GOVERNIVIEN1

Storage

TO IMPROVE OPERATIONS OF FEDERAL

IN CREDIT BANKS Y4 

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HEARING

BEFORE THE

SUBCOMMITTEE ON CONSERVATION AND CREDIT

OF THE

COMMITTEE ON AGRICULTURE

HOUSE OF REPRESENTATIVES

EIGHTY-NINTH CONGRESS

FIRST SESSION

ON

O H.R. 4152

FEBRUARY 17, 1965

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0— Printed for the use of the Committee on Agriculture

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Serial C

U.S. GOVERNMENT PRINTING OFFICE

44-788 WASHINGTON : 1965
COMMITTEE ON AGRICULTURE

HAROLD D. COOLEY, North Carolina,. Chairman

W. R. POAGE, Texas, Vice Chairman

E. C. GATHINGS, Arkansas

JOHN L. McMILLAN, South Carolina

THOMAS G. ABERNETHY, Mississippi

WATKINS M. ABBITT, Virginia

PAUL C. JONES, Missouri

HARLAN HAGEN, California

FRANK A. STUBBLEFIELD, Kentucky

GRAHAM PURCELL, Texas

JAMES H. MORRISON, Louisiana

ALEC G. OLSON, Minnesota

SPARK M. MATSUNAGA, Hawaii

MASTON O'NEAL, Georgia

THOMAS S. FOLEY, Washington

JOSEPH Y. RESNICK, New York

LYNN E. STALBAUM, Wisconsin

ELIGIO DE LA GARZA, Texas

JOSEPH P. VIGORITO, Pennsylvania

JOHN C. MACKIE, Michigan

ROLLAND REDLIN, North Dakota

BERT BANDSTRA, Iowa

STANLEY L. GREIGG, Iowa

CLAIR A. CALLAN, Nebraska

MRS. CHRISTINE S. GALLAGHER, Clerk

HYDE H. MURRAY, Assistant Clerk

JOHN J. HEIMBURGER, General Counsel

ROBERT C. BRUCE, Assistant Counsel

FRANCIS M. LE MAY, Staff Consultant

PAUL B. DAGUE, Pennsylvania

PAGE BELCHER, Oklahoma

CHARLES M. TEAGUE, California

ALBERT H. QUIE, Minnesota

MRS. CATHERINE MAY, Washington

DELBERT L. LATTA, Ohio

RALPH HARVEY, Indiana,

PAUL FINDLEY, Illinois

ROBERT DOLE, Kansas

LAURENCE J. BURTON, Utah

PRENTISS WALKER, Mississippi

RESIDENT COMMISSIONER

SANTIAGO POLANCO-ABREU, Puerto Rico

SUBCOMMITTEE ON CONSERVATION AND CREDIT

W. R. POAGE, Texas, Chairman

E. C. GATHINGS, Arkansas

FRANK A. STUBBLEFIELD, Kentucky

JOHN L. McMILLAN, South Carolina

STANLEY L. GREIGG, Iowa

CLAIR A. CALLAN, Nebraska

S. POLANCO-ABREU, Puerto Rico

It

RALPH HARVEY, Indiana

CHARLES M. TEAGUE, California

ROBERT DOLE, Kansas

•-•

•
CONTENTS

Pags H.R. 4152, a bill to amend the Federal Farm Loan Act and the Farm Credit Act of 1933 to provide means for expediting the retirement of Government capital in the Federal intermediate credit banks, including an increase in the debt permitted such banks in relation to their capital and provision for the production credit associations to acquire additional capital stock therein, to provide for allocating certain earnings of such banks and associations to their users, and for other purposes O'Connell, Richard T., secretary, National Council of Farmer Cooperatives, letter of February 17, 1965 

Statement 34 of:

Banks, King L., chairman, National Advisory Committee of Produc- tion Credit Associations 19 Gault, David G. member, Federal Farm Credit Board 23 Graham, Harry L., legislative representative, National Grange 24 Harris, Glen R., member, Federal Farm Credit Board 21 Johnson, Reuben L., director of legislative services, National Farm- ers Union 30 Nay, Paul, president, West Virginia Farm Bureau 31

Tootell, 

Stone, J. Pittman, Chairman, Federal Farm Credit Board 3

R. B., Governor, Farm Credit Administration 

In
I-
TO IMPROVE OPERATIONS OF FEDERAL

INTERMEDIATE CREDIT BANKS

WEDNESDAY, FEBRUARY 17, 1965

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON CONSERVATION AND CREDIT

OF THE COMMITTEE ON AGRICULTURE,

Washington, D.C.

The subcommittee met, pursuant to notice, at 11 a.m., in room 1310

Longworth House Office Building, Washington, D.C., Hon. W. R.

Poage (chairman of the subcommittee) presiding.

Present: Representatives Poage, Gathings, Greigg, Callan, Harvey

of Indiana, Teague, and Dole.

Also present: Martha Hannah, staff; Hyde H. Murray, assistant

clerk; and Robert C. Bruce, assistant counsel.

Mr. POAGE (presiding). The committee will now pass to H.R.

4152, to increase the authority of intermediate credit banks to market

debentures to the public and require a retirement of additional Government capital.

(The bill, H.R. 4152 introduced by Mr. Cooley, follows:)

[H.R. 4152, 89th Cong., 1st sass.]

A BILL To amend the Federal Farm Loan Act and the Farm Credit Act of 1933 to provide means for expediting the retirement of Government capital in the Federal intermediate credit banks, including an

Increase in the debt permitted such banks in relation to their capital and provision for the production

credit associations to acquire additional capital stock therein, to provide for allocating certain earnings of

such banks and associations to their users, 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 inserting immediately before the semicolon at the end of paragraph

(1) of section 202(a) thereof (12 U.S.C. 1031(1)) the following: "or without

collateral to the extent authorized under rules and regulations prescribed by

the Farm Credit Administration";

(b) by striking out "Provided" and all that follows it in section 203(a)

thereof (12 U.S.C. 1041) and substituting therefor the following: "Provided,

That the aggregate amount of the outstanding debentures and similar

obligations issued by the Federal intermediate credit banks shall not exceed

fifteen times the surplus and paid-in capital of all such banks.";

(c) in section 205(a) thereof (12 U.S.C. 1061(a))—

(i) by substituting "one-eighth" for "one-sixth" in the ninth sentence of

paragraph (1); and

(ii) by inserting the following as two separate paragraphs between the

eleventh and twelfth sentences of paragraph (2):

"Each Federal intermediate credit bank, with the approval of the Farm

Credit Administration, may determine the amount of additional class B stock

in the bank to be subscribed for by the production credit associations in the

farm credit district served by the bank in order to provide capital to meet

the credit needs of the bank. The amount so determined shall be allotted

among the production credit associations in the district upon such basis that,

as nearly as may be practicable, the sum of the class B stock already owned

and the additional amount to be subscribed for by each association will be

1
2 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

in the same proportion to the total amount of class B stock already owned and

to be subscribed for by all of the associations in the district that the average

indebtedness (loans and discounts) of each association to the bank during

the immediately preceding three fiscal years is of the average of such indebtedness of all production credit associations to the bank during such three-year

period. Each production credit association shall subscribe for class B stock

in the bank in the amount so allotted to it. Such subscriptions shall be

subject to call and payment therefor shall be made at such times and in such

amounts as may be determined by the bank.

"Whenever the relative amounts of class B stock in a Federal intermediate

credit bank owned by the production credit associations differ substantially

from the proportion indicated in the preceding paragraph, and additional

subscriptions to class B stock through which such proportion could be reestablished are not contemplated, the Federal intermediate credit bank, with

the approval of the Farm Credit Administration, may direct either separately

or in combination such transfers, retirements, and reissuance of outstanding

class B stock among the associations as will reestablish the aforesaid proportion as nearly as may be practicable. Outstanding class B stock which is

transferred or retired for this purpose shall be the oldest stock held by the

association and the bank shall pay the association therefor at the fair book

value thereof not exceeding par and collect therefor from any production

credit association to which such stock is transferred or reissued."; and

(d) in section 206 thereof (12 U.S.C. 1072)—

(i) by striking out "equal to 25 per centum of the outstanding capital

stock and participation certificates of the bank" from clause (3) of the first

sentence of subsection (a);

(ii) by striking out the second sentence of subsection (a) and inserting in

lieu thereof as a separate paragraph the following:

"Amounts applied to reserve account as provided in (3) above, either heretofore or hereafter, shall be allocated on the same patronage basis and have the

same tax treatment as is provided in subsection (b) of this section for patronage

refunds. Such allocations of reserve account shall be sub'ect to a first lien as

additional collateral for any indebtedness of the holders thereof to the bank and

in any case where such indebtedness is in default may be retired and canceled

for application on such indebtedness, and, in case of liquidation or dissolution of

a holder thereof, such reserve account allocations may be retired, all as is provided for capital stock and participation certificates in section 205 of this Act.

At the end of any fiscal year that the reserve account of any bank exceeds 25 per

centum of its outstanding capital stock and participation certificates, such excess

may be distributed, oldest allocations first, in class B stock and participation certificates issued as of the date of the allocations and, whenever the bank has no

class A stock outstanding, also in money."; and

(iii) by inserting immediately before the last sentence of subsection (c)

the following new sentence: "Any of the reserve established pursuant to subsection (a) of this section shall be paid to the production credit associations

and other financing institutions to which such reserve is allocated on the

books of the bank.".

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

(a) by adding the following at the end of subsection (b) of section 22 thereof

(12 U.S.C. 1131f (b)) : "When so specified in the approval by the Federal

intermediate credit bank, such dividends may be paid even though the amount

in the surplus account provided for in subsection (a) is less than the minimum

prescribed by the bank. If the bylaws of a production credit association so

provide, (1) any remaining net earnings at the end of a fiscal year may be

distributed on a patronage basis in class A stock of the association and, when

the United States does not hold class A stock in the association, also in money,

and (2) any part of the earnings for the fiscal year in excess of operating

expenses held in the surplus account may be allocated to borrowers on a

patronage basis. With the approval of the Federal intermediate credit bank,

amounts so allocated may be distributed, oldest allocations first, in class A

stock of the association issued as of the date of the allocation and, when the United States does not hold class A stock in the association, also in money.

As used in the second preceding sentence 'on a patronage basis' means in the

proportion that the amount of interest earned on the loans of each borrower

bears to the total interest earned on the loans of all borrowers during the fiscal year."; and
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 3

(b) by adding the following as a separate paragraph at the end of section

23 thereof (12 U.S.C. 1131g) :

"As a further means of providing capital, a production credit association

may, upon such terms and conditions as may be provided in its bylaws, require

borrowers to invest in an equity reserve in the association. Amounts so invested

by each borrower shall be subject to a lien for the indebtedness of the borrower

to the association, application on such indebtedness in event of default by the

borrower, charges for losses of the association which are in excess of other loss

reserves and surplus, and any portion of the amounts so invested which have not

been so used and no longer are required for the purposes of the association may

be returned to the borrower by revolving or retirement, all as may be provided

in said bylaws."

Mr. POAGE. This is not a measure that has been passed upon as

such before, but is a measure the general subject matter of which has

been before this committee for a long time.

It seeks to implement what the committee has been trying to do

for a long time—trying to move more and more of this Government

capital into the hands of the farmers, and we have with us or I have

listed here Mr. Stone as the first witness.

Mr. Stone is the Chairman of the Federal Farm Credit Board.

We have Mr. Tootell, Governor of the Farm Credit Administration.

I presume Mr. Stone will make the first presentation.

STATEMENT OF J. PITTMAN STONE, CHAIRMAN, FEDERAL FARM

CREDIT BOARD

Mr. STONE. Mr. Chairman and gentlemen of the committee, the

Farm Credit Administration is recommending enactment of H.R. 4152,

to amend certain provisions of the Federal Farm Loan Act and the

Farm Credit Act of 1933 with respect to the Federal intermediate

credit banks and the production credit associations.

