Speech

9-15-47 FIHAICIH& SOIL CONSBBVATIOH AHD IMPROVMENT by Chester C Davia, President Federal Reserve Bank of St* Louis, St* Louis, Missouri Changaa in American agriculture are taking plaoe at an almost revolutionary rata* Total agricultural production during recant years has averaged 21^ above tha 1935*39 prewar level* While muoh of this increase came about during the lorld War II period, it is becoming generally agreed that there is more to it than an all-out war affort to meet emergency demands for food and fiber* Actually, the answer to what's back of it all lias in the teehnelogieal developments during the last twenty to twmnty-five years* %ra complete mechanisation of farms, crop improvements sueh as the development of hybrid seeds, improved livestock breeding and feeding methods, and the wider adoption of soil conservation and soil improvement practices are the real forces that have created the higher level of farm production* %ile it is possible that the years ahead may see some slight decline from present level®, it is almost certain that the normal level of farm production in this country will remain well above the prewar level and that further technological developments will exert an upward rather than a downward pressure on farm output* At first glance, it might appear that the recent trends in production reflect a new era of better land use and sounder soils management* To the extent that farmers are more widely accepting soil conservation programs and soil building practices, that is true* Actually, however, the balance is in the other direction* %ile better soils management is making a definite contribution, the two strongest factors behind the increased level of farm production are mechanisation and crop improvements* The farmer is not putting into practice improved soils management methods to the extent that he has accepted Improved techniques of extracting the last drop of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 2 productivity from the soil through heavier feeding crops and more timely mech anized farm operations* He is simply doing a more complete job of soil exploi tation* This creates a more urgent need for soil conservation and soil improve ment than has existed heretofore* Heavier drains on productivity ssust be balanced with better soils management if in the long run farm output is to be maintained at or near present levels* The exploitive habits of the American farmer have already resulted in soil erosion losses and productivity declines almost beyond the human imagination* Agriculture has existed by cashing year by year a part of its basic capital assets* It is one of the few industries that has been able to operate under such a system* Only those industries that live through exploitation of natural resources can do so* There are definite limits beyond which agriculture cannot continue the annual sales of basic capital assets* To reverse the trend means a re-investment of new capital in the basic producing assets of agriculture* Much new capital is required on American farms if erosion losses and productivity declines are to be reversed* Capital will be required for soil conservation practices such as the construction of grass waterways, terraces, outlet structures, and new fences to re-arrange the physical farm layout with the natural lay of the land* Capital is needed to re build soil productivity through the addition of lime and mineral fertilisers* It requires capital to develop timber and permanent pasture on lands not suited to cultivation and to buy seeds for soil building crops for cover and gree nm&mxr&* Additional new capital is needed for more complete meehaniEation of farms and further improvement of livestock and crop production* The active interest of the Federal Eeserve Bank of St* Louis in the problem of soil and farm improvement is at least two-fold* first, the research program of the Federal Keserve Bank is being geared towards the overall economic development of the District* The lighth Federal Heserve District is largely agricultural* It is, therefore, logical that the St* Louis bank*s interest should focus on the conser- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 5 ration end development of the soil resources of the District* Second* as a member of the financial ecmainity, it is interested in knowing something about the vclume of new capital required to facilitate shifts to more efficient utili* zation of far® resources, where the new capital will eons from how it will be # used, and its soundness from an investment viewpoint* These Interests are behind the Federal Reserve Bank*s program of individual case farm studies of soil eon* servatien and improvement programs* It seems ilkely that as the trend towards better soils management continues, a considerable demand will develop for loans to finance complete soil conservation and improvement programs on the individual farm* Our individual farm studies* therefore* have been designed t© answer the questions of how imaeh does it cost to place the ordinary run-down farm under a complete and well integrated program of soil conservation and impr o veins nt* nhat are the prospective returns from soil im«* provement investments, how long a time is required for the investments to retire themslves, snd can credit be soundly extended to individual fanners for soil im» prevement work* The Eeserve Bank*s case farm studies show that there is a wide variation in the type of practices required in the shift to a balanced system of farming, in the per acre cost of making the shift, and in the rapidity with which farm im provement