loans at less than the current rate of interest to established customers during tight money periods. Therefore, this credit rationing probably results in fewer loans being made to marginal farming operations and relatively more loans being made to local patrons for nonagricultural purposes. 55 for the increase has been the decrease in rate of saving by farmers. From the early 1950's to the late 1960's the farmers' savings rate fell from 37 percent to 32 percent. As a result of this and the fact that capital flow as a percent of cash flow has increased from 42 to 50 percent, the proportion of capital flow financed internally has decreased from 88 percent in the early 1950's to only 65 percent during the late 1960's. Thus, agriculture has come to depend on external financing to a much greater extent than it did in the past. All of which suggests that the idea "farmers operate on an all equity basis" is not nearly as valid as it might have once been. As farmers have been able to rid themselves of the "depression psychologyll of the 1930's they have increased their use of credit. Thus, again we find the possibility that agriculture may be subject to the influence of changing monetary policy. Research by 0011 [30] and Nash [118] indicates that this may be the case. Both studies found monetary policy to have an effect on the income of the agricultural sector. Nash also found the money supply to be related to agricultural investment in the manner specified in the previous theoretical discussion. Further, Nash found the response of agriculture to monetary conditions to be greater in countries where government was involved to a lesser extent than it has been in the United States. This suggests that government involvement in agriculture may act as a buffer against the impact of monetary policy. If this is the case, the beef industry in the United States may be influenced more by monetary policy than the other sectors of the agricultural industry 56 since there is little direct government involvement in the livestock industry. TheiBeef Industry The analysis of the potential effects which changing monetary policy and credit conditions may have on agriculture suggests that the beef industry may be influenced more by monetary conditions than agriculture in general. Also, the characteristics of each of the major sectors of the beef industry imply that there may be differential impacts on these sectors. The Feeder Calf Industry Chapter Two's descriptive analysis of the cow-calf opera- tions in the United States suggests that changing monetary and credit conditions may have a relatively large impact on these operations. These firms are typically quite small. Normally they are located in rural areas with limited access to credit and capital markets. The operations also require relatively large amounts of capital in the production process. In addition, the operations have been noted for their low levels of profitability. All of these attributes imply that monetary pOlicy may affect the cow-calf operator's investment decisions to a large extent. The same may not be true for beef feeding. 57 The Beef Feeding Industry As described in Chapter Two, the beef feeding industry is quite different from the feeder calf industry. Typically, beef feeding firms are larger and more profitable than cow-calf opera- tions. Beef feeding has tended to becone more geographically con- centrated than feeder calf production. All of these factors may have made credit and capital markets more readily accessible to beef feeding firms than they have been for cow-calf operations. In addition, many observers feel that lenders serving beef feeders do not exhibit credit rationing to the same extent that lenders serving cow-calf operations do. Thus, these differences between the beef feeding and the cow-calf industry suggest that the impact of monetary conditions on beef feeding may be less than on feeder calf production. Chapter IV MONETARY POLICY, CREDIT CONDITIONS AND THE BEEF COW INDUSTRY INTRODUCTION The previous discussion has set the stage for the analysis undertaken in this chapter. Chapter Two pointed out that the supply of feeder calves has been a critical link in the beef production process in the past and that its importance will likely increase in the future. The major source of feeder calves is the beef cow industry. Therefore, if monetary policy and credit conditions affect the beef cow industry, it also affects the supply of feeder calves and eventually the total supply of beef. Chapter Three described the macroeconomic aspects of the theoretical relationship between monetary policy, credit conditions, and investment. It also explained how and why changing monetary policy and credit conditions would be expected to influence invest- ment in the beef cow industry. The objective of this analysis is to investigate this relationship and attempt to answer the basic question and test the hypothesis set forth in the introductory remarks of this study. At this point, it should be pointed out that this study is not an attempt to investigate the "cattle cycle." While it could 58 59 have implications concerning the cattle cycle, this study does not consider the total number of cattle but attempts to separate the dairy industry and the beef industry and concentrates on the latter. The basic assumption underlying this analysis is that the major determinant of the long run supply of beef is the size of the beef breeding herd. This relationship is shown in the flow chart presented in Figure IV-l. As demonstrated there, the solid lines represent the critical flow of beef through the production system. Thus, factors that affect the beef cow herd would have effects on the whole system and ultimately change the total beef supply in subsequent time periods. If the number of cows in the breeding herd is increased during the current period, this will result in more feeder calves being born within the next year. This increased supply of feeder calves will move through the feeding system in the following year to be slaughtered as fed beef. Thus, a change in the size of the beef herd may take two or three years before it is reflected through final slaughter; but it may influence total supply for sometime thereafter. The same can be said for a reduction in the size of the beef breeding herd. The following analysis investigates the relationship between monetary policy, credit conditions, and the size of the beef cow herd. The analysis begins by looking at how changing monetary con- ditions should theoretically affect a firm's decision to invest in additional beef cows. Then an econometric model is formulated to 60 TOTAL SUPPLY OF BEEF 1F"' \ \ \ DOMESTIC IMPORT SUPPLY F \ SUPPLY \ FED BEEF NONFED SUPPLY BEEF SUPPLY \ \ \ \ CULL STOCK VEAL CALVES 4 A l I I \ BEEF cow ‘ HERD ‘ BEEF FEEDLOTS FEEDER CALVES Figure IV-l. Flow chart of beef producing industry. 