KANSIIC CTAi0 IINIVFINITY I IIIPARIFe

IMPROVE CAPITALIZATION OF FEDERAL INTERMEDIATk'.

CREDIT BANKS AND PRODUCTION CREDIT ASSOCIATIONS KSU LIBRARIES 

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021

GOVERNMEN4

Storage

HEARING

BEFORE THE

COMMITTEE ON AGRICULTURE

HOUSE OF REPRESENTATIVES

NINETIETH CONGRESS

SECOND SESSION

ON

H.R. 16674

APRIL 29, 1968

Serial UU

Printed for the use of the Committee on Agriculture

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 1968
COMMITTEE ON AGRICULTURE

W. R. POAGE,

E. C. GATHINGS, Arkansas,

ice Chairman

JOHN L. McMILLAN, South Carolina

THOMAS G. ABERNETHY, Mississippi

WATKINS M. ABBITT, Virginia

PAUL C. JONES, Missouri

FRANK A. STUBBLEFIELD, Kentucky

GRAHAM PURCELL, Texas

MASTON O'NEAL, Georgia

THOMAS S. FOLEY, Washington

JOSEPH Y. RESNICK, New York

ELIGIO DE LA GARZA, Texas

JOSEPH P. VIGORITO, Pennsylvania

WALTER B. JONES, North Carolina

JOHN G. DOW, New York

BILL NICHOLS, Alabama

G. V. MONTGOMERY, Mississippi

FRANK J. BRASCO, New York

JOHN R. RARICK, Louisiana

Texas, Chairman

PAGE BELCHER, Oklahoma,

Ranking Minority Member

CHARLES M. TEAGUE, California

CATHERINE MAY, Washington

ROBERT DOLE, Kansas

GEORGE V. HANSEN, Idaho

WILLIAM C. WAMPLER, Virginia

GEORGE A. GOODLING, Pennsylvania

CLARENCE E. MILLER, Ohio

J. HERBERT BURKE, Florida

ROBERT B. MATHIAS, California

WILEY MAYNE, Iowa

JOHN M. ZWACH, Minnesota

THOMAS S. KLEPPE, North Dakota

ROBERT PRICE, Texas

JOHN T. MYERS, Indiana

RESIDENT COMMISSIONER

SANTIAGO POLANCO-ABREU, Puerto Rico

CHRISTINE S. GALLAGHER, Clerk

WILLIAM C. BLACK, General Counsel

HYDE H. MURRAY, Assistant Counsel

L. T. EASLEY, Staff Consultant
CONTENTS

H.R. 16674, a bill to amend the Federal Farm Loan Act and the Farm

Credit Act of 1933, as amended, to improve the capitalization of Federal

intermediate credit banks and production credit associations, and for Page

other purposes 1

Statement of:

Bement, Benjamin F., Jr., Dowagiac, Mich 35

Bice, Lorin T., Chairman, Federal Farm Credit Board 2

Boddy, H. M., Chairman, National Advisory Committee of Production

Credit Associations 9

Curtiss, Homer, Stockton, Ill 27

Enns, Paul I., chairman, Berkeley District Farm Credit Board 22

FunderBurk, C. B., representing the Third Farm Credit District_ _ 29

Hague, Lyle L., Cherokee, Okla 38

Haynes, Kit H., assistant legislative director, American Farm Bureau

Federation 46

Hendry, James, Lost Cabin, Wyo 37

Hoffpauir, George E., Morse, La 33

Lage, E. Riddell, chairman, Farm Credit Board of Spokane 40

Nay Paul, Jane Lew, W Va 25

Nelson, J. Richards, Madison, Conn 28

• Newsom, Herschel D., master, National Grange 43

Schroeder, Guido, West Bend, Wis 36

Studebaker, Samuel S., Tipp City, Ohio 32

Thompson, Charles C., chairman, board of directors, Farm Credit

Banks of Houston 18

Tootell, Hon. R. B., Governor, Farm Credit Administration 5

Correspondence submitted to the committee:

McNeill, Charles R., director, Washington Office, American Bankers

Association, letter of April 29, 1968 48

Norton, E. M., secretary, National Milk Producers Federation, letter

of April 29, 1968 47

O'Connell, Richard T., secretary, National Council of Farmer Cooperatives, letter of April 29, 1968 42
‘.
IMPROVE THE CAPITALIZATION OF FEDERAL INTERMEDIATE CREDIT BANKS AND PRODUCTION CREDIT

ASSOCIATIONS

MONDAY, APRIL 29, 1968

HOUSE OF REPRESENTATIVES,

COMMITTEE ON AGRICULTURE,

Washington, D.C.

The committee met, pursuant to notice, at 10 a.m., in room 1301,

Longworth House Office Building, Hon. W. R. Poage (chairman)

presiding.

Present: Representatives Poage, Gathings, McMillan, O'Neal, de la

Garza, Montgomery, Belcher, Teague, Mrs. May, Goodling, Miller,

Mathias, Mayne, Zwach, Kleppe Price, and Myers.

Also present: Christine S. Gallagher, clerk; William C. Black, general counsel; Hyde H. Murray, assistant counsel; L. T. Easley, staff

consultant, and Fowler C. West, assistant staff consultant.

The CHAIRMAN. The committee will please come to order.

We are met this morning to consider certain amendments to the

Federal Farm Loan Act and the Farm Credit Act of 1933, as amended,

to improve the capitalization of Federal intermediate credit banks and

production credit associations, and for other purposes.

(H.R. 16674 by Mr. Poage follows:)

[H.R. 16674, 90th Cong., second sess.]

A BILL To amend the Federal Farm Loan Act and the Farm Credit Act of 1933, as amended,

to improve the capitalization of Federal intermediate credit banks and production credit associations, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States

of America in Congress assembled, That the Federal Farm Loan Act, as amended,

is hereby amended—

(a) by substituting "twenty" for "twelve" in section 203(a) thereof

(12 U.S.C. 1041) ;

(b) by changing the heading over section 205 thereof (12 U.S.C. 1061) to

read "CAPITAL STOCK AND PARTICIPATION CERTIFICATES" instead of "CAPITAL

STOCK" and by adding the following new subsection (c) at the end of section

205 thereof (12 U.S.C. 1061) :

" ( C ) PARTICIPATION CERTIFICATES IN ADDITION TO THOSE ISSUED IN PAYMENT

OF PATRONAGE REFUNDS.—In addition to the participation certificates issued in

payment of patronage refunds, each Federal intermediate credit bank may issue

further amounts of such participation certificates, with the same rights, privileges, and conditions, for purchase by institutions other than production credit

associations that are entitled to receive participation certificates from the bank

in payment of patronage refunds."; and

(c) by inserting the following new paragraph between the present second

and third paragraphs of subsection (a) of section 206 thereof (12 U.S.C.

1072(a)) :

"If and when the relative amounts of class B stock in a Federal intermediate

credit bank owned by the production credit associations are adjusted to reestablish the proportion of such class B stock owned by each association, as

(1)
2

provided in the second or third paragraphs of section 205(a) (2) of this Act

(12 U.S.C. 1061(a) (2) ), amounts in the reserve account that are allocated to

production credit associations may be adjusted in the same manner, as far as

practicable, to reestablish the holdings of the production credit associations in

the allocated legal reserve accounts into substantially the same proportion as are

their holdings of class B stock.".

SEC. 2. The Farm Credit Act of 1933, as amended, is hereby amended—

(a) by inserting "or otherwise, except as may be authorized under rules

and regulations prescribed or approved by the Farm Credit Administration,"

immediately after the word "loan" in the last sentence of the first paragraph

of section 23 thereof (12 U.S.C. 1131g) ; and

(b) by adding the following at the end of section 24 thereof (12 U.S.C.

1131h) : "Subject to rules and regulations prescribed by the Farm Credit

Administration, a production credit association may issue its capital notes

for sale to borrowers and others, but the principal amount of such capital

notes outstanding at any one time, together with other liabilities of the

association, may not exceed ten times the paid-in and unimpaired capital

and surplus of such association.".

The CHAIRMAN. We have with us Mr. Bice, Chairman, Federal Farm

Credit Board, and Governor Tootell, Governor, Farm Credit Administration; accompanied by Mr. F. Vernon Wright, Deputy Governor,

and Director, Shorf -Term Credit Service; and Paul 0. Ritter, General

Counsel, Farm Credit Administration.

I understand that they will wish to appear at the table together. Is

that the way they wish to do it? If so, we will be glad for them to do so.

We will be glad to hear you now, Mr. Bice. We will be glad to have

you start this discussion.

STATEMENT OF LORIN T. BICE, CHAIRMAN, FEDERAL FARM CREDIT

BOARD

Mr. BICE. Mr. Chairman and gentlemen of the committee, my name

is Lorin T. Bice and I am appearing here today as chairman of the

Federal Farm Credit Board in support of H.R. 16674 which is recommended by the Farm Credit Administration for enactment by Congress. The general purpose of the bill is to improve the capitalization

of the Federal intermediate credit banks and production credit associations and also otherwise enhance their capacity to continue to meet

the increasing credit needs of farmers and ranchers while at the same

time retiring the remaining Government capital from the banks within a reasonable period.

The Farm Credit Administration is the agency of the Federal Government which has the supervision of the Federal intermediate credit

banks and production credit associations whose capitalization and

ability to serve their function would be improved by the bill. Also subject to supervision by the Farm Credit Administration are the Federal

land banks and Federal land bank associations, and the banks for cooperatives, but the present bill does not concern them.

Originally established in 1933, the Farm Credit Administration itself, as reconstituted in 1953, now consists of the Federal Farm Credit

Board, a chief executive officer, who is known as Governor of the Farm

Credit Administration, and other necessary personnel. Under its Governor, R. B. Tootell, the official of the Farm Credit Administration

most directly concerned with the Federal intermediate credit banks

and production credit associations is the Deputy Governor and director of Short-Term Credit Service, F. Vernon Wright.
3

The Federal Farm Credit Board, established in 1953, has 13 members, one appointed by the President with Senate consent from each of

the 12 farm credit districts, and a 13th member appointed by the

Secretary of Agriculture. The Board meets six or more times a year to

determine major policy for the Farm Credit Administration. A continuing function and duty of the Federal Farm Credit Board is to

make recommendations to Congress for amendments to the laws relative to agricultural credit administered by the Farm Credit Administration.

Before undertaking to present some background information about

the Federal intermediate credit banks and production credit associations, which may be helpful in your consideration of the bill now being

recommended, I would like- to offer some personal information about

myself.

My own farming is producing and marketing citrus. My son is associated with me in operating family citrus groves in Florida. For

many years I have been a member of the Florida Citrus Production

Credit Association and the Federal Land Bank Association of Lakeland, and have had considerable experience on the boards of these

local associations. I was a member of the Farm Credit Board of

Columbia in the third farm credit district, which includes North and

South Carolina, Georgia, and Florida, from 1956 until 1963 when I

was appointed to the Federal Farm Credit Board for a 6-year term

ending in 1969. For my last year on the Federal Board I am serving

as Chairman.

The Federal intermediate credit banks, one in each of the 12 farm

credit districts into which the 50 States and Puerto Rico are divided,

were established in 1923. They were organized and operate under

title II of the Federal Farm Loan Act as added by the Agricultural

Credits Act of 1923 and since amended. Their primary function is

to discount for, or purchase from, production credit associations and

other financing institutions, with their indorsement, notes representing

loans made by them to farmers and ranchers; and to make loans and

advances to such associations and other financing institutions to enable them to make or carry loans for any agricultural purpose. Loans

made to farmers or ranchers may be used as collateral for loans and

advances from the credit banks. There now are about 118 other

financing institutions being served by the Federal intermediate credit

banks but approximately 95 percent of the discounting and lending

by such banks is for production credit associations.

The Federal intermediate credit banks obtain funds for such discounting and lending by selling their consolidated debentures in the

public securities market. These debentures, for which loans made to

farmers or ranchers are pledged as collateral, are the joint and several obligations of the 12 credit banks and are not obligations of the

United States. During the fiscal year ending June 30, 1967, $4.2 billion of such debentures were issued and the total amount outstanding

at the end of the year was $3.3 billion.

Throughout the country there are 459 production credit associations,

with the number in the 12 farm credit districts varying from 22 to 65.

The associations are chartered by the Farm Credit Administration

and operate under the provisions of the Farm Credit Act of 1933, as

amended. Each association has a prescribed territory, within which
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it makes loans to farmers and ranchers. Loan maturities usually are

not more than one year but loans may be made for terms up to seven

years. During fiscal 1967, the volume of this lending, with loan funds

furnished by the Federal intermediate credit bank in each of the 12

districts totaled $5.1 billion. Out of a total membership of 548,279 at

the end of that year, there were 322,700 borrowing members of the

associations with $3.7 billion of loans outstanding.

From their beginning in 1923, all of the capital stock of the 12

Federal intermediate credit banks was owned by the United States and

it was not until 1956 that provision was made for the Government

capital to be supplanted by private capital. During 1957 and 1958, as

required by the Farm Credit Act of 1956, the production credit associations purchased capital stock in the Federal intermediate credit

banks in an aggregate amount equal to 15 percent of the capital stock

in the banks then owned by the United States and a corresponding

amount of the capital stock owned by the United States, or slightly

more than $13.1 million, was retired. Further, seven of the banks have

used earnings to retire about $454,000 more of the capital stock held by

the United States.

Following the 1956 legislation, the production credit associations

have also increased their holdings of capital stock in the banks because

the annual patronage refunds by each Federal intermediate credit

bank are paid to the associations of its district in the form of capital

stock. In 1965, there was further legislation which authorized each

Federal intermediate credit bank, with the approval of the Farm

Credit Administration, to require the production credit associations

in its district to purchase additional capital stock in the bank in order

to meet its credit needs. A number of the banks are now preparing to

do this. However, there has been no net reduction in the amount of

capital stock in the banks held by the United States. This is because

during the same period, out of the revolving fund in the Treasury

available for that purpose, it has been necessary for the Governor of

the Farm Credit Administration to purchase $51,950,000 of additional

capital stock in eight of the banks in order to meet their credit needs.

On the whole, therefore, the amount of Government capital put into

the banks since 1956 is almost four times the amount that has been

retired. Since the legal debt-to-capital ratio of the banks was increased

to a maximum of 12 to 1 in 1965, though, there has been no change in

the Government capital in the banks and the amount has remained

at $125,789,120.

Since 1953 it has been the declared policy of Congress that the

Government capital in the Federal intermediate credit banks eventually should be supplanted by capital provided by borrowers from the

banks. The amendments enacted in 1956 and 1965 were intended to

facilitate this. However, experience has shown, as Governor Tootell

will explain later, that we will need the further amendments now

being recommended if the banks are to return their Government

capital within a reasonable period and at the same time continue to

serve the increasing needs for agricultural credit.

This proposed legislation has been considered by and is acceptable

to the 12 district farm credit boards that serve as the board of directors of.the Federal intermediate credit bank in their respective

farm credit districts. To indicate their support, a director from each
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of the districts is present and available to testify if time permits. A

subsequent witness is also expected to endorse the legislation on behalf

of the National Advisory Committee of Production Credit Associations, of which he is chairman.

And now I would like to defer to Governor Tootell who is standing

by to undertake a more detailed explanation of our proposals.

The CHAIRMAN. Thank you, Mr. Bice.

We will be glad to now have the presentation by Governor Tootell.

STATEMENT OF R. B. TOOTELL, GOVERNOR, FARM CREDIT ADMINISTRATION; ACCOMPANIED BY F. VERNON WRIGHT, DEPUTY

GOVERNOR, AND DIRECTOR, SHORT-TERM CREDIT SERVICE, AND

PAUL 0. RITTER, GENERAL COUNSEL

Mr. TOOTELL. Mr. Chairman and gentlemen of the committee.

Against the background just provided by the chairman of the Federal Farm Credit Board, I would like to describe in detail the amendments to our existing laws which would be made by H.R. 16674, and

the reasons why we are recommending them. There are five amendments, three of which will be discussed as Federal intermediate credit

bank amendments and two as production credit asociation amendments. I will take them up in the order in which they appear in the

bill.

FEDERAL INTERMEDIATE CREDIT BANK AMENDMENTS

Section 1 ( a) . As has already been mentioned, the 12 Federal intermediate credit banks sell their consolidated collateral trust debentures

in the public securities market in order to obtain funds with which to

finance production credit associations and other institutions in making

loans to farmers and ranchers. Under existing law (12 U.S.C. 1041

(supp. II, 1967) ), there is a limitation "That the aggregate amount

of the outstanding debentures and similar obligations issued by the

Federal intermediate credit banks shall not exceed 12 times the surplus

and paid-in capital of all such banks." The proposed amendment is

to substitute "twenty" for "twelve" in this limitation so that the permissible debt-to-capital ratio would be 20 to 1 instead of 12 to 1. This

would permit up to $20,000 of debentures, secured by a like amount of

collateral, to be issued for each $1,000 of surplus and paid-in capital

of the banks. Differently stated, as of June 30, 19672 the 20-to-1 ratio

would have permitted $6.2 billion of debentures and similar obligations

to be outstanding instead of $3.7 billion under the present 12 to 1

ratio. The present limitation (12 to 1) is unnecessarily conservative

and too restrictive if the credit banks are to continue to meet the

increasing demands for agricultural financing without calling on the

Government for more capital and while returning within a reasonable

time the Government capital they now have.

When the debt-to-capital ratio of the credit banks is close to 12 to

1. and loans and discounts are increasing rapidly, the banks can continue to operate within that ratio only if additional capital is paid in.

