CROPS

Thanks to bigger acreages and good weather, especially at harvest, farmers last year achieved record crop output. They planted 2 percent more winter wheat last fall. They expect to increase plantings of other major field crops this spring by 1 percent.

They are likely to plant more corn, cotton, and spring-planted wheat but less soybeans. They owned large stocks of wheat, rice, feed grains, and soybeans at the start of 1976. This was the result of large 1975 crops, smaller than expected gains in domestic use of grains in the second half of 1975, and a delay in some marketings. Meanwhile, exports were far and away the largest on record.

The 1975 wheat harvest of 2.1 billion bushels marked the third successive record-setting year. Exports are also expected to be a record, totaling 1.3-1.4 billion bushels. Domestic use in 1975/76 continues to lag as relatively strong wheat prices have cut sharply into wheat feed use. July 1 carryover stocks will show an increase from the low reached in the summer of 1974. The projected stock level of about 400 million bushels is still small compared with the early 1970's.

Although wheat prices remain well above the levels of the early 1970's, they have fallen from the peaks of the last 2 years. The 1975/76 season average price for wheat is estimated at about $3.50 per bushel.

The higher acreage indicated for 1976 must be assessed in light of unfavorable winter weather. However, another crop exceeding 2 billion bushels is possible if the weather improves.

Farmers intend to plant almost 81 million acres of corn in 1976, 4 percent more than in 1975, and a total of 126 million acres to the four feed grains (corn, sorghum, oats, and barley), 2 percent more than in 1975.

We expect some price strength for corn this spring as a result of heavier domestic feeding and continued record-large exports. The season average farm price may be $2.50 to $2.75, compared with about $3 last year. For the whole 1975/76 marketing year, domestic use and export movement likely will total slightly below 1975's production of 5.7 billion bushels, resulting in a small buildup in carryover next fall to around 500-600 million bushels from 359 million last fall.

The soybean supply for 1975/76 totals about a fourth above the previous year. Total use will expand less than that, and carryover stocks next fall will rise, perhaps to a record level of 300-350 million bushels. For the entire season. farmers' prices are expected to average $4.50-$4.75 per bushel, down sharply from the record $6.64 of last season. Based on January 1 intensions farmers will plant 3 to 4 million fewer acres to soybeans in 1976 than the 54.6 million in 1975. Soybeans are losing ground to corn and cotton.

The 1975/76 season for U.S. cotton features sharply smaller production, much larger domestic use, and reduced exports. The total supply, at 14.1 mil lion bales, is smallest since the 1920's. Total use could reach a million bales above 1974/75's 9.8 million bales. Consequently, stocks next summer may be well below the 5.7 million bales of last summer. The price of base quality SLM 1-1/16-inch cotton in mid-January was about 57 cents per pound, compared with 56 cents a month earlier and about 36 cents last January. Farmers intend to devote nearly a fifth more acreage to cotton this spring. If yields recover to more normal levels, production could total much above last year. The optimistic planting intentions for cotton are resulting from higher prices and better market prospects than for soybeans and other competing crops.

LIVESTOCK

Production is increasing this year and prices are well above a year ago. so the income picture on the livestock side looks good. Beef output may rise 2 to 4 percent; pork production is rising and will begin exceeding year-ago levels after midyear. Broiler and milk production for the year will be up, too. The cattle inventory as of January 1 fell 3 percent from the year before, ending an expansion that had lasted 9 years. The peaking in cattle numbers and the recent pickup in cattle feeding have improved the feedlot demand for replacement cattle. and should provide for improved returns to cow-calf operators later in 1976.

If fed beef production rises this winter and spring as expected, it will be the first year-to-year increase in 3 years. There were 28 percent more cattle in feedlots in 23 States on January 1 than a year ago.

Profit margins for cattle feeders are being squeezed this winter. Fed steer prices have moved lower under the pressure of record beef production, reflecting the very heavy slaughter of range cattle versus fed cattle. Choice steer prices at Omaha in early February were below $40 per 100 pounds, down $13 from last year's peak. However, if we have average weather conditions for pastures and crops, slaughter of nonfed cattle likely will decline this year, which will give some support to prices.

