Beige Book Report: Minneapolis
June 16, 1976
Capacity bottlenecks are not currently a major problem in the Ninth District economy; and in general, capacity problems are not expected to arise in 1976, though there are exceptions. In most industries, there is still excess capacity. In other industries, such as coal and taconite, firms are responding to demand pressures by adding to capacity. Lead times for some products such as brass and steel continue to lengthen, but these longer lead times are not seen as evidence of capacity bottlenecks. Industrial raw materials prices are up, but the increases have been modest. Gasoline prices have also increased, but supplies are ample. Overall energy supplies appear adequate for the rest of 1976. Drought conditions in the District have worsened in the last month; some farming regions are now in critical need of rainfall, and farm prices are rising.
There is more evidence of underutilized capacity than of supply bottlenecks in the Ninth District economy. A copper plant in upper Michigan is now running at 50 percent of capacity and is expected to be at 75 percent of capacity by year's end. A paper mill in the same area has recently expanded its plant and is operating below its new capacity. A representative from a major food processing concern says he is unaware of any capacity problems in this region s key industries. A director from a major manufacturing firm which buys inputs from national markets says that his firm's operations have not been hindered by capacity problems among suppliers.
Only about 1 in 7 of the 175 firms responding to this Bank's May survey of District manufacturers says that existing plant and equipment is inadequate in light of current backlogs and prospective sales over the next year. Nearly half of those firms are in food processing; for several of the firms, capital outlays would be used to update and improve existing facilities rather than to increase capacity. In the paper industry, considered by some to be a likely bottleneck in the coming month, most survey respondents say that capacity is adequate to meet anticipated sales over the near term.
Purchasing agents report only scattered problems in obtaining inputs. One exception is that electronic firms say integrated circuits are currently in short supply; suppliers reportedly have a 90-day backlog of orders, and only orders from preferred accounts are being accepted. Capacity of circuit suppliers is reportedly being expanded, but the increased supply will not come on line in the near term.
Another exception is a manufacturer of steel castings who says that heavy demand from the District's expanding taconite industry is pressing on his firm's supply capabilities. Smaller orders are not being accepted, and the firm is taking on only those customers who show promise of developing into major accounts. The firm is considering construction of a new foundry, which would come on line in 1979. The foundry would be constructed in Duluth or northern Wisconsin, and its primary purpose would be to meet the rising needs of the taconite industry on the Minnesota iron range.
Except for integrated circuits and castings, most inputs are in adequate supply. A manufacturer of heavy construction equipment says that lead times are lengthening. But he feels that the longer leads are due to the low inventories being held by suppliers rather than to limits on productive capacity. A producer of paper products says that his firm has integrated vertically to guard against a recurrence of the supply problems of 1973 and 1974; he sees no supply problems developing for his firm over the near term.
Productive capacity is growing in the region's primary industries. Capital inputs in the farm sector have been substantially upgraded in recent years. Coal production is also increasing. Finally, six taconite projects now under way on the iron range will boost capacity 60 percent by 1979. Two of those projects should be in operation by the end of 1976.
Prices of industrial raw materials have edged upward in recent weeks, but the increases have not been sharp, and directors expect that any increases over the summer months will be moderate. In the farm sector, prices of feed inputs have also been rising; one director, for instance, says that soybean meal prices in his area are up substantially since April.
Gasoline prices in the region are up, with the increases generally ranging from one cent to three cents per gallon. Nonetheless, gasoline remains in ample supply, as do all petroleum products. The purchasing agent of a major regional corporation says that there are currently gluts of heavy fuel oil and, consequently, considerable price cutting. Overall energy supplies in the region are seen as adequate into 1977, unless the coming winter is unexpectedly harsh.
The crop situation in the District has worsened since the last Red Book report. Normal crop yields are now very unlikely in Minnesota. Corn and soybeans are making some progress but remain under great stress, and a shortfall in hay production has sent livestock producers scrambling for existing supplies. In addition, drought conditions have spread westward in the District and large areas of the Dakotas are now in need of additional rain. The anticipated shortfall in production can be expected to have the greatest impact on prices of barley, oats, flax, and durum wheat, products for which this area is the major supplier.