61 test the theoretical relationship. Finally, the empirical results are presented and discussed. THEORETICAL ASPECTS OF AN INDIVIDUAL FIRM'S DECISION T0 INVEST IN A BEEF COW Theory of Investment There have been various theories of investment set forth by a number of authors in economics and finance. Eisner [34], Jorgenson [78], Johnson [75], and Resek [128] present somewhat different theories of investment. However, they are quite comple- mentary in the sense that they all point out what each believes to be the critical determinants of investment. For the most part, all of the theories consider the same determinants, but treat them in somewhat different ways. In general, the theoretical determinants of investment can be put into three general classes: 1) output variation (i.e., investment depends on changes in output), 2) price of capital (i.e., investment depends on cost of capital services), and 3) supply restraints (i.e., investment limited by capital goods available) [128, p. 325]. The theories set out by the various economists then cast measures of these determinants in some type of theoretical framework to explain changes in the stock of capital, or investment. The one major exception of the above generalization is the investment-disinvestment theory advocated by Johnson [75]. This theory diverges from the others by relaxing the normal assumptions of perfect knowledge and foresight. This results in differing 62 capital prices depending on whether the firm is investing or disin- vesting in an asset. Therefore, the price the firm considers relevant depends on the marginal value product of the input. If the input's marginal value product is greater than its price (acquisition price), then the firm would invest in the asset. Should the marginal value product of an input fall below the price for which the firm could sell the input (salvage price), the firm should disinvest in the asset. All of the previous investment theories are based on the same general idea. This idea has been expressed succinctly by Lindauer [88, p. 53]. The purchase of a new capital asset occurs primarily because an investor expects returns over its life which will cover all the costs of purchasing and operating the asset while also yielding a net return at least equal to the interest he would have to pay if he borrowed the money to purchase it. The return anticipated must be that high or the potential investor would not want to borrow the money to purchase the asset. Using this rationale, the various investment theories develop a framework that represents an individual firm's investment decision. At this point, the theories of investment begin to differ. The acceleration and capacity models developed by Eisner1 and others consider investment as simply an attempt by the firm to achieve the desired amount of capital stock. Therefore, investment is considered to be primarily dependent on the level of output or the desired level of output. 1See Resek [128] for a discussion of these models. 63 Jorgenson's theory of investment is based on the assumptions of classical production theory. Thus, the firm's demand for capital goods depends on the marginal value product and its price. The theoretical model developed by Resek is a compromise of the Eisner and Jorgenson theories. We can use this previous work in investment theory to develop a theoretical model of an individual firm's deci- sion to invest in additional beef cows. Theoretical Considerations of a Beef Cow Investment Decision The firm's investment decision has been investigated and discussed in both the fields of finance and economics. There are numerous methods by which a firm can judge the merits of a proposed investment. These methods include: 1) urgency, 2) payback, 3) accounting rate of return, 4) net present value, and 5) internal 2 The extent to which such criteria are used by rate of return. firms in making investment decisions is unknown. The general observations are that the first two criteria are used quite exten- sively since they are relatively easy to use. The last two are theoretically more correct because they consider the time value of money, but are explicitly used to a much lesser extent by business firms due to the relatively complicated nature of the required computations. However, it is apparent that a theoretical model of a firm's beef cow investment decision should consider the time value of money. Thus, this suggests that one should use either 2For a discussion of these and other such criteria see Mao [104], Quirin [127], and Van Horne [173]. 64 the net present value criterion or the internal rate of return criterion. Due to its relative simplicity, the net present value con- cept will be used to develop the theoretical model. It is not only easier to use than internal rate of return but the results of both with respect to the accept-reject criteria are the same for simple investments. This type of theoretical model has been specified by Jorgenson [78]. The Theoretical Investment Model If we assume that a beef cow operator desires to maximize his net worth, he will invest in additional beef cow units if and only if the investment will increase his net worth. We can further define the operator's net worth as being the sum of all discounted net revenues of all investments undertaken. Let R(t) be gross revenues at time t, C(t) costs at time t, and r the discount rate. Then the net worth, NW, would be: NW =‘fe-rt [R(t) - C(t)] dt. The firm would then desire to maximize the function "NW." Using this assumption, we can look at the decision to invest in a beef cow. The definition of net present value (NPV) is: g [R(t) ' C(t)J where R(t), C(t), and r are as previously defined. t=° (1+r)t Here we are considering one single investment and taking revenues and costs to occur within a discrete time period rather than being con- tinuous as in the case of NW. Thus, there is no conceptual defini- tional difference between NPV and NW as defined previously. Therefore, as a firm attempts to maximize net worth, it will choose 65 only those investments for which the NPVzp. If the NPVeuueamee .mpe>ep OF. e:e.mo. .Fo. pe eoceoemwcmwm Peoepmwuepm epocee mxmweepme ewes» ece o3» .eco .e:_e>tu wee memecuceewa cw meenE:ze heF.Pv flee.ev ANN.