The associations make loans to farmers and ranchers and the loans

then are rediscounted with or used as collateral for a loan from a

Federal intermediate credit bank. The credit banks in turn obtain

funds by selling their collateral trust debentures to the investing

public.

For a full explanation of the bill we will rely on our chief executive

officer, Gov. R. B. Tootell, who is present and ready to testify right

after I finish. However, as Chairman of the Federal Farm Credit

Board, which has the general supervision of the Farm Credit Administration, I appreciate the opportunity to make a preliminary statement at this hearing on the bill.

If you are interested in anything personal about me, I am serving

on the Federal Farm Credit Board from the Fifth or New Orleans

Farm Credit District, consisting of the States of Alabama, Mississippi,

and Louisiana. My home is in Mississippi where I am farming about

2,000 acres and also practice law.

When the Federal Farm Credit Board was established a little over

11 years ago, the Farm Credit Act of 1953 directed that the Board

make recommendations to carry into effect the declared policy of

Congress to encourage and facilitate increased borrower participation

in the management, control, and ultimate ownership of the permanent

system of agricultural credit made available through institutions

operating under the supervision of the Farm Credit Administration.

This was to include means of increasing borrower participation in

ownership of the farm credit system to the end that the investment of
4 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

the United States in the Federal intermediate credit banks and production credit associations, to which the present bill relates, as well

as the banks for cooperatives, may be retired. It is also a specified

and continuing function and duty of the Federal Farm Credit Board

to make recommendations to Congress for amendments to the laws

relative to Federal agricultural credit.

The production credit associations were first authorized in 1933.

The capital stock in each association not purchased by the organizers

or initial borrowers was all held on behalf of the United States.

Government capital in the production credit associations reached

a peak of 890.1 million in 1934.

In accordance with the original design, the Government capital in

each association was gradually retired as the borrowers acquired

more and more capital stock. The first association to retire all of its

Government capital did so at the end of 1944 and today there are only

2 out of 482 associations with Government capital, the total of which

is $40,000.

From their beginning in 1923 the 12 Federal intermediate credit

banks were entirely capitalized by the United States and originally

there was no provision for private capital to supplant Government

capital. However, this was changed when Congress enacted the

Farm Credit Act of 1956 following recommendations made by the

Federal Farm Credit Board.

Within 2 years after the 1956 legislation became effective, that is,

January 1, 1957, the production credit associations had to purchase

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 $454,200 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. 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 $46,750,000 of additional

capital stock in six of the banks to keep their debt-to-capital ratio

within the statutory limit of 10 to 1. As the volume of loans and discounts made by a bank increases, its own borrowings increase proportionately and when the debt-to-capital ratio of a bank approaches

the 10-to-1 maximum, it means that the capital of the bank must be

increased if the bank is to continue making more loans and discounts.

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

the banks since 1956 is over three times the amount that has been retired.

It was to do something about this that a study was conducted

within the Farm Credit Administration and the bill now before you

represents the recommendations growing out of that study. Its

primary purpose is to check the flow of additional Government capital

into the Federal intermediate credit banks and to expedite the re-.
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

turn of the Government capital now in the banks while, at the same

time, permitting the banks to continue the service expected of them.

In order that such a change in trend may begin as soon as possible, ,r

it is our hope that the bill may be enacted early in the present s#0,sioil -)

of Congress. This proposed legislation has been considered by."cilid

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. A subsequent witness is expected

to endorse the legislation on behalf of the National Advisory Committee of Production Credit Associations, of which he is chairman.

As I mentioned in the beginning, Governor Tootell is standing by

to undertake a more detailed explanation of our proposal and two of

my fellow members on the Federal Farm Credit Board are also

present and may testify later.

Thank you, Mr. Chairman, for this opportunity.

Mr. POAGE. Thank you very much, Mr. Stone.

I just noticed that early in your statement you pointed out that you

farmed 1,400 acres of land and also practiced law. I just wondered

if you meant by that that nobody could farm 1,400 acres of land

without practicing law or some other remunerative business to support

the farm.

Mr. STONE. I think Lawyer Stone is a very good asset to Farmer

Stone.

Mr. POAGE. I found a long time ago it was awfully hard as a

lawyer to keep up the farm. In fact, you had to practice a whole

lot of law to keep the farm going.

Mr. STONE. That is what I say.

Thank you very much.

Mr. POAGE. Are there any questions of Mr. Stone?

If not, we are very much obliged to you.

Mr. STONE. Thank you. It is a pleasure to be with you.

Mr. POAGE. Governor Tootell. Governor Tootell has been before

this committee many, many times. He is the Governor of the Farm

Credit Administration, and if you would like to introduce any of your

coworkers, you may.

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. Thank you.

Mr. Chairman, I have with me this morning Mr. F. Vernon Wright,

who is Deputy Governor and Director of Short-Term Credit Service

and Mr. Paul Ritter, who is our General Counsel in the Farm Credit

Administration.

H.R. 4152 would amend certain sections of the Federal Farm Loan

Act and the Farm Credit Act of 1933 that relate to the Federal intermediate credit banks and production credit associations. As Governor

of the Farm Credit Administration, the independent agency in the

executive branch of the Government that has the supervision of those

banks and associations, I appreciate being a witness in explanation

and support of the bill.

44-738-65-2
6 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

The basic purpose is to enable the Federal intermediate credit

banks and the production credit associations to continue the service

expected of them while at the same time reducing or eliminating the

need for more Government capital in the credit banks and expediting

the return of Government capital they now have.

As reflected in its title, the bill includes an increase in the debt

permitted the credit banks in relation to their capital and would

create an alternate source of capital by providing for the production

credit associations to acquire additional capital stock in the credit

banks.

In addition to these two major provisions, there are several others

also designed to contribute to the purpose of the bill. Among them

are provisions for allocating certain retained earnings of such banks

and associations to their users.

Before getting into more detail about the bill, though, it may be

helpful to present certain background information about the Federal

intermediate credit banks and the production credit associations and

the need for the proposed legislation.

The 12 Federal intermediate credit banks were established in 1923

to provide agriculture with a permanent, stable, and dependable

source of short- and intermediate-term credit. 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.

There is 1 bank to serve each of 12 farm credit districts into which

the 50 States and Puerto Rico now are divided. These banks discount for, or purchase from, production credit associations and other

financing institutions, with their endorsement, notes representing

loans made by them to farmers and ranchers. Also, they make loans

and advances to such associations and other financing institutions

secured by collateral approved by the Governor of the Farm Credit

Administration. In addition, the credit banks supervise, assist, and

provide services to the production credit associations.

Approximately 95 percent of the discounting and lending by the

Federal intermediate credit banks is for the production credit associations, although there also are about 100 other financing institutions

presently being served by the banks. For the most part, these other

financing institutions are State chartered, privately capitalized credit

corporations and livestock loan companies; some are commercial

banks.

On the other hand, the production credit associations are chartered

by the Farm Credit Administration and operate under the provisions

of the Farm Credit Act of 1933, as amended, for the benefit of their

member borrowers. There are 482 such associations with from 26 to

77 in each farm credit district. Each association has a prescribed

territory, usually ranging from one or more counties up to as much as

one State or more, within which it makes loans to farmers and ranchers.

Loan maturities usually are not more than a year but loans may be

made for terms up to 7 years.

The credit banks finance their operations primarily through the

issuance and sale to the investing public of consolidated collateral

trust debentures and by direct borrowings from commercial banks.

The notes of farmers and ranchers received from production credit

associations and other financing institutions are used as collateral for

the debentures.
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 7

Under existing law, the outstanding debentures and similar obligations of a Federal intermediate credit bank may not exceed 10 times

its surplus and paid-in capital. As a consequence, when the ratio of

debt to surplus and paid-in capital of a credit bank is close to 10 to 1,

and loans and discounts are increasing rapidly, the bank can continue

to operate within that ratio only if its surplus and paid-in capital is

increased. One way of doing this is to provide additional capital from

the revolving fund in the Treasury that is available for the purchase

of class A (Government) capital stock in such amount as the Governor

of the Farm Credit Administration determines is needed to meet the

credit needs of the bank.

The Federal intermediate credit banks were wholly owned by the

United States from 1923 through 1956. Amendments made by the

Farm Credit Act of 1956, however, provide for the gradual acquisition

of capital stock of the credit banks by production credit associations,

with a view to the eventual retirement of all Government capital.

Beginning in 1957, the capital stock of the banks was divided into

class A stock to be issued to and held only by the Governor of the

Farm Credit Administration on behalf of the United States, and class

B stock to be issued only to production credit associations. Since

then, too, the credit banks have been changed toward a cooperative

basis of operation. After restoring any impairments of capital stock;

participation certificates, and surplus account, their net earnings each

year that are not required to be applied to reserve account or paid

to the United States as a franchise tax are distributed as patronage

refunds in the form of class B stock to production credit associations

and in the form of participation certificates to other financing institutions.

As a first step toward retirement of Government capital the 1956

amendments required the production credit associations to purchase

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

of the total amount of Government capital in the 12 banks on January 1, 1957. This was done and a corresponding amount or $13.1

million of Government capital was retired.

In addition, the 1956 amendments require each credit bank annually

to determine the amount of its class A stock that shall be retired.

Whenever the total of the capital stock, participation certificates,

surplus, and reserves (net worth )of the bank is more than one-sixth

of the highest month-end balance of debentures and other obligations

issued by or for the bank, outstanding during the immediately preceding 5 years, the minimum amount of class A stock to be retired

is the total amount of class B stock and participation certificates

issued for that year.

Under the annual retirement provisions, seven of the banks have

retired a total of $454,000 of class A (Government) stock out of

earnings since January 1, 1957. During the same period, though,

out of the revolving fund available for that purpose, the Governor of

the Farm Credit Administration has had to purchase $46,750,000

of additional class A (Government) stock in six of the banks to keep

the ratio of debt to surplus and paid-in capital within the statutory

limit of 10 to 1.

Thus, the amount of Government capital that had to be put into

six of the banks is more than three times the amount of Government
8 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

capital retired from all of the banks since the 1956 amendments

became effective.

Although the 12 banks added $67.1 million to net worth out of

earnings during the 7%-year period from January 1, 1957, through

June 30, 1964, the growth in loan volume that made it necessary for

some of the banks to obtain additional Government capital out of the

revolving fund available for that purpose, in order to stay within the

statutory 10-to-1 ratio of debt to surplus and paid-in capital, has

resulted in the banks now having nearly $33.2 million more Government capital than on January 1, 1957.

It is apparent, therefore, that the 1956 amendments have not been

adequate to fully accomplish the shift from Government to private

ownership within a reasonable period of time.

The amount of Government capital in the production credit associations is negligible, but, inasmuch as the associations actually make

the loans to the farmers and ranchers and are being looked to as a

source of capital for the Federal intermediate credit banks, it is

important to have their financial structure in mind.

Production credit associations were first authorized in 1933. As

each association was organized, all of the capital stock not purchased

by the organizers or initial borrowers was held on behalf of the United

States. In accordance with the original design the Government

capital in each association was gradually retired as the borrowers

acquired more and more capital stock. From a peak of $90.1 million

in 1934, there now are only 2 out of the 482 associations with Government capital the total of which is $40,000.

Upon obtaining a loan from a production credit association, the

borrower is required to purchase class B stock in the association in

the amount of $5 per $100 of loan. Such stock is not canceled or

retired when the loan is paid, but 2 years after the holder ceases to be

a borrower his class B stock is required to be exchanged for class A

stock. Class B stock may be transferred only to another farmer

borrower or an individual eligible to become a borrower. Class A

stock may be purchased and held by the Governor of the Farm Credit

Administration and by investors. There also is provision for class C

stock which may be purchased and held by the Governor of the Farm

Credit Administration and by investors, but there is no such class C

stock outstanding at the present time.

