Beige Book Report: Kansas City
January 15, 1975
Purchasing managers at Tenth District firms are applauding the return of a "buyers' market" for most industrial materials. Materials prices are reported to have generally stabilized, and allocations and long lead times have virtually disappeared. Materials inventories are being worked off in the face of weak demand for output and easier availability of supplies. Farm prices have been declining recently, but expected reduced output of poultry and meats suggests higher prices in the spring and summer. Total loan volume at Tenth District banks has grown at about the expected seasonal rate, while deposit growth has been strong.
Purchasing managers in the Tenth District report that the easing in availability and prices of materials, which was becoming apparent last fall, has gained momentum. From their point of view, there has been a dramatic change for the better since October. With very few exceptions, allocations are now a thing of the past. Lead times are now generally described as ranging from normal to "overnight deliveries", if requested. As a result, larger than normal stocks of materials are no longer necessary. In most instances, inventories are being worked down. Even those firms keeping inventories at relatively high levels are no longer buying all they can get, as they did earlier.
The aggressiveness in purchasing policy that was formerly directed simply at getting the materials is now being devoted to bargaining on prices. Raw materials prices generally are seen as "fairly well stabilized", with some reductions and such increases as occur being "smaller and less frequent". Several purchasing managers go so far as to call the present situation a "buyers' market". Not only is competition among suppliers reappearing after a long absence (". . even have some salesmen around now..."), but purchasing managers are successfully resisting price increases in many instances. As one said: "Personally I feel that I have better control over prices in 1975 than in 1974—since supplier competition is again becoming a factor, I can now put some pressure on suppliers about prices." Other purchasers speak in terms of refusing to accept price increases and going after price cuts on big items.
The preceding discussion does not include steel, where problems of availability and lead times continue to exist for some items. Part of this situation is attributed to the effects of the coal strike and some to the steel mills' continued emphasis on production of high profit items. Two buyers, noting the close ties of steel availability to the production of new automobiles, suggested that a turnaround in new car production could well make for a return to tightness in steel supplies.
Winter wheat acreage in the District's three biggest producing states is 5 percent larger than last year. Presently, the condition of the crop throughout the District is generally quite good and, if yields should return to 1973 levels, 1975 production will be up sharply. Total demand is expected to continue strong not only in the current period but also in the 1975-76 marketing year. A bumper crop in 1975 would be required to meet these demands, while rebuilding carry-over stocks to some extent. But, if output falls considerably short of expectations, the supply situation will remain tight for another year, and wheat prices will likely stay relatively high.
Farm prices as a whole have been declining recently. During the month ended December 15, 1974, the index of prices received by farmers fell 3 percent to a level 4 percent below a year earlier. Grain prices have continued to show weakness since them, but livestock prices have perked up somewhat. Recent information shows that sharp cutbacks in poultry and pork production are in store for the coming months; beef output will also be seasonally lower in the first quarter but above the reduced levels of a year ago. These production adjustments suggest that live animal prices may strengthen rather significantly this spring and summer, causing likely increases in food prices, especially if processors and retailers try to maintain or widen their margins.
A survey of large Tenth District banks reveal total loan volume increasing at about the expected seasonal rate, with strength in business loans offsetting weakness in the consumer sector. Commercial and industrial loans are up partly, due to seasonal requests to finance inventory, working capital, and accounts receivable. Demand for cattle, feed, and grain loans has also increased. Real estate loan portfolios are relatively inactive, although several District banks plan to commit funds for future construction. Denver banks reported a strong market for commercial real estate. Consumer installment loans are weak because of further declines in auto and mobile home purchases, while bank credit card loans remain strong. For the first time in several months, banks have been able to adjust their loans to a volume consistent with their desired loan-to deposit ratios. Accordingly, they now feel in a better position to accommodate loan requests over the upcoming period. The demand for loans is expected to remain strong, especially if the prime rate is reduced to around 8 1/2 percent by midyear—as many Tenth District bankers anticipate.
Deposits moved sharply upward in recent weeks. The increase in
deposits, to some extent, reflects the attempt of corporations to
show a highly liquid position around the
year-end. Also, an increase
in large negotiable certificate of deposit has been achieved by
keeping CD rates comparable to commercial paper.