Pork supplies will be lower than usual through midyear. The December inventory of hogs and pigs was down a fourth from a year earlier, with much of the decline in heavy hogs. The inventory makeup suggests first quarter will be 10 to 15 percent below a year earlier with the deficit narrowing to 3 to 5 percent in the second quarter. Farmers' farrowing plans point to gains in the second half.

Market hog prices have run mostly $48-$51 per 100 pounds since last November, about $10 above a year earlier. Feed costs have been dropping profit margins for hogs continue favorable.

Recent gains in milk output likely will continue. Production during the first half of 1976 is expected to be about 1 percent above a year earlier. Farmers received $10.20 per 100 pounds of milk in January, up $1.87 from last January. In coming months prices likely will decline at a sharper rate than usual, reflecting slower sales, especially of butter. However, chese sales have been strong and fluid milk sales remain above year-earlier levels.

A favorable relationship between broiler prices and feed prices is expected to continue in coming months, and broiler output during the first half of 1976 is expected to be around 10 percent above January-June 1975. Less of a rise is likely in the second half. Prices have declined from last fall's levels but have remained relatively strong. Reflecting the larger supplies, broilers this winter and spring will sell in the low to mid-40 cents a pound range despite relatively high red meat prices.

FOREIGN TRADE

The value of U.S. agricultural exports in the current fiscal year should total near the 1974/75 record, but the volume will jump by over one-fifth. With 1975's record farm output here at home, together with the slow gains in domestic use of crop products, exports must get much of the credit for maintaining farmers' net income over the past months.

Some people blame the slide in crop prices since early last fall on the temporary hold that was put on our grain sales to Russia. They forget that exports kept rising, and in the fourth quarter of 1975 reached unprecedented totals one-third above year-earlier levels. Furthermore, the temporary hold gave us time to judge the size of our corn crop, and was instrumental in getting a long-term grain agreement with the Soviet Union. This agreement is a real plus for American farmers.

The output of one out of every 31⁄2 harvested acres goes abroad. But agricultural exports do a lot more than help the farmer. Our nation would really be in trouble if we hadn't had large favorable balances of agricultural exports to make up for huge trade deficits elsewhere in our economy. We must keep promoting agricultural exports; they are vital to the economic welfare of the nation and more people should come to understand that.

The fact that consumer food prices went up much less in 1975 than in 1974 puts in perspective those horror stories about how much last summer's sale of grain to Russia would affect food prices. "Negligible" was my assessment at the time, and still is.

AGRICULTURAL PRODUCTIVITY

The 1970's saw a basic shift in farm policy, permitting farmers not only to plant more acres but also to shift production from one crop to another. Farm output increased 14 percent between 1970 and 1975 with substantial gains in efficiency. Part of the increase was due to fuller employment of fixed capital inputs such as land and machinery.

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The 1970's are identified with "all-out" farm production. Between 1973 and 1975, farmers planted an average of 360 million acres of cropland for crops, compared with 337 million acres during the 1960's. We have produced some record crops. But the 1970's have also included some difficult times such as when southern leaf blight cut corn production in 1970; the 1974 drought that crippled feed grain output in the Corn Belt and Plain States; and the near doubling of fertilizer prices between the spring of 1973 and 1975.

Over the next 5 years, improved cultural practices and continuing advances in technology should increase productivity and help offset the impact on yields from less productive acreage entering the larger cropland base. At the same time, total output will continue to increase to meet the anticipated greater domestic and foreign demand.

FARM INCOME

Farm income during the first half of 1976 will likely continue close to the improved levels of the second half of 1975 and well above the reduced early 1975 levels. Income prospects for all of 1976 are very tentative. As the year unfolds, returns to farmers will depend increasingly on the growing season and prospects for U.S. and world crops. However, with a strengthening general economy, the small grain stocks, and prospects for another good U.S. crop, there are solid reasons to expect that farm income will hold around levels of the past 2 years.

Production of all major livestock and livestock products is increasing. But considering the growing consumer buying power, prospective gains in red meat supplies are modest. Livestock product prices, responding to increasing supplies, are down from the highs of last summer. But they continue well above a year ago. For the year, prices of livestock products may approximate the relatively favorable 1975 averages. This will mean increased receipts from livestock in 1976.