-V flee.v mF.N eee. ee.eep e_.eee eree.ee Pp.w- _Ne. e Ree.v Awm.wv A_e.v Aem.ev mm.~ wee. em.eem- em.ep erem.Fe 05.5 ewwee. e Ae~._v AeN._V Aee.wv Ase._v Aee.wv N_.~ Nee. Ne.emm- Ne.em mN.N_ eewe.ee Ne.e .emee. m Ame.v Awe.wv flee.Fv Amw.ev eN.N wee. ee.eme- Ne.m ewee.ee we.w_ tome. e Awe.mv Aem._v Aem.ev me.N eee. Ne.er- we..ee eh.e_ .mee. w ANN.V Aee.ev em. ewe. Ne.e_e- P~.e eeke. N Aee.ev ee. eee. ee.eme- eene. _ e e e e e a 3-0 we eewemeae eeeze eeeeee e agapecepaxm coeweacm .mmm_-~mmp .mepnwwee> zeouecwpqxe eeaoepem ece Aozedmv mpopeemm mmeep mo Lease: cmezpwn maesmcowuepme emueewumm .Fu> epneh 127 relationship between the feeder calf industry and the beef feeding industry. If beef feeders invest in a counter-cyclical manner this could account for the wrong relationship when we consider the time lags for decision making and bringing facilities into operation. Beef feeders may "read" the cycles and realize that when conditions appear to be the most inappropriate for expansion is actually the opportune time to invest. If they decide to invest and expand capacity during such times, their facilities will be on line and producing when the cycle peaks in the future. Therefore, such in- vestors could profit from their investment during what appeared to be an illogical period for expansion of facilities. Thus, this could account for the wrong estimated relationship between investment in feedlot facilities and the rate of interest. Another explanation of the wrong relationship involves the relationship between the feeder calf and beef feeding industries. As discussed in Chapter Four, higher rates of interest resulted in fewer heifers being kept for replacement stock by beef cow operators. Thus, more feeder calves are made available to the beef feeding industry during periods of high interest rates. This increased supply of feeder calves could encourage beef feeders to expand their operations. This would result in continued investment by beef feeders during periods of high interest rates. Thus, increases in the rate of interest do not appear to discourage investment in large feedlot facilities. Beef feeders appear to be willing to pay the higher financial costs. However, 128 they may not be able to obtain the credit they desire during tight money periods. The coefficient of CBTDIF indicates that the avail- ability of credit does influence the investment decision. Beef feeders appear to be willing to use credit and invest in large feedlot facilities even though interest rates might be quite high. But, they may be limited in their use of credit by its availability. Monetary policy and credit conditions appear to have a mixed impact on the investment in large feedlot facilities, as measured by BFLNO. Beef feeding is apparently profitable enough to allow firms to underwrite high costs of credit, but the avail- ability of credit appears to limit the industry's investment. Using these results concerning the number of large feedlots as a measure of the beef feeding industry's investment in large feedlot facilities, let us look briefly at other alternative measures of investment. The Estimated Large Feedlot Investment Relationship Using the Capacity ofTLarge Feedlots (CAPBFLlpeS a—Measure ofTInvestment Table V-2 presents the estimated investment relationship where CAPBFL was used as a measure of investment in large feedlot facilities. BCOFAM, FICBLR, and PRMAR had the same relationship to investment as in the previous analysis. However, BCRAT changes Sign from what was expected in equations two, three, and six as it did when FWAGR was introduced into the relationship used to explain BFLNO. Again this would indicate the possibility that when the beef-corn ratio increases, the profitability of beef feeding is Feueumepepm epoceu mxmeeepme omega use o3» .eco .xpm>wpumamme .m_e>ep op. uce .mo. .Fo. we eucwowmecm_m .espe>tp wee memecpceeea cw meenszze 129 A_e.F-v Ame.ev Ame.v flee.ev oe.~ Nee. _e.e_e.ee- e_.eee.ee- teem.epe.P ee.nmw .ON.N A Ame._-v Ae~.,v Aee.-v Aew.ev we.N Nee. mm.eee.ee- ee.eee.e- ee.~ee N~.ee- .Ne._ e A_e.-v Ahm.wv Ae~.~V ANP.V. Aem.~v Ne.N Nee. ee.mem.me- _e.eme- eweee.epm eeem_.emm.w em.e~ «Ne.P m . AeN.mv Aee.ev :Feo.v Aem.ev mm.~ eke. _e.ewm mm- e.ee.eem wwmm.mwm.w eep. .ee.~ e A_N.Fv Awo.P-v Ame.mv N_.N ewe. eN.Fne.em- e~._e~._ ep.mmm- «em.. m Aee._-v App.ev Ne._ eoe. _e.eem.me- em.eee- ree.w N Awe.ev mN._ eee. Fe.eme.ee- wee._ P eee<3e edeeeee ee agouecepqu . .mfimpsmump .mepnewee> zeoueceyaxe uepoepem uce Auuma epne» 130 such that firms do not feel it necessary to invest in new technology to become more efficient through the use of larger feedlot facilities. When the wage rate was introduced into equation seven to test the capital-labor substitution argument, the coefficient of FWAGR was the opposite of that found in the BFLNO relationship (Table V-l, equation 7). This suggests that the increasing cost of hired labor discourages the addition of feedlot capacity that uses labor, but encourages the addition of feedlot capacity that utilizes capital inputs (reflected through FICBLR'S positive coef- ficient). The substitution of capital for labor may explain the positive relationship between investment, as measured by CAPBFL, and the rate of interest (FICBLR). The coefficient of the measure of credit availability (CBTDIF) had a negative Sign in equations five and six. This indi- cates that credit availability does not present a problem for feed- lots as they attempt to increase capacity. This relationship in conjunction with the previous findings concerning the rate of interest suggest that monetary and credit conditions do not have the expected effect on the beef industry's investment in additional large feedlot capacity. The Estimated Large Feedlot Investment Relationship Using the Cattle Marketed per Feedlot by Large FeedlotsQICMPLBE)_as a Measure of Investment Table V-3 presents the estimated relationship where CMPLBL was used as a measure of investment in large feedlot facilities. All the estimated relationships are consistent with a priori 131 Feuwpmwpeum epoceu .zpe>euueameg .mpe>ep op. uce .mo. .90. pe euceowmwcmem mxmweeume megs» use o3» .eco .eepe>-u eee memeguceeen :_ meea532e AFN.NV A-._-V flee.v Aew._v em.N mwm. mm.Nm_.m- «eem.PNm.m um.oupu mo.mp NFP. N Nem.Nv A_e.v ANN.NV hee.ev mm.N omm. mu.mm_.n- eeemo.epN mm.nm eeee.Nm «NwN. u Ame.FV Aem.m-v A_N.