The ratio as of June 30, 1967, was 11.35 to 1, but this was reduced to

10.78 to 1, after earnings for the year were distributed. Based on the

latest available estimates the ratio will closely approach the present

12 to 1 legal maximum in May or June 1968.

95-021-68----2
•

6

It is estimated that total loans and discounts outstanding at June 30,

1968, in the 12 Federal intermediate credit banks will be $4,050 million.

Ten years ago the amount at the same month-end was $1,547 million.

The estimated increase this June 30, over June 30, 1959, is 230 percent.

Growth in outstandings over the previous year with 1968 estimated,

was 14.1 percent in 1966, 15.6 percent in 1967, and 14.3 percent in 1968.

We see no evidence of any leveling off in the volume of loans and

discounts of the credit banks. Some projections estimate the nonreal

estate debt of farmers and ranchers in 1980 at $40 billion. The share

of this market to be handled by the Federal intermediate credit banks

we estimate at from 20 to 25 percent.

At June 30, 1959, the total net worth of the 12 Federal intermediate

credit banks was $173,413,000. At June 30, 1968, it is estimated this

amount will be $334,893,000, or an increase of about 117 percent. Thus,

over the 10-year period, growth in net worth percentagewise has been

about half the rate of the increase in loans and discounts outstanding.

The net worth of the credit banks is made up of Government-owned

capital stock, $125,789,120, and net worth generated from earnings and

stock purchases, estimated to be $209,104,000 at June 30, 1968. Additions to net worth from earnings after payment of franchise taxes for

the 10 years ending June 30, 1968, is estimated at $129,143,000. While

these earnings are substantial they have not been commensurate with

growth in business. Consequently, it is estimated that the debt-to-capital ratio of the credit bank system would be 11.9 to 1 prior to the close

of business on June 30, 1968.

If more capital must be put into the credit banks in order to permit

increased lending under the present 12 to 1 limitation, there now are

two general sources for such additional capital.

First, out of a revolving fund available for that purpose in the

Treasury of the United States, the Governor of the Farm Credit

Administration may subscribe to capital stock of the banks in such

amount as he determines is needed to meet the credit needs of a bank

or banks (U.S.C. 1061 ( a) (1) ).

Second, each Federal intermediate credit bank, with the approval of

the Farm Credit Administration, may also require the production

credit associations in its district to purchase capital stock of the bank

in order to provide capital to meet the credit needs of the bank (12

U.S.C. 1061(a) (2) (supp. II, 1967) ). It would be contrary to the programs now being developed by the banks for the return of their Government capital within a reasonable time, if more Government capital

were put into the banks in order to meet increasing credit needs under

the 12 to 1 debt-to-capital limitation. As part of their Government

capital retirement programs, the banks do expect to call on the production credit associations to purchase additional capital stock of the

banks. However, it is not deemed feasible for the associations to do this

in an amount that would both permit the return of Government capital and support increasing credit needs under the 12 to 1 debt-tocapital limitation now applicable. This is why it is proposed that the

debt-to-capital limitation be changed to 20 to 1.

Such a change is necessary if the Federal intermediate credit banks

are to continue to meet the increasing credit needs they are intended to

serve, while at the same time returning Government capital, and looking to the associations, within their capacity, to provide additional
7

capital instead of calling for more Government capital. It is not only

deemed necessary but is also deemed amply justified by the financial

strength of the credit banks, supporting which, as hereafter explained,

there is also the financial strength of the associations.

Before a Federal intermediate credit bank could suffer any loss on

its financing of the production credit associations in its district, which

represents about 95 percent of its financing, it would be necessary that

one or more of the associations become insolvent. However, this is well

guarded against because the liabilities of each association, including

its liability to the credit bank, may not exceed 10 times the paid-in and

unimpaired capital and surplus of the association (12 U.S.C. 1032).

Overall the associations are currently operating within about a 7-to-1

debt-to-capital limitation. Their losses in the 33 years of their existence

since 1933 have amounted to only eight-hundredths of 1 percent of the

total cash advanced to farmers and ranchers. This has not resulted in

any loss to the credit banks, which have sustained no losses on any

of their loans or discounts made since 1933, when the associations came

into being. Taking into account losses suffered from their organization in 1923, the net losses of the credit banks in 44 years of operation

have amounted to approximately $1 for each $9,000 of credit extended.

Today the likelihood of losses by the credit banks on their loans and

discounts for the associations is even further reduced. As a protection

for their capital and surplus, the associations have accumulated reserves for losses totaling $99.9 million, or 2.7 percent of total loans

outstanding on December 31, 1967. Further, the associations in the

different districts, within the past few years, have adopted either losssharing agreements, participation loan agreements, or guarantee plans,

or combinations of these, in connection with their loans. While these

agreements for the different districts are in varying terms, the general

effect is that certain losses by one association would be made up by

contributions from the other associations. In this manner, the collective financial strength of the associations in a district serves to

insulate the credit bank from losses on its loans or discounts for the

associations. The debentures issued by the Federal intermediate credit

banks, therefore, are not only supported by a like amount of farmers'

notes and the financial strength of the banks themselves, but also, to a

considerable extent, by the financial strength of the associations. With

due recognition of this, there is considered to be ample justification

for the proposed amendment so far as concerns the financial stability

of the Federal intermediate credit banks and the debentures issued

by them.

While the major proposal in the bill is to increase the permissible

debt-to-capital ratio of the Federal intermediate credit banks from

12-to-1 to 20-to-1, there also are amendments which would enlarge

the amount of capital for the credit banks obtainable from other

sources than the Government; that is, from production credit associations and other institutions that are financed by the credit banks.

Section 1(b). The capital of the Federal intermediate credit banks,

against which their debt-to-capital ratio must be applied, includes not

only the capital stock of the banks, which is held by the United States

and production credit associations, but also participation certificates,

which are held by financing insitutions other than production credit

associations that use the services of the credit banks. Under existing
8

law (12 U.S.C. 1072 (b) ), these participation certificates are issued by

the banks to such other financing institutions only in payment of

patronage refunds that are distributed annually by each bank and

there is no provision for issuing additional amounts of participation

certificates. In the case of production credit associations, patronage

refunds are paid in capital stock and such associations have in the

past been required and may again be required to purchase additional

capital stock in the bank. The present amendment would authorize a

Federal intermediate credit bank to issue participation certificates, in

addition to those issued in payment of patronage refunds, for purchase

by financing institutions that are entitled to receive participation certificates in payment of patronage refunds.

Section 1(c). At the end of its fiscal year, each Federal intermediate

credit bank is required to apply its net earnings as specified in the law

(12 U.S.C. 1072 ( a) (supp. II, 1967) ) . Some of such net earnings are

retained in a reserve account where they are allocated on a patronage

basis to the production credit associations and other financing institutions that borrow from or rediscount with the bank. The remainder

of such net earnings, which are not applied otherwise, are distributed

as patronage refunds to production credit associations in the form of

class B stock and to 'other financing institutions in the form of participation certificates. Over the years a production credit association

thus acquires interests in a Federal intermediate credit bank that is,

allocations of surplus account and class B stock which are in proportion to the business done by the association with the bank during each

year. The thought has been that the interests in a Federal intermediate

credit bank owned by a production credit association occasionally

should be brought into proportion with its current use of the bank.

Under a 1965 amendment (12 U.S.C. 1061(a) (supp. II, 1967) ) ,

the relative amounts of class B stock in a Federal intermediate credit

bank owned by production credit associations may be adjusted to reestablish the amount of such class B stock owned by each association in

proportion to the average indebtedness (loans and discounts) of each

association to the bank during the immediately preceding 3 fiscal years.

If and when this is done, the present amendment would authorize

amounts in the reserve account that are allocated to production credit

associations to be reestablished in substantially the same proportion as

the holdings of class B stock.

PRODUCTION CREDIT ASSOCIATION AMENDMENTS

Section 2 ( a). Each borrower from a production credit association

is required to own, at the time the loan is made, class B stock of the

association in an amount equal to $5 per $100 or fraction thereof of

the amount of the loan (12 U.S.C. 1131g) . Class B stock entitles a holder

to vote (one vote per holder) and may be purchased only by farmer

borrowers from the association and individuals eligible to become borrowers; and within 2 years after a holder of class B stock has ceased

to be a borrower from the association, such class B stock must be exchanged for nonvoting class A stock of the association which may be

purchased and held by investors (12 U.S.C. 1131e) . The present amendment concerns a provision in the law (12 U.S.C. 1131g) that the class

B stock of a production credit association owned by a borrower from
9

the association "shall not be canceled or retired upon payment of the

loan." Immediately after the quoted words would now be added "or

otherwise, except as may be authorized under rules and regulations

prescribed or approved by the Farm Credit Administration." This

would make it possible to authorize retirement of the stock upon payment of the loan, as may sometimes be in the best interest of both the

borrower and the association. The amendment would also permit retirement of the stock for application of the proceeds in partial or final

payment of the loan and in other circumstances as authorized under the

rules and regulations.

Section 2(b). Production credit associations are specifically authorized to borrow from, and rediscount paper with Federal intermediate

credit banks. Except with the approval of the Governor of the Farm

Credit Administration (12 U.S.C. 1131h, second sentence) , such associations may not borrow from or rediscount paper with any other

bank or agency. It has not been considered within their authority

to borrow from investors generally as by the sale of capital notes.

The proposed amendment would specifically authorize a production

credit association to issue its capital notes for sale to borrowers and

others. This new authority would be subject to rules and regulations

prescribed by the Farm Credit Administration, and the capital notes

outstanding at any one time, together with other liabilities of the association, may not exceed 10 times the capital and surplus of the

association.

This concludes my prepared explanation of the bill and we hope

that the committee may see fit to act favorably on it.

The CHAIRMAN. Thank you, Governor Tootell.

Do you want us to proceed with Mr. Boddy before we proceed to

ask anybody questions?

Mr. TooTELL. Just as you wish, Mr. Chairman.

The CHAIRMAN. I think it would be better to get all the background

statements in here before we go into questioning.

We will now hear from Mr. Boddy, chairman of National Advisory

Committee of Production Credit Associations.

We will be glad to hear from you now, Mr. Boddy.

STATEMENT OF H. M. BODDY, CHAIRMAN, NATIONAL ADVISORY

COMMITTEE OF PRODUCTION CREDIT ASSOCIATIONS

Mr. BODDY. Mr. Chairman and members of the committee. I represent the National Advisory Committee of Production Credit Associations which is composed of the committeefnen from each of the 12

districts and they represent, in turn, the 370,000 production credit

association members.

These members are chosen in each district. They operate very closely

together. They are members of their own production credit associations and also are committeemen.

At our annual meeting the 1st of April here, the primary interest

of our members, 370,000 production credit association members, was

this matter of capitalization and particularly the matter of the ratio

requirements. The people from every area brought with them a mandate from their own associations to go into this matter, and at the

suggestion of one of the districts we passed a resolution which was

adopted which says, basically, three things:
10

That the present 12-to-1 ratio is overly conservative and restrictive;

That the proposed 20-to-1 ratio will be adequate in view of past and

projected loan losses by production credit associations;

That conservative loan loss projections are reasonable in view of

the sound financial position, successful management, and mutual loss

sharing plans that have been adopted.

We feel that the Federal intermediate credit bank system varies

from other lending institutions in many ways:

In the first place, we are doubly capitalized by the members investment in the stock of both the production credit associations and the

Federal intermediate credit banks. So, you have double-duty dollars;

you have a doubling of the capitalization by the members in these

associations. A reduction in Federal intermediate credit bank capital

ratio will lessen the demands for additional capital at a time of large

expense and small profit by agriculture.

Second, the investing public is insulated from any kind of loss by

three layers of reserves, surplus, and capital; first, the capital of the

bank, then by the capital of the association, and then by the farmer

members of that association.

The loans are made on the land and the livestock, the cattle of the

members. These notes in turn are placed or pledged with the association which, in turn, pledges their surplus which has been contributed

by the same members, and a reserve has been built up. It is placed in

the credit banks which in turn place it in their reserves.

The Federal Intermediate Credit Banks capital surplus and reserves

must disappear before any investor looses a dime. For the Federal

intermediate credit bank capital to disappear the same amount of reserve surplus and capital in the Production Credit Association must

disappear. This would mean the loss of all equity in land and chattels

of the individual members. Thousands of farmers and cattlemen must

go broke, hundreds of Production Credit Associations must go broke

and some Federal Intermediate Credit Bank must lose all it has before

any investor is in jeopardy.

If an association goes broke, no one is affected, no one loses; no deposits are involved, no third parties are involved, and if an association goes broke, which would be a first, the only thing that would be

involved would be the capital of the farmer members that they have

already put in.

On June 30, the Houston Federal Intermediate Credit Bank will

repay to the Treasury all the Government capital invested in it. Within

5 years, all the Government capital in all other Federal intermediate

credit banks is scheduled for repayment.

With no Government capital at risk, no depositors or third party

funds at stake, with investors protected by this pyramid of reserves,

and with proven management and credit know-how it would seem

that farm credit is justified in requesting this ratio change.

So, with these differences between our system and ordinary banking

systems, the members of the National Advisory Committee would like

to urge your consideration of this legislation.

(Following is a resolution passed by the National Advisory Committee of Production Credit Associations:)

Resolution of the National Advisory Committee of Production Credit Associations urging the passing of Federal legislation to change the Federal Intermediate Credit Bank maximum loans and net worth ratio from 12 to 1 to 20 to 1.
11

Whereas the present limitation of 12 to 1 is unnecessarily conservative and

too restrictive if the credit banks are to continue to meet the increasing needs

for agricultural financing without calling on the government for more capital

while returning within a reasonable time the government capital they now have,

and

Whereas the major reason for having a ratio requirement is a protection

against loss for investors and stockholders, based on loss experience and the

probability of future losses, the 20 to 1 ratio is adequate, and

Whereas the Production Credit Associations, the primary lenders in our System, are required to maintain sound financial structures and sizeable provisions

for bad debt losses; and,

Whereas most Production Credit Associations have joined in a program for

sharing of losses thereby spreading the risk of their lending business, and

Whereas it has been determined that because of the strong financial position of

Production Credit Associations and their sound lending policies over the years,

the changing of the ratio would not have an effect upon the debenture market,

and

Whereas to ask farmer-members to invest additional money to capitalize Production Credit Associations and the Federal Intermediate Credit Bank, when it

is not necessary, will put an additional financial burden on them: Now, therefore, be it

Resolved, by the National Advisory Committee of the Production Credit Associations, That Federal legislation be passed changing the present Federal Intermediate Credit Bank maximum loan to net worth ratio of 12 to 1 to 20 to 1.

The CHAIRMAN. Thank you, Mr. Boddy.

I think we might now ask questions of our panel and then call upon

the representatives from the Farm Credit districts.

Do you think that is a proper way to proceed, or would you rather

hear from the others at this time?

Mr. TOOTELL. I think there is merit to directing questions to those of

us who are here at the present time and then proceed to the district

people.

The CHAIRMAN. I was interested in Mr. Bice's statement.

On page 4, you have a statement about a membership of 548,279 at

the end of 1967, and, of that number, there were 322,700 borrowing

members of the associations. Now, how did you get that difference

between the two groups, those that were and those that were not borrowers? They would have to be a borrower of the association to be a

member, would they not?

Mr. BICE. That comes about in two ways, I would think.

A lot of these 548,000-odd that I have mentioned repay their loans

before the end of the year so that the number is reduced. They are

members at one time but not necessarily so at the end of the year, and

then they would be in and out a year or two, just as their needs might

require. So long as they retain their class B stock they are members.

They are not voting members when they own class A stock, but they

are members. So they come in and out. I think that is the answer to

this discrepancy in the figures.

The CHAIRMAN. Does a, man cease to be a member when he converts his class B stock into class A stock? He ceases to be a voting member.

How does he cease to be a member?

Mr. BICE. Well, eventually, that stock can be offered for sale and picked up by another member. Under the proposed act it would be provided that his B stock may be retired as a part of his last payment

on his loan. So then, of course, he would cease to be a member when the

last payment was made.

The CHAIRMAN. Of course, when he comes to pay off the land bank

loan, you can use that last 5 percent to pay the loan?
12

Mr. BICE. That is correct.

The CHAIRMAN. And you will require that procedure to be followed

here?

Mr. BICE. That would be permissible under the amendment we are

asking for; yes, sir.

The CHAIRMAN. Governor Tootell, on page 2 of your statement, you

state:

When the debt-to-capital ratio of the credit banks is close to 12 to 1 and loans

and discounts are increasing rapidly, the banks can continue to operate within

that ratio only if additional capital is paid in.

And you state that as of June 30, 1967, the ratio was 11.35 to 1, but

that this was reduced to 10.78 to 1 after earnings for the year were distributed, and that based on the latest estimates available, the ratio will

closely approach the present 12-to-1 legal maximum in May or June

1968. I think you have actually answered the question that I had in

my mind when you read that.

You pointed out that the Production Credit Associations were being

called upon to provide more capital, that that is the way that

you intended to continue to operate. Of course, the 12-to-1 would occur,

so far as operation is concerned, but you would prevent that by additional purchasing of the stock by the Production Credit Associations,

and you do not consider that that is a permanent solution and it will

not bring in enough money to keep us in an operating position over

a period ofyears, and that that is why we have to change the ratio

for the intermediate credit banks.

Mr. TOOTELL. This is exactly right, Mr. Chairman; this is purely a

temporary assistance to purchase the class B stock, in order to meet

the increasing requirements of farmers that the Production Credit

Associations are being called upon to meet. After the PCA's provide

this additional capital to the credit banks, it simply means that the

farmers would be called upon for completely unjustified capital contributions to the two credit institutions.