In the future the farmers and ranchers that are borrowers from and

members of the production credit associations, in addition to providing

the net worth of their associations, will also be expected to provide

additional capital required by the Federal intermediate credit banks,

including that necessary to retire the Government capital in the banks.

In saying this we have not overlooked the other financing institutions that do business with the credit banks but in most districts they

provide only a relatively small part of the net worth of the bank.

Because of the relationship of the production credit associations to the

Federal intermediate credit bank in their respective districts, some of

the amendments in the bill necessarily relate to the associations.

Their nature and bearing on the operations of the associations will be

indicated as we now take up the provisions of the bill section by

section.
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

ANALYSIS OF BILL

Unsecured loans from Federal intermediate credit banks to production

credit associations (sec. 1(a) amending sec. 202(a) of the Federal Farm

Loan Act, 12 U.S.C. 1031(1)).

In addition to discounting for, or purchasing from a production

credit association, the farmers' and ranchers' notes representing loans

made by the association, a Federal intermediate credit bank may

also—

make loans and advances to any such association secured by such collateral as

may be approved by the Governor of the Farm Credit Administration.

To this would be added authority to make loans and advances to

production credit associations—

without collateral to the extent authorized under rules and regulations prescribed

by the Farm Credit Administration.

This will provide greater flexibility in utilizing the resources of an

association. It will permit giving recognition to the value of assets

such as accrued interest receivable, cash on hand, investment in office

quarters and, at times acquired property.

Debt to surplus and paid-in capital ratio for Federal intermediate

credit banks (sec. 1(b) amending sec. 203(a) of the Federal Farm Loan

Act, 12 U.S.C. 1041).

The amount of collateral trust debentures which the Federal intermediate credit banks now may have outstanding is subject to the

statutory limitation:

That the aggregate amount of the outstanding debentures and similar obligations issued individually by any Federal intermediate credit bank, together with

the amount of outstanding consolidated debentures or other similar obligations

issued for its benefit and account, shall not exceed 10 times the surplus and

paid-in capital of such bank.

The bill would change the foregoing limitation from a 10-to-1 to a

15-to-1 ratio and apply it to the 12 Federal intermediate credit banks

collectively instead of individually. The amended limitation would

be

That the aggregate amount of the outstanding debentures and similar obligations issued by the Federal intermediate credit banks shall not exceed 15 times

the surplus and paid-in capital of all such banks.

To the extent practicable, the presently intended policy is that the

debt to surplus and paid-in capital ratio of each bank should not be

permitted to exceed 12 to 1 except for temporary periods such as

seasonal peaks in outstanding borrowings.

Mandatory retirement of Government capital by Federal intermediate

credit banks (sec. 1(c)(i) amending sec. 205(a)(1) of the Federal Farm

Loan Act, 12 U.S.C. 1061(a)(1)).

Annually at the end of its fiscal year, it is for each Federal intermediate credit bank to determine the amount of its class A (Government) stock that shall be retired. The only further requirement in

this respect is that:

Whenever the total of the capital stock, participation certificates, surplus, and

reserves of the bank is more than one-sixth of the highest month-end balance of

debentures and other obligations issued by or for the bank, outstanding during the

immediately preceding 5 years, the minimum amount of class A stock to be

retired shall be the total amount of class B stock and participation certificates

issued for that year.

A
10 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

The bill would substitute "one-eighth" for "one-sixth" in the quoted

sentence. This is deemed warranted because of the increase in the

debt to surplus and paid-in capital ratio being proposed under the

.preceding amendment. The class B stock and participation certificates referred to in the quoted sentence includes not only those,

issued to the production credit associations and other financing institutions as patronage refunds but also any additional class B stock

purchased by production credit associations as may be required under

the next amendment.

Additional purchases by production credit associations of class B stock

in Federal intermediate credit banks (sec. 1(c)(ii) amending sec. 205 (a)(2)

of the Federal Farm Loan Act, 12 U.S.C. 1061(a) (2)).

Under the amendments made by the Farm Credit Act of 1956, the production credit associations were required to purchase class B stock

in the Federal intermediate credit banks in an amount equal to 15

percent of the class A (Government) stock outstanding on January 1,

1957, and a corresponding amount of such class A (Government)

stock was retired. Subsequently, when increased business made more

capital necessary in order for a bank to stay within the statutory

10-to-1debt to surplus and paid-in capital ratio, the Governor of the

*Farm Credit Administration, out of the revolving fund in the Treasury

.available for that purpose, purchased additional class A stock on

behalf of the United States.

• Under the bill, a Federal intermediate credit bank, in order to provide capital to meet its credit needs, may require the production credit associations of its district to subscribe for or otherwise acquire additional class B stock in the bank where necessary and feasible. The

relative amount of class B stock in the bank to be held by each association would be in the general proportion that its indebtedness to the

bank is to the total of all association indebtedness to• the bank. All

demands under the new legislation that the associations acquire additional class B stock in a bank would be subject to approval by the

Farm Credit Administration and would be with due regard for the Circumstances of the associations:

The revolving fund in the Treasury mentioned above would con- tinue available for further subscriptions to class A (Government) stock

of the banks if needed.

Allocation to users of Federal intermediate credit, banks of net earnings

applied to reserve account (sec. 1(d) amending sec. 206 of the Federal Farm

Loan Act, 12 U.S.C. 1072).

• Since January 1, 1957, each Federal intermediate credit bank, at

the end of its fiscal year, after restoring any impairment of capital

stock, *participation certificates and surplus account, is required to

'apply 25 percent of its net earnings then remaining to create and maintain a reserve account equal to 25 percent of the outstanding

capital stock and participation certificates of the bank.

And—

If at the end of any fiscal year the sum of the surplus and the reserve account of any bank is less than its outstanding capital stock and participation certificates, the bank shall continue to apply such 25 per centum of its net earnings to the ieserve account until the sum of the surplus and the reserve account is equal to If,s outstanding capital stock and participation certificates.

The net earnings finally remaining after paying a franchise tax to 1Tnited States. while there is Government capital in a bank,
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 11

must be distributed as patronage refunds, in class B stock to production credit associations and participation certificates to other financing

institutions. There is now no provision for allocating or distributing

the earnings applied to reserve account.

Under the bill, the 25 percent of net earnings remaining after restoring impairments would always be applied to the reserve account each

year. All amounts so applied, whether heretofore or hereafter, would

be allocated to the production credit associations and other financing

institutions on a patronage basis.

These allocations would have the same general treatment for tax

and other purposes as is provided for patronage refunds. If a holder

of such allocations is in default on indebtedness to the bank, it would

be within the discretion of a bank to cancel and retire such allocations

for application on the indebtedness. There would be a similar

discretion to retire allocations when a holder is liquidated or dissolved.

When the total of such allocations exceeds 25 percent of the outstanding capital stock and participation certificates of a bank, such

excess may be distributed, oldest allocations first, in class B stock

and participation certificates issued as of the date of the allocations

and, whenever the bank has no class A stock outstanding also in

money. In brief, that is what paragraphs (i), (ii), and (iii) of subsection (d) of section 1 would provide.

Option of production credit association to pay patronage refunds and

allocate to borrowers net earnings retained in surplus account (sec. 2(a)

amending sec. 22(b) of the Farm Credit Act of 1933 12 U.S.C. 1131f(b)).

Presently 342 production credit associations have bylaws, adopted

with the approval of the Farm Credit Administration, under which

certain net earnings may be paid to the borrowers as patronage

refunds. These are the net earnings remaining each year after

applying earnings as specifically directed or authorized by statute or

the bylaws. The pertinent statutory provisions are that earnings in

excess of operating expense must be applied, first, to restore any

capital impairment and, second, to maintain a surplus account, the

minimum amount of which is prescribed by the Federal intermediate

credit bank.

Dividends on capital stock not to exceed 7 percent a year may be

paid when approved by the Federal intermediate credit bank and

consistent with policies established by the Farm Credit Administration.

The first sentence added by section 2(a) of the bill would provide

that, when so specified in the credit bank approval, such dividends

may be paid even though the amount in the surplus account is less

than the prescribed minimum.

In addition to recognizing that the finally remaining net earnings

may be paid as patronage refunds, the rest of the addition made by

section 2(a) of the bill specifically would authorized an association

to adopt a bylaw providing for allocation to the borrowers on a

patronage basis of any part of the net earnings required to be applied

to surplus account or otherwise retained therein.

For tax and other purposes this would permit any net earnings

hereafter applied to or retained in the surplus account to be accorded

the same treatment as now is given the patronage refunds paid by

associations. Inasmuch as all bylaws of the production credit

associations are subject to approval of the Federal intermediate credit
12 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

bank and the Farm Credit Administration, the policy presently

intended to be followed is that bylaws should not be approved which

would permit an association to allocate to its borrowers any allocations

received by the association from the Federal intermediate credit bank

with respect to net earnings included in the reserve account of the

bank prior to July 1, 1965.

Option of production credit association to require borrowers to invest

in equity reserve in the association as a means of providing capital

(sec. 2(b) amending sec. 23 of the Farm Credit Act of 1933, 12 U.S.C.

1131g).

In addition to the capital stock in the production credit associaciation which a borrower is required to own, section 2(b) of the bill

would authorize an association, if its bylaws so provide, to require

borrowers to invest in an equity reserve in the association upon such

terms and conditions as may be provided in its bylaws. Such an

equity reserve would be part of the surplus of the association in

applying the 10-to-1 debt to paid-in and unimpaired capital and surplus ratio under which the production credit associations must operate. The equity reserve would serve that purpose and without the

expense of dividends as would be expected if the same amounts were

invested in class A capital stock of the association.

That concludes the section-by-section analysis of the bill and also

my initial statement in explanation and support of H.R. 4152. Our

submission of this proposed legislation includes a Budget Bureau letter with some comments that we think are not related to either the

specific provisions or the general objectives and purposes of the present bill. But if any of them are to be considered in detail here I

would like an opportunity later in the hearing to say more about them.

Mr. POAGE. Let me ask you, Governor, right here on that last page,

is not that an error, about the middle, where you say "in applying the

10-to-1 debt to paid-in and unimpaired capital and surplus ratio,"

that it should be 15-to-1 ratio?

Mr. TOOTELL. Mr. Chairman, I did not hear your question.

Mr. POAGE. I say on your last page you read the sentence:

Such an equity reserve would be part of the surplus of the association in applying

the 10-to-1 debt to paid-in and unimpaired capital and surplus ratio under which

the production credit associations must operate—

That is really a 15-to-1 ratio.

Mr. TOOTELL. No, sir. This refers to the debt-to-capital ratio of a

production credit association. The 15 to 1 which we propose has to do

with the Federal intermediate credit banks.

Mr. POAGE. You are not changing it for the production credit

associations?

Mr. TOOTELL. Not for the production credit associations which

are the primary lenders.

Mr. POAGE. You are leaving that 10 to 1, and making 15 to 1 only

on intermediate credit banks.

Mr. TOOTELL. Yes, sir.

Mr. POAGE. I did not get that clear.

Now, there was one other item here about which I wanted to raise

a little question. I notice that you, on page 8, suggested there that

there be, you add, authority to make loans to production credit

associations without collateral to the extent authorized under the

rules and regulations prescribed by the Farm Credit Administration.

p.
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 13

On its face that always arouses a question. Then somewhere there

did not you say a little further down that it was the intention that

you would not go beyond a 12-to-1 ratio? That would seem to

indicate that you felt that we should not go too far on this matter

of expanding credit. I know they are not exactly the same thing,

but I am particularly interested in finding out if you authorize it to

15 to 1 and you try to hold it to 12, and then you make loans without

any collateral, how do you reconcile making those loans without

collateral?

Mr. TOOTELL. Mr. Chairman, I would- like to have Mr. Vernon

Wright who himself for some 15 years was the manager of a production

credit association, and for approximately almost 4 years now has been

our Director of Short-Term Credit Service, to answer that one on the

matter of loans without collateral.