-v Nee.wv flee.o_v nm.N emm. um.eNm.m- mm.~m eemo.mnu em.PFt «emm.mu «eNN. m Ame.e-v Ame.-v Ame.ev Ame.epv o_.N Pam. mo.me.u- «en.em- mm.me- tum.nm «NmN. e ANN.-V Ame.mv Nee.ev Po._ Num. um.men.m- Nm.mNt teN.omP rmNm. m ANN.wV ANF.e_V Fm._ New. m~.Nom.w- ew~.omF empm. N AeN.ev FN. mom. mm.eNN.uu «mnm. P eee::e eeHeeme ee zeoueceFme . .NumpiNcmp .mepaewee> agapecepaxe ueaoepem uce Aumuezuv mquueew emeep en popueee Lea uepexges wpuueo ceezpee mawgmcowuepee ueueeeumm .m-> eFQeH 132 expectations except the relationship between PRMAR and investment in equations four and five. In these equations, an increase in the price margin is associated with a decrease in the number of cattle marketed per feedlot by large feedlots. This can be explained when one realizes that there are a large number of small feedlot operations that are capable of profitably feeding cattle during periods of generally high profits in the beef feeding industry. During such periods, smaller, less efficient feedlots would, therefore, feed cattle that would otherwise be available for feed- ing by large feedlots. Therefore, as the smaller feedlots feed more of the available feeder calves, there are fewer cattle to be fed by large lots and the cattle marketed per lot by large lots necessarily decreases. Hence, when we hold constant the other measure of beef feeding profitability (BCRAT), this could explain this estimated relationship between CMPLBL and PRMAR. The coefficients of FICBLR and CBTDIF indicate that monetary and credit conditions may have the expected effect on CMPLBL. The coefficient of FICBLR is never statistically signifi- cant and has the wrong sign in equation six, which indicates that this is not a very reliable relationship. However, the coefficient of CBTDIF consistently has the correct sign and is statistically significant in equation six, which would suggest that this rela- tionship is more reliable than the interest rate relationship. 133 Summary_of Estimated Investment Relationshipp The first general conclusion that can be drawn about the three estimated relationships is that the results were quite mixed and inconsistent. While each of the equations was quite successful in explaining the variation in the dependent variable, the incon- sistency of the sign of various independent variables among equations suggests that there may be serious problems in the estimated rela- tionships. These problems may be the result of the characteristics of the investment measures employed in each of the three equations estimated. As explained previously, much of the problem may be the result of the relationship between small and large feedlots in the cattle feeding industry. This appears to be particularly true with respect to the inconsistency of the estimated relationships between investment and the measures of profitability (BCRAT and PRMAR). Theoretically we expected increased profits or expectations of greater profit to encourage investment in large feedlot facilities. But the empirical analysis did not consistently verify the theoreti- cal expectations. This is believed to result from actions of smaller beef feedlot operations. During high profit periods in the beef feeding industry, the cost advantages of new technology may not be great enough to encourage investment in larger feedlot facilities. But, decreases in beef feeding profit margins may necessitate the invest- ment in larger feedlot facilities by small feedlots. The feedlots 134 either become more efficient or go out of business. This could explain the theoretically incorrect relationship between profit- ability and feedlot investment in some of the estimated relation- ships. Monetary policy and credit conditions appear to have a mixed impact on investment in large feedlot facilities. The general indications are that beef feeders do not react to the rate of interest as expected. But the availability of credit does appear to limit the amount of investment undertaken by beef feeders. This result indicates that beef feeding is sufficiently profitable to allow firms to invest even though the interest rate might be quite high. Beef feeders would also use more credit to finance investment in large feedlot facilities if it was available. SUMMARY This analysis of the impact monetary policy and credit conditions has on investment in large feedlot facilities and thereby the ability of the beef feeding industry to increase the supply of beef fails to show that restrictive monetary policy has an adverse effect on the beef feeding industry. Although no quantitative estimates of the impact on beef supply were made due to data limita— tions, this analysis indicates that the cost of credit does not discourage greater investment in large feedlot facilities. However, the availability of credit does act to limit feedlot investment. Therefore, restrictive monetary policy appears to have a mixed impact on the investment in large feedlot facilities by the beef 135 feeding industry and the resultant effect on the supply of beef over time is at best uncertain. Thus, we cannot provide a very meaningful answer to the basic question set out in Chapter One, with respect to the beef feeding industry. The most that can be said is that this analysis found no evidence that monetary policy and credit conditions have a significant effect on the beef feeding industry. Chapter VI SUMMARY, CONCLUSIONS AND IMPLICATIONS SUMMARY AND CONCLUSIONS Objectives of the Study The basic objective of this study was to answer the question: "Do the monetary and credit actions of the Federal Reserve System as it attempts to control rising prices in the general economy have an adverse effect on the supply of beef in subsequent time periods?" In conjunction with this basic re- search objective there were a number of more specific objectives. These objectives were to: (l) investigate the beef producing industry to determine what major changes have taken place in the past 20 years and the critical links in the production process both historically and in the future, (2) set forth the theoretical relationship between monetary policy and the supply of beef, and (3) construct one or more econometric models to test the theoreti- cal relationship and describe the effects of monetary policy on subsequent supplies and prices of beef. The following discussion will present a short summary of the analyses associated with each of these objectives and the 136 137 resulting conclusions. Following this, implications of the research