The CHAIRMAN. Which has the effect of raising the interest rate

to the farmers.

Mr. TOOTELL. It would have the same effect; yes.

Another way is to increase the interest rate and to have these additional net earnings or net worth that will add to the capital, but this

is a very, very expensive way from the farmers' standpoint.

The CHAIRMAN. I feel that it is, too, and I feel that we should arrive

at a system that would enable us to extend the lending power of the

intermediate credit banks to the extent that we get his money from the

Production Credit Associations. It would seem to me that the effect

of it is to postpone the time when the Production Credit Associations

would pay off all of their capital. I believe there are only twoMr. TOOTELL. There are three in the United States.

The CHAIRMAN (continuing). That have not done that now, but they

ought to get their Government capital all paid out and they ought to

establish adequate reserves, it seems to me, at the local level, which has

the same effect on the securities of the lending institutions when you

add this additional capital at the local level, except that it does not

meet the legal requirements of the ratio of the intermediate credit

banks, and to me, it seems to be more desirable, or it would be desirable

if we increased the reserves at the local level rather than putting their

reserves in intermediate credit banks.
13

Mr. TOOTELL. I think this is a very good point in favor of this.

Actually, as pointed out in the testimony, there is no effort at all or

intention to change either the legal ratio of the Production Credit

Associations which has been a 10-to-1 ratio, from the beginning in

1934, nor to change the factual operating ratio which is about to

71/2 to 1. The Production Credit Associations as primary lenders will

continue to make loans in that fashion and will continue to be kept in

a very sound financial position.

The CHAIRMAN. But, as you know, for some years I have been one

of those who have been reluctant to let this ratio of loans to capital

(Yet too high in any 9f these institutions, because I felt that solvency

was the most important thing that we should have and that we could

not perform any of the rest of the functions of the banks unless we had

absolute assurance of the solvency of the institutions.

And I think, as I recall it, back 10 or 12 years ago when we revised

this, that I thought that the 12-to-1 ratio was probably as high as we

could go but I do recognize that we have had a great expansion in

the institutions in the meantime and that the need for capital reserves

is not nearly as great as it was, in my judgment, 10 years ago—certainly 40 years ago. I think that with the passage of time these institutions have become very much stronger than they were that the

local support, meaning the Production Credit Associations are so

much stronger than they were 10, 20 years ago, it seems to me that it

would justify making the change that is being proposed here.

Mr. TOOTELL. I would like to draw another comparison. You mentioned the other institutions in our Farm Credit system, the Federal

land banks, that they from the beginning in 1916 have had a 20-to-1

ratio and that the Federal land banks are primary lenders while the

credit banks are secondary lenders and have the financial strength

of the PCA's ahead of them in case of any loss. I think this is further

evidence.

The CHAIRMAN. Are there any other questions?

Mr. TEAGUE of California. I have to leave in a moment.

Through the years I have been on this committee, I have come to

have a very high regard for Governor Tootell and his judgment, and

therefore, I expect to support these amendments unless some very

unforeseen thing happens. I am sorry that I do have to leave.

The CHAIRMAN. Thank you, Mr. Teague.

Mr. Gathings ?

Mr. GATHINGS. On page 5 of your statement, Governor Tootell, that

"Their losses in the 33 years of their existence since 1933 have

amounted to only .08 of 1 percent," and then a little farther down on

your statement you say that "the net losses of the credit banks in 44

years of operation have amounted to approximately $1 for each $9,000

of credit extended."

I am greatly impressed with the reserve situation mentioned at the

bottom of page 5. You state that the reserves for losses total $99.9

million or 2.7 percent of total loans outstanding on December 31, 1967.

That seems to me to be a very great record. I commend you for it.

Mr. TOOTELL. Thank you, Mr. Gathings.

May I add, with regard to this reserve bad-debt losses, that is being

built up to 3.5 percent, generally. There are some associations that have

actually exceeded that at the present time.

95-021-68-3

•
14

Mr. GATHINGS. That 2.7 would move up, then?

Mr. TOOTELL. Yes. A few years from now, maybe just 2 or 3 years

from now, that will probably be 3.5 percent for the system as a whole.

Mr. GATHINGS. Thank you. That is all, Mr. Chairman.

The CHAIRMAN. Are there any further questions?

Mr. McMillan?

Mr. McMILLAN. Mr. Chairman, I would like to thank the governor

for the fine work the banks have done in my State of South Carolina.

They have been a great help and a lifesaver to the farmers.

And I appreciate your statement.

Mr. TOOTELL. Thank you.

The CHAIRMAN. Mr. 6-oodling ?

Mr. GOODLING. I am not as familiar with this as I would like to be.

What is your present loan rate to farmers?

Mr. TOOTELL. Do you mean of the Production Credit Associations?

Mr. GOODLING. Yes.

Mr. TOOTELL. This varies, sir, by associations, depending, in large

part upon the size of the association and its operating efficiency. The

typical loan rate today is 7 percent, with the next most common loan

rate being 6 percent. This is the answer. Of course, the reason that is

that high is because the PCA's have to hire their money and they hire

it from the credit banks which, in turn, hire it from the money markets,

and you know where the money markets are and have been these last

few years.

Mr. GOODLING. That answers my next questions with reference to

how you compete with commercial banks with a loan rate of 7.5 percent. In my home State, commercial banks are limited to 6 percent.

Mr. TOOTELL. Of course, over a long period cf years, the typical loan

rate of the PCA's has been 6 percent or less. And just to keep the

record straight, I would have to admit that the PCA's do compete to

a limited extent with commercial banks, but I would hasten to point

out that the PCA's are specialized lenders. They are permitted by law

to loan only to farmers and ranchers. They are not permitted to make

any other types of loans. They are required to do that, and they cannot

accept deposits. And so that the competition is limited. In most parts

of the country, let me say that the local bankers in the agricultural

lending business welcome the additional funds that the PCA's bring

into the rural areas and also are glad to have the deposits which the

PCA's maintain with the commercial banks locally.

Mr. GOODLING. What is your criteria for making loans to farmers

and ranchers?

Mr. TOOTELL. Well, in the first place, he must be an agricultural producer, and he must have the ability to repay. It is never the intention

to make a rancher or a farmer a loan unless an analysis of his situation

leads the loan committee of the PCA to believe that the loan will do

him some good and that means that he will be able to repay the loan

and we hope will have considerably more benefit than just getting

enough additional money.

Mr. GOODLING. Do you pay Federal income tax on your earnings?

Mr. TOOTELL. The PCA which are the primary lenders do so; they

do so.

Mr. GOODLING. Thank you. That is all, Mr. Chairman.

The CHAIRMAN. Are there any further questions?
15

Mr. Mayne?

Mr. MAYNE. I would like to commend Governor Tootell and Chairman Bice and all of the other gentlement here on the very splendid

work that the farm credit system has been doing in the Omaha District which is personally known to me. I would like to ask you, Governor Tootell, this question : On page 5, you say that moving the debtto-capital limitation from 12 to 1 to 20 to 1 is justified by the financial

strength of the credit banks and the associations, and that one of the

safeguards of assuring this is, as you point out, that the liability of

each PCA, including its liability to the credit banks, may not exceed

10 times the paid-in and unimpaired capital. and surplus of the

association.

Now, this seems like a strong argument to me, if you intend to adhere to this 10 to 1 ratio.

I would like to ask if there are any plans to ask the Congress for a

liberalization of the 10 to 1 ratio?

Mr. TOOTELL. I will answer unequivocally no.

Mr. MAYNE. Well, I am glad to hear that. So that we will understand that we will not be getting into a situation where if we do have

the 20-to-1 debt-to-capital limitation it will then be argued that the

10-to-1 limitation is unrealistic or unfair when compared with the

20-to-1 ratio. That will not be the situation ?

Mr. TOOTELL. I have just checked. I do not foresee any situation of

that kind at all. As a matter of fact, most associations are required by

the credit banks to keep that ratio down to around 7 or 71/2 to 1.

Mr. MAYNE. Well, with that additional assurance, I will reiterate

that I think that you have a very strong argument.

Thank you.

That is all, Mr. Chairman.

The CHAIRMAN. Thank you.

Mr. Zwach ?

Mr. ZWACH. I would like to commend especially the group I am

familiar with, the St. Paul district, over the many years, for their

work, the Federal land banks, the production credit associations and

the Bank for Cooperatives, and the others. They have been a very

important part of our agriculture.

I would like to ask you now if the farm debt is increasing more

rapidly than the farm asset?

Mr. TOOTELL. No, Mr. Zwach ; it is not.. The farm debt has been increasing at a very rapid rate. Since 1950, particularly in the last few

years, it has been increasing at the rate of about $4 billion a year, but

actually farm assets have been increasing at a faster rate. This increase

in farm asset value is something that can be debated by some, because

a high percentage of that is the increase in the land price. And the

present land price is there. And further the increase in the other prices

which I think are going to be determined is dependent upon the income situation of the farmers over the years.

We know about outside income. We know that a fairly high percentage of farmers nowadays have some sources of outside income,

and if it were not for that income I do not believe that the present

would be such as it is.

Mr. ZWACH. In other words, your feeling is that without increasing

their income, we would be approaching what would be a questionable

area in the farmers ability to repay at the present high interest rates?
N.

16

Mr. TOOTELL. I think that is a distinct possibility.

The actual equity ratio of the farmers is good. This debt-asset ratio

has been going up from about 12 percent to some 17 percent at the

present time, maybe 18 percent. This makes the equity of the farmers

in the current value of their farm assets about 82 percent.

Mr. ZWACH. My impression sort of was that your operations have

been pretty conservative on farm loans. I am thinking specially of the

Federal land banks and perhaps the PCA's. I do not think you have

been over extended. The fact is that I think that other agencies have

had to come in to sort of supplement.

Mr. TOOTELL. Well, the Farmers Home Administration, for instance,

was created to do a low-equity and higher risk financing job than the

farm credit system. Whether that is due to undue conservatism, I do

not know, on the part of the cooperative farm credit system. It is a

matter of opinion.

Mr. ZWACH. I am basically conservative. But when I look at the

credit needs and see the denial of this need in specific cases, I come

to this conclusion, but I have to commend you and I think that your

request here for this change in the ratio is very reasonable. Thank you.

That is all, Mr. Chairman.

The CHAIRMAN. Mr. Kleppe ?

Mr. KLEPPE. Governor Tootell, some 26 years ago I was running a

little commercial bank somewhat in competition with the PCA's and

at that time, and to my knowledge since, they performed a service in

the community that by and large could not be met by the commercial

banks.

You indicated, in answer to one of the earlier questions, that to some

degree the PCA did compete with commercial banks. In our part of the

country I think that we, generally, agree and accept the fact that they

fully meet this need just below where the comercial banks can go. Is

this not generally true?

Mr. TOOTELL. The term "just below" puzzles me. If you mean by this

serving a clientele that the bankers would not be willing to serve, I

would say "No."

Mr. KLEPPE. This is what I mean generally.

Mr. TOOTELL. No. I would say, "No." I would say that, generally,

because the PCA's have to rely upon the market itself; that by and

large their loan policy would not be greatly different than that of good

country bankers.

Mr. KLEPPE. Just a little bit is all I am talking about. [Laughter.]

Mr. TOOTELL. I will concede "a little bit."

Mr. KLEPPE. I remember loans that I could not handle that were just

barely out of the category of what I could handle which were good

loans for the PCA and they did fill that need, and, as a general rule, it

seemed to me, and does seem to me that this is still true up in our part

of the country anyway, that this serves a real purpose and has a real

meaning.

Did you not say that three of the banks have the Government capital

paid out?

Mr. TOOTELL. Three of the PCA's out of 459 PCA's—there are only

three that have any Government capital. The 12 intermediate credit

banks, none of them have retired all of their Government capital.
17

Mr. KLEPPE. In effect, these PCA's are private, independent operators, competing in the market selling debentures, and they are paying

the going-money rate, whatever it is ?

Mr. TOOTELL. That is right.

Mr. KLEPPE. And the interest rates that are being charged are, generally, competitive within that area, are they not?

Mr. TOOTELL. Yes; they are.

Mr. KLEPPE. My question is pretty academic, I realize.

In the history of this operation, ever since it was set up, has there

ever been a default on debentures?

Mr. TOOTELL. There never has been, no; and this goes back to 191&

when the Federal Land Bank was started.

Mr. KLEPPE. There has never been a request from your organization,.

or any part of it, to the Government to come in and pick up the slack

where there was a default of any kind?

Mr. TOOTELL. No.

Mr. KLEPPE. It seems to me that your request here in these amendmends is very much in order2 because this item of credit in farm operations and in ranching operations is so very vital because we have people

today, who could become good operators if they had the capital, and

here is the way, it seems to me, that we can provide some more. And I

commend all of you at the table for your presentations and being a

part of a Government program that has really worked.

I think this is very commendable.

I thank you.

That is all, Mr. Chairman.

The CHAIRMAN. Are there any further questions?

Mr. Mathias?

Mr. MATHIAS. Is there a limit on the authorized loans?

Mr. TOOTELL. Actually not on the total dollar value. If a production

credit association proposes to make a loan, or does make a loan, that

exceeds 15 percent of the net worth of the association, it must get the

permission of the intermediate credit bank, it must have prior approval of the intermediate credit bank. If the proposed loan exceeds

35 percent of the net worth of the association, then the additional

approval of the Farm Credit Administration must be had. So, there

are those two safeguards in there with respect to the size of the loans.

But, you see, when the net worth of the PCA varies, as it does, very

substantially, these loans also may vary very substantially.

Mr. MA:rims. With regard to the amount that they can loan?

Are there any large loans?

Mr. TOOTELL. I should like to defer that question to Mr. Wright who

is a deputy governor in charge of that.

Mr. WRIGHT. We have a few large loans that would run up into a

few million dollars, but precious few. Most of our loans would be

below $10,000. I have a table here on that which I will be glad to refer

to.

Mr. MATIms. What is your average?

Mr. WRIGHT. $11,587 on the outstanding basis. So, even though we

have a few large loans, primarily in the ranching sector, they are few

in number.

Mr. MATHIAS. That is all. Thank you.

The CHAIRMAN. Thank you.
18

• Are there any further questions?

If not, we will now call on Mr. Charlie Thompson of the Houston

District.

STATEMENT OF CHARLES C. THOMPSON, CHAIRMAN, BOARD OF

DIRECTORS, FARM CREDIT BANKS OF HOUSTON, AND PRESIDENT,

CITY NATIONAL BANK OF COLORADO CITY, TEX.

Mr. THOMPSON. Mr. Chairman and gentlemen of the committee. I

have only a very brief statement to supplement what these gentlemen

have already said.

I am taking advantage of you before you do of me, in telling you

that I am chairman of the board of directors of the Farm Credit Banks

of Houston which as you know, also acts as the board of directors of

the Federal Intermediate Credit Bank of Houston and also I am

president of the City National Bank of Colorado City, Tex. I have

been president of the bank for 30 years. I make that explanation in the

beginning.

Generally speaking, this bill represents an effort to solve some of the

capital problems of our intermediate credit banks and production

credit associations. One or two of the sections are technical in nature

and I am sure will be explained in detail by other witnesses. I shall

address myself only to the three provisions which appear to me to be

fundamental. These are:

(1) Increase the debt-to-capital ratio of the intermediate credit

banks from 12 to 1 to 20 to 1;

(2) Authorize sale by the intermediate credit banks of participation

certificates to agricultural credit corporations, and

(3) Authorize production credit associations to issue capital notes

to members and others.

Now, as to the increase in ratio from 12 to 1 to 20 to 1.

I would like to direct your attention to two basic ideas which I will

state and then discuss briefly.

First: If we continue with the 12-to-1 ratio, farmers and ranchers

of America will be required to invest added millions in their intermediate credit banks. They should be spared this requirement if it

can be done soundly—and I emphasize the word "soundly."

As you know, the philosophy of our farm credit system long has

been that eventually, the capital needs of our banks and associations

are to be met by investments of American farmers and ranchers in our

banks and associations.

These farmers and ranchers are willing—yes, even anxious—to supply this capital; they have proved this in the case of our land banks

and production credit associations; they are proving it in the case of

our banks for cooperatives and our intermediate credit banks.

At the same time, however, we must recognize that while these

farm and ranch people want to supply the capital that is needed

for these banks and associations they must not be required to put in

more than is required for sound and safe operations. In these times,

they cannot afford this. They need the money in their own operations.

Now, gentlemen, it will be obvious to you from other testimony'

offered here that with continuation of this 12-to-1 ratio, the intermediate credit banks cannot generate from earnings sufficient capital
19.

to take care of the expansions in credit which all of us know are coming. They simply cannot afford to charge sufficient interest to do this,

and farmers and ranchers cannot afford to pay such charges.

In light of this we come right up against it: If the ratio is not increased, this added capital will have to come from some source. Since

our policy is to repay Government capital and not receive more, the

only source remaining is the farmer and rancher who uses our facilities. We are talking about many millions of dollars. If we keep this

ratio 12 to 1, farmers and ranchers must dig up these huge sums; if

we increase it as requested, they will keep this money in their own

business.

Believe me, gentlemen, they need it.

Second: In my opinion, you can increase this ratio without risk

either to the intermediate credit banks, the production credit associa-:

tions, or the investing public.

Bear in mind that this 12-to-1 ratio is only two points higher than

the 10-to-1 ratio created in the original intermediate credit bank

legislation in 1923. This 10-to-1 ratio remained in effect for 42 years,

during which time the banks increased their net worth from nominal

amounts originally subScribed by the Government, to a total of $292,-

707,918 at the end of 1965, the year we increased the ratio 12 to I. At

the end of 1967, this net worth figure was $327,814,852.