Mr. POAGE. Yes, Mr. Wright.

Mr. WRIGHT. Congressman, the production credit associations

today own Government bonds. These bonds are pledged with the

intermediate credit banks for direct loans. This is over and above

the discounting of loans.

It does not take into account office buildings, accrued interest, in

some instances acquired property, and there are certain- other assets

owned by the production credit associations.

As a result of this, the PCA's have no way to utilize all of their

assets in their operations. We have approximately $22 million

invested in production credit association office buildings albne.

This unsecured loan request we think is sound because it would

enable the credit banks to lend on the total assets of the associations.

Mr. POAGE. Well, then what you are saying is really you do not

want to make unsecured loans, but you want to be able to use these

assets that are a part of the security; is not that what you are saying?

Mr. WRIGHT. No, sir. We would intend, Mr. Chairman, to make

unsecured loans.

Mr. POAGE. I know. You would not actually take a lien on the

office building, but you would take that into consideration in making it.

Mr. WRIGHT. We would, sir, consider the assets owned by the

associations; that is right.

Mr. POAGE. I suppose that gets pretty close to commercial banking

when you go to loan something just on a man's signature, does it

not? It either gets to commercial banking or it gets to FHA banking,

one of the two.

Mr. TOOTELL. Mr. Chairman I would like to add this: Production

credit associations not infrequently make unsecured loans.

Mr. POAGE. I did not know that. I will have to look into that.

Mr. TOOTELL. If your financial statement is good enough, you see,

I am sure that they would make you one.

But the other point that I would make in connection with this is

that the production credit associations are not permitted by law to

borrow anywhere except from a Federal intermediate credit bank.

Mr. POAGE. Yes.

Mr. TOOTELL. And that has a bearing on this point.

Mr. WRIGHT. Mr. Chairman, also all of the assets of an association

really are pledged to the credit bank by virtue of the rediscount

agreement that each association has with the respective credit bank.

44-788-65------&
14 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

So this, in a sense, I think, would make it justifiable to make unsecured loans to all PCA's.

Mr. POAGE. You do that in one paragraph and then the -next

paragraph—I will not say paragraphs—but at the same time you

greatly increase the ratio of loans to assets. Now, all of this is

loosening up considerably your credit.

I think I recognize full well that we are going to have to always

keep increasing the amount of money that these people can borrow

because the demands are just larger and larger. That is the reason

we have not paid off this intermediate credit bank stock. The banks,

these production credit associations, have been called upon to make

more loans to their borrowers, they kave had to make more and more

loans to serve their borrowers, and, therefore, they get up to a 10-to-1

ratio, and you have to go, out and put more Government stock into

them, more Government capital into their capital structure, if they

are going to keep making loans. That, as I see it, is the basic reason

for the law of 1956 not having retired more of this capital than it has,

and I think that is going to continue; do you not?

Mr. TOOTELL. We expect our demand for credit to continue, Mr.

Chairman.

However, PA volume, I think we pointed out here, has increased

about 23/ times just since this act went into effect January 1, 1957.

Our conservative estimate is that our PCA volume will double in the

next 10 years.

I would point this out with regard to this ratio thing. The original

legislation that created the 12 intermediate credit banks provided for

this 10-to-1 debt-to-capital ratio. They were established presumably

to loan to livestock loan companies and agricultural credit corporations

that would be set up, and this was the case.

Most of those were weakly capitalized. They did not have experienced management, and this was considered by Congress to be

about as wide a ratio as should be permitted, and we think wisely so.

But I would point out that since 1934 practically all of the business,

90 to 95 percent of the business, of the Federal intermediate credit

banks has been with production credit associations; and before a

Federal intermediate credit bank can lose a dollar, a production credit

association has to go completely broke. No Federal intermediate

credit bank has lost a dollar on any loan made to a production credit,

association, or, in fact, on any loan made since 1934. In the meantime, the production credit associations have built up a very strong

net worth, and what we really are confronted with here is in a sense a,

double capitalization of the institutions in our system that are financing farmers.

There is, first, this capitalization of the credit bank, the discounting

bank, and then the capitalization of the primary lender, the production

credit association. We do not propose to reduce the capital structure,

you see, of the production credit associations. ' We propose to retain

this at 10 to 1.

But we feel that our experience indicates that now with the very

substantial capital structure in the production credit associations as

a backstop against any loss to the credit banks that we would be safe

in widening this ratio to a 15-to-1 systemwise.

Mr. POAGE. I do not mean it is necessary to argue with that.

But in Washington we have already liberalized our commercial
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 15

banking institutions by act of this Congress; at least the Federal

Reserve, we have liberalized that. That is one of several things the

Congress has done.

There has been a lot of liberalizing of credit, and I think that is

really the basis of what we want to consider here: Are we willing to

liberalize credit still further.

Personally, I think we must provide the additional source of credit,

and I think we have got to keep real clear, though, that we do not

want farm credit to become another FHA.

Mr. TOOTELL. Yes.

Mr. POAGE. I have great respect for the FHA, and I think it serves

a very worthy purpose. But I do not want you to serve that purpose.

I think that there is a difference in the field in which you should

operate.

Mr. TOOTELL. Mr. Chairman, I am very glad that you have

drawn this distinction. We certainly appreciate your understanding

of this distinct difference, and I would say that we do not propose

to lower the standards in our lending to farmers and ranchers.

Mr. POAGE. Well, it is almost inevitable that when you have plenty

of credit you are going to be a little easier in making your loans than

when you do not have.

I have observed that the ordinary bank, when it has a whole lot on

deposit is going to be a little easier to borrow money from than in

time when deposits are scarce.

Mr. TOOTELL. Mr. Chairman

'

we are under just the opposite

situation. When this banker has his deposits built up and he is

paying interest on them he is under pressure to get those loaned.

All of our money is hired in the market, and we only hire it as the

demand for it has manifested itself through the production credit

association and OFT loans, so we have no shortage of money. We are

able to get every dollar that is needed. There is no ceiling authorization on us.

The thing that determines the amount of money which we loan is

simply the number of sound loans that are submitted by farmers

and ranchers, and we go to the market and hire the funds that are

needed to cover them, and for the benefit of the new members of the

committee, I will point out, without a Government guarantee on them.

Mr. POAGE. Mr. Callan.

Mr. CALLAN. One thing that I would be interested in knowing

about: In our area the PCA and the Federal land bank are the two

agencies that sponsor the Nebraska football games.

Mr. TOOTELL. Sponsor which?

Mr. CALLAN. They are advertising on the radio that broadcasts

the Nebraska football games. In other words, they are out soliciting

loans and they sponsor the whole program throughout the year.

In other words

'

are they soliciting loans to promote their business?

Mr. TOOTELL. Yes, sir; they are soliciting business.

You see, the Federal land banks have been completely memberowned since 1947. The production credit associations are 999/00

percent farmer-owned, and they do solicit business, and they do that

for these reasons: One, an increase in the volume of business that an

association has permits it to extend credit at a lesser rate to its members than would be the case if it had a small volume.
16 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

We have a few associations in the United States that do have a

small volume of business, and because they have to pay the market

cost of money, plus the cost of maintaining an office, and doing business, their interest charged to their members is relatively high.

The objective of the production credit and the land bank is to

make loans to their farmer members at the lowest cost consistent with

sound business principles.

Mr. POAGE. Yes.

Mr. HARVEY. Governor, on page 13 up near the top of your statement you refer to a ceiling on dividends. I assume now this is referring to production credit.

MT. TOOTELL. Yes, sir.

Mr. HARVEY. And you are saying that they may pay dividends to

their borrowers. Is this now on their class B stock?

Mr. TOOTELL. On class B stock or on class A stock.

Mr. HARVEY. Not to exceed 7 percent. Now, I am intrigued to

know just what goes here. In the first place, do very many of your

PCA's after they have met all of their other reserve requirements and

so forth, get to the place where this becomes a factor?

Mr. TOOTELL. Well, Mr. Harvey, this depends upon how good a

year they have had. If the interest rate in the market, the cost of

money in the market, is going down, it will mean that the PCA

probably has good earnings for that year, and will pay a reasonable

dividend.

If, as happened this last year, the cost of money is going up, they

pass on this additional cost to the farmer as sparingly as possible.

They compress their net earnings. And last year, Mr. Wright, only

a relatively small percentage of the PCA's paid dividends, I believe.

Mr. WRIGHT. Well, 412 out of the 482 PCA's paid dividends on

class A stock in 1964 and 11 associations paid dividends on class B

stock in 1964.

Mr. HARVEY. How much was the dividend, how much was the

total of the dividends paid on class A stock?

Mr. WRIGHT. Well, let me see, the total amount in dividends was

$2,758,724, and most of this, of course, Congressman Harvey, would

have been class A stock dividends, because only 11 associations paid

dividends on B stock.

Mr. HARVEY. When they pay this dividend on class A stock, the

Government holds, the intermediate credit bank holds, that stock; is

that not right?

Mr. WRIGHT. No, sir, Mr. Harvey. The farmer borrowers.

Mr. HARVEY. The farmer borrower who continues to hold and carry

that stock becomes class A instead of class B when he ceases to become

an active borrower, and he holds the stock, so it is actually just the

same as if you would hold stock in any other enterprise so far as that

is concerned.

Mr. TOOTELL. Well, it is difficult to keep the credit bank operation

and the PCA operation clear and distinct, but this is the PCA operation referred to here.

I think we need to keep in mind that the class A stock in a production credit association is investment stock over and above the legal

requirement.

Now, the B stock requirement is a legal requirement equivalent to 5

percent of the maximum amount of the loan.
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 17

Many borrowers, many farmer members, in associations that have

been expanding rapidly have been prevailed upon to invest additional

sums in class A stock in order to help capitalize the association and,

therefore, when dividends are paid they are paid first on A stock which

is to those people who invested beyond the legal requirement.

Now, in a year in which PCA's make good earnings, why, a fairly

high percentage of them will pay some dividends, 2, or 3, or up to 4

percent on B stock, and would you not say that generally dividends

are not paid in excess of about 4 percent?

Mr. WRIGHT. Generally this is true.

Mr. HARVEY. Is that just sort of a Volley that you have persuaded

them to follow or is it a limit because they do not make more than

that?

Mr. TOOTELL. -Well, I would'say that it is both. There is not much

point in their pursuing a policy that would result in earnings which

would permit them to pay 7 percent. They try to operate in a way

that permits them to make just reasonable earnings out of which

ordinarily 3- or 4-percent dividends on B stock would be the limit.

Mr. HARVEY. That was my understanding. When I saw this 7-

percent figure there it intrigued me because if you were supervising

these PCA's adequately, and advising them with regard to the procedures, as I am sure you do, well, I Just do not think that 7-percent

figure is a very important one, really.

Mr. TOOTELL. It is not. It is simply a statutory limit or ceiling,

and we do not have to invoke that.

Mr. HARVEY. It would be like giving your boy a Volkswagen and

telling him not to drive over 120 miles an hour. That is all, Mr.

Chairman.

Mr. POAGE. Any further questions?

Mr. Teague.

Mr. TEAGUE. Yes, Mr. Chairman, I have one brief question. It

does not have to do with this specific bill, but it does have, I believe,

to do with—it does involve—the Governor's general area of responsibility.

It may not have come to your attention that California fruit and

produce growers are having a very difficult time because of their

inability to harvest their crops. I would hope it is temporary, but

I am not sure it is. It will be temporary if they can develop a domestic

supply or if the Government changes its policy to allow foreign supplemental labor to come in. But at the moment I am told that farmers

are having an increasingly difficult time in getting credit from commercial banks. It may be too early for you to have reached any

judgment on this. But have you yet noticed any increase in your

applications for credit in California from produce and tree farmers,

tree fruit farmers?