findings are set forth. The Beef Industry A growing cattle herd and increasing productivity of the beef industry have both contributed to the general increase in the supply of beef over time. Various factors have contributed to the beef industry's ability to increase productivity in the past. Many of these factors have been fully exploited. Increased beef feeding is an example of this type of change. During the past 15 years, fed beef as a proportion of total beef slaughter has increased from 27 percent to 68 percent. The beef feeding industry has diverted animals from veal slaughter and grass fattening to such an extent that there is no potential feeder calf supply remaining to be diverted to beef feeding. Future increases in the number of animals fed will require the production of more feeder calves rather than diversion of animals from alternative uses. Other factors that have contributed to increased productivity in the past (such as calving percentage and death losses) have been utilized in a similar manner. Therefore, the importance of productivity gains relative to increases in the size of the cattle herd has decreased over time. As a result, future increases in the supply of beef are much more dependent on increases in the size of the cattle herd than in the past. 138 The production of beef can be divided into two major functions that have become somewhat separate and distinct over time. The production of feeder calves by the feeder calf industry and the feeding of these calves to slaughter weight by the beef feeding industry are the two major functions performed by the beef industry. Changes have occurred in each sector, but at different rates. The Feeder Calf Industry Feeder calves are produced by a relatively large number of relatively small producers. Farms or ranches that keep beef cows to produce feeder calves as a major enterprise often have very few or no alternative uses for their resources. Other farms use beef cows as a supplementary operation to use resources that are available at very little cost. In general, the profitability of producing feeder calves has not been sufficient to encourage significant enterprise and resource use changes where viable alternative uses for the resources exist. Therefore, the structure of the feeder calf industry and the method of producing feeder calves have not undergone major changes over time. The average size of beef cow herds in the United States has very slowly been increasing but they are still quite small. There has also been some enterprise shifting from dairy to beef and some geographical dispersion of feeder calf production, particularly into the southeastern United States. But, these are the major changes that have taken place in feeder ,7 :_hM-w_.. _. _..._ _. 139 calf production. No major technological changes have taken place in the industry. Thus, the feeder calf industry has maintained its traditional structure and method of production to a large extent. The Beef Feeding Industry In contrast with the feeder calf industry, the beef feed- ing industry has undergone a great deal of change during the past 15 years. There has been a movement to a much smaller number of larger, more efficient feedlot operations. During the past ten years, the proportion of all cattle fed that were fed by feedlots with a capacity of 1,000 head or more has increased from 37 to 62 percent. This trend to larger beef feeding units has been accom- panied by some changes in production methods. The larger feedlot operations have allowed producers to improve the feeding efficiency of the beef feeding operation. They have also allowed improvement of the rate of gain of feeder steers and heifers. Thus, the beef feeding industry has been able to shorten the time that an animal must remain on feed and to produce beef at a lower cost per pound of gain. Thus, the beef feeding industry has adopted technological changes to become more efficient in the production process. But, the feeder calf industry has not. The beef feeding industry has gradually increased the number of animals fed to the point that any further increase is dependent on increased feeder calf production. All of which suggests that future increases in the supply of beef 140 will be dependent on or limited by the changes that occur or fail to take place in the feeder calf industry. Using this descriptive analysis of the beef industry and recognizing where the critical links have been in the past and where they are likely to be in the future, we then turned to the basic questions under consideration in this study: Does monetary policy affect the beef industry? If so, how and to what extent? Monetary Ppljcngredit Conditions and the Supply and Price of Beef: Theoretical Considerations Theoretically, monetary policy should affect the supply and price of beef through its influence on producers' decisions concerning investment in productive asSets. As the Federal Reserve System administers monetary policy, it changes the supply of money in the economic system. In turn, this affects the credit conditions that exist in the economy. These changes in the cost and avail- ability of credit influence producer investment decisions. Invest- ment in productive assets determines the amount of output in subsequent time periods. Changes in output or supply in turn influence the price of output. It is fairly easy to see how changes in credit availability could influence investment in the beef industry. It, in fact, simply acts to limit the amount of investment by beef producers regardless of the cost of credit. If producers require credit to finance an investment and it is not available, the investment cannot be made. 141 The effect of changes in the cost of credit or interest rate on investment are somewhat less straight forward in nature. As the rate of interest increases (decreases) the net present value of an investment decreases (increases). Therefore, as beef pro- ducers analyze the possibility of investing in additional produc- tive assets, changes in the discount rate they use (which is directly related to the rate of interest) in evaluating proposed investments should affect the profitability and, therefore, the amount of investment undertaken. In this manner, monetary policy should affect the invest- ment in the beef industry and thereby the supply and price of beef in subsequent time periods. Specifically, restrictive monetary policy designed to control inflation which raises the rate of interest and reduces credit availability should act to reduce investment in the beef industry. This would reduce the supply and raise the price of beef in subsequent time periods. Empirical AnaLysis and Findingp To investigate the effect monetary policy has on the beef industry, the industry was separated into its two major functional parts, the feeder calf industry and the beef feeding industry. The effect of changing credit costs and availability on each industry was analyzed separately. 