And in addition to this, since 1934, we have added to the overall

strength of our system the net worth and reserves of production credit

associations, which at the end of 1967 came to $591,064,409.

Now, while these figures are impressive in themselves, even more

important is the recognized fact that the intermediate credit banks

were and are firmly established as institutions of unquestioned soundness and stability; they are so considered everywhere, and their history

bears this out. First, we have the financial stability; and, secondly, we

have histolical stability, as witness the astounding statement made

elsewhere in these hearings that their losses on loans in the 44 years

of their history have been approximately $1 for each $9,000 loan, and

no losses since 1933.

In light of the foregoing, it is my opinion and that if the farm

credit people in the Houston District, that the system has proved itself

ready for this 20-to-1 ratio and fully capable of handling it. This being

true. I hope the Congress will give it to us and allow us to keep these

millions of extra capital where they are most needed.

SALE OF PARTICIPATION CERTIFICATES

The second item of importance, is the authorization to the intermediate credit banks to issue—in effect to sell—participation certificates to agricultural credit corporations.

We call these corporations OFI's (other financing institutions, as

distinguished from production credit associations).

As the law now stands, the only way an OFT may acquire participation certificates from a bank is through the patronage refund process,

or, in other words, from the bank's annual earnings.

A bank may issue stock to a production credit association; it even

may assess the associations and require them to buy this stock. It has

no authority to do this for OFI's, and, in fact, under existing law it

cannot even sell a single certificate for cash.
20

As the banks continue to expand, this OFT business in some districts

will take on added importance. In my district (Texas) , they are doing

about 15 percent of the total business with the bank. They always have

been an important segment of our overall financing.

If they are to use the banks' facilities in a substantial way, then, in

my opinion, the banks should have opportunity to ask them to furnish

the capital necessary to carry this use. Otherwise, they would be using

capital put in by production credit associations and other OFI's. This

is only equity in action.

For your information, I am advised that our bank people in Texas

have discussed this matter in detail with all our OFT representatives;

they are aware of the problem and feel that this is a proper amendment.

SALE OF CAPITAL NOTES

The third item is authorization of sale of capital notes by production credit associations.

You may know that heretofore our associations have raised needed

capital by sale of what is known as "A" stock. In effect, this has been

sort of a preferred stock.

Many associations have paid dividends on this stock. These dividends are taxable to the associations; taxable to the recipients.

Since they have considered it somewhat of an obligation to retire

this stock on demand, many associations have felt that this is more in

the nature of a loan by the member than a stock purchase.

This being so, they have said: "If it is a loan, let's call it a loan. Thus

the interest on the note would be tax deductible."

I am a banker. I do not visualize a great use of this section outside

the membership of production credit associations—certainly not one

which would be considered as affecting banks or other institutions

seeking savings from the public. I do see in it a device wherein an

association in need of added capital may solve part of its problems by

a benefit both to itself and to its membership and other folks in a rural

community.

Thank you.

The CHAIRMAN. Thank you, Mr. Thompson.

Are there any questions of Mr. Thompson?

Let me say that Mr. Thompson has had a fairly long experience

in operating these things as chairman of the board in the Houston

district. He is as familiar with these operations as anybody and

certainly, as the head of a country bank—if I may call it that—

Mr. THOMPSON. That is correct, Mr. Chairman.

The CHAIRMAN. He has had a good bit of experience on the other

side, where there has been some fear expressed that there might be

some kind of competition, expressed by Mr. Goodling.

Mr. Price?

Mr. PRICE. I would like to ask Mr. Thompson a question.

I have heard that the insurance companies are moving as rapidly

as possible out of the farm and ranch loan business.

Mr. THOMPSON. Out of farm and ranch loans?

Mr. PRICE. IS this correct?

Mr. THOMPSON. Not true in our district; they are still operating;

but they are moving towards larger and larger loans. They are interested in big farms and big ranches.
21

Mr. PRICE. I had understood that because of the high-risk area in

agriculture there have been a number of major companies that have

been moving out of the farm and ranch loans into, oh, say, the big

apartment-house complexes where they turn their money over faster.

What I am trying to say is that this is creating a demand for more

capital for these loans from the Federal loan banks and the like.

If we could substantiate this showing, the need for more capital in

these areas, it would be helpful.

Mr. THompsoN. I certainly think it would be helpful for the Federal

intermediate credit banks and the PCA's. The insurance companies are

not interested in little loans, and not in the rate of interest that we

charge, either. I will say that.

They do not make nearly as- many loans as they did for a while,

because, as I said, they have moved out of the small-loan area in our

district in the State of Texas. They are still making a considerable

number of loans, particularly in the ranching part of the country,

in sections of the high plains, but not as many as have been made in the

past. There are so many opportunities for income off of these loans

of various kinds, stock, bonds, and everything else, that they can

pick where they want to go, and that is the reason that the PCA's

and Federal intermediate credit banks need to have this increase in

interest rates so that they might meet that situation soundly.

Mr. PRICE. In my district alone, in the Panhandle, people are going

to need a billion dollars in the next few years for cattle feeding and

other normal agriculture credit, and our banks are going to be strained

to furnish this money.

Mr. THOMPSON. And they could not lend it without the increase in

the rates, because it would be impossible for the farmers to go in now

and buy 8 or 10 percent additional stock certificates to make that ratio

go up to 20 to 1. It is not feasible and it is unfair to the farmers. I

think the record of the last, certainly, 33 years of the PCA's has indicated that they are making a success, they have built up reserves; and,

now, in the last few years we have had the privilege of building

reserves to guard against losses. How long has that been? Since 1961.

All of these reserves for losses have been built since 1961, at which

time the Internal Revenue Service said something to the effect that

we could build it up to 3.5 percent.

Mr. PRICE. You do not get into any other areas of loaning other

than to farmers and ranchers?

Mr. THOMPSON. No, this is a production credit association and it

is strictly for farm loan business—all types of agriculture. And the

Federal intermediate credit bank is able to discount its paper with

any institution if it is a farm piece of paper. A bank in Amarillo right

now has some paper discounted there.

Mr. PRICE. Thank you.

That is all, Mr. Chairman.

The CHAIRMAN. Thank you, Mr. Price.

Are there any further questions of Mr. Thompson?

If not, we are always glad to have you with us, and we appreciate

your statement.

Mr. THOMPSON. Thank you.

The CHAIRMAN. I will now call on Mr. Paul Enns of the Berkeley

District.

95-021-68 4
22

Mr. Mathias?

Mr. MATHIAS. This is Mr. Enns. He is a constituent in the fine city

of Bakersfield, Calif. He is a farmer. He has a ranch about 12 miles

west of Bakersfield. He can tell us something about this subject that

we are discussing this morning. It is my pleasure to introduce Mr.

Paul I. Enns.

The CHAIRMAN. We are glad to have you, Mr. Enns. You may

proceed.

STATEMENT OF PAUL I. ENNS, CHAIRMAN, BERKELEY DISTRICT

FARM CREDIT BOARD

Mr. ENNS. Mr. Chairman and members of the committee, my name

is Paul I. Enns and I am a member of the 11th, or Berkeley District

Farm Credit Board, and presentlyam serving as its chairman. The

Berkeley District serves California, Arizona, Nevada, Utah, and

Hawaii. After being released from the service in 1945, I went into

farming. I have used .the facilities of the farm credit system since that

first loan. I am a full-time farmer and I now operate and live on a 520-

acre irrigated farm located about 15 miles west of Bakersfield, Calif.,

which is in the southern part of the San Joaquin Valley. My present

operation consists of 140 acres of cotton, 146 acres of alfalfa, and 230

acres of grain. I have also been finishing about 3,000 head of cattle

annually. This is the 23d year that I have been using farm credit system loans in my operations.

In 1951, the farmer-owners of the Bakersfield Production Credit

Association elected me to be a director of their association and I 'am

now serving as vice president of the board, and in my sixth 3-year

term. In addition, the 28 production credit associations (PCA's) of

the 11th Farm Credit District have elected me to represent them on

the district board. I am now serving my fourth 3-year term.

Our district board has asked me to come here to support the legislative changes proposed in H.R. 16674. My recommendations and views

are based on my experiences as a farmer-user of the system, the experience of serving on the local PCA board, and the district farm credit

board.

I will now present my views on the proposed legislation affecting

the Federal intermediate credit banks (FICB's).

Section 1(a), the proposal to change the debt to capital ratio from

12 to 1 to 20 to 1.

There are a great number of reasons that substantiate this change

and I would like to begin with this analogy:

The FICB's were established in 1923 and we could say that this

would be like taking the model T Ford, so popular and revolutionary

at that time, and subjecting it to the competition of other vehicles on

the freeways and parkways of today.

Since 1923 many changes have taken place in farm credit. Originally, loans were made only to other financing institutions (OFI's), and

some cooperatives under completely different conditions such as:

1. Complete Government capitalization of the FICB's.

2. Under direction of Federal land bank boards.

3. No earned reserve or surplus accounts in the FICB's.

4. Limited experience of personnel employed to operate the

banks.
23

It soon became evident that this method of farmer crop mortgage

financing was not fulfilling the great need.

I will now identify some very important developments in the 1933-

68 period that support the change in the debt-to-capital ratio as stated

in section 1(a) of this proposed legislation.

1. Establishment of production credit associations (PCA's) in 1933

with supervision provided by the district production credit corporations under the general supervision of the Farm Credit Administration (FCA) , provided the guidance and policies so necessary for pro-

()Tess and success.

2. PCA's elect two members to the district boards for improved

representation.

3. PCA's maintain reasonable debt-to-capital ratios (10-to-1 legal

limit). The 11th district PCA's, at the end of February 1968, had a

debt-to-capital ratio ranging from a low of 3.8 to 1, to a high of 6.9 to 1.

These ratios fluctuate from year to year and in various seasons of the

year, depending on loan volume and other factors.

4. PCA's make the loan with the farmer and must "go broke" before

the FICB becomes at all involved, with the exception of its general

supervisorial responsibilities delegated by the Farm Credit Administration.

5. In addition, "share the loss" or "participation loan" programs are

being used as a first line of defense by the PCA's against possible losses

to the FICB.

6. Establishment and funding of reserve for loss accounts in PCA's.

7. Loss history in PCA's remains small compared to dollars loaned,

even though today there are many farm problems.

8. The losses suffered by the FICB's were in the period from 1923 to

1933 and are the only losses in their entire history.

9. Continuance of specialization in agricultural lending for the best

possible service to farmers.

10. Farmer capital is continually increasing in the FICB's even

though increased volume has not allowed repayment of Government

capital.

11. Manpower development and training of personnel for improved

and increased efficiency and resulting astuteness.

12. Better organization development to handle problems as they

develop.

In recommending favorable consideration of the proposed legislation to change the debt-to-capital ratio of the FICB's to 20 to 1, ido so

with the firm conviction that substantial savings will result to farmers

and ranchers. I am positive that this proposal will not weaken the

financial structure of these farm credit organizations, but, rather, will

restore a proper balance in the utilization of the resources now available in the system.

Our relationship between one another is such that we understand

what we are doing. They both have to tie together, and these are both

very important.

I feel that this proposed legislation is very important. I do not feel

that the credit bank is just to restore anything but a proper balance

between the capital that we have available and debt and it will result

in savings to the farmers.

I also support the other sections of this proposed legislation which

are:
24

Section 1(b). This proposed section would permit OFI's to purchase additional participation certificates in FICB's when conditions

prevail where OFT business adds to the stress on the debt to capital

ratio of FICB's.

Section 1(c). Permits reallocation of FICB allocated reserve account proportionately with the use of the bank by the owners of the

bank.

Following are sections affecting the production credit associations

(PCA's) :

Section 2(a). This would allow the PCA to liquidate "B" stock.

Situations now arise where a farmer ceases to use the services of the

association and it is advisable to also sever all ownership relations.

Section 2(b). Circumstances now arise where PCA's may wish to

obtain additional capital on specific terms. Associations could beneficially use this method, especially where private capital is available

in their local area.

In conclusion, I am convinced that this legislation is desirable to keep

the short-term lending services of the farm credit system up to date

with the current and future needs of agriculture. In meeting our responsibility in providing credit service to American agriculture, it is

vital that we employ the capital resources of our farm credit system

to optimum advantage consistent with sound financial and fiscal principles.

Thank you very much.

The CHAIRMAN. Thank you.

I believe that to get an understanding of the way the testimony is

going so far, I wish to sugo-est that the committee insert in full the

written statements of any of the witnesses, together with the queqions

ClIat will be asked, or we can insert the statement in the record that

you are making along with any questions. If you take a written statement, in my opinion, and paraphrase that statement and then put the

full statement into the record, it will encumber the record. Either one

that the witness wants, if you will advise the clerk which you want

inserted, we will put that in, and we will put in all of the questions

and answers, but we will not duplicate the statements where they are

written out and then paraphrase it as has been happening. There is

nothing wrong with that, but I just want that to be known.

As I understand it, the next witnesses are Mr. Nay and Mr. Curtiss.

Mr. Nay and Mr. Curtiss will conclude those that will testify orally

and the remainder will insert their statements, it is my understanding.

Is that correct.?

Mr. TOOTELL. These men, before this session started, this morning

agreed that these folks would have preferential treatment as to time.

I think it depends upon the time that is available and the wishes of the

committee. They all have statements. If the committee would like to

have them, they would like to present them.

The CHAIRMAN. If I could quote something that is well known to

all lawyers, "Never argue with the Court when he is ruling with you."

I do not think there has been any serious objection thus far presented

by the committee.

We will be glad to hear from Mr. Nay, who is the next witness.

I do not want anyone to feel that I am suggesting that the testimony

will not be worthwhile, but, after all, there is no purpose in just ac-
25

cumulating testimony that is repetitious. I am afraid that you have

done such a good job that you could leave the rest of your witnesses

in the position of just saying that what they would have to say would

be somewhat repetitious.

We will be glad to hear from you now, Mr. Nay.

STATEMENT OF PAUL NAY, JANE LEW, W. VA.

Mr. NAY. Mr. Chairman and gentlemen of the committee, I had

already intended to insert my statement into the record, if permitted,

because much of my testimony is repetitious. I am well aware of this.

Consequently, you may use the filed statement, and I will be very

brief in my remarks.

My name is Paul Nay, and I operate a farm at Jane Lew, W. Va.,

which is in the territory of the Clarksburg Production Credit Association. I am a member of that association and helped finance my f arming operations by obtaining loans from it.

''Also I am a member of the board of directors of the Federal

Intermediate Credit Bank of Baltimore and vice chairman of that

board. We serve Pennsylvania, Maryland, Virginia, West Virginia,

and Puerto Rico. These affiliations give me an opportunity to observe

the operations, and the related problems, of the associations and the

credit bank.

I am glad to have this opportunity to testify to the need for, and

the desirability of, this legislation proposed by the Farm Credit Administration. Increasing farm production costs and the demand for

larger quantities of food, with which I am well aware as a farmer,

have resulted in requests for larger amounts of short- and intermediate-term credit to be provided by our production credit associations. The associations obtain their lending funds from the Federal

intermediate credit banks. These banks are being called upon to discount an increasing volume of loans, which requires a corresponding

increase in the bank's volume of debentures and other short-term

borrowings, such borrowings are now limited by law to 12 times their

capital and surplus. To meet the increasing demand for loans, the

system needs additional capital and a more realistic ratio which will

permit the capital of the credit banks to support a larger volume of

loans.

A number of years ago, the PCA's throughout the Nation, with a

few minor exceptions, completed the repayment of the Government

capital which had been invested in them in the formative stages of

their development. Partly as a result of purchase and partly by means

of patronage distributions, the associations now own a substantial

portion of the stock of the FICB's. Plans have been made for their

systematic acquisition of the remaining stock, thereby permitting the

Government capital now in the banks to be repaid. In the Baltimore

district, with which I am most familiar, the PCA's have just purchased $2 million of additional stock in the Federal Intermediate

Credit Bank of Baltimore.

It would not be appropriate, nor in the best interest of our farm

credit organizations in the long run, to endeavor to meet the FICB's

capital needs by requesting additional Government capital; our aim

continues to be in the opposite direction—complete farmer ownership of all of our farm credit organizations.
•

26

The legislation that has been requested is designed to help our shortterm credit system (the Federal intermediate credit banks and production credit associations) help itself during this period of expansion. This would be accomplished in the following ways:

The proposed increase in the FICB's debt-to-capital ratio ( from 12

to 1 to 20 to 1) would permit the capital to serve as a base for a substantially larger volume of loans. The proposed ratio is the same as

that which, for many years, has applied to the Federal land banks by

the Federal Farm Loan Act.

The change would be sound because the credit banks are not primary

lenders but, instead, discount agricultural loans made by PCA's and

other financing institutions. The notes are endorsed by such primary

lenders. The production credit associations, which operate under the

supervision of the Federal intermediate credit banks, have had a remarkable loss experience (less than one-tenth of 1 percent of the money

they have loaned) .

As a further precaution against losses resulting from catastrophe to

one or more PCA's, a large percentage of the associations in each district participate in loss sharing plans. While the associations are restricted by law to debts-equal to 10 times their paid-in and unimpaired

capital and surplus, it is general practice for them to operate on a more

conservative basis. The debt-to-capital ratio is about 7 to 1 in most of

the associations in my district, and I understand that this is true generally: in PCA's throughout the Nation. All of these factors minimize

the risk of loss to the FICB's. Therefore our district strongly urges

liberalization of the banks' debt-to-capital ratio to 20 to 1, as proposed

in this bill.

