In light of the recent sharp rise in farm prices at wholesale levels, inquiries were made in several Tenth District states to assess the agricultural situation. Despite recent rains and cooler temperatures in the District, damage to crops, particularly corn, has been serious although grain sorghum and soybean prospects have improved somewhat. Some District bankers have indicated that they expect spillover effects from the drought conditions to show up soon in increased loan demands by farmers. Consumer interest in the recent 9 percent Treasury note issue has prompted substantial deposit withdrawals. Several District bankers have expressed concern over the longer run impact of similar Treasury financing operations in the future.

Recent and cooler temperatures over much of the District have eased the stress on growing crops, but additional precipitation will be required before any significant benefits are realized. A grain spokesman mentioned that by no means has the drought been broken, but "now that we've had rain, there is hope it can rain again". The general consensus on crop conditions is that the corn has been badly damaged and the rains will be of little benefit. Except for irrigated corn, which accounts for nearly one half of total acreage, the Nebraska crop will be "nearly zero" this year and only a small portion is suitable for chopping into silage because of its low nutritive value and the buildup of nitrates in the stalk. The Kansas and Missouri corn prospects are not so grave as Nebraska's, but again the recent rains came too late to be of much help. However, with additional rainfall, the yield prospects for soybeans and grain sorghum could be substantially improved as these crops are now in the critical development stage.

In light of recent developments, corn production in the nation will likely fall moderately below 1973 levels. One month ago, the crop was expected to be about 8 percent larger than last year's. The soybean crop will also probably fall below earlier expectations. With grain supplies already very tight, the shortfall in 1974 production levels will likely buoy prices over the next year. Furthermore, the hoped-for reductions in feed costs for livestock producers and some abatement in food prices have been blunted by this new outlook on the grain situation.

The drought has greatly reduced the carrying capacities of pastures throughout the District, forcing producers either to use supplemental feed ahead of schedule or to move animals to other points, including slaughter. The recent rains will help alleviate this problem, but more rain will he needed before the pastures begin to rejuvenate. If dry conditions persist, especially into and through 1975, heavy liquidation of animals will likely occur. While this will temporarily boost meat supplies in the short run, supplies in the longer run will be smaller and prices correspondingly should move higher.

In July total loans at Tenth District weekly reporting banks continued to rise at well above normal seasonal rates, with commercial and industrial loans accounting for most of the increase. Farm loans at these banks fell more than seasonally, but several banks anticipated that the demand for such loans would soon be stimulated by the drought and the increasing cost of feed grains. District reporters experienced a decline in demand deposits, mostly United States Government, and substantial gains in other types of deposits, with the result that total deposits grew at well above average seasonal rates. No larger banks indicated special problems in meeting targets for CD funds.

The situation at smaller District banks may be somewhat different. The tendency for farmers to withhold crops from market and the special problems of cattle feeders appear to have caused deposits in smaller banks to grow less than seasonally and loan payoffs to be less than anticipated. Consequently the normal seasonal easing of liquidity pressures may be delayed this year.

The overriding concern among bankers contacted was the $2.25 billion issue of 9 percent Treasury notes being completed at the time of the survey. Consumer interest in these securities was resulting in substantial withdrawals of deposits from both banks and savings and loan associations. Although only one bank explicitly voiced concern about the cost of processing small individual orders, several of the banks noted a substantial concern over the longer run impact on deposits if such issues were to become more common.