142 The Feeder Calf Industry This analysis of the effect monetary policy has on the feeder calf industry looked at investment in the beef cow herd in the United States during the period, 1952 to 1971. The basic assumption behind the approach was that the size of the beef cow herd is the major determinant of the number of feeder calves that are made available to the feeding industry. The number of heifers added to the breeding herd (investment) and the number of aged cows culled from the herd (disinvestment) determine changes in the size of the beef cow herd over time. Therefore, any factors that act to influence investment in the beef cow herd will change the size of the herd, the number of feeder calves produced, and finally the supply and price of beef in subsequent time periods. Ordinary least squares regression analysis was used to estimate the investment and disinvestment relationships in the feeder calf industry. Using this technique one is able to estimate the economic relationship between the cost and availability of credit and investment in the beef cow herd. The two estimated relationships indicated that a one percentage point increase in the annual average rate of interest would result in a six percent decrease in the number of heifers added to the beef herd in the following year. This in- crease in the rate of interest would also result in an increase in the number of cows culled from the herd by three to 14 percent1 in the same time period. Thus, the increased cost of credit in one 1This range is based on two different estimated disinvest- ment relationships. 143 year results in a smaller breeding cow herd in the following year due to decreased investment and increased disinvestment. In addition to the effect the cost of credit had on investment, the relationship between credit availability and investment was found to be consistent with a priori expectations. While the relationship did not prove to be statistically signifi- cant, it did indicate that investment in the beef cow herd was somewhat limited by the availability of credit. This would tend to reinforce the conclusions concerning the effect of monetary policy on investment in the feeder calf industry. To see how restrictive monetary policies on the part of the Federal Reserve System might have contributed to the high beef prices currently being experienced, the effect on investment and disinvestment were traced through the beef production process. The interest rate during 1969 and 1970 was about 1.7 percentage points higher than it was in 1967 and 1968. This higher rate of interest would result in a beef cow breeding herd that was from 802,400 to 1,392,300 head smaller in 1970-1971 than it would have been if the interest rate had remained at the 1967-1968 level. Allowing for calving rates, death losses, and a two to three year production period for the calves to be born, raised, and fed by the beef feeding industry; this reduction in the poten- tial size of the breeding herd could reduce the total supply of steer and heifer beef in 1972 and 1973 by two to four percent. This reduction in the supply of beef could have resulted in a 3.7 to 6.4 percent increase in the farm price of steers and heifers. 144 Thus, restrictive monetary policies during 1969 and 1970 could have resulted in a farm price of fed beef that was one to two dollars per hundred pounds greater than it would have been in the absence of such tight money policies. Based on the empirical results of the analysis of the feeder calf industry restrictive monetary policy does have an adverse effect on the supply of beef in subsequent time periods. Thus, we would reject the null hypothesis as set out in Chapter One and accept the alternative. The Beef Feeding Industry As viewed in this study, the beef feeding industry simply takes what feeder calves are available at any point in time and feeds them to slaughter weight. Therefore, its ability to change the supply of beef is quite limited. Beef feeders can adjust the weights at which they market animals and the timing of marketings in the short run, but they cannot directly change the long-run supply of beef. The beef feeding industry could indirectly increase the supply of beef by becoming a more efficient industry. If the industry could lower the cost of feeding an animal to Slaughter weight, it could pay higher feeder calf prices. This would en- courage the feeder calf industry to increase the supply of feeder calves and in this manner the beef feeding industry does affect the supply of beef in the long run. 145 One of the principle ways by which a beef feeding opera- tion can become more efficient in the feeding process is by becoming larger and utilizing the economies of size that exist in beef feed- ing. But, the adoption of new technology and the change to a larger operation requires additional capital investment. Thus, monetary policy and credit conditions could affect the beef feeding industry's investment in larger feedlot facilities and thereby its ability to increase the supply of beef. To empirically analyze this type of relationship, the investment in large feedlot facilities in the United States during the period 1962 to 1972 was investigated. As in the analysis of investment in the feeder calf industry, regression analysis was used to estimate the economic relationship between investment and the cost and availability of credit. The major problem encountered in this analysis was that there were no published data concerning the investment in large feedlot facilities. Therefore, three dif- ferent possible measures of investment were investigated. As a result, the three estimated investment relationships had quite mixed and inconsistent results. The general indications were that the cost of credit did not reduce investment in large feedlot facilities. But, the availability of credit did act to limit investment. Such results were believed to be related to the profitability of beef feeding. If beef feeding was sufficiently profitable, increases in the rate of interest (over the range of observations) may not have been suf- ficient to make investment in large feedlot facilities unprofitable. 