The 1976 picture for crops is less clear, but a high level of returns is in the making for the 1975 crops now being marketed. Moreover, there is no basis for expecting anything but another good crop in 1976. Producer prices for crops have been relatively favorable, world grain stocks are low, and production costs are rising more slowly. Reflecting this, farmers probably will step up plantings. With continued larger supplies of crops, grower prices will likely average below 1975 levels. But if domestic and export markets hold up as expected, total grower earnings from crops will be well maintained.

The trends in supply and cost of farm inputs will continue to improve for the farmer. Fertilizer supplies generally will be larger, with prices running possibly a fourth below last spring. Pesticide supplies will be adequate at price levels slightly below 1975. The supply and price outlook for fuel points to some easing from last fall.

Prospective returns and cost trends point to a net farm income in 1976 about as good as net income for 1975.

RETAIL FOOD PRICES

Retail food prices for all of 1975 averaged 81⁄2 percent above 1974. This compares with increases of about 141⁄2 percent for each of the preceding 2 years. Retail food prices are expected to rise about 1 percent each quarter through mid-1976, averaging around 6 percent above the first half of 1975. Widening farm-retail spreads along with higher prices for fishery items and imported foods will account for most of the increase in average food prices.

Red meat prices are expected to average close to last fall's level during the first half of this year with increases for beef and veal about offset by lower pork prices. Poultry and egg prices may also decline moderately. Retail dairy prices, which advanced rapidly late last year, may stabilize this winter and decline some in the spring as supplies increase. Fresh produce prices are likely to advance seasonally during the winter and early spring. However, prices of most other crop-related foods, such as processed fruits and vegetables, cereal and bakery products, and vegetable oil products, will probably remain relatively stable.

MARKETING SPREADS

Farm-to-retail marketing spreads this year will likely again account for more of the rise in retail food prices than will changes in farm prices. Widening spreads last year accounted for almost three-fourths of the rise. However,

the increase in marketing spreads should moderate from the 9 percent rise in 1975, mainly because of prospects for a slower increase in prices of materials and services purchased by food marketing firms.

Prices of many products sold by farmers have fallen as a result of record grain harvests last fall and rising production of meat and most other livestock products. However, there have not been corresponding adjustments in retail prices. Where retail price reductions have been posted, they have lagged the declines in farm prices. The retail cost for a market basket of all farm foods rose about 12 percent from last September to December. During the same period, the farm value of these foods fell nearly 7 percent. The differences between the farm and retail values-the farm-retail price spread-thus widened sharply, by nearly 8 percent in only 4 months.

Prices for intermediate goods and services purchased by food marketing firms rose 13 percent in 1975, compared with 19 percent in 1974. Packaging materials, which account for an eighth of total marketing costs, jumped 15 percent in' 1975, but 23 percent in 1974. The energy cost spiral-an unprecedented 46 percent in 1974-slowed to 17 percent in 1975. Interest rates dropped to 8.2 percent by third quarter 1975, compared with 12.4 percent a year earlier. And the increase in cost of shipping food products by rail, 16 percent in 1974, slowed to a 13 percent rate last year.

In contrast, labor cost, the biggest expense item for food marketing firms, accelerated. Hourly earnings of food marketing employees increased about 10 percent in 1975, up from the year-earlier increase of 9 percent and an annual average increase of a little over 6 percent in the early 1970's.

Profit-to-sales ratios (after taxes) for leading food chains during the first 9 months of 1975 were almost unchanged from a year earlier at 0.9 percent of sales, excluding A&P which had a large write-off due to store closings. Profits after taxes for 14 leading chains, excluding A&P, amounted to 11 percent of stockholders' equity in 1974, up substantially from 1972 and 1973. Available data suggest that equity profits for 1975 held around the 1974 rate.

However, as raw material costs declined in 1975, profit margins of food manufacturing companies rose. These margins, as reported by the Federal Trade Commission, averaged 3.2 percent of sales in the first 9 months of 1975, compared with 2.9 percent a year earlier. Returns on stockholder equity rose from 13.6 percent to 14.4 percent. But by third quarter 1975, margins surged to a 2-year high, averaging 3.7 percent of sales and 17.2 percent return on stockholder equity.