Mr. TOOTELL. Mr. Congressman, I was in California just the day

before yesterday. I flew back overnight in order to be here for the

hearing, and I met with the Berkeley Farm Credit Board and talked

with the officers in the intermediate credit bank. They are very

concerned, of course, about this labor shortage, but they said that to

date that it had not influenced their credit operations or their requests

for credit.

Mr. TEAGUE. Which probably—pardon me, Governor, it is probably a little early.

A
18 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

Mr. TOOTELL. Yes, I think that is right.

Mr. TEAGUE. There is citrus all year but lettuce and tomatoes are

also grown in the more northerly California counties. In several

weeks or more there will be the harvest peak, which I predict will be a

disaster situation.

Mr. TOOTELL. Later on this morning Mr. Glen Harris, a member

of our Federal Farm Credit Board from California, is going to testify,

and he might have something to add on that point.

Mr. TEAGUE. Thank you, Mr. Chairman.

Mr. POAGE. Mr. Dole.

Mr. DOLE. Just as a matter ot information, in the last decade, for

example, your volume of loans, of course, has increased. I am

wondering if the number of borrowers has gone down and you now

make bigger loans to fewer farmers?

Mr. TOOTELL. No, Mr. Dole, we are rather proud of the fact that

in spite of a very substantial decrease in number of farms, and I

suppose that would be at least a million and a quarter in the last

decade, that our number of borrowers has increased.

One of my assistants may be able to look up the increase in number,

but it has been fairly substantial. Our production credit associations,

I would say, had approximately 25 percent more borrowers in 1964

than they had in 1954.

Our Federal land banks had something like 20 percent more borrowers. Our banks for cooperatives had something like 35 percent

more borrowers. So it is a combination of number of borrowers and

also the size of the loan. The size of loan certainly has been going up

markedly.

Mr. DOLE. Do you have any figure on it, Mr. Wright?

Mr. WRIGHT. 

Yes, 

sir; I do. Since 1957 the number of PCA

members are up 55,507 or 11.5 percent since January 1, 1957.

We have a total membership now of 537,751.

Mr. DOLE. What percent of your loans are loans during that same

period?

Mr. WRIGHT. I would say roughly the same. This past year the

number of loans made were up a little less than that, but roughly the

same, I would say.

Mr. DOLE. If this ratio is changed from 10 to 1 to 15 to 1, how

much are we talking about making available in dollars on an estimate?

•Do you have any estimate on that?

Mr. TOOTELL. Well, the Federal intermediate credit banks in

calendar year 1964 loaned $4.7 billion mostly to production credit

associations.

As I indicated earlier, we believe that over the next 10 years that this

volume will double.

The effect of our proposed change in ratio would simply be to make

it possible to meet this increasing volume without having to go to the

Treasury for more revolving fund money. .

Mr. DOLE. Thank you.

Mr. POAGE. Are there any further questions?

If not, we are very much obliged to you, Governor.

Mr. TOOTELL. Thank you, Mr. Chairman.

Mr. POAGE. I believe next is Mr. Banks, if he would care to make

a statement. We will be glad to hear from him.

This is Mr. King L. Banks, chairman of the National Advisory

Committee of Production Credit Associations.
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 19

STATEMENT OF KING L. BANKS, CHAIRMAN, NATIONAL ADVISORY COMMITTEE OF PRODUCTION CREDIT ASSOCIATIONS

Mr. BANKS. Thank you, Mr. Chairman and gentlemen of the committee, my name is King L. Banks and I live in Delta, Colo. It is on

the western slope of the Rockies.

I am chairman of the Ninth District Production Credit Advisory

Committee. The ninth district is composed of Kansas, Oklahoma,

New Mexico, and Colorado. I represent the ninth district on the

National Advisory Committee of Production Credit Associations and

at present am chairman of that body. I am making this statement

in that capacity.

As background, I was born and reared on a farm and have been a

farmer all my life. Like Mr. Stone I am a farmer by proxy at present.

I still own the farm, of course.

I graduated from two agricultural colleges, the last one being the

University of Missouri.

I helped organize the Montrose Production Credit Association in

1933, went on the board and loan committee in February 1937, and

have served as a director ever since, becoming president in 1952.

I have served on the national committee for 10 years and have been

chairman the past 8 years. I am also a member of the Federal Land

Bank Association of Montrose.

The production credit associations in each of 11 farm credit districts

have formed an advisory committee, consisting of association directors,

that consults with the board of directors and officers of the Federal

intermediate credit bank of the district. Each district advisory

committee has named a representative to the National Advisory

Committee of Production Credit Associations. The national advisory

committee meets once a year in Washington to consider questions

submitted by the district advisory committees. Recommendations

emanating from that meeting are then discussed with the Federal

Farm Credit Board.

Our last meeting was here in Washington in April of 1964, at which

time the committee endorsed the proposed legislation which has since

been introduced as H.R. 4152.

Of the 482 production credit associations there are today only 2

associations with Government capital, the total of which is $40,000.

This is a reduction from a peak of $90.1 million in 1934.

Those of us who have worked with the production credit associations since they were first organized in 1933 and 1934 are proud of

this record. We look forward to the enactment of this bill, to the

end that the capital structure of the system may be employed more

effectively in meeting the credit needs of farmers and stockmen; and

that production credit associations may make more rapid progress

in acquiring capital stock in the Federal intermediate credit banks,

in order that retirement of Government-owned stock in the banks

may be expedited.

The proposed legislation has been thoroughly discussed with all

associations in the country. There was very little objection in these

discussions and they were on minor matters. As it now stands this

proposed legislation has the unanimous support of all production

credit associations.
20 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

I might say that this report I am making is in my own words, and

you may want to overlook some of my expressions in it.

In section 1(a) at present PCA's are restricted in their loa ng

capacities to a 10-to-1 ratio of their capital and surplus. A large

number of associations have built and own their own home as well

as branch offices, in some cases.

I might say in my own association we have three branch offices.

In addition, some have a small amount of acquired property obtained

in the process of liquidation of loans. The value of this real property

is not counted in this ratio. This has tied up a large amount of

capital and yet is excellent collateral. Section 1 (a) simply authorizes the Federal intermediate credit bank to recognize the value of

real property and other assets in making loans to the associations.

Here I might depart from this just a little bit. In Governor

Tootell's testimony, as far as the question on unsecured loans, gentlemen, everything we have got is in the intermediate credit bank. We

are buying the intermediate credit bank, and if we, as far as being

unsecured is concerned, if we cannot pay our loan they are going to

take the real property and the home offices and everything else we

have got.

Now, section 1(b), the present law restricts FICB's to a loaning

ratio of 10 to 1. I doubt if anyone in this room visualized what would

take place in Farm Credit when it was organized some 32 years ago.

Nor do I think very many foresaw 10 years ago what has taken place

since. Requirements for credit in farming have increased enormously.

Whether this movement of small farmers off the land is good or bad is

debatable but there can be no debate on the statement that larger

farm units for those who remain are an absolute necessity. Only

those small farmers with off-the-farm jobs are able to buck the tide.

This means more land, more livestock, and larger and more expensive

machinery. So the need for additional credit is fully justified.

Due to reasons mentioned and the loaning ratio of 10 to 1 the

FIBCS's have been bumping the ceiling. To keep their doors open

and to keep this avenue of farm credit available many have had to

ask for additional Government capital from the revolving fund. This

revolving fund as you know was set up with this in mind and is a

source of additional capital for the FICB's so that they can continue

to discount the paper of the PCA's and OFI's. The Farm Credit Act

of 1956 called for the PCA's to purchase the credit banks and by a

prescribed formula to orderly retire Government capital in the system.

This act also placed the FICB's on a cooperative basis so that net

earnings could be returned to PCA's and OFI's on a patronage basis.

The purpose of this section to raise the FICB ratio up to 15 to 1 is

mainly to obviate the credit banks having to call on the revolving

fund for additional capital in these rapidly changing farm credit times.

We feel that this is fully justified for the reason that the PCA's will

eventually retire all Government capital and own the system outright.

Section 1(c) (i) : It is felt that this change is desirable due to the

change in debt to capital ratio proposed in the preceding section.

Our managers and accounting departments recommend this and our

committee has agreed to it.

Section 1(c) (ii) : This was the only part of the proposed legislation

about which there was any question when it was presented to all

associations last year. It was very thoroughly discussed in all dis-
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 21

tricts and it was agreed that it would be for the good of the system

if due regard for the circumstances of the associations concerned were

taken into consideration. To show our good faith we agreed we would

go along with this change.

Section 1(d) : As mentioned before each FICB was set up on a

cooperative basis in the 1956 act and any earnings, after certain provisions in the law were complied with, were to be paid in B stock on a

patronage basis to each PCA and participation certificates to OFI's.

Among these regulations was one concerninc, certain additions to

reserves. However, there was no provision for allocating these reserves to the associations and the OFI's. The three paragraphs under

subsection (d) will provide for correcting this situation.

Section 2(a) : This will allow an association, with proper changes

in its bylaws, to follow the same procedure with its members as the

FICB proposes to do with associations. At present the surplus of

associations as well as the credit banks has never been allocated to

those responsible for its accumulation. This means that only on

dissolution could these funds be distributed. We have no intention

of dissolving so we should provide means for starting allocation of

these reserves. However, a cutoff date is necessary and this is set

for July 1, 1965.

If you will pardon me I would like to make a personal reference to

our own association in Colorado. We recently looked at a sample of

our loans which we have done periodically since 1955. We came up

with some startling figures. Our B stock members, who are active

farmers, have remained about the same in number although we made

some 608 new loans during this period. During this same period we

lost 563, very few of whom have gone to other financing agencies.

Some have moved away, some deceased and others just decided to sell

out and quit while they still had a little left.

With only a few more members on last January 1 than we had in

1955, our dollar volume of loans has increased almost three times,

from $3.5 million to $9.8 million.

Our average size loan has increased 2% times. Over half of our

members have outside income. This certainly emphasizes the necessity for passage of H.R. 4152 because we are sure this trend will continue at least for the foreseeable future and we want to be in a position

to serve the credit needs of our members.

I thank you gentlemen for the opportunity of appearing before you.

Mr. POAGE. Thank you very much, Mr. Banks. I do not want to

cut anybody off, but we just want to hear the rest of the witnesses.

If there are no questions of Mr. Banks, we are much obliged to you.

We will hear from Mr. Glen R. Harris, a member of the Federal

Farm Credit Board.

STATEMENT OF GLEN R. HARRIS, MEMBER, FEDERAL FAR1VI

CREDIT BOARD

Mr. HARRIS. Mr. Chairman and gentlemen of the committee, my

name is Glen R. Harris and I am just finishing up a 6-year term on

the Federal Farm Credit Board as the member from the 11th or

Berkeley Farm Credit District, which includes the States of Hawaii,

California, Nevada, Utah, and Arizona.

I have farmed since 1924 and that is also my present occupation.
22 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

I am now a borrower from and a member of the Chico Production

Credit Association in California and in the past I have been both a

director and president of the association.

From 1953 to 1959 I was a member and chairman of the National

Advisory Committee of Production Credit Associations, the position

Mr. Banks now holds.

I have always been interested in the relationship between the

production credit associations, which makes the short- and intermediate-term loans to farmers and ranchers, and the Federal intermediate credit bank which finances the associations in its district, and

I might add particularly interested in providing means by which the

farmers and ranchers may finally own the complete system.

When the Farm Credit Act of 1956 changed the operation of a

Federal intermediate credit bank toward a cooperative basis and

provided for the production credit associations to acquire capital

stock in the Federal intermediate credit bank of the district in substitution for capital stock held by the United States, the associations

were called upon to undertake certain responsibilities which they were

glad to do.

During 1957 and 1958 they purchased capital stock in the Federal

intermediate credit banks equal to 15 percent of the capital stock

then owned by the United States. This amounted to some $13.1

million and a corresponding amount of Government capital was retired.