146 Therefore, beef feeders would have continued to invest even though the rate of interest might have been relatively high. But, if credit to finance the investment in larger feedlot facilities was not available, the investment could not be undertaken. Hence, this analysis failed to Show any significant effect of monetary and credit conditions on investment in large feedlot facilities by the beef feeding industry. Restrictive monetary policies do not appear to have an adverse effect on the beef feeding industry and its ability to indirectly increase the long-run supply of beef. The Beef Industry The results of this analysis show that the beef industry is primarily influenced by monetary policy through its effect on investment in the feeder calf industry. The effect of restrictive monetary policies on the feeder calf industry and the resulting supply and price of beef in subsequent time periods shows that monetary policy did have an impact on the beef industry. Based on this analysis we would reject the null hypothe- sis: "Monetary policy does not affect the supply of beef" and accept the alternative: "Monetary policy to control inflation in the general economy through its effect on consumer demand has resulted in reduced beef supplies in subsequent time periods." In addition, future prospects indicate that the importance of monetary policy's effect on the supply and price of beef in the future may be even greater. 147 Given that the beef industry has exploited many of its potential sources of productivity increases and is unable to increase productivity in the future by some of the means it has in the past, future increases in the supply of beef will be much more dependent on increases in the size of the breeding herd than in the past. This will require greater future investment by the feeder calf industry. In addition, past trends in agriculture have been toward greater use of credit by farmers to finance their operations. As this trend continues, feeder calf producers could become even more sensitive to changes in monetary and credit conditions. Thus, considering the possible need for increased investment by feeder calf producers and a greater use of credit to finance this invest- ment, the effect of changes in the cost and availability of credit on the feeder calf industry could be more important in the future than they have been in the past. As a result, the effect of mone- tary policy on the supply and price of beef may be greater in the future than it has been historically. IMPLICATIONS OF THE STUDY Policy Implications This study has implications for at least two major policy making bodies in the United States, the Federal Reserve System and the United States Department of Agriculture (USDA). The Federal Reserve administers monetary policy. Therefore, when restrictive 148 monetary policies are designed and implemented to c0ntrol inflation in the general economy, the Federal Reserve shOuld be aware of the reduced supply of beef and increased beef prices that could occur in the future as a result. If the Federal Reserve has any desire to keep beef prices low, then it Should recognize that tight money policies, as administered in the past, may not be consistent with the goal of cheap beef. I There are changes that the Federal Reserve could make that might alleviate this situation. The most radical proposal involves the implementation of a differential interest rate policy by the Federal Reserve. It could be very specific in nature such that there was a Specific ceiling on the interest rate charged on loans for investment in beef cows. Or, it could be quite general in nature such that the basis for differentiation was the loan purpose. Loans for production purposes would carry a lower rate of interest than loans for consumption. This should tend to limit consumer demand without limiting production. A less radical and likely less effective proposal involves credit availability. The Federal Reserve apparently does not favor the use of differential interest rate policies [103]. But, it could institute policy changes to assure that credit is available irregard- less of the cost of credit. This would involve removing money market constraints or changing regulations to make credit more readily available than it has been in the past. An example of such .a change is the recently instituted "seasonal borrowing privilege." 149 Similar changes could tend to remove credit unavailability as a limiting factor on investment in the beef industry. The findings of this study also suggest that there may be a need for the USDA to undertake a more concerted effort to increase the supply of beef in the future. The feeder calf indus- try should be of particular concern. The analysis of the produc- tivity of the beef industry suggests that sources of productivity that were enjoyed in the past have been fully exploited. Therefore, the USDA should undertake research efforts or intensify ongoing efforts to find methods of improving cattle herd productivity and bring about their adoption. Two examples of such methods of improving productivity could involve the improvement and increased use of crossbreeding and the introduction of multiple births. If sufficient productivity increases are not forth coming, the USDA and Congress should consider the possibility of subsidizing the cost of producing feeder calves or other methods of encouraging feeder calf production. If the USDA desires to keep the price of beef low in the future, such actions may be necessary. In addition, the findings of this study suggest that the USDA should be aware of monetary policies being followed by the Federal Reserve System as it attempts to increase the supply of beef. Restrictive monetary policies that increase the cost of credit and reduce the availability of credit could offset USDA efforts to increase the beef supply. An example of such a situation involves the recent USDA policy change to allow farmers to graze diverted acres that were 150 not previously ayailable for grazing. During the same period, the rate of interest has gone up. Therefore, the increase in the supply of beef in future periods will likely be less than it otherwise might be, due to the increased cost of investing in additional cows to graze the diverted acres. To offset this, the USDA and other institutions could undertake programs to educate owners