Financing institutions, other than PCA's, which discount agricultural loans with FICB's receive participation certificates each year

from distribution of the banks' earnings. We support the proposal that

the law be changed to permit them to purchase participation certificates

and thus also aid the credit banks in meeting their capital needs.

The other three provisions of the proposed legislation would not

contribute directly to the solution of the capital problem however, they

are desirable and we urge they be enacted into law. One would allow

the reserves which the credit banks have allocated to the PCA's in their

respective districts over a period of years to be reallocated in order that

they will be in proportion to the borrowings of the associations from

the credit banks during the past 3 years. The capital stock owned by the

associations in credit banks was similarly reallocated and it is equitable

that both the stock and the reserves be owned by the individual PCA's

in proportion to their borrowings.

Another recommended change would permit PCA's to sell capital

notes to borrowers and others. This will make it possible to secure funds

locally from persons who are not accustomed to buying FICB debentures or any other type of security.

The last recommended change would permit the Farm Credit Administration to issue regulations which would enlarge the basis upon

which class B stock PCA's could be retired. This change would make

the purchase of stock less objectionable to borrowers if it can be retired

on payment of the loan under certain circumstances.

I sincerely believe that the changes recommended in this proposed

legislation are needed and would be beneficial, and I certainly urge that

the amendments be adopted.
27

Thank you.

The CHAIRMAN. Thank you, Mr. Nay. Are there any questions?

If not, we will hear now from Mr. Homer Curtiss of Stockton, Ill.

STATEMENT OF HOMER CURTISS, ROUTE 1, STOCKTON, ILL.

Mr. CURTISS. Mr. Chairman and members of the committee. My

name is Homer Curtiss. My home is Route 1, Stockton, Ill. I have

been a farmer all of my life and now own and operate, with one of my

sons, a 427-acre grain and dairy farm in northern Illinois.

I have been a director of the Farm Credit Board of St. Louis since

1953, and have had long service on the board of directors of the Blackhawk Production Credit Association of Freeport, Ill., as well as a

number of other farm organizations.

As a farmer, I look on the farm credit system as an essential credit

tool to help the farmer. -Under today's conditions it is necessary for

every farmer to have a dependable credit home. Most farm costs are

going up fast while prices for farm products are going the other way.

The purpose of this bill is to help our farm credit machinery operate

more efficiently and at lower capital cost.

I strongly favor section 1(a), increasing the aggregate debt obligations issued by the bank from 12 to 20 times the capital and surplus of

all such banks.

It is costing us too much to capitalize our system at both the production credit association and Federal intermediate credit bank level. By

increasing the permitted discount ratio of the Federal intermediate

credit bank to 20 to 1, we can cut down on some of the excess capital

required in the system without risk to anyone, as the capital of the

Federal intermediate banks and the production credit associations support the same loans, for the most part.

The Federal intermediate credit banks are banks of discount, not

primary lenders. They are fully protected by the capital structure of

the production credit associations and other discounting institutions,

as well as the farmers' notes. Also the production credit associations

and the other financing institutions are limited by law or regulation

to 10 to 1 to capital ratio or less.

Section 1(b) seems only fair as it will help put other financing institutions which use our system on a more equitable basis with production

credit association in financing the discount agencies we both use,

which are the Federal intermediate credit banks.

Section 1(c) is another way of seeing to it that the users of the

system contribute fairly to the capitalization of the Federal intermediate credit bank. I strongly favor both 1(b) and 1(c) as a basis for

strengthening capital of the bank and equalizing discounting institution responsibilities.

Section 2 (a ) has been needed by production credit association and

the farmer for a long time. The Federal Land Banks have, and use

this authority and the farmer appreciates it. This provision can be

applied as needed on this point of retiring class B stock on payment

of a loan. Farmers generally need their money and hate to wait for it

after a loan is paid unless they plan to borrow back soon.

Section (b) will give farmers another method of getting capital

for their credit system and also helping to capitalize it themselves on

•
28

a local basis as their finances permit. There has been a strong demand

for this.

I thank you for this opportunity of presenting the viewpoint of a

man whose income depends entirely on farming and who uses the farm

credit system. Also, this represents the opinion of all the members of

the Farm Credit Board of St. Louis which, in turn, is representative

of the farmers of the great States of Arkansas, Missouri, and Illinois.

The CHAIRMAN. Thank you very much, Mr. Curtiss. There are a

number of other members of the District Farm Credit Boards who are

present. I think we have statements from all of them. Those that want

to be heard, or have anything that they feel is unique that has not been

presented, may make such presentations, but in all frankness I do not

see any purpose in presenting the same testimony from a number of

witnesses.

The chair will recognize each -individual member, unless someone

else especially wants to be heard, and we will ask each one of you if

you favor this legislation, and you will have the opportunity to say

that you do or do not. We have next as a witness Mr. J. Richards Nelson of Madison, Conn. Did you want to make a statement, Mr. Nelson?

STATEMENT OF J. RICHARDS NELSON, MADISON, CONN.

Mr. NELSON. Mr. Chairman and members of the committee.

I have filed a written statement.

The CHAIRMAN. Yes, you may file your written statement, and we

will be glad to insert it in the record as a part of the record, and we

will be glad to have you confirm now whether you favor this

legislation?

Mr. NELSON. I do, sir. I favor it very strongly.

(The prepared statement submitted by Mr. Nelson reads in full as

follows:)

STATEMENT OF J. RICHARDS NELSON, MADISON, CONN.

Mr. Chairman and Members of the Committee: I very much appreciate this

Opportunity to appear before you today. My name is J. Richards Nelson of

Madison, Connecticut. My business is shellfish farming in Connecticut and New

York. I belong to the Long Island Shellfish Farmers' Association of Long Island,

New York. I am a past director of the former Providence, Rhode Island, Production Credit Association and a present borrower of the Southern New England

Production Credit Association. I am presently Vice Chairman of the Farm Credit

Board for the Springfield District which serves the farmers and their cooperatives

In the six New England states, New York and New Jersey.

I sincerely believe that the Federal Intermediate Credit Bank of Springfield is

a tremendous force for good for the agriculture of our area by serving as a source

of lending funds to the Production Credit Associations and other financing institutions. Therefore, I favor whatever will continue or improve upon our ability

to serve farmers. The proposed legislation will improve the opportunity for the

Bank, the Associations and the other financing institutions to continue to provide effectively the money needs of farmers. This is the reason Congress put the

Banks and the Associations in business, and I, for one, want to see that they

have the necessary tools to continue that business. I would hate to see the day

come when a farmer could not borrow from his Production Credit Association

because inadequate loan funds were available.

I am pleased with the performance of the Federal Intermediate Credit Bank—

Production Credit Association System. However, the demand for credit has grown

sharply. This has created a strain on its capital structure and a concern for

obtaining adequate loan funds. I feel that as a result of skilled people, strong

reserves, excellent loss experience and the coming of age of our lending system,
29

we may safely increase the debt-to-capital limitation on the Banks from 12 to

1 to 20 to 1. It is this ratio which determines the amount of debentures which the

Banks may sell to the investing public to obtain the funds for their lending and

discounting operations. If I thought that this increase would cause a blowup in

the system, I certainly would not be in favor of this change. As a spokesman

both for the farmer lenders who make up the Farm Credit Board of Springfield

and for the farmers who borrow from us, I only want changes which will

strengthen, not weaken, Farm Credit. In my opinion, our legislative proposals

will definitely strengthen Farm Credit's ability to serve farmers.

It is true that increased lending under the present 12 to 1 limitation could be

accomplished by more capital being put into the Banks. Two primary ways exist

to obtain this added capital—fromi the Government and from the Production

Credit Associations. Increasing the investment of Government capital runs counter

to the progress of the Banks toward retiring all of the Government capital they

now have as soon as they may safely do so. If necessary and within their capabilities, the Springfield Bank in the future may have its Associations purchase

more of its stock. However, the amount of stock which the Associations would

have to buy to keep the Bank within the 12 to 1 ratio would place a major burden

upon them and more seriously upon the individual farmers who own the Asso-

.cia dons.

Part of the proposed Bill is to provide the Federal Intermediate Credit Banks

with an additional source of capital. The financing institutions other than the

Production Credit Associations which use the services of each Bank would be

allowed to buy participation certificates of the Bank. This is toward consistency

with the present law under which the Associations may acquire stock in the Bank

beyond what they receive as patronage refunds.

The Farm Credit System has always prided itself on being a dependable source

of credit in good times and bad. When it reaches the point that enough loan funds

may not be available for the needs of farmers without placing undue pressure on

capital, I must ask Congress for help—not for money but to remove a barrier to

the most efficient use of farmer capital. I am afraid that without the passage of

this legislation, a time may be at hand when a deserving farmer may not be able

to obtain credit when he needs it most unless the Federal Intermediate Credit

Banks' capital were increased in a manner inconsistent with the best interests of

all. Toward this same objective of serving farmers is the proposal that a Production Credit Association be authorized to issue its capital notes for sale to borrowers and others. This would provide the Associations with an additional source

of funds for lending and expenses and also would provide farmers with a means

of investing surplus funds in their own credit business.

The present explosive demand for agricultural credit requires us to deal today

with increasing the Banks' unnecessarily conservative debt-to-capital limitation

and with the other related legislative proposals. Passage of this Bill will be Congress' way of saying that the Farm Credit System's performance thus far deserves the continuing confidence of Congress and adjustments as needed from

time to time to permit maintaining a sound operation sensitive to the credit needs

of a changing agriculture.

The CHAIRMAN. We next have Mr. C. B. FunderBurk of the Third

Farm Credit District, Columbia, S.C.

.STATEMENT OF C. B. FITNDERBURK, REPRESENTING THE THIRD

FARM CREDIT DISTRICT

The CHAIRMAN. Do you favor this legislation?

Mr. FUNDERBURK. Mr. Chairman and members of the committee, I

.do; yes, I do.

The CHAIRMAN. We will make your statement a part of the record

at this point.

Mr. FUNDERBURK. Thank you.

(The prepared statement submitted by Mr. FunderBurk reads in

full as follows:)
30

STATEMENT OF C. B. FUNDERBURK, CHAIRMAN, BOARD OF DIRECTORS, THIRD FARM

CREDIT DISTRICT, COLUMBIA, S.C.

Mr. Chairman and gentlemen of the Committee: My name is C. B. FunderBurk,

of Atlanta, Georgia. I am Chairman of the Board of Directors of the Third

Farm Credit District at Columbia, South Carolina. We serve the States of North

and South Carolina, Georgia and Florida.

I should like also to tell you that for 33 years, from September 1933 to January

1966, I was Treasurer of Cotton Producers Association of Atlanta, Georgia, which

is a farmer cooperative marketing and purchasing organization. In addition to

that, I am the founder and still President of Cotton States Mutual Insurance

Company and Cotton States Life and Health Insurance Company. All three of

these organizations are farmer owned and controlled and serve the farmers in

their efforts to make a living on their farms. I cite this merely to indicate that

most of my business career has been devoted to aiding farmers.

My Board has designated me to appear before your committee today to ask your

support of this pending legislation to amend the Farm Credit Act to permit the

Federal Intermediate Credit Banks to increase their debt to capital ratio from

the present ratio of 12 to 1 to a ratio of 20 to 1.

I am sure that you gentlemen understand the set-up of the Farm Credit System,

but for the sake of clarity let's review it very briefly.

The nation is divided into 12 districts. Each district has a Federal Intermediate

Credit Bank (abbreviated as FICB's or "credit banks"). These banks make no

direct loans to farmers or ranchers. Instead, they accept discounted loans from

Production Credit Associations ( abbreviated PCA's) in their respective districts.

These loans cover short term needs of farmers and ranchers.

Originally, the Federal Government provided the capitalization of the FICB's

by buying their Class A Stock in the amount of $125.7 million nationwide. The

Third District, which I represent, has Class A Stock outstanding in the amount

of $15.5 million.

None of the FICB's have been able to retire the Class A Stock because through

the years the demand for loans has been so great that they have been unable to

generate enough capital from their earnings to do so. All of their earnings have,

of necessity, been plowed back into loans to make available sufficient operating

capital to the farmers.

Each district has a number of Production Credit Associations. Nationally,

there are 459 such associations including 65 in our district. All of these were

originally capitalized by the Government, but all of this capital has been retired

by the PCA's. They were able to do this because they required farmer borrowers

to purchase capital stock in their associations. This, plus the earnings on their

own capital and patronage refund from FICB's, raised enough capital to pay out

the Government. Therefore, the farmers own all of the capital stock of the PCA's

in our district.

Now, let's examine the record of these operations. The Columbia FICB has

loaned since its organization in 1923 $5.6 billion while its losses in that period

were $1,623,000, or .00029%. All of this loss occurred in the period prior to 1933

when the PCA's were organized. No losses have occurred in the FICB since 1933.

The PCA's in our district have loaned $3.3 billion since organization in 1933.

Their losses have been $2,328,000, or 7/100 of 1%.

We believe that our district is about on a par with all districts and we assert

that this is a peerless record in the farm lending field and a great testimony to

the management skills and practices which farmers have created in their Farm

Credit structure.

Now, let's look at the future. The volume of credit extended to farmers in the

Third District has increased 76.8 percent in the past five years. This, too, is about

on a par with the national figures. Based upon projections from our agricultural

colleges and farmers themselves, it appears that the volume of credit will perhaps double in the next ten years. There is considerable evidence that many

lenders are pulling out of farm credit financing because they can use their capital

more lucratively elsewhere. This increases the actual number of farmers who

need financial help over and beyond the normal increase brought about by increasing cost of technological changes in farm equipment and the inflation that

engulfs all of us. ,

While we have no desire to pre-empt the whole field of farm finance, we do have

the duty and obligation under the law to help as many farmers as we can, provided they can meet the requirements. We are serving 90,000 in our district now

and still they come—not only in numbers but each with increased demands. This

is part of the struggle to keep this nation supplied with food and fibre.
31

Years of experience have proven that the FICB's cannot generate, internally,

enough capital to meet the increasing demands for loans and repay the Government capital at the same time, even though we have at present a debt to capital

ratio of 12 to 1. This repayment is required, and rightfully so, under the Farm

Credit Act. We do not feel that we can possibly require the farmers to capitalize

the FICB's when they have already capitalized their own PCA's in our district to

the sum of $72,621,000. This would be an impossible burden if the loan volume

doubles in ten years as is anticipated.

We have made a serious study of this problem and have evolved a plan and a

projection which we believe will retire the Government capital in five years in

our district, but it is based on the assumption of your granting us the authority

to maintain a debt to capital ratio of 20 to 1. This projection calls for repayment in annual equal payments which will-be completed in 1973, at which time the

debt peak will be $664,300,000 with a capital base of $36,857,000, which is a debt

to capital ratio of 18.1 to 1.

When a higher debt to capital ratio is considered, there immediately arises the question, "Will not this weaken the credit structure of the banks in relation to

the debenture buyers?" Our answer is "No, it will not, for these reasons :"

1. The soundness of a credit risk is based essentially on two factors:

(a) The individual farmers: Today they, in increasing numbers, are college trained, younger, and more technically proficient operators than were

those of one or two generations past. They are also better financial managers.

(b) The amount of the loan in relation to the collateral: Our people have

many years of training in weighing this factor and they are constantly reschooled in their work. Our lifetime record of extremely low loss ratios in

both our FICB's and PCA's attests the fact that we make only what we be- lieve to be sound loans and we shall not change our rules in this respect.

2. The collateral which we hold doubtless has some cushion between its value and what we have loaned on it.

3. All of this collateral is pledged to the debenture buyers, in addition to the

net worth of all the FICB's.

4. As a first line of defense behind the actual value of the collateral is the net worth of the PCA's. In our district this is further strengthened by a mutual as- sistance agreement among our 65 associations. The second line of defense is the

net worth of our FICB.

5. Nationally, the PCA's and FICB's have accumulated and continue to ac- cumulate reserves for losses which now aggregate many times the actual losses for our entire history.

6. Generally, balance sheets are judged, in part, by the ratio of its current

assets to its current liabilities. A current ratio of 2 to 1 is considered an unusually

good ratio. Not all corporations nor individuals can maintain it. At December 31,

1967, our FICB had a current ratio of 1.09 to 1. Our projections for 1973 indicate

a current ratio of about the same as 1967. The reason for this low ratio in the

FICB in comparison with the desirable ratio of 2 to 1 is that it borrows on a 9-

month basis only, which places all its debt in current liabilities. However, our comparison of the 1967 and 1973 ratios prove that current portion of our balance

sheet has not been weakened by the use of debt capital ratio of 20 to 1.

7. This matter of debt-capital ratio has been discussed many times with the security dealers through whom we sell the debentures. They have stated re- peatedly that they see no danger in raising the ratio to 20 to 1, because of the financial strength of our system and our historical success in management.

8. The Federal Land Banks have, since their inception in 1917, had a debt to capital ratio of 20 to 1. This enabled them to pay out the Government capital in

30 years. They never were accused of having a weak capital structure nor did any

debenture holder ever suffer a loss or even raise a question about their security.

They have been 100 percent owned by the farmer-members since 1947 and are steadily increasing the capital and service to themselves and their neighbors.

Comparing the character of the Federal Land Bank with that of the FICB, the Land Bank is a primary lender (making loans directly to the borrower) whereas

the FICB is a secondary lender and has the financial strength of the PCA's between it and a possible loss. To that extent, it would have greater strength than

the Land Bank and thus offers greater security to the debenture buyer, which

should overcome any possible suggestion of fearing the 20 to 1 ratio in the FICB.

The next question that arises is, "Will this debt to capital ratio of 20 to 1

jeopardize the Government capital?"