investments pay for themselves* fhese variations are found between different areas of the district and to a great degree within relatively smal le<«&- immities* the most significant fact in this research to date is that in all the analyses of individual farms that have been completed, not a single instance has been found in which the investments made for soil conservation, soil building, and other farm improvement practices were not highly profitable* An interesting individual case farm study is a farm located in the Black Belt that extends into Central Mississippi* In this area, minerals have been leached from the soil and profitable farm production is almost impossible without Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis h a liberal replacement of mineral plant food* In a ton-year program on this li$5 &ora farm, a total of 48,832 is required to install a sound land use and balanced system of farming* This averages a total cash outlay of |60«91 P*r aert, of which 4l|0#l4G represents the oost of minora! plant food* Despite this unusually high investment, howaver, in the ten**year period f 12,1*30 in new income, oaloulatad on an agerage price basis, liiloh figures wheat at 4*9& per bushel, oorn at 4*73* Oate •* 1*1*0, alfalfa hay at 112*50, and pasture at 4l*j?0 par mature cow per month* The net income fro© the farm was increased by il 7H with an annual maintenance oost of 4600* # To carry this analysis a little further, let ua review acme figures from ten farms scattered throughout the Eighth Federal Reserve district on which w© have analysed the records of farm improvement programs on a before-aft#r and through- the«*middle basis* These ten farms include a total of 2,255 aere® of land with an average normal appraised value of 4U7*&* p#r acre at the time the improvement pro** grams were started* The time involved in the improvement programs has ranged fro® 6 to 10 years and for the ten farms has averaged eight years* The average improve ment oost per aere has been 429*28 whloh is approximately 6l§ peroent of the original normal appraised value* However, the average per aere returns during the period in which improvement programs were being completed increased 465*1+7* ^^-0h is a 42*20 return for every tl*00 invested in soil improvement* Of the total of 429*28 in vested per aere, 417*58 represented permanent improvement to the land and raised the normal appraised value on the average from iltfo^l* to 165*22 per aere* The average farm of those analysed would be a 22£& aere farm with a normal appraised value of ilO,7W* &t the time the improvement progrsm was started* in addition of new capital in the anount of 16,603 would be required to complete the improvement program in an eight-year period* This investment of new capital would result in increased income in the eight-year period of 4lt**568 or 42*20 return for # each |1*00 invested* The yearly income from the farm following the completion of the improvement program would be increased by 42*391 with an annual maintenance Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 5 cost ef #56$ which would leave a net increase in income of $1*823 P*r y<Mur» ^he normal value of the farm would have increased to fl4*908* ffhese studies, and a pile of other evidence* are convincing proof that* morals or ethics aside, from a cold business standpoint, the man who controls a farm can- not afford not to start now on a complete and integrated program of conservation farming* One more word about capital* A conservation program* generally adopted* would require a lot of it* there was a time when the lack of capital would have been definitely a limiting factor* In isolated instances that may even be true today* It is interesting* however* to project the cost of a complete improvement program on every acre of land in a given community and then lay the figure of total costs alongside bank deposit totals for the same community* In most agricultural areas the local supply of capital is more than sufficient to meet the cost of farm im-» provements if tbay were to start now and proceed much more rapidly than we can ever hope will be the ease* Xou will find in almost every instance that bank de posits* and in many oases even the amount of uninvested cash on hand in banks* will exceed the amount of new capital that would be required to complete a sound land use program on every acre of farmed land in the comammityn low it is tufca* of course* that while the total supply of capital within a community may be sufficient* there will be individual instances where the farmer lacks sufficient liquid reserves to meet the need in his particular case« Be may have to resort to borrowing to carry out a sound soil improvement program* A well-planned soil improvement program carried out under the right kind of super** vision is a sufficiently profitable venture to justify the ready extension of credit for its completion* i'Btm improvement plans can be developed end financed on a basis that will enable the farmer to repay the borrowed money from income earned directly by the improvement investments* It requires a little different type of loan than the conventional real estate loan or the crop production loan with which Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 6 we have long been familiar* ^ending money for farm improvement programs requires a careful analysis of the individual farm and a flexible extension of credit wherein money can be advanced in varying amounts on farm real estate mortgage security over a period of years# The repayment program needs to be geared to the income pattern of the farm* varied