Under the present bill, H.R. 4152, the production credit associations

may be called upon to purchase additional capital stock in the Federal

intermediate credit banks. I am sure that they will again be willing

to meet their responsibilities in this respect. However, it would be

tantamount to a breach of faith if, changes should now be made in

the basis set forth in the 1956 act under which the associations made

their initial purchase and embarked on a program for acquiring the

remaining capital stock in the Federal intermediate credit banks.

I mention this and would like to develop it a little further in view

of some statements made in the letter by which the Bureau of the

Budget cleared the present recommendations of the Farm Credit

Administration for submission to Congress. It is our thought that

none of the ideas contained therein should be given effect to hold up

or alter the provisions proposed in H.R. 4152.

As we see it, allocation on a patronage basis of the amounts retained

in the reserve account of a Federal intermediate credit bank will place

its operation on a more cooperative basis and will have the further

effect of adding to the net worth of the production credit associations.

Further, we see no way in which this would adversely affect the

'Government's interest.

When it enacted the Farm Credit Act of 1956, Congress specified

how the franchise tax for a Federal intermediate credit bank should be

computed for any year in which it had Government capital. At the

same time, Congress also provided that while a Federal intermediate

credit bank has Government capital the patronage refunds paid by it

to a production credit association in capital stock and to other financing

institutions in participation certificates should not be subject to

Federal income tax thereon to the recipient. Since both of such provisions will no longer have any application to a bank after its Government capital is retired, and since a basic objective of the present bill

is to expedite retirement of Government capital, we do not consider
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 23

that this is occasion for changing the decisions made by Congress in

these two respects as recently as 1956. Neither do we feel that the

present legislative proposals made by the Farm Credit Administration

should afford occasion for the suggestion that all existing tax exemptions of the Federal intermediate credit banks should be eliminated

upon retirement of Government stock.

I would like to hope, therefore, that you may see fit to act favorably

on the proposals that have been made to you by the Farm Credit

Administration.

Mr. POAGE. Thank you very much, Mr. Harris.

Any questions?

Mr. TEAGUE. I have no questions, but I would like to command

Mr. Harris, my fellow Californian on his very precise statement.

Mr. POAGE. Thank you, Mr. Harris.

Mr. HARRIS. Thank you.

Mr. POAGE. Now we will hear from my fellow Texan friend,

Mr. David Gault, who is a member of the Federal Farm Credit

Board. I know he is a practicing farmer and makes his living at

it, and, so far as I know, without any other profession.

• Mr. Gault, we will be glad to hear from you.

STATEMENT OF DAVID G. GAULT, MEMBER, FEDERAL FARM

CREDIT BOARD

Mr. GAULT. Mr. Chairman, it certainly is a pleasure to meet

before you today.

My name is David G. Gault and I am the member of the Federal

Farm Credit Board from the 10th or Houston Farm Credit District which consists of the State of Texas. Since 1945 I have been selfemployed in general farming and dairying. My present operation

is a 1,400-acre 200-milking cow dairy farm, plus replacement heifers

and small beef herd. I have also been general manager of the MidTex Milk Producers' Association since 1956. In the past I have

been a director of the Austin Production Credit Association, of which I have been a member since 1936. I have also served on the National Advisory Committee of Production Credit Associations.

• Others may mention it too but I do not believe it does any harm to

say it more than once. The production credit associations now have

over $2.1 billion loans outstanding to over 290,000 farmers and

ranchers. For 1964, there were over 360,000 loans made in the total

amount of $3.7 billion. The total of the member stockholders of these associations is 540,000. To finance the associations in making

these loans the Federal intermediate credit banks now have outstanding with the investing public over $2.1 billion of their consolidated

collateral trust debentures. This reflects a very great service being

rendered by the credit banks and associations.

I would like to express myself in favor of H.R. 4152 as recommended

by the Farm Credit Administration. I am just finishing the first

year of my 6-year term on the Federal Farm Credit Board and it was

largely during this period that the Board decided upon the proposals

included in H.R. 4152. Governor Tootell has explained in some detail why they are considered necessary. On that I would only

repeat that the changes made by the Farm Credit Act of 1956 will

need to be supplemented with some further amendments if the shift
24 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

from Government to private ownership of the Federal intermediate

credit banks is to be accomplished within a reasonable period of time.

I think it is important that the provisions of the bill be considered

in the light of the policy and purpose intended to be served by the

Federal intermediate credit banks and the production credit associations as heretofore specified by Congress. In the Farm Credit

Acts of 1953 and 1956 Congress declared as policy that borrower

participation should be increased and for the Government capital

in the Federal intermediate credit banks to be retired and replaced

with capital stock held by the production credit associations. If we

measure the present bill against this policy, as I think we should,

some of the comments made in connection with the bill are hardly

relevant.

Under such an approach it would seem inappropriate to suggest

that there now should be any change in the decisions made by Congress

in 1956 regarding the tax treatment of patronage refunds paid by a

Federal intermediate credit bank and the formula for computing its

franchise tax. Both of such provisions will be applicable only so

long as there is Government capital in a particular bank.

It would seem to follow also that any suggestion to eliminate all

existing tax exemptions of a Federal intermediate credit bank upon

retirement of Government stock is not relevant to the provisions

included in H.R. 4152 or to the policy and purpose intended to be

served by them. While the function performed by the Federal intermediate credit banks is much better known today and likely to be

taken for granted, that function is no less in the public interest than it

always has been. The law under which the credit banks were established provided certain general tax exemptions for the banks that are

in continuing terms. When the operation of the banks was changed

toward a cooperative basis in 1956, with provision for retirement of

Government capital and substitution of capital provided by the

production credit associations, no change was made in the continuing

tax exemptions of the credit banks. Since then the production credit

associations have pm-chased capital stock in the banks and we now are

looking to them to acquire more in order that the Government capital

may be retired within a reasonable time. In the circumstances, we

think that no change in the exemptions is indicated either by anything

in the present bill or otherwise.

Mr. Chairman, I want to express my thanks for the opportunity to

meet with this committee. I know time is running short and that

concludes my statement.

Mr. POAGE. We are very much obliged to you, Mr. Gault.

Are there any questions?

If not, we thank you so much.

We will now hear from Mr. Harry Graham of the National Grange.

STATEMENT OF HARRY L. GRAHAM, LEGISLATIVE REPRESENTATIVE, NATIONAL GRANGE

Mr. GRAHAM. Mr. Chairman, I am only going to call attention to

the first three pages of this now, and of the statement.

Mr. POAGE. Without objection, it will all be inserted in the record.

Mr. GRAHAM. I would like to also say that the last part of the

statement that has been prepared has been an attempt to answer

some of the objections that were raised by the Bureau of the Budget,
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 25

and having said that, I am going to leave it simply for your information.

Beginning in the middle of page 1, let me read for a little bit because

I think I can do it faster that way.

Our concern about farm credit is increasing because of developments during the last few years, which indicate the increasing need

and demand for long-term credit at reasonably low costs if the farm

operators who have continued to expand their operation as a means

of staying in business are to survive.

The phenomena of American agricultural production is based on a

technological revolution which has been the direct result of substituting capital for labor. This trend is increasing in tempo. It is

complicated by the fact that the prices for agricultural production

have not kept pace with the costs of production and consequently

the inputs into the agricultural plant have exceeded the outputs for

a number of years.

Another way of saying this is to remind this committee that farm

prices have reached a parity index of 100 percent only twice during

the last 50 years and each of these times was when the country was

either preparing for war or engaged in war. The parity index is

holding at a steady 75 percent.

The obvious result of this expansion of the productive plant without

adequate compensation has been that the farmers have been substituting credit for earnings. The capitalization both in land and in the

assets of production or the non-real-estate loans have been increasing

steadily.

I would point out to you that farm mortgage debt index has in-

'creased from 100 in 1950 to 249 in 1962. The non-real-estate debt

index has increased from 100 to 235 during the same period. All debt

has increased from 100 to 362 during this 12-year period; however, the

production assets have increased only from 100 to 277. In other

words, during this 12-year period the debt index increased by 262

points and the asset index increased by 177.

At present, most of the increase in assets is in real property despite

the continued increase in non-real-estate debts. Thi ; is also despite

the fact that increasing numbers of the so-called production or operating loans are being secured by mortgages on real estate.

At the same time the character of the loans has changed from the

regular commercial loans for short-term indebtedness to production

credit-type loans and to longer term, lower interest loans such as the

Farmers Home Administration. This is partly the result of the

availability of credit through our cooperative lending agencies or

through our Federal institutions but it is also partly a result of the

fact that the rural banks which supply the majority of the private

capital for the short-term loans have loaned up to their legal limitation.

Might I take just a second to say in these reports from the Independent Bankers Association and the Federal Reserve Board indicate

that they are loaning about 80 percent of their total deposits. Now,

they cannot go any further under legal limits. The reports that we

have had during the last week indicate that due to the change in the

interest rate which the Federal Reserve bank made recently, trying

to compensate for some of the outflow of gold or trying to control

that, due to that change these rural banks are telling us now they are

being forced to discount their loans somewhere between 95 and 100

•
26 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

percent, more of them toward the 95 percent than the 100 percent,

which means that the operating capital that they have been using is

being used up in this discounting of the loans.

Now, this kind of a situation is serious enough that the bankers

are beginning to worry very much about it, and I think we have got

to worry about it, too, and this is one reason why we are so enthusiastic about supporting this particular legislation, because we have a

fear there is going to be an increased demand for this kind of legislation

due to what is happening in our rural banks.

This was primarily what I wanted to call to your attention except

for one other thing, and that is the next paragraph.

Revised estimates of the total amount of real estate farm debt and

non-real-estate farm debt held by nonreporting creditors shows that

the non-real-estate farm debt, held by reporting institutions has increased from $2,834 million in 1950 to $9,465 million in 1964.

Of equal significance and more hazardous to the financial structure

of American farms is the fact that the debt held by nonreporting

creditors including merchants and dealers, consumers and sales

finance companies, and various nonreporting lending institutions,

individuals, and miscellaneous creditors, have increased from $2,320

million in 1950 to $6,720 million in 1964. It is also significant to

note that this last figure compares with an earlier estimate $4,500

million for debts held by nonreporting creditors.

In other words, our estimates on this have been too low until very

recently. This confirms the suspicions that some of us had in the

past.

Now, I think, with that statement I would conclude this except,

that I want to state for the record, that we are concerned with any

attempt to solve the problem of farm income on a permanent basis

by simply extending credit; that once this is done, and we think this

has to be done, we have still got to come to grips, and very rapidly

and very thoughtfully, with this whole problem of farm income and

what is involved in it, because only thus can we actually justify the

increase in farm credit in the amounts that seem to be required in

the future.

Mr. POAGE. Thank you very much, Mr. Graham.

(The prepared statement of Mr. Graham follows:)

STATEMENT OF THE NATIONAL GRANGE BY HARRY L. GRAHAM, LEGISLATIVE

REPRESENTATIVE, WASHINGTON, D.C.

Mr. Chairman, members of the committee, my name is Harry L. Graham.

I am the legislative representative for the National Grange.

We appreciate the opportunity to appear before this committee and its members

who have long distinguished themselves by their interest in the farm problems

and especially the problem of farm credit because the problems confronting

American farmers at this point are serious and they need the immediate attention

of this committee and the Members of the House of Representatives and the

Senate.

The National Grange has had a long history of interest in farm credit and

through the leadership of Mr. Albert Goss, former master of the National Grange,

and the present national master, Herschel D. Newsom, it has rendered significant

service to the field of agricultural credit.