We must watch such developments closely, just as we must stay vigilant in the promotion of our agricultural markets abroad and in the protection of the farmer's planting and marketing freedom here at home. The payoff is increased activity in the agricultural sector to the benefit of all Americans and our trading partners abroad. Thank you.

Representative MOORHEAD. Now, Secretary Richardson, please.

STATEMENT OF HON. ELLIOT L. RICHARDSON, SECRETARY OF COMMERCE, ACCOMPANIED BY MAYNARD COMIEZ, ACTING CHIEF ECONOMIST; BEATRICE N. VACCARA, ASSOCIATE DIRECTOR FOR NATIONAL ANALYSIS AND PROJECTIONS; AND JOHN E. CREMEANS, CHIEF STATISTICIAN, BUREAU OF ECONOMIC ANALYSIS, DEPARTMENT OF COMMERCE

Secretary RICHARDSON. Thank you very much, Mr. Chairman, and Congresswoman Heckler. It is a pleasure to be here today. This is, as you pointed out, my first appearance before this committee, and I welcome the opportunity, even though I have, as you also pointed out, only been Secretary of the Department of Commerce a couple of days. At the same time, I have come here from an experience in the United Kingdom, which in many respects may be relevant for the problems that confront this country at the present time. And I may have occasion in my summary of my prepared statement to touch on this aspect of the situation.

I would appreciate, as you mentioned, Mr. Chairman, having that full statement printed in the record.

Representative MOORHEAD. Fine.

Secretary RICHARDSON. May I, before proceeding-in the event that I may need to call upon them in areas where my own direct information is inadequate-may I identify for the record three of my Department of Commerce colleagues. First, and behind me to my left, is Mr. Mavnard Comiez, Acting Chief Economist; on his left is Mrs. Beatrice Vaccara, Associate Director for National Analysis and Projections of the Bureau of Economic Analysis; and on Mr. Comiez's right and immediately behind me is Mr. Jack Cremeans, Chief Statistician for the Bureau of Economic Analysis.

Representative MOORHEAD. We welcome all of you to the committee. Secretary RICHARDSON. Thank you, Mr. Chairman.

As I indicated a moment ago, it seems to me generally relevant that I have seen in the United Kingdom in recent months a situation in which there has emerged a broad consensus on the proposition that inflation creates unemployment. It is really remarkable, beginning particularly in June, to see the Trade Union Council and the national union leadership, which until then had been negotiating wage agreements which called for massive increases for their rank and file membership, come to the realization that the result would be not only to fuel galloping inflation, but, over time, to reduce the numbers of jobs available for their membership.

And so we have seen, since June of 1975, the British Government follow policies directed toward reducing inflation in order, in due course, to protect employment. Persistent inflation creates a climate of uncertainty that discourages long-term investment. That, in turn, adversely affects our economic growth rate, our productive potential, our employment level, and the creation of jobs.

This essentially is the set of inter-related propositions that are now the subject of basic consensus in the United Kingdom. And I think it is fair to say they are more nearly the subject of basic consensus in the United States, in light of our own recent experience with the combination of under utilized capacity and unemployment in a situation of continuing inflation, than they have heretofore been. At any rate, from whatever perspective one views inflation, no redeeming features are to be found. Any postulated solution to our problem which is likely to lead to a resurgence of inflation as a byproduct, is no solution at all. It will almost certainly make matters worse. The dominant objective to be pursued, as I see it, is the long term, healthy growth of the American economy. Thus, the President's economic goal is to create an economic environment in which stable and noninflationary growth can be achieved.

Unemployment and inflation are not opposites to be traded off one against the other. They are related symptoms of an unhealthy economy. The inefficient use of physical resources is a waste; the underutilization or nonutilization of human resources is a tragic waste. It carries unacceptably high social costs above and beyond the economic costs of foregone production of goods and services.

Since inflation was the major underlying cause of recession and the consequent unemployment, any policy that seeks to reduce unemployment at the price of more inflation is doomed from the start.