in auount repaid from year to year as incense from the improve ment investments develops* Loans tor soil conservation and iisproveaaAt to be soundly advanced and repaid »*st be elosely geared to a good fara plan# The general principles laid down above will apply but loan advances, repayments, and terms will vary with the individual farm* She only way to be sure that the extension of credit fits a particular farm problem is to gear it closely to the farm plan» fhere have been tiiaes when it -would have been impossible to make farm plans with ©uffieient accuracy to serve as de pendable farm mortgage loan guides* today* however, with the vast stockpile of technical inforia&tion that haa been developed at the Land Grant Colleges, through actual performance of farms cooperating with the Soil Conservation Service and other sources, a well~trained far® planner can ait down with the farmer and lay out a program over a period of years through which coats and production increases can be accurately estimated* This laakes it possible to project a realistic loan program by which money can be advanced for needed improvements and can be repaid from income that will be produced by the improvessents* Up until recent years there may have been soiae justification for the ex ploitive farm real estate mortgage practices that have persisted* Kith the prac tical knowledge that is available today, however, there is little reason for con tinuing fara mortgage loan practices that encouraged poor land use* Ih© prisiary offenders have been the farm appraiasl policies, the slide rule method of loan amount determination* and the requirement that the annual loan balance beeoiaes successively leas from the time the loan is made* These are merely conventional lorn practices that have persisted for years and are generally adhered to today* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 7 They worked reasonably wall In the days when farmers first begen to encounter a nmd for farm mortgage finance *nd whan farm land was new* The farmer, through annual liquidation of a part of hi© soil productivity capital, could retire a loan with reasonable eartainty* While* these conventional loan practices actually encouraged exploitation, virgin soils could withstand the shook sad farm ownership via tha credit routa wea accomplished even though the fana whan paid for, in many instances was much lass valuable than whan tha purchase was made* As time want on, however, and land values Increased, total mortgage debt rose and soil produe* tivlty declined, these conventional loan practices have become a less certain vehiale of farm ownership* We have reaohad appoint today where it has become difficult for a farmer who is ready to advance from a tenant to an owner to buy a good farm* Hew land is no longer available and in most instances tha prospective farm owner is confronted with tha purchase of a farm which has already been badly exploited* Airther exploitation under heavy mortgage indebtedness mekas form ownership a less certain possibility* The average farm buyer today is eonfrented with the problem of conserving what topsoij remains and with rebuilding soil productivity to a level that will produce sufficient income to furnish a reasonable standard of living and retire indebtedness* It seems only reasonable, therefore, that farm mortgage loan policies mast be adjusted in keeping with the times if the use of credit is to con* tinue to be a sound medium of individual farm ownership* The adjustment® in farm mortgage credit policies which must be made are relatively simple* ^e must first recognise that the real value of farm land, irrespective of sale prices, actually increases or declines depending on the nature of practices followed on a particular farm* Here are some adjustments that need consideration! (l) Land appraisal must be adjusted to recognise the increased real value that results from proper soils management* fieeog* nition of changes in real value will meke it possible for the slide rule lenders to vary tha mount loaned to cover iaaprovement Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 8 coats* The slide rule or percentage limitation prae** tieea are established by lew for notm landers but there is no law that regulates the real value of lend* (2) Disbursement schedules on farm laortge^e loans must bo lib* ©raliaed from the conventional praetiee of one disbursement for each mortgage loan* A realistic lorn program requires that a flexible disbursement schedule be adopted through which funds oan be advanced to the borrowing fenter over a period of years for conservation and improvement costs in addition to the initial disbursement for purchase of the land* (3) Repayment pro grans must be more nearly geered to the income pattern of the particular firm being financed* %ere heevy investments for soil improvements are required* these eestt will usually exceed the income they produce for a period of from two to five years* This makes it iterative that re«* payments be made flexible so that repayments are li^htt during the period when costs are hi&h end returns low and that the annual repayments increase in amount m income increases from the iisprovement investments* (I4) The ide§ that the mortgage balance on a given farm loan should be successively leas each and every year from the tteie the loan is made nuet be overcome* Actually, on many farms which require heavy improvement outlays* the year-end balance of the mortgage debt may actually increase for a period of some two to five years while the productivity level of the farm is being rebuilt* Ihen lenders generally accept these four adjustments from conventional loan practices and write into mortgage papers a Bound soils management program* fam Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 9 improvement loans will become a much &^r& constructive Influence toward in dividual farm ownership than has ever been true in the prist* These adjust** menti are an absolute "Wat* if this nation in to realise its Hill potent!