Our concern, however, is increasing because of developments during the last

few years which indicate the increasing need and demand for long-term credit at

reasonably low costs if the farm operators who have continued to expand their

operation as a means of staying in business are to survive.
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 27

The phenomena of American agricultural production is based on a technological

revolution which has been the direct result of substituting capital for labor. This

trend is increasing in tempo. It is complicated by the fact that the prices for

agricultural production have not kept pace with the costs of production and

consequently the inputs into the agricultural plant have exceeded the outputs

for a number of years. Another way of saying this is to remind this committee

that farm prices have reached a parity index of 100 percent only twice during the

last 50 years and each of these times was when the country was either preparing

for war or engaged in war. The parity index is holding at a steady 75 percent.

The obvious result of this expansion of the productive plant without adequate

compensation has been that the farmers have been substituting credit for earnings.

The capitalization both in land and in the assets of production or the non-realestate loans have been increasing steadily. -I would point out to you that farm

mortgage debt index has increased from 100 in 1950 to 249 in 1962. The nonreal-estate debt index has increased from 100 to 235 during the same period.

All debt has increased from 100 to 362 during this 12-year period; however, the

production assets have increased only from 100 to 277. In other words, during

this 12-year period the debt index increased by 262 points and the asset index

increased by 177.

At present, most of the increase in assets is in real property despite the continued increase in non-real-estate debts. This is also despite the fact that increasing numbers of the so-called production or operating loans are being secured

by mortgages on real estate.

At the same time the character of the loans has changed from the regular

commercial loans for short-term indebtedness to production credit type loans and

to longer term, lower interest loans such as the Farmers Home Administration.

This is partly the result of the availability of credit through our cooperative

lending agencies or through our Federal institutions but it is also partly a result

of the fact that the rural banks which supply the majority of the private capital

for the short-term loans have loaned up to their legal limitation.

Reports from the Independent Bankers Association and the Federal Reserve

Board indicate that the rural banks at the present time are loaning about 80

percent of their total deposits which is their legal limit. Indeed, a number of

them are discounting their short-term farm paper for as low as 96 percent in

order to get capital on which to operate.

Revised estimates of the total amount of real estate farm debt and non-realestate farm debt held by nonreporting creditors shows that the non-real-estate

farm debt held by reporting institutions has increased from $2,834 million in 1950

to $9,465 million in 1964. Of equal significance and more hazardous to the

financial structure of American farms is the fact that the debt held by nonreporting

creditors, including merchants and dealers, consumers and sales finance companies, and various nonreporting lending institutions, individuals, and miscellaneous creditors, have increased from $2,320 million in 1950 to $6,720 million

in 1964. It is also significant to note that this last figure compares with an

earlier estimate $4,500 million for debts held by nonreporting creditors. In

other words, these debts are $2,220 million more than it was believed prior to a

recent revision of the estimates.

Much of this latter group of nonreported debts is of a relatively short-term

and high-interest character. The hazard is that many of these are demand

debts or they are exceptionally expensive to service. We must anticipate that

many of these must move from their present relationships into the more permanent type credit agencies. This movement will be rapidly accelerated if there is

any further deterioration in the price of agricultural commodities. Therefore,

we think that it is a matter of prudence and caution that legislative provision is

being proposed to deal with the anticipated needs of our agricultural producers

both in the cooperative lending institutions which they own and in the Farmers

Home Administration which makes credit available where no other credit can be

obtained. We congratulate both the distinguished chairman of this committee

for having introduced H.R. 4152 to amend the Federal Farm Loan Act and

Farm Credit Act of 1933 to provide means for expediting the retirement of Government capital in the Federal intermediate credit banks and to increase the

amount of debts permitted such banks in relation to their capital.

We urge passage of this legislation.

We have noted with interest the communication addressed to the Honorable

R. B. Tootell, Governor, the Farm Credit Administration and directed to the

attention of Mr. Paul 0. Ritter and which was written by Mr. Phillip S. Hughes,

Assistant Director for Legislative Reference of the Bureau of the Budget. This
28 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

letter was printed in the January 15, 1965, issue of the Congressional Record on

page 522 of the Senate section. The last paragraph of this letter dealt with the

specific criticisms of the bill from the Bureau of the Budget. This paragraph

reads as follows:

"With respect to specific provisions of the bill, we regard the proposed section

1(d), relating to the allocation of the FICB earnings as adversely affecting the

Government's interest and unnecessary to the basic objective of the bill. Further,

we believe that the basis for computing the franchise tax paid by the FICB's

should be modified to make it more consistent with the credit program policy

guidelines. We also believe that, in line with general tax policy, patronage refunds

received by the PCA's from FICB's in which the Government owns stock should

be made taxable. Finally, we believe that there should be provision for the

elimination, upon retirement of Government stock, of existing tax exemptions

afforded the FICB's."

In studying this bill it is our considered judgment that section 1(d) contributes

to the overall purpose and objective of the bill and we do not recognize any way

in which it should adversely affect the Government's interest. The other three

suggestions serve other interests and are not related to the specific provisions of the

bill or its overall purpose and objective. In the circumstances, it is not considered

that such suggestions either singly or collectively should be permitted to delay

H.R. 4152 or alter any of its provisions:

"With respect to specific provisions of the bill, we regard the proposed section

1(d), relating to the allocation of FICB earnings, as adversely affecting the Government's interest and unnecessary to the basic objective of the bill."

Section 1(d) would provide that the net earnings of a Federal intermediate

credit bank applied to its reserve account each year shall be allocated on the

same patronage basis and have the same tax treatment as is provided under

existing law for patronage refunds. This means that such amounts would be

allocated to production credit associations and other financing institutions in the

proportion that they pay interest to the bank and, while the United States owns

capital stock in a bank, that the recipients of such allocations shall not be subject

to Federal income taxes thereon.

As to a Federal intermediate credit bank, such allocations will put the annual

application of net earnings more completely on a cooperative basis. As to the

production credit associations, such allocations will increase their net worth for

several purposes, one of which would be to increase the permissible amount of

their borrowings from the Federal intermediate credit bank, since such borrowings are limited to 10 times their capital and paid-in surplus. In these respects,

therefore, section 1(d) seems appropriate to the basic objective of the bill.

We think it would be difficult to demonstrate, too, that allocation of Federal

intermediate credit bank earnings retained in reserve account would adversely

affect the Government's interest.

"Further, we believe that the basis for computing the franchise tax paid by

the FICB's should be modified to make it more consistent with the credit program

policy guidelines."

The reference presumably is to the report of the Committee on Federal Credit

Programs to the President of the United States which was transmitted by the

President to agencies with responsibilities for Federal credit programs on February

11, 1963. However, we have not located therein the specific 'guidelines" to which

it was intended that reference should be made. The intent may be that a Federal

intermediate credit bank with Government capital should compute its franchise

tax to yield a more equitable rate to the Treasury. The present standard for

computing the franchise tax is found in step (4) of the section which directs how

each Federal intermediate credit bank shall apply its net earnings at the end of

the fiscal year (12 U.S.C. 1072(a)) :

"(4) if said bank shall have outstanding capital stock held by the United States

during the whole or any part of its fiscal year, it shall next pay to the United.

States as a franchise tax, a sum equal to 25 per centum of its earnings then remaining, not exceeding, however, a rate of return on such Government capital

-calculated at a rate equal to the computed average annual rate of interest on all

public issues of public debt obligations of the United States issued during the

fiscal year of the United States Treasury ending next before such tax is due, as

certified to the Farm Credit Administration by the Secretary of the Treasury."

The foregoing formula was prescribed by Congress in 1956 and, as then intended,

we think this provision should be permitted to run its course which is until the

.Government capital is retired from a bank. In any event we see no relationship
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 29

between increasing the franchise tax payable by a Federal intermediate credit

bank which has Government capital and the provisions recommended by the

Farm Credit Administration that are now included in H.R. 4152.

"We also believe that, in line with general tax policy, patronage refunds received by the PCA's from FICB's in which the Government owns stock should

be made taxable."

Under amendments made by the Farm Credit Act of 1956, the operation of the

Federal intermediate credit banks was changed toward a cooperative basis.

The amended law specified how the net earnings of a Federal intermediate credit

bank were to be applied at the end of each fiscal year. After meeting all other

requirements, any remaining net earnings are required to be distributed as

patronage refunds. Whenever the United States holds capital stock in a bank,

the patronage refunds for that year must be paid in class B stock to production

credit associations and in participation certificates to other financing institutions

borrowing from or rediscounting with the bank during the fiscal year for which

such refunds are declared. Congress then made the further specific provision,

"The recipients of such patronage refunds shall not be subject to Federal income

taxes thereon" (12 U.S.C. 1072).

One reason for the quoted provision is that for Federal income tax purposes

there would always be the question of assigning any present market value to

"paper" refunds of this type. In any event, Congress enacted this provision

in 1956 with the intention that it should continue in effect until Government

capital was retired from a Federal intermediate credit bank. To the extent that

the present bill would make this same sentence applicable to allocations of earnings

retained in the reserve account of a bank, we think it is not only appropriate but

indicated that such account allocations should have the same tax treatment as

patronage refunds that are paid in capital stock and participation certificates.

"Finally, we believe that there should be provision for the elimination upon

retirement of Government stock, of existing tax exemptions afforded the FICB's."

The proposals now embodied in H.R. 4152 were made in furtherance of general

policy declared in the Farm Credit Acts of 1953 and 1956 for the Federal intermediate credit banks and the production credit associations. Any suggestion

that the existing tax exemptions of the Federal intermediate credit banks should be

eliminated upon retirement of Government capital stock is not relevant to the

provisions of H.R. 4152 or the objective or purpose it is intended to serve. We,

therefore, think that H.R. 4152 should not be held up by any such suggestion

which necessarily is to serve a different interest.

What we have been trying to say is that, although we recognize the reasons

for the objections raised by the Bureau of the Budget, we do not believe that they

are sufficiently important or sufficiently germane to require the attention of this

committee to the point that the proposed legislation should be amended to care

for these objections. In fact, we believe that much of the useful purpose of this

legislation would be destroyed if this was done; therefore, we urge the committee

to approve the legislation as it is written and submit it to the Congress which we

sincerely hope will also approve the proposal.

I would note in conclusion that every prediction which is available to us indicates

that the demand for credit by American farmers is going to continue and increase

during the present year. And therefore, we believe that the suggestions which

are made in these legislative proposals should be enacted into law with the greatest

dispatch that is consistent with the proper hearing and discussion techniques so

profitably employed by the Congress.

Meanwhile, necessity is laid upon us all to revise and improve our farm programs

and farm income so that the shadow of increasing farm indebtedness can be made

to disappear in the bright sunshine of adequate farm income.

Mr. GATHINGS. Mr. Graham, these figures are amazing to me, and

I wondered, did your research people on your staff compile these?

Mr. GRAHAM. We took them from available 

Mr. GATHINGS. Where did they take them from?

Mr. GRAHAM. We took them from the material we got from the

Farm Credit Branch of the Economic Research Service of the Department of Agriculture. These figures are available for anybody. We

just dug them out.

Mr. GATHINGS. They are authentic?

A
30 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

Mr. GRAHAM. They are authentic. They are the figures I received

yesterday. I presume they are still good today. Yes, they are

authentic figures from the Department of Agriculture.

Mr. GATHINGS. Thank you.

Mr. POAGE. Thank you, Mr. Graham.

We will now hear from Mr. Reuben Johnson.

Mr. BRUCE. I think he stated earlier that he would put his statement in the record.

Mr. POAGE. Without objection, his statement will be included at

this point in the record.

(The statement of Mr. Johnson follows:)

STATEMENT OF NATIONAL FARMERS UNION BY REUBEN L. JOHNSON, DIRECTOR

OF LEGISLATIVE SERVICES

Mr. Chairman and members of the subcommittee, I am Reuben L. Johnson,

director of legislative services, National Farmers Union. I appear today here in

behalf of Mr. James G. Patton, president, National Farmers Union, and the

700,000 members of National Farmers Union.

Farmers Union supports this bill under consideration by the subcommittee.

The following brief comments will further explain the views of our organization.