of diverted acres or land that is not currently being used for pro- ductive agricultural purposes concerning the potential of putting beef cows on the otherwise unproductive land. In a similar manner, the USDA could design and implement policies to offset the effect of tight money policies on the beef industry. Such policies could provide for the subsidization of the interest cost of investing in beef cows by the feeder calf industry. Provisions might be made such that cost of interest above a certain rate would be paid by the USDA with funds authorized by Congress. This would in effect place a ceiling on the rate of interest paid by feeder calf producers and tend to offset the effect of restrictive monetary policies on the beef industry. Implications for Further Research This analysis of the beef industry showed that monetary policy does have a significant effect on the supply and price of beef. Does monetary policy have similar effects on other agricul- tural industries? If so, this could have significant implications concerning the price of food in general. Further research is needed to determine if restrictive monetary policies do affect the 151 supply of other agricultural products as it does the supply of beef. If it does, this would suggest that there is a definite need for the Federal Reserve System to reevaluate its use of restrictive monetary policy to fight inflation. The Federal Reserve could actually be defeating its purpose if tight money policies to fight inflation result in higher food prices in subsequent time periods. This further suggests that there may be a need for further research to reevaluate the whole theory of the use of monetary policy to con- trol inflation. If restrictive monetary policy has a greater impact on supply than it does on demand; then supply may be reduced more than demand. This would result in price increases rather than decreases. Therefore, restrictive monetary policy has acted to create inflation rather than control it. This investigation of the beef industry also found the production of feeder calves to generally be a very low profit enter- prise. The logical question arises: Why do farmers produce feeder calves if it is unprofitable? If, as suggested in this study, beef cows are kept by producers that have no alternative uses for their resources, what type of incentive will be required to encourage increased feeder calf production in the future? What level of feeder calf prices will be required to encourage farmers to Shift additional resources, that were previously used for other purposes, into feeder calf production? Where will this enterprise shifting occur? When and to what extent will such shifting be required in the future? 152 Questions of this type imply that there is a need for in- depth, firm level, analysis of the economics of feeder calf produc- tion. A great deal of research has been carried out concerning the beef feeding industry. But, increased feeder calf production appears to be the critical determinant of future increases in the supply of beef. Therefore, there is a definite need for research into the economics of producing feeder calves. 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Following this listing and descrip- tion are tables that contain both the data that were directly available from secondary sources and the derived data series used in the analysis of the beef cow industry. Appendix Table A-1. Definition of variables for which data were available from secondary source. Variable Name Definition and Source TCAF39t Total number of cattle and calves on feed (in 1,000 head), in January 1 inventory for largest number of states reported by the USDA. Source: [155] and [156]. TCAF23t Total number of cattle and calves on feed (in 1,000 head), in January 1 inventory, for largest number of states for which USDA provided breakdown by class and type of animal on feed. Source: [163], [161], and [154]. 169 170 Table A-1. Continued. Variable Name Definition and Source BECF23t Total number of cows on feed (in 1,000 head) in January 1 inventory, for largest number of states for which USDA provided breakdown by class and type of animal on feed. Source: [163], [161], and [154]. BEKF23t Total number of calves on feed (in 1,000 head) in January 1 inventory, for largest number of states for which USDA provided breakdown by class and type of animal on feed. Source: [163], [161], and [154]. BEHF23t Total number of heifers on feed (in 1,000 head) in January 1 inventory that weighed over 500 pounds,1 for largest number of states for which USDA pro- vided breakdown by class and type of animal on feed. Source: [163], [161], and [154]. BEECOWt Total number of other2 cows 2 years and older in January 1 inventory (in 1,000 head).3 Source: [155] and [156]. BEEHEFt Total number of other2 heifers 1 to 2 years old in January 1 inventory (in 1,000 head). Source: [155] and [156]. BEESTRt Total number of other2 steers 1 year and older in January 1 inventory (in 1,000 head). Source: [155] and [156]. BEEMALt Total number of other2 bulls 1 year and older in January 1 inventory (in 1,000 head). Source: [155] and [156]. BEEKAFt Total number of other2 calves in January 1 inven- tory (in 1,000 head). Source: [155] and [156]. DARCOWt Total number of cows 2 years and older, kept for milk, in January 1 inventory (in 1,000 head). Source: [155] and [156]. TCADEAt Total cattle deaths (in 1,000 head). Source: [155] and [156]. 1This classification was 600 pounds for 1950 through 1954. 2Other than dairy. 3The method of reporting the inventory variables was changed in 1971. Therefore, adjustment of reported inventory numbers was neces- sary in 1971 and 1972 to provide a consistent series. 171 Using the variables defined in Appendix Table A-1, the following mathematical transformations were used to derive the values for variables used in the analysis of Chapter Four. BCFEED (TCAF39t/TCAF23t) X BECF23t, an estimate of the total t number of cows on feed. BKFEEDt = (TCAF39t/TCAF23t) X BECF23t, an estimate of the total number of calves on feed. BHFEEDt = (TCAF39t/TCAF23t) X BEHF23t, an estimate of the total number of heifers weighing more than 500 pounds on feed. BCOFAMt = BEECOWt - BCFEEDt BKNOFDt = BEEKAFt - BKFEEDt RBHEFKt = BEEHEFt - BHFEEDt BCNDEA = [(BEECONt - BCFEEDt)/(DARCOWt + DARHEF + BEECOWt t + BEEHEF + BEESTR + BEEMALt)] X TCADEA. t t These last four variables are those which were defined and used in Chapter Four. 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