** alities from sound development of its ferw resources* The following table gives P loan schedule for the lip acre Mississippi Black Bait fam, mentioned earlier in this «rt£nle* This ic a farm which lies reasonably well but which ha a a soil that ic very deficient in basic mineral elements* For complete improvement, it requireK some erosion control practices and very heavy tppliemtions of mineral fertiliser er.d lime, in addition to a properly balanced cropping system* The normal value of the lend without treat* ment is $20 per acre or $2,900 for the farm* (BSES1 TABLE I) Line one and two gives a conventional 10 year purchase loan besed o n607'* of the normal appraised value of the land amortised txt the rste of i$ of the original loan balance per year* Line three shows the additional disbursements that would be required on the loan to finance a complete farm improvement program* This calls for loan advances each yeer throughout a ten year improvement program* Line 1* shows the repayment schedule for the conservation portion of the loan* repayments are calculated on the beat* of 75/^ °£ %+& anticipated increased in come resulting fro® the improvement program* F^pey-menta are light during the early years of the prcgrsm and build up as income free the improvements develops* Line 5 shows the annual y*ar~end balanoe of the sdvtnees for conservation and improvement purposes* It is interesting to note here that the maximum balance for the conservation portion of the loan comes in 1949 #** ths fourth year of the program and totals only tl l*6l*98* despite the fact that improvement costs amounted t to an aggregate of $8,852* Line 6 shows the total ye^r-end mortgage debt during the 10 year loan program and illustrates a ease where the total mortgage debt Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 10 remains relttiyaly constant for s five ye*-r period while farm improvement*! are being made and then declines sharply as improvement expenditures are re duced and new income develops in a substantial amount* Lin© 7 merely outlines the total principal payments by years throughout the tea year program* This is a rather typicel program that *#culd be esraaeted on lands inhere productivity is badly depleted* responses are irelatively slow, and total eosts heevy* Yet t the ultimate income returns are ac great that *» fancier buyiar this type of fern cannot afford not to iiake the additional investment* Likewise, the banker advanoing mcney for purchase cf the form will better aeeure the loen end latere nearly insure repayment through, advancing the additional money for improvement purposes* This esse represents one of tie mr® difficult kind* Of the total of |8832 invested in improvements 42 lt83«l£ represents permanent long-term t # t # improvement to the land, raisin.^ the per acre value from 420 to |'3?*12 per acre or for the entire farm from $£,300 to C3*38>1"* This exaiapla of hoi*/ loans ran be extended for insprovement purposes in ad- dition to the conventional purchase loan illustrates" the four suggested ad justments listed earlier* First, a controlled re**appraisal procedure is accepted through which per- nanent improvements added to the land are reflected in appraised value* fhis enables the banker to advance dLl the cash costs necessary to a. sound improve ment program in addition to the conventional purchase loen and to keep the total loan balance within 60/<> of the normal appraised value* Flexible dis«* bursement scheduler are set up according to the planned program und repay ments on the conservation advances are geared to the income increases that ere expected from the planned program* Total unrtgrge debt is sllorrad to increase or to remain relatively constant during the period that the improvement program is being completed* 'i'h© important point is that idiile in some instances the total amount of credit required for improvement purposes may be a relatively • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 11 smell amount, to the fenmr investing all his available liquid assets in the donn^peymeat on e term, e st^ll amount of additional credit may well mean the difference between e starvation operation and a highly profitable farm program* It is not difficult to sea the benefits that accrue to the farm b$yer if purchase mortgeges are medo to include sound soils management programs* The community, too hrs sonething to btake in such a program* Multiply the in* f come increases from this type of program on one i'arm by hundreds for the comma? ity, tens of thousands for ti*e state, and aaiiiiona for the netion and what do you get? Vastly increased r<*> turns* reduced coet of production* and larger profits mvm fit tho lemur price levels we shall one day see* Xn the *ggr€>Satt* a l®n& that is at lon^ last adjusting iteelf to eternal fruitfulnees* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Chester C. Davis (1947, September 14). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19470915_davis

@misc{wtfs_speech_19470915_davis,
  author = {Chester C. Davis},
  title = {Speech},
  year = {1947},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19470915_davis},
  note = {Retrieved via When the Fed Speaks corpus}
}