We believe that the same answers that we gave with respect to the debenture

holders would apply here, except, of course, that Government capital is the final
32

protection to the debenture holder. We cannot imagine a situation so cataclysmic

as to wash out this capital. Speaking personally for a moment, if I may, I think

the Government investment in this capital stock is safer and far more likely to be

repaid than some debts receivable from some of our "friends" abroad.

Gentlemen, let's consider some alternatives to passage of this proposed amendment. We could:

1. Curtail our loans to keep within the present 12 to 1 ratio. Considering

our growth in the last five to ten years and the prospective demands of the

next ten years, this approach would impose a terrific hardship on some fine

people who will desperately need help.

2. We could demand that farmers put some ten million dollars into the

capital account. Where they would get it, we don't know. It could have the

adverse effect of their increasing their borrowings so that they could get

their capital contribution out of the loan proceeds.

3. We could increase our interest rates so as to build a larger surplus out

of which to repay the Government capital. Here again we would impose

another burden on people who are already heavily burdened.

The other provisions of the proposed legislation are sound and we believe the

advantages are obvious; therefore, I shall not take your time in discussing them.

In conclusion, Gentlemen, let me say that the farmers of the country have

proven their support of the cooperative Farm Credit System and their willingness

to capitalize it on a sound basis, and the production credit associations in our

four-state area, without exception, are in full support of this proposed legislation.

Thank you so much for hearing us.

The CHAIRMAN. The next is Mr. Samuel S. Studebaker of Tipp

City, Ohio.

STATE1VIENT OF SAMUEL S. STUDEBAKER, TIPP CITY, OHIO

The CHAIRMAN. I take it that you favor this legislation?

Mr. STUDEBAKER. Mr. Chairman and members of the committee, I

do.

There is just one point that I do not think has been emphasized on

this matter of the rapid conversion of the stock in the PCA's, and

that is in the matter of settling an estate. One loan is paid up by the

i estate and the stock is listed with the PCA and if the PCA is n a

period of retraction of loans it has a large block of stock listed and

it takes a long time to get the estate stock up on top so that it can be

paid off. I think if we had the opportunity of applying these stocks

as the last payment on the loan, we could make more rapid settlement of the estates.

The CHAIRMAN. Thank you.

Your entire statement will be made a part of the record at this

point.

(The prepared statement submitted by Mr. Studebaker reads in full

as follows:)

STATEMENT OF SAMUEL S. STUDEBAKER, TIPP CITY, OHIO

I am Samuel S. Studebaker, a dairy farmer from Tipp City, Ohio, a member

and director of the Miami Valley Production Credit Association, and a member

of the District Board of the Farm Credit Banks of Louisville, elected to that

position by the production credit associations of the district.

We wish to express our support for certain amendments to the Federal Farm

Loan Act and the Farm Credit Act of 1933, as amended, to improve the capitalization of Federal intermediate credit banks and production credit associations,

and for other purposes, such amendments being incorporated in Senate Bill 3292

and House Bill 16674.

Legislation making it possible for the production credit associations to purchase and eventually own the twelve Federal intermediate credit banks was
33

passed in 1956, and was another important milestone in developing the Farm

Credit System into its present constructive program through which the farmers

and ranchers of this country are assured a dependable source of credit at

reasonable cost and on terms to fit the special needs of agriculture.

When the 1956 legislation was passed, it was impossible to foresee the tremendous growth in demand for production credit by the farmers of the country.

In the Louisville District which I represent, the amount of credit extended by

the Federal Intermediate Credit Bank of Louisville increased from $208,380,066

in 1956 to a total of $718,198,192 in 1967, or an increase of 345 percent. Thus

the program of farmer ownership of the bank, which was hailed in 1956 as being

easily attainable, became increasingly difficult to attain because of the tremendous amount of capital which the farmers would have been forced to provide if the government capital were to be retired as planned.

As a result, even though the PCAs of the district ( and thus their farmer

members) increased their investment in the bank through ownership of class B

stock and reserves by over $15,000,000, it was still necessary to secure from the

Revolving Fund a total of $11,600,000 to maintain the capital needed under the

10-to-1 ratio that was in effect. (Amended to 12 to 1 in 1965.)

During the past few years it has become increasingly evident that if the

Federal intermediate credit banks are to attain the status of full ownership, and

thus return the government capital as contemplated in the 1956 legislation, then

a more realistic position must be taken on the required capital-to-debt ratio of

these banks. Thus, we strongly urge the proposed change to 20 to 1.

Another proposal in this legislation applies to OFIs (other financial institutions

discounting with the Federal intermediate credit banks) .

In order to provide for equitable treatment and equitable distribution of the

overall task of capitalizing their Federal intermediate credit banks, this legislation provides that other financial institutions using the resources of the banks

shall share in the capitalization requirements through making the same basic

requirements apply to participation certificates as now apply to PCA-owned class

B stock in the bank.

The original Farm Credit Act of 1933 providing for the establishment of the

production credit associations contained certain restrictions on the cancelation

or retirement of member-owned class B stock. These restrictions have been

found, in practical application, to work a hardship on certain farmer members,

and the request is being made for a liberalization of this provision through permitting the Farm Credit Administration to prescribe authorization for the cancellation and retirement of class B stock.

A further amendment which we strongly support is that making it permissive,

under rules and regulations prescribed by the Farm Credit Administration, for

PCAs to issue in limited amounts capital notes for sale to borrowers and others.

This is considered most desirable in order for production credit associations to

better serve the needs of their farmers, and to provide for greater flexibility in

providing loanable funds.

We commend this committee for its understanding and leadership in farm

credit legislation, and appreciate this opportunity to make a statement in support

of the present amendments.

This proposed legislation has been given extensive study, not only as to the

fiscal soundness of the proposal, but also as to its acceptability by the farmer

owners of the production credit associations and other financial institutions that

use the banks. We, in the Fourth Farm Credit District strongly support the

proposed legislation, and urge that it be given favorable consideration.

The CHAIRMAN. Now, we have next Mr. George E. Hoffpauir, of

Morse, La.

STATEMENT OF GEORGE E. HOFFPAUIR, MORSE, LA.

Mr. HOFFPAI7IR. Mr. Chairman and members of the committee.

I favor the legislation, and I would like to submit my statement

for the record.

The CHAIRMAN. Thank you, sir. It will be made a part of the

record.
34

(The prepared statement submitted by Mr. Hoffpauir reads in full

as follows:)

STATEMENT OF GEORGE E. HOFFPAUIR, MORSE, LA.

I am George E. Hoffpauir of Morse, Louisiana, where I am engaged in operation

of a farm producing rice, soybeans and cattle. I am a member of the Board of

Directors of the Fifth Farm Credit District comprising the states of Alabama,

Louisiana and Mississippi. My purpose here is to attempt to point out the urgent

necessity for favorable consideration of the bills now pending before you that

affect the Federal Intermediate Credit Bank of New Orleans and the production

credit associations of the New Orleans District.

AMENDMENT TO INCREASE THE PERMISSIBLE DEBT TO CAPITAL RATIO TO 20 TO 1

INSTEAD OF THE PRESENT 12 TO 1 RATIO

Sec. I (a). The discounting of loans by the Federal Intermediate Credit Banks

for production credit associations and other financing organizations have rapidly

increased during the past two years. This increase in loans discounted in my district was due in part to plans of many producers to plant 95% of their cotton

allotment as compared to 65% that was planted last year. In addition, the rice

acreage allotment has been increased by 20% for the year 1968. The continual

increase in costs of production of crops and livestock has also contributed to the

increase in loans.

The loans discounted by the Federal Intermediate Credit Bank and loans made

by production credit associations and other financing institutions are for productive purposes and are not made for speculative reasons or inflationary purposes.

The present law provides "That the aggregate amount of the outstanding

debentures and similar obligations issued by the Federal Intermediate Credit

Banks shall not exceed twelve times the surplus and paid-in capital of all such

banks." This limitation (12 to 1) is unnecessarily conservative and too restrictive

if the credit banks are to continue in the future to meet the increasing demands

for agricultural financing without calling on the Government for more capital

and also returning within a reasonable time the Government capital they now

have. The production credit associations will be called upon to purchase additional capital stock of the banks as part of the program to return their Government capital within a reasonable time.

The proposed amendment substitutes 20 to 1 for the present 12 to 1 debt to

capital ratio.

This amendment is deemed necessary and considered justified by the financial

strength of the credit banks, and the associations. The Federal Intermediate

Credit banks could not suffer any loss in connection with its financing unless

the production credit association became insolvent. During the past 33 years, the

losses experienced by associations have amounted to .08 of one percent of the

total cash advanced to farmers and cattlemen. During this period the Federal

Intermediate Credit Banks have sustained no losses on loans discounted for

production credit associations. As an added protection to the capital and surplus

of the production credit associations, reserves for bad debts have been accumulated in excess of 86 million dollars.

The associations at present have a debt-to-capital limitation of 10 times the

paid-in and unimpaired capital and surplus. At the present time the associations

are operating at about a 7 to 1 debt-to-capital ratio.

With proper recognition of the above factors, a change from the present 12 to

1 debt-to-capital ratio to 20 to 1 seems justified.

PARTICIPATION CERTIFICATES IN ADDITION TO THOSE ISSUED IN PAYMENT OF

PATRONAGE REFUNDS

Sec. 1 ( b) At present, participation certificates are issued in payment of patronage refunds to financing institutions other than production credit associations

that use the services of the Federal Intermediate Credit Bank. Production credit

associations are paid patronage refunds in capital stock of the bank, and such

associations have, in the past, and will, in the future, be required to purchase

additional capital stock in the bank. The proposed amendment will permit other

financing institutions to purchase participation certificates in the bank and

thereby share in the capitalization of the banks and the benefits therefrom, along

with production credit associations. This amendment would provide the Credit

banks with an additional source of capital.
35

REESTABLISH THE HOLDINGS OF THE PRODUCTION CREDIT ASSOCIATIONS IN THE

ALLOCATED LEGAL RESERVE ACCOUNT OF THE BANK IN SUBSTANTIALLY THE SAME

PROPORTION AS ARE THEIR HOLDINGS OF CLASS B STOCK

Sec. 1(c) At the present time the relative amounts of Class B stock owned in

the Federal Intermediate Credit Bank by production credit associations may be

adjusted to reestablish the amount of such Class B stock owned by each association in proportion to the average indebtedness of each association to the bank

during the immediately preceding three years.

The present amendment would authorize the reestablishment of amounts in

the reserve account that are allocated to production credit associations to be in

substantially the same proportion as the holdings of Class B stock.

THIS AMENDMENT WOULD MAKE IT POSSIBLE TO AUTHORIZE RETIREMENT OF THE

STOCK OWNED BY AN ASSOCIATION BORROWER UPON REPAYMENT OF THE LOAN

Sec. 2(a) Each borrower from the production credit association is required

to own Class B stock at the time the loan is made in an amount equal to five

dollars for one hundred dollars or fraction thereof of amount of loan. The

present law states that Class B stock of a production credit association owned

by a borrower from the association "shall not be cancelled or retired upon payment of the loan." The proposed amendment would place the authority in the

Farm Credit Administration to prescribe rules and regulations under which

stock could be retired upon payment of the loan in instances where such retirement is in the interest of the borrower and the association. This amendment is

necessary and would add flexibility to the retirement of Class B stock owned

by the production credit association borrowers.

ASSOCIATIONS' AUTHORITY TO BORROW FROM INVESTORS BY THE SALE OF CAPITAL

NOTES

Sec. 2 (b) At the present time, production credit associations are authorized

to borrow from and rediscount paper with the Federal Intermediate Credit

Banks. The proposed amendment would authorize a production credit association to borrow from investors generally by the sale of its capital notes. The new

authority, however, would be subject to rules and regulations prescribed by the

Farm Credit Administration. Such capital notes are to be considered along with

other liabilities of the association, and may not exceed ten times the capital

and surplus of the association.

The CHAIRMAN. We next have Mr. Ben Bement, Jr., of Dowagiac,

Mich.

STATEMENT OF BENJAMIN F. BEMENT, JR., DOWAGIAC, MICH.

Mr. BEMENT. Mr. Chairman and members of the committee, I have

filed with you a written statement that I would like to have made a

part of the record, and I strongly urge support of this proposed

legislation.

Thank you.

The CHAIRMAN. Thank you.

Your statement will be made a part of the record at this point.

(The prepared statement submitted by Mr. Bement reads in full

as follows:)

STATEMENT OF BENJAMIN F. BEMENT, JR., DOWAGIAC, MICH.

I am Ben Bement, Jr., a grain and livestock farmer from Dowagiac, Michigan,

seventeen years a member-borrower of my Production Credit Association. Presently, I am a member of the Seventh District Farm Credit Board.

I appear here today representing approximately 69,000 farmers and ranchers

from the States of North Dakota, Minnesota, Wisconsin and Michigan, who are

stockholders in Production Credit Associations, in support of this proposed legislation which will allow a debt-to-capital ratio of 20 to 1 for the twelve Federal

Intermediate Credit Banks.
•

36

The farmer needs this bill or else he will pay the burden of unnecessary capitalization. This legislation is justified by the present financial strength of the System.

Those of us who may survive in agriculture are increasing in size, crop and livestock production. We are substituting capital for labor, and are making other

necessary farm and equipment improvements. With all this, we face the need for

larger sums of operating money under somewhat limited restrictions of its use,

and even the possibility of an insufficient supply of capital.

In addition to the present high cost of borrowed money, I invest $5.00 for each

$100.00 borrowed. This 5 percent B stock investment helps meet my association's

legal capital reserve requirement of 10 to 1. Also, many Production Credit Association borrowers have further invested in A stock.

During times of rapid association growth, such as in the past few years, it is

difficult to generate enough earnings to meet the capital reserve requirements. At

this point, may we keep in mind Production Credit Associations are the primary

lenders and are required to maintain a sizable reserve for losses. Production

Credit Associations have joined together either in a loss-sharing program or participation loan agreements, or both. Since organization in the Seventh District,

Production Credit Associations have had six one-hundredths of one percent losses,

with the Federal Intermediate Credit Bank having no losses since 1933.

Without the proposed 20 to 1 ratio, the Federal Intermediate Credit Banks

will have to assess larger amounts from the Production Credit Associations, and

then, in turn, the Production Credit Associations will have to turn to the farmerborrowers for funds further in excess of those I have already mentioned. I

sincerely believe that the 69,000 farmers and ranchers in my district need any

relief, support, and consideration possible within our power to provide, rather

than ask farmer-members to invest additional money to capitalize Production

Credit Associations and Federal Intermediate Credit Banks when not necessary

and place additional financial burden on us.

I, therefore, strongly support and urge your favorable consideration on the

passage of this legislation.

Thank you.

The CHAIRMAN. We have next Mr. Guido Schroeder, of West Bend,

Wis.

STATEMENT OF GUIDO SCHROEDER, WEST BEND, WIS.

Mr. SCHROEDER. Mr. Chairman and gentlemen of the committee.

I would like to have my statement filed for incorporation in the

record and at this time I would like to say that I have been connected

with the Farm Credit Board for a good many years as a farmer, as

proven by our records, and I hope that the committee will see fit to

endorse this legislation.

The CHAIRMAN. Thank you.

Your statement will be made a part of the record at this point.

(The prepared statement submitted by Mr. Schroeder reads in full

as follows:)

STATEMENT OF GUIDO SCHROEDER, WEST BEND, WIS.

My name is Guido Schroeder a dairy farmer from West Bend, Wisconsin,

Route 1. I am President of the Juneau Production Credit Association serving

1364 farmers in six counties. Also I am a Director of the Seventh District

Federal Intermediate Credit Bank of St. Paul by virtue of election by 68,880

Farmers and Ranchers who use the services of the Bank through their local

Production Credit Associations as the primary lenders.

The Production Credit Associations are the primary lenders in our System

and are required to maintain sound financial structures. Further, they are

required to maintain a sizeable reserve for losses. In the Seventh District, as of

December 31, 1967, this amounted to $11,387,000. The Production Credit Associations of the Seventh District have joined in a program of sharing of losses,

thereby spreading the risk of their lending businesses. The loss ratio in the

District since organization represents a little under ohoo of one percent of the

total cash advances of $3,144,000,000.
37

A major reason for having a ratio requirement should be as a protection

against loss for investors and stockholders and based on the loss experience

and the probable future losses, the 20 to 1 ratio for Federal Intermediate Credit

Banks is adequate.

Because of the facts already stated, plus my own knowledge of the lending

policies of Production Credit Associations, I do not believe that a change in the

Federal Intermediate Credit Banks debt to capital ratio would affect the debenture market. This is an important point as I would not support any change which

could increase further the cost of money to the farmers and ranchers in my

District.

As the change in ratio requirement would not adversely affect the ability of the

System to absorb reasonable losses, nor would it affect the cost of money, I,

therefore, support as strongly as possible the passage of this legislation rather

than ask farmer-members to invest additional money to capitalize PCAs and

FICBs when it is not necessary and would, in fact, put an additional financial

burden on farmer-members.

There are two objectives which I have supported since the beginning of the

PCA-FICB System:

1. To provide short and intermediate-term credit on a sound, dependable

and constructive basis to qualified farmers and ranchers.

2. To build and maintain a strong independent financial structure which

will insure a dependable source of money to meet the credit needs of responsible farmers and ranchers and also provide the necessary protection to our

investors.

The passage of the proposed legislation complements these two important continuing objectives. On behalf of the nearly 69,000 members in my District I urge

favorable consideration.

The CHAIRMAN. We next have Mr. James Hendry, Lost Cabin, Wyo.

STATEMENT OF JAMES HENDRY, LOST CABIN, WYO.

Mr. HENDRY. Mr. Chairman and members of the committee, I endorse

this legislation, and I ask- that my statement, which has been submitted be made a part of the record.

The CHAIRMAN. It will be made a part of the record, sir.

Thank you.

(The prepared statement of James Hendry reads in full as follows:)

STATEMENT OF JAMES D. HENDRY, LOST CABIN, WYO.

My name is James D. Hendry. I own and operate a cattle and sheep ranch

near Lost Cabin in the central part of Wyoming. I appear before this committee

in support of HR 16674, both as an individual and as a director of the Farm Credit

Banks of Omaha, serving farmers and ranchers in Iowa, South Dakota, Nebraska,

and Wyoming.

At the turn of the century my father migrated from Scotland because of a

promise that in America he could own his own land. After years as a sheepherder and tenant rancher, he bought the nucleus of the ranch on which I was

born and which I still operate. Had it not been for the Federal Intermediate

Credit Bank and the production credit system, we would have lost this ranch

some 30 years ago, because there was no private money available in my area

at any cost. My father became a member of the Wyoming Production Credit

Association shortly after it was organized in 1934, and he or I after him have

been members ever since. I give you this background to show you my vital interest

and concern in the continuance of this source of credit, and I assure you that

I would recommend nothing that I did not firmly believe was for the best interests

of the Farm Credit System and the farmers and ranchers.

Among other provisions, HR 16674 would increase the statutory debt-to-capital

limitation in the 12 Federal Intermediate credit banks from the present 12 to 1

ratio to a 20 to 1 ratio. In order to conserve time I will confine my remarks to

this phase of the bill. Not only do I believe this increase to be sound, but I also

believe such action is essential in order to assure the farm and ranch operators in

my district continued access to funds through the Federal Intermediate Credit

Bank and production credit associations.
38

Last year $700 million of such credit was extended to more than 20,000

operators in our four-state district. It is therefore, evident that this service is a

very important factor in livestock and crop production.

The rising cost of farm machinery, the increased use of fertilizers and insecticides and, whether good or bad, the growing need for farm consolidations to

absorb these mounting costs, have contributed to an increase in the demand for

agricultural credit in recent years. This demand will undoubtedly continue to

expand during coming years. The volume of loans and discounts outstanding in

the Federal Intermediate Credit Bank of Omaha has climbed from $60 million in

1956 to $375 million at the present time. However, the capital structure of the

Bank has not kept pace with this growth.

Although $6 million additional government capital was invested in the Omaha

Bank from 1961 to 1964, the debt-to-capital ratio has increased to 14.2 to 1 at

the present time. Since the statutory limitation of 12 to 1 is applicable to the

combined system of 12 banks, up to now the Omaha Bank has benefited from the

lower ratio of other credit banks whose growth until recently has not been as

rapid. The system ratio will probably reach the statutory limit within the next

few months. When this happens, the Omaha Bank would have to restrict its

lending or require the 40 production credit associations in our district to purchase

possibly as much as $7 million additional stock in the Bank. To supply this

additional capital will put a considerable strain on the resources of the associations, and on the farmers and ranchers who own them. The Wyoming Production Credit Association, of which I am also a director, would be required to

purchase $630,000 of such stock.

The credit banks were established in 1923 with a limitation on borrowings of

10 times their net worth. This limitation was subsequently increased to the

present 12 to 1. This is unrealistic in view of certain protective features which

are now operative in the production credit system. All of the loans and discounts

of the banks are backed with full recourse against the production credit associations and other financing institutions which make the loans to the farmers and

ranchers. Before a bank could suffer any loss on such financing, it would be necessary that the endorsing institutions become insolvent. This possibility is minimized by the fact that all 40 production credit associations in our district (and

this is also the case in other districts) have substantial reserves for losses and

have entered into a mutual loss sharing agreement whereby all of them would

share excessive losses incurred by an individual association. The banks have

sustained losses of less than one-hundredth of one percent of the amount loaned

since they were organized in 1923, and have had no losses on loans made by the

PCAs since they came into being in 1934.

Therefore, we believe that the limitation presently imposed on the Federal intermediate credit bank system is unnecessarily conservative, and could soon restrict

the lending funds available to agriculture.

The provisions of the subject bill are proposed in order that the Farm Credit

System may meet the demands of modern agriculture, which is requiring constantly increasing amounts of credit.

I respectfully request that you extend favorable consideration to H.R. 16674.

The CHAIRMAN. We next have Mr. Lyle L. Hague, of Cherokee,

Okla.

STATEMENT OF LYLE L. HAGUE, CHEROKEE, OKLA.

Mr. HAGUE. Mr. Chairman and members of the committee. I have

filed a statement which I should like to have made a part of the record.

I have no other comment than to say that we need this now.

Thank you.

The CHAIRMAN. Thank you.

We will make your statement a part of the record.

(The prepared statement submitted by Mr. Hague reads in full as

follows:)

STATEMENT OF LYLE L. HAGUE, MEMBER, NINTH FARM CREDIT DISTRICT BOARD

My name is Lyle L. Hague of Cherokee, Oklahoma. I have spent my entire

lifetime as a farmer and stockman in this community.
39

I was a charter member and have served on the board of directors of the

Enid Production Credit Association of Enid, Oklahoma, since its organization

in 1934. I am presently serving as president of that association.

For more than 12 years I have been a member of the Ninth Farm Credit

District Board, having been elected to this position for five consecutive terms

by the production credit associations of this district. I am presently Chairman

of that board.

My other business experience includes approximately 12 years as an appointed

member of the Federal Reserve Board of the Tenth Federal Reserve District.

Previous testimony before your Committee has outlined the changes in existing law which are proposed by this legislation and indicated the developments in

the FICB—PCA System which have brought about the need for the changes

proposed.

The increasing demands for capital which are pressing on all agricultural

operators and the unfavorable net income position of farmers and ranchers makes

it imperative that all organizations serving farmers operate as efficiently as

possible. Among other things, the provisions of this bill will, by increasing the

permitted liability-to-capital ratio of the Federal intermediate credit banks,

utilize more efficiently the farmer invested capital in the FICB-PCA System.

The rapidly rising credit requirements of farmers, caused in part by low net

income and operating losses, create the need for additional capital in the credit

banks and the production credit associations. Under present policy, the burden

of capitalizing growth in both of these organizations is upon the farmer-user.

Unfortunately, for the reasons mentioned above, they must provide this capital

largely by increasing their own capital debt.

The higher ratio cannot conceivably expose the institutions, the investors or

te farmer owners of these organizations to undue risk. This is due both to the

remaining capitalization in the banks required by the proposed ratio, the maximum ratios of the production credit associations, and their reserves for losses

and risk-sharing arrangements.

One proposed change will permit other financing institutions to make direct

contributions to the banks' capital structure. This will make it possible for all

users of the banks to contribute to their capital in direct proportion to their

use of the banks' facilities. Officials of other financing institutions using the Federal Intermediate Credit Bank of Wichita have indicated their willingness to

make such contributions and agree that the proposed arrangement is equitable.

The proposed provision to permit reallocation of the banks' legal reserve

accounts will provide and maintain full proportionate PCA ownership of the

banks' capital components owned by them. The ability to restore proportionate

ownership of class B stock in the banks by the associations exists in present

law. This provision will bring about fairness and consistency.

The provision to make the circumstances under which class B stock in a production credit association may be retired and canceled subject to rules and regulations of the Farm Credit Administration, will facilitate the maintenance of

the principle of proportionate ownership of capital stock in the associations by

their borrowing members. The present provisions for the retirement of class R

stock have, at times, forced members who might be unwilling or financially

unable to retain such investment to do so. It is not believed that an association

board of directors would approve retirement and cancellation of a member's

stock except when the capital structure of the association, related to its needs,

would be adequate after such retirement. It is further anticipated that the district boards and the Farm Credit Administration, both of whom would be establishing policy or making rules and regulations relating to such retirement, would

do so in such manner that the financial position of each association would be

fully safeguarded.

The provision to permit production credit associations to issue capital notes

would provide for production credit associations an additional source of senior

capital of a type now available to some other financial institutions. It would also

permit the association to comply with requests frequently made by members

and other local investors that an interest bearing investment in the local association be made available. While this is expected to provide only a limited amount

of additional lending funds, it would strengthen the local support of the production credit association.

I believe this entire proposal should be enacted by the Congress at the earliest

possible date. The increase in the permitted ratio of the credit banks is particularly urgent. Some of the credit banks have already found it necessary to
40

assess production credit associations for additional cash investment in their

class B stock. This is an added burden upon farmers and ranchers. Prompt

action might eliminate need for further assessments to support volume growth.

The record of the Farm Credit System, including the production credit associations and the Federal intermediate credit banks, indicates that they have

attempted to continuously adapt their services to the changing needs of their

agricultural producer owners. This has been necessary in order to keep the institutions abreast of the rapid changes in agriculture of which members of your

committee are fully aware. The proposed legislation represents another step in

the process of keeping the associations and the Federal intermediate credit banks

strong, useful, and in a position to fulfill their responsibility for providing a

sound and dependable source of short- and intermediate-term credit to the

farmers and stockmen of this country.

The CHAIRMAN. We next have Mr. E. Riddell Lage, chairman, Farm

Credit Board of Spokane.

STATEMENT OF E. RIDDELL LAGE, CHAIRMAN, FARM CREDIT

BOARD OF SPOKANE

Mr. LAGE. Mr. Chairman and members of the committee, we heartily

endorse this legislation. And we-appreciate very much the opportunity

to appear before you today. We thank you for your courtesy in helping

us to clear this up so that we could come to this hearing and take part

in the Senate hearing tomorrow.

The CHAIRMAN. Thank you very much.

Your statement will be made a part of the record.

(The prepared statement submitted by Mr. Lage reads in full as

follows:)

STATEMENT OF E. RIDDELL LAGE, CHAIRMAN, FARM CREDIT BOARD OF SPOKANE

Mr. Chairman and gentlemen of the committee, my name is E. Riddell Lage.

I am the principal stockholder in a family corporation known as Lage Orchards,

Inc., which owns and operates an orchard and packing plant at Hood River,

Oregon. I am a member and borrower of the Mid-Columbia Production Credit

Association, The Dalles, Oregon and of the Federal Lank Bank of Spokane. I

am a director and president of the Mid-Columbia Production Credit Association.

I am chairman of the board of directors of the three Farm Credit Banks of

Spokane. I have been elected to this board by the Production Credit Associations

in my district.

The district I represent is the Twelth Farm Credit District comprising the

States of Alaska, Idaho, Montana, Oregon and Washington. I greatly appreciate

this opportunity to appear before your Committee and express the views of myself, my fellow directors and constituents.

We consider passage of HR 16674 of paramount importance to the Federal

Intermediate Credit Bank and Production Credit Association Systems and to

the more than 21,000 Production Credit Association member-stockholders as well

as potential new members in our district.

We heartily endorse and recommend passage of HR 16674 in its entirety, as

being in the best interests of agriculture as a whole. In the interest of brevity,

I will confine my remarks to the section of the bill pertaining to the debt-tocapital ratio which is of primary importance.

This section increases the maximum debt-to-capital ratio of the Federal intermediate credit banks from 12 to 1 to 20 to 1. In our opinion this increase is

necessary and justified for the following reasons:

1. It will enable the banks to make more effective use of their present

capital structures, a substantial portion of which has been derived from

production credit associations and their members, under directives of the

Congress as expressed in the Farm Credit Acts of 1953 and 1956.

2. This amendment will not jeopardize the sound financial condition of

the banks.

3. It will enable the banks to generate the additional capital needed to

support anticipated growth in credit requirements of PCA present and prospective members, at minimum cost to or investment by such members.
41

4. It will facilitate and expedite the present plans which have been developed by each Federal intermediate credit bank for orderly retirement of the

Government's capital investment in the Banks.

At June 30, 1967, the close of the last fiscal year, the capital structure of the

Federal Intermediate Credit Bank of Spokane was as follows:

Capital stock and participation certificates:

Class A—U.S. Government $5,645, 530. 00

Class B—Production Credit Associations 7,077, 040. 00

Participation certificates—Other financing institutions 30, 360. 00

Total 12,752, 930. 00

Surplus—Reserved 5,889, 724. 77

Legal reserve (allocated to PCA's and other financing institutions) 2,529, 761. 44

Total capital 21,172, 416. 21

Debentures and notes payable, plus accrued interest 221,745, 336. 48

Ratio of debt to capital 10.49 to 1

By the end of the current fiscal year, June 30, 1968, it is anticipated that the

debt-to-capital ratio of the Spokane Bank will be crowding the present 12 to 1

legal limitation.

In the 44-year history of the Spokane Bank, it has sustained net credit losses

of $1,598,218.70 (all sustained prior to 1933) , or only .03% on $5.9 billion in

credit extended from organizatiOn through June 30, 1967. This loss record demonstrates the stability of the Bank, and its ability to support a large debt structure

in relationship to capital, with negligible risk to investors in its debt instruments.

Before the Bank could suffer any loss on its financing of the Production Credit

Associations in its district, which represents over 95% of its financing, it would

be necessary that one or more of the associations become insolvent. However,

this is well guarded against by the following factors:

1. Liabilities of each association may not exceed 10 times the paid-in and

unimpaired capital and surplus of the association. (12 U.S.C. 1032 ) . Actually,

the associations generally are currently operating within a 7 to 1 debt-tocapital ratio, at seasonal peaks.

2. The net losses of the PCAs in the Spokane District aggregated $1.4

million, or only .04% of the $3.6 billion cash advanced from organization

to December 31, 1967.

3. The associations in the Spokane District have capital structures and

reserves for losses aggregating $50.8 million, to support loans outstanding

averaging $228 million, during calendar year 1967.

4. All associations in the Spokane District have entered into a mutual

loss sharing agreement, under the terms of which excessive credit losses by

one association will be made up by contributions from the other associations.

Thus, the collective financial resources of the associations in the Spokane

District serve to insulate the Bank from credit losses. To all intents and

purposes this is complete protection from loss to the Bank except under

conditions of total disaster.

The Bank and the associations are committed to the principle of generating,

from retained net earnings or direct investment, the additional capital that will

be needed (1) to support the steadily increasing credit requirements of present

and prospective PCA members, and (2) to accomplish orderly retirement of the

balance of Government capital in the Bank, in accordance with a plan approved

by FCA. Irrespective of the method (s) by which this capital will be generated,

it must come from the users of the system. They have accepted their responsibility to capitalize the associations and the Bank. Management, in turn, has the

responsibility to use such capital with maximum effectiveness, consistent with

the law and sound business practices.

Interest rates and other costs to farmers are currently at historic highs. Anything that can be done legitimately to reduce the cost and investment required to

operate the system will be of significant benefit to these people and to the agricultural industry generally. The foregoing representations, in our opinion, support the proposition that a larger debt-to-capital relationship than that permitted under existing law will not jeopardize the sound financial condition of

the banks nor the safety of their debt instruments, and will facilitate orderly

growth and service to farmers and ranchers.

A
42

I am convinced that this bill will be for the ultimate good of agriculture. The

other members of my board concur with me. Thank you.

The CHAIRMAN. I have before me a statement dated April 29, 1968

in the form of a letter from Mr. Richard T. O'Connell of the National

Council of Farmer Cooperatives which he asks be inserted into the

record, and, without objection, it will be inserted into the record at

this point.

Incidentally, the statement indicates that he is in favor of the

legislation.

(The letter dated April 29, 1968 follows:)

NATIONAL COUNCIL OF FARMER COOPERATIVES,

Washington, D.C., April 29, 1968.

Hon. W. R. POAGE,

Chairman, Committee on Agriculture,

House of Representatives,

Washington, D.C.

DEAR CHAIRMAN POAOE : The National Council of Farmer Cooperatives urges

the passage of H.R. 16674.

The amendments contained in H.R. 16674 will act to improve credit for farmers,

reduce the dependency on the Federal Government for additional funds from the

revolving fund, and avoid pressing farmer-owned Production Credit Associations

for additional capital stock purchases in the Federal Intermediate Credit Banks.

The most significant portion of this measure is the increasing of the debt-tocapital ratio of the Federal Intermediate Credit Banks from 12 to 1 to 20 to 1.

The Federal Intermediate Credit Banks are now approaching their legal debt-tocapital limitations while the need for farmer credit steadily increases. To enable

the Federal Intermediate Credit Banks to expand credit to farmers, either they

will be required to seek additional Government capital from the revolving fund

or require additional capital stock purchases from the farmer-owned Production

Credit Associations.

We do not believe either alternative is desirable or necessary.

It is not desirable because it delays the time when the banks of the Farm Credit

Administration will retire Government capital. We do not believe it is necessary

because the stability of the Production Credit Associations has not been impaired

in previous changes in the debt-to-capital ratios. Further adequate funds have

been set aside for bad debt losses and the historic bad debt losses through the

Production Credit Associations-Federal Intermediate Credit Banks relationship

have been miniscule.

One element frequently overlooked in discussing the growing credit needs of

farmers is the availability of funds from other sources. This is best reflected in

a recent statement by Mr. Darryl R. Francis, President, Federal Reserve Bank

of St. Louis. He said, "Some banks are in low savings and high credit demand

areas. Since loanable funds of banks are generally obtained locally, these banks

may not be able to meet their farm credit requests at going rates."'

We believe this statement accurately presents the growing dependence by

farmers on a Production Credit System where funds to not have to be obtained

locally. This growing dependence emphasizes the need for H.R. 16674.

We urge its adoption.

We respectfully request this letter be made part of the record.

Sincerely,

RICHARD T. O'CONNELL.

The CHAIRMAN. We have two further witnesses, Mr. Herschel D.

Newsom, master, National Grange, and Mr. Kit H. Haynes, assistant

lecrislative director of the American Farm Bureau Federation.

IVlr. Newsom, do you care to make any comments?

1"Maneuverability of Funds for Agriculture," p. 5. An Address by Darryl R. Francis,

President, Federal Reserve Bank of St. Louis, Missouri, November 13, 1967, before the

National Agricultural Credit Conference.
43

STATEMENT OF HERSCHEL D. NEWSOM, MASTER, NATIONAL

GRANGE

Mr. NEWSOM. Mr. Chairman and members of the committee, in addition to filing the statement I would simply like to point out that, as

you know, Mr. Chairman, and some of the other members of the committee, for many years I have had the satisfaction of serving on the

joint farmer-credit committee representing the Grange and the National Council of Farmer Cooperatives and the Farm Bureau

Federation.

, So far as I know there is no objection to this proposal.

As a matter of fact, the urgency of moving in this direction, I

think, Mr. Chairman, if I may say so, is necessary.

I should like to indicate by asking that, as a part of my testimony,

the balance sheet of agriculture as of January 1, 1956 through January

1, 1967, and selected indebtedness ratio to total assets in agriculture

be filed also, because you will see in this table that the ratio of agricultural indebtedness to the total assets is increasing rather rapidly.

This does not refute the statement made by Governor Tootell, but it

does indicate very clearly that the urgency is very great.

The CHAIRMAN. We will file those with the record.

Thank you very much, Mr. Newsom.

(The prepared statement submitted by Mr. Newsom and the balance

sheet of agriculture, January 1, 1956 to January 1, 1967, are as

follows:)

STATEMENT OF HERSCIIEL D. NEWSOM, MASTER, NATIONAL GRANGE

Mr. Chairman and committee members, the Grange supports the proposed

legislation to improve the capitalization of the Federal intermediate banks and

of the production credit associations so that these agencies of the Farm Credit

Administration may more adequately meet the rapidly increasing credit requirements of farmers and their service agencies.

Grange interest in the evolution of our cooperative farm credit structure is

historic and needs no definition before this Committee. From the original conception of the National Farm Loan Act as it began to appear in Grange policy

statements in 1908, the basic conception of temporary use of Government funds

to develop a cooperative farm credit structure, up to this very moment, the

Grange has continued to support such plans as those proposed by the twelve

Federal intermediate banks to retire within a reasonable time their capital stock

owned by the United States, so that all of the capital in each of these banks

will then be owned by the production credit associations in its district.

Currently, we are much concerned that the Federal intermediate banks shall

have the capacity to meet the increasing requirements for credit from the 459

production credit associations and the 118 other lending institutions that are

financed by the Federal intermediate credit banks. This means, under current

circumstances, that the credit banks must be in a position to obtain sufficient

loan funds with which to meet these credit requirements.

As the members of this Committee know full well, these loan funds are

obtained by the 12 Federal intermediate credit banks through the selling of consolidated debentures for which the loans made to farmers are offered as collateral, in the public securities market. With credit requirements increasing

as they have been recently and are destined to continue to increase for some

time to come, the amount of such debentures and similar obligations that may

be outstanding at one time, limited as they presently are to twelve times the

surplus and paid in capital of the Federal intermediate credit banks, neE ds reexamination.

It is on the basis of such re-examination that we now support proposals

to make permissible debt-to-capital ratio, twenty to one, in lieu of the present

twelve to one ratio. This would increase the amount of loan funds obtainable

by the Federal intermediate credit banks without interfering with our basic
44

target of relying increasingly on our participation and the normal commercial

money market for these credit requirements.

We, therefore, commend to you the acceptance of the explanation of the

Farm Credit Board, the Governor and his co:workers of the Farm Credit

Administration that a twenty to one debt-to-capital ratio for these intermediate

credit banks is justified and necessary.

Working rather closely with the Governor and the members of the Board

as we have done throughout the history of the Farm Credit Administration since

it became operative in its present form as a result of the Farm Credit Act of

'53, we are convinced that this legislation is important and the present twelve

to one limitation should be lifted so that this cooperative farm credit system may

continue to meet the increasing production credit needs of farmers that can

qualify for such credit on a self-sustaining basis.

The members of this Committee know full well that most of the business •

of the Federal intermediate banks is with the production credit associations. I

am advised that this percentage is currently about 95 percent. But these banks

also finance other institutions that make loans to farmers. At present, the

production credit associations acquire capital stock in the Federal intermediate

credit bank serving their district, both as annual patronage refunds and by

purchase. The interests in the bank acquired by such other financing institutions

are known as participation certificates, and presently are issued only as annual

patronage refunds. We see no objection to additional participation certificates

being issued for purchase by the other financing institutions as would be provided

in section 1 (a ) of the bill. This would be an additional source of capital for a

credit bank.

Section 1(c) seems to be in furtherance of the general idea that the ownership interests in a Federal intermediate credit bank held by a production

credit association should be reasonably related to the current patronage of the

bank by the association, inasmuch as the volume of patronage may vary considerably over the years.

In 1965, as many of you will recall, provision was made for a Federal intermediate credit bank to adjust the amount of its capital stock held by each production credit association in proportion to its patronage during the intermediately

preceding three fiscal years. However, in addition to the capital stock in the bank

held by an association, each association is also allocated on a patronage basis

each year, a certain portion of the earnings that are retained in the reserve

account of the bank. In order that all ownership interests in the bank held by an

association may be related to its patronage during the immediately preceding

three fiscal years, adjustment should be made for the reserve account allocations

held by an association as well as for the capital stock.

This would be authorized as to reserve account allocations by section 1 (c) of

the bill. For each shift of such ownership interests there would be an offsetting

transfer of money so that it would not cause any change in the net worth of an

association.

The remaining two amendments concern the production credit associations.

With Farm Credit Administration approval, section 2 (a) would authorize a

production credit association to retire the class B stock which a borrower is required to own. Presumably retirement could be permitted upon payment of a loan

or to apply the proceeds in partial or final payment of a loan and in other special

circumstances. It seems to us that this is preferable to requiring that the borrower in every case continue to hold the stock, even though he does not expect to

borrow from the association again.

We also see no objection to section 2 (b) which would permit a production

credit association to obtain funds by selling its capital notes to borrowers and

others. This is deemed sufficiently safeguarded because any notes issued, together

with other liabilities of the association, may not exceed ten times the capital and

surplus of the association and could only be issued under rules and regulations

prescribed by the Farm Credit Administration.

The bill clearly seems to be an effort to improve the capacity of the Federal

intermediate credit banks and the production credit associations to continue to

provide the service expected of them in meeting the increasing credit needs of

farmers. I, therefore, recommend that the Committee report the bill favorably and

seek its early passage.
THE BALANCE SHEET OF AGRICULTURE, JAN. 1, 1956, TO JAN. 1, 1967, AND SELECTED INDEBTEDNESS RATIO

Item 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1

1968

estimate

Billion dollars

Assets:

Real estate 102.9 110.4 115.9 124.4 129.9 131.4 137.4 143.6 152.3 161.3 172.2 182.0 191.5

Other physical assets 2 48. 7 49. 5 51.6 58.9 55. 3 54.5 56.7 58.2 58.6 57.4 62.9 66.3 67.7

Financial 3 18. 0 18.0 18. 3 19.2 18.3 18.0 18.3 18.9 19. 1 19. 8 20.6 21. 1 22.0

Total 169.6 177.9 185. 8 202. 5 203. 5 203.9 220. 7 220. 7 230. 0 238. 5 255. 7 269. 5 281. 2

Liabilities:

Real estate debt 

Non-real-estate debt (including Commodity Credit

9.0 9.8 10.4 11. 1 12. 1 12.8 13.9 15.2 16.8 18.9 21.2 23. 3 25. 0

C.TR

Corporation loans) 9.8 9.6 10.0 12.6 12.8 13.4 14.8 16.6 18. 1 18.6 20.4 22.4 24.9

Total 18.8 19.4 20.4 23.7 24.9 26.2 28.7 31.8 34.9 37. 5 41.6 45.7 49.9

Proprietors' equities 4 150.8 158. 5 165.4 178.8 178.6 177. 7 183.7 188.9 195. 1 201.0 214. 1 223.8 231.8

Percent

Ratio real estate debt-real estate assets 8.7 8.9 9.0 8.9 9.3 9.7 10. 1 10.6 11.0 11.7 12.3 12.9 13.4

Ratio total debts-total assets 11. 1 10.9 11.0 11.7 12.2 12.8 13.5 14.4 15.2 15.7 16.3 16.9 17.7

1 To be published in 1967 Balance Sheet. 2 Livestock, machinery and motor vehicles, crops stored on and off farms, and household furnishings and equipment.

2 Deposits and currency, U.S. Savings Bonds,and Investments in Cooperatives.

4 Assets minus liabilities.

4
46

The CHAIRMAN. The next is Mr. Kit H. Haynes, assistant legislative director, the American Farm Bureau Federation.

We will be glad to hear from you now.

STATEMENT OF KIT H. HAYNES, ASSISTANT LEGISLATIVE

DIRECTOR, AMERICAN FARM BUREAU FEDERATION

Mr. HAYNES. Mr. Chairman and members of the committee, our

statement endorses the objective of the bill. I think that, in view of the

time, it would be wiser to file the written statement. I am only a telephone call, 15 minutes away, if anyone has any questions.

The CHAIRMAN. Thank you, Mr. Haynes, and without objection your

statement will be made a part of the record.

(The prepared statement of the American Farm Bureau Federation

follows:)

STATEMENT OF KIT H. HAYNES, ASSISTANT LEGISLATIVE DIRECTOR, THE AMERICAN

FARM BURgAU FEDERATION

We appreciate this opportunity to present views of the American Farm Bureau

Federation on legislative proposals to amend the Federal Farm Loan Act and

the Farm Credit Act of 1933 to improve the capitalization of the Intermediate

Credit Banks and the Production Credit Associations.

The American Farm Bureau Federation is the nation's largest general farm

organization, with a voluntary paid membership of more than 1,753,000 member

families in some 2,770 County Farm Bureaus located in 49 states and Puerto

Rico.

Adequate credit available under reasonable terms has been an important factor

in development of the nation's agriculture. The steady advancement of agricultural technology in recent years and the degree to which efficient and profitable

farming operations depend upon maximum utilization of that technology have cast

skillful use of credit in an even more significant role in present-day farming

operations. It is safe to say that most Farm Bureau families use or have used

credit as a working tool in production and marketing of crops and livestock.

For this reason, Farm Bureau has long recognized that sound agricultural

credit is essential to successful farming, that credit needs are continually changing and growing and that those needs must be met.

The proposed amendments to the agricultural credit legislation would change

present law in five respects, all of which are aimed at increasing the capital

available for lending by the 12 Federal Intermediate Credit Banks and, in turn,

by the more than 450 Production Credit Associations.

Farm Bureau supports the objectives of these amendments, the major one of

which would increase the debt-to-capital limitations on the Federal Intermediate

Credit Banks from the current ratio of 12 to 1 to 20 to 1. Such an increase would

enable the banks to sell additional debentures to the investing public in the

nation's money markets and thereby increase the amount of funds available for

agricultural financing without calling upon the government for more capital.

In view of the ever-expanding use of credit in agriculture and with due consideration of the banks' outstanding record with respect to losses, an increase in

their permissive debt-to-capital ratio would seem both reasonable and safe. We

recommend that the debt-to-capital ratio be raised to the extent required to enable the banks to meet expanding credit needs of PCA's and other agricultural

financing institutions which they serve while, at the same time, maintaining the

soundness which has characterized their operations for more than 30 years.

The 12 Federal Intermediate Credit Banks were established in 1923, and their

losses since that time have amounted to approximately $1 for each $9,000 of credit

extended, with no losses at all since 1933. This is an enviable record and reflects

both the soundness of the credit program conducted by these banks and the skill

of those who are responsible for management. The banks initially operated on an

individual 10-to-1 debt-to-credit ratio. This was raised to 12-to-1 for the whole

system about three years ago, without any increase in the amount of losses.

Primary function of the FIBC's is discounting or purchasing from Production

Credit Associations or other agricultural financing institutions notes representing

loans made by them to farmers and ranchers. The banks also make loans and ad-
47

vances to the PCA's and other financing institutions to enable them to make or

carry loans for agricultural purposes. There now are about 118 other financing

institutions being served by the banks, but approximately 95 percent of the banks'

discounting and lending business is done with the PCA's.

Because of his membership, the individual farmer has a more direct tie with

his local Production Credit Association than with other agencies of the Farm

Credit Administration. The success of the PCA's is a good example of farmers

working to help themselves. Set up to provide individual farmers and ranchers

credit—generally for periods not to exceed one year—these associations operate

in all of the 50 states and in Puerto Rico. The soundness of their operations is

evidenced by the fact that of the 459 associations in the nation, all but a very

few are now completely farmer-owned. During the 1967 fiscal year, these associations made loans totaling more than $5 billion. At the end of the year, there were

322,700 borrowing members out of a total membership of 548,279, and outstanding

loans amounted to $3.7 billion.

The amendment increasing the debt-to-capital ratio of the intermediate credit

banks would enable the PCA'g to continue to meet the expanding credit needs

of individual farmers and ranchers promptly and effectively.

Included in the bill before you, H.R. 16674, are four other amendments of

a more technical nature and of relatively lesser importance. Each is aimed at

strengthening the credit structure of the credit banks and the PCA's. In the

interest of the Committee's time, we shall not attempt to discuss each of these

individually.

We believe that the objective of these amendments is sound and is in he

interest of American farmers and ranchers.

We thank you for the opportunity to present Farm Bureau's views on this

matter.

(The following letters were also submitted to the committee:)

NATIONAL MILK PRODUCERS FEDERATION,

Washington, D.C., April 29, 1968.

Hon. W. R. POAGE,

Chairman, House Agriculture Committee,

Longworth House Office Building,

Washington, D.C.

DEAR Mn. POAGE : We shall greatly appreciate it if you will place in the

record of the hearing on H.R. 16674 this letter supporting the bill.

The purpose of this bill is to improve the capital structure of the Federal

intermediate credit banks and the production credit associations. We are in

accord with the purposes of this legislation, and we believe that the excellent

record established by these agricultural credit institutions justifies the proposed amendments.

One of the objectives of this legislation is to permit these lending institutions to meet the increased credit requirements of today's agriculture without

increasing the amount of capital supplied by the U.S. Government or interfering with the steady progress being made toward the retirement of the Government capital in the Federal intermediate credit banks. Dairy farmers and

dairy cooperatives make extensive use of the Farm Credit lending agencies.

Dairy farming requires substantial capital, as does also the operation of dairy

cooperative plants, and this need is steadily increasing.

We never cease to be impressed by the remarkable story of the Farm Credit

Administration. By merely providing the use of Government capital for a relatively short period of time, Congress has been able to establish a system of

agricultural credit which is of tremendous importance. The steady progress

being made in the retirement of the Government capital and its replacement

with farmers' funds is a tribute to the integrity of the American farmer and

the able leadership which the Farm Credit Administration has provided.

We again express, as we have many times before, our appreciation for the

legislation enacted several years ago to enable the banks for cooperatives to

embark on an effective program to retire the Government capital used by those

banks. Cooperatives have responded favorably to that legislation, and we have

come a long way toward accomplishment of our goal which is the repayment

in full of all of the Government capital.

The pending legislation further promotes this objective and we urge its prompt

enactment.

Sincerely,

E. M. NORTON, Secretary.
48

THE AMERICAN BANKERS ASSOCIATION,

Washington, D.C., April 29, 1968.

Hon. W. R. POAGE,

Chairman, Committee on Agriculture, U.S. House of Representatives,

Longworth House Oflice Building, Washington, D.C.

DEAR CHAIRMAN POAGE : The American Bankers Association takes this opportunity to express its views concerning Section 2(b) of H.R. 16674, which would

authorize a Production Credit Association to issue its capital notes for sale to

borrowers and others. The A.B.A. is forced to oppose Section 2(b) as it would

merely siphon funds from small country banks, some of whom are having trouble

acquiring funds required to finance farm customers in the present tight money

market. Giving PCA's authority to enter this new field will not create any

additional funds. There is a sharp distinction between the Federal Intermediate

Credit Banks entering the national capital market and PCA's competing for

local funds.

It seems that before the Congress should make such a drastic change in the

financial structure of the Federal farm credit agencies, the proposal should be

reviewed in context with other efforts which are directed towards solving the

problem of availability of funds for agriculture. The study of the discount window

presently being made by the Board of Governors of the Federal Reserve System

will throw new light on this problem. We feel that commercial banks and government agencies, such as the Board of Governors of the Federal Reserve System,

the Federal Home Loan Bank Board, the Federal Deposit Insurance Corporation,

and the Comptroller of the Chrrency, should have an opportunity to study this

Section in detail and express their views.

Sincerely yours,

CHARLES R. MCNEILL.

The CHAIRMAN. That completes the testimony.

We thank all the witnesses.

The committee will now go into executive session on the bill.

Mr. BICE. Mr. Chairman, may I make this further comment?

We wish, on the part of the Farm Credit, to thank you for your

very attentive consideration, your understanding. It has been most

helpful you have been most gracious in your comments, and we indeed

are most appreciative.

Thank you.

The CHAIRMAN. Thank you very much.

We are very glad to have had all of you here.

We will now go into executive session.

(Whereupon, at 11 :45 a.m., the committee retired into executive

session.)