H.R. 4152

On behalf of our members who are able to qualify for loans through production

credit associations and Federal intermediate credit banks, we support this bill.

The bill has the strong endorsement of the Board of Directors of the Farmers

Credit Administration. Further, we understand the bill is fully consistent with

the policies established in the Farm Credit Acts of 1953 and 1956.

In expanding our comments, Mr. Chairman we would like to refer to a letter

from the Budget Bureau to the Governor of the Farm Credit Administration

dated December 1, 1964.

In the last paragraph of the Budget Bureau letter, reference is made to the

allocation of the earnings of Federal intermediate credit bank as adversely affecting the Government's interest and unnecessary to the basic objective of the bill.

As we understand the matter, these earnings now applied to the reserve account

of Federal intermediate credit banks are not allocated. It is difficult to see how

allocations of such earnings would adversely affect the interest of the Government

and we hope that Congress will make no change in the proposed method of

allocation.

The last paragraph of the letter relates also to the computation of franchise

tax paid by a Federal intermediate credit bank each year that Government

capital is used. The present formula for the computation of this tax was specified

when Congress enacted the Farm Credit Act of 1956. We see no need or justification for any change in the procedure spelled out in earlier legislation.

Also called for in the Budget Bureau letter is a change in the tax policy whereby

patronage refunds received by production credit associations from the Federal

intermediate credit banks in which the Government owns stock would be made

taxable. The changes called for in the computation of the franchise tax and for

the taxation of patronage refunds have no further effect or use when Government

capital has been repaid. Therefore, we do not understand why the current legislative proposal which would encourage repayment of Government capital should

be made the occasion for changing the direction given by Congress in 1956 to

lending activities of these credit institutions.

The last change called for in the Budget Bureau letter is elimination upon

retirement of Government stock of the tax exempt status of the Federal intermediate credit banks. We would further point out that we see no relationship

of such change to the purpose of the proposed legislation and we urge the subcommittee not to alter the existing provision of the Farm Credit Act of 1956.

We appreciate very much the opportunity to appear before the subcommittee

in behalf of these bills.
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 31

FARM CREDIT

TABLE A.—Changes in farm debt

Year

Farm mortgage debt

1950-62 nonreal-estate

debt 1

All debt 1

Production

assets

1950 

1962 

100

249

100

222

100

362

100

277

1 Excludes CCC loans.

TABLE 13

[In millions of dollars]

Year

Non-real-estate debt (excluding CC C

loans)

Earlier

estimates of

non-realestate debt

held by nonreporting

creditors

Total

(revised)

Held by reporting

Institutions 1

Held by nonreporting

creditors

(revised) 2

1950 4,930 2,710 2,220 2,200 1958 8,814 4,994 3,820 3,500 1964 16,185 9,465 6,720 4,500

1 All operating banks, production credit associations, Farmers Home Administration, and Federal inter, mediate credit banks.

2 Merchants and dealers, consumer and sales finance companies, various other nonreporting lending institutions, individuals, and miscellaneous creditors.

Mr. POAGE. We have Mr. Lynn representing the American Farm

Bureau of Federation. I believe he sent someone else.

Mr. NAY. Mr. Lynn stepped out.

Mr. POAGE. We will be glad to hear from you.

STATEMENT OF PAUL NAY, PRESIDENT, WEST VIRGINIA FARM

BUREAU

Mr. NAY. Mr. Chairman, and gentlemen, I am Paul Nay, president

of the West Virginia Farm Bureau. I am a dairy farmer from West

Virginia. I have used farm credit system loans in my own farming

operation for 25 years. I have been a member or a director of Clarksburg, W. Va., farm credit office at that office for close to 20 years.

Most of the statement that I have prepared has been covered

thoroughly by Chairman Stone, Governor Tootell, and some of the

others who have already appeared. So, Mr. Chairman, with your

permission, I would like to file the statement.

Mr. POAGE. Without objection it will be included in the record.

Mr. NAY. And confine my remarks to the Farm Bureau's support

of H.R. 4152.

The American Farm Bureau Federation represents 1,647,455 paid-up

member families in 49 States and Puerto Rico. The membership

includes farmers and ranchers from every part of the country who

produce every kind of agricultural commodity, and who use the

farm credit system.

Now, if you are following my statement, I would refer you to page 3.
32 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

Farm Bureau has supported the farm credit system. At our most

recent annual meeting a policy- dealing directly with the issue before

this subcommittee was adopted as follows:

We recognize the value of the enactment during recent years of a series of laws,

beginning with the Farm Credit Act of 1953, to provide for an independent bipartisan Farm Credit Board, retirement of Government capital, preservation of

revolving funds, and decentralization of authority to increase ownership and

control of farm credit institutions by farmers and ranchers. We support the

continuation and development of these principles. We oppose efforts to establish

Federal budgetary control over farm credit institutions or the surpluses existing

therein.

Now, gentlemen, we recognize that all H.R. 4152 is designed to

enable the Federal intermediate credit banks on the production credit

associations to serve and expand needs of farmers and ranchers

better—to serve the expanded needs of farmers and ranchers; to

reduce or eliminate the need for additional Government capital and

to retire the Federal capital now in the system at an increasing annual

rate.

This is to be accomplished by increasing the debt-to-capital ratio

permitted by the Federal intermediate credit banks from 10 to 1 to

15 to 1.

The effect of this amendment would be to allow the banks to have

outstanding obligations for their benefit and account equal to 15

times their paid-in capital and surplus. The current limit is 10 to 1.

Also we recognize the bill provides for mandatory retirement of

the Government capital now in the banks. It provides further for

additional purchase of class B stock in the Federal intermediate credit

banks by the production credit associations.

We believe the proposed amendments would strengthen the system

by providing more adequate credit for modern-day farm needs and,

at the same time, speed up the retirement of Government capital,

thus hastening the day when the farm credit system will be wholly

owned by farmers.

We, therefore, recommend favorable consideration of H.R. 4152.

Thank you, gentlemen.

(The prepared statement of Mr. Nay follows:)

STATEMENT OF THE AMERICAN FARM BUREAU FEDERATION BY PAUL NAY,

PRESIDENT, WEST VIRGINIA FARM BUREAU

The American Farm Bureau Federation represents 1,647,455 paid-up member

families in 49 States and Puerto Rico. The membership includes farmers and

ranchers from every part of the country who produce every kind of agricultural

commodity, and who use the farm credit system.

H.R. 4152 would amend the Federal Farm Loan Act and the Farm Credit Act

of 1933 to provide means for expediting the retirement of Government capital

in the Federal intermediate credit banks. It would authorize an increase in the.

debt permitted such banks in rehtion to their capital, and also provide for production credit associations to acquire additional capital stock in the banks.

There is a Federal intermediate credit bank in each of the 12 farm credit

districts. These banks make funds available to production credit associations

and other eligible financing institutions by discounting agricultural paper.

Throughout the country there are some 483 production credit associations with

the number varying from 26 to 77 in the 12 farm credit districts. These associations are chartered by the Farm Credit Administration and operate under theprovisions of the Farm Credit Act of 1933, as amended.

From 1923 through 1956 the Federal intermediate credit banks were wholly

owned by the United States. Beginning in 1957, under amendments made by

the Farm Credit Act of 1956, the capital stock of the banks was divided into
OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS 33

class A stock, issued to and held only by the Governor of the Farm Credit

Administration on behalf of the United States, and class B stock, issued only to

production credit associations. At the same time the plan for FICB operations

was changed to a cooperative basis. Under the 1956 act, as long as there is

Government capital in a Federal intermediate credit bank, net earnings each

year after restoring any impairments of capital stock, participation certificates,

and surplus must be applied as follows:

(1) Twenty-five percent goes to a reserve account until it reaches a specified

level.

(2) Up to 25 percent of what then remains, but not more than the Treasury

cost of the Government capital in the bank, is next paid to the United States

as a franchise tax.

(3) Dividends of not to exceed 5 percept may then be paid on outstanding

class B stock and participation certificates.

(4) The remaining net earnings are distributed as patronage refunds by

issuing class B stock to production credit associations and participation certificates to other financing institutions.

Under the 1956 amendments, it was expected that the capital stock of the

Federal intermediate credit banks held by the United States gradually would be

retired and that eventually all of the capital stock of such banks would be owned

by production credit associations. However, under the existing law the banks

have not been making the progress in retiring Government capital that was

expected when the 1956 amendments were adopted.

Although the 12 banks added $67.1 million to net worth out of earnings during

the 7 -year period from January 1, 1957, through June 30, 1964, growth in loan

volume made it necessary for some of the banks to obtain additional Government

capital out of the revolving fund available for that purpose in order to stay within

the statutory 10-to-1 debt-to-capital ratio. As a result the banks now have

nearly $33.2 million more Government capital than on January 1, 1957.

Farm Bureau has supported the farm credit system. At our most recent

annual meeting a policy dealing- directly with the issue before this subcommittee

was adopted as follows:

"We recognize the value of the enactment during recent years of a series of

laws, beginning with the Farm Credit Act of 1953, to provide for an independent

bipartisan Farm Credit Board, retirement of Government capital, preservation

of revolving funds, and decentralization of authority to increase ownership and

control of farm credit institutions by farmers and ranchers. We support the

continuation and development of these principles. We oppose efforts to establish

Federal budgetary control over farm credit institutions or the surpluses existing

therein."

H. R. 4152 is designed to enable the Federal intermediate credit banks and the

production credit associations to serve the expanded needs of farmers and ranchers

better, to reduce or eliminate the need for additional Government capital, and to

retire !the Federal capital now in the system at an increasing annual rate. This

is to be accomplished by increasing the debt-to-capital ratio permitted the Federal

intermediate credit banks from 10 to 1 to 15 to 1. The effect of this amendment

would be to allow the banks to have outstanding obligations for their benefit

and account equal to 15 times their paid-in capital and surplus. The current

limit is 10 to 1.

The bill also provides for mandatory retirement of the Government capital

now in the banks. It further provides for additional purchases of class B stock

in the Federal intermediate credit banks by the production credit associations.

We believe that the proposed amendments would strengthen the system by providing more adequate credit for modern-day farm needs and, at the same time,

speed up the retirement of Government capital thus hastening the day when

the farm credit system will be wholly owned by farmers.

We, therefore, recommend favorable consideration of H. R. 4152.

Mr. POAGE. Thank you very much, Mr. Nay. Any questions? If

not, we are much obliged to you.

Now we have a request from Mr. Richard T. O'Connell for permission to file a statement, and without objection that request will be

granted.

JI
34 OPERATIONS OF FEDERAL INTERMEDIATE CREDIT BANKS

(The prepared statement of Mr. O'Connell referred to follows:)

NATIONAL COUNCIL OF FARMER COOPERATIVES,

Washington, D.C., February 17, 1965.

Hon. W. R. POAGE,

Chairman, Special Subcommittee on Conservation and Credit,

House of Representatives, Washington, D.C.

DEAR MR. POAGE: This letter is to indicate our support of H.R. 4152. We

support the bill in its entirety for the following reasons:

(1) The change of the ratio of the lending limits from 10 times the surplus

and paid-in capital of all the banks to 15 to 1 will expedite the retirement of

Government capital; will reduce the input of money from the revolving fund,

while continually providing expanding credit needs for farmers. '

(2) Of significance is the fact that the production credit associations will

be required to purchase additional capital stock in the Federal intermediate

credit banks.

It has been the position of the National Council of Farmer Cooperatives to continually support progressive development of the farm credit system and we

believe the amendment to the Farm Credit Act of 1933, as written in H.R. 4152,

will continue to meet the goals of agriculture by providing a viable and useful

farm credit system.

We urge the passage of this measure and its adoption into law. I would appreciate your making this a part of the record for H.R. 4152.

Thank you.

Sincerely,

RICHARD T. O'CONNELL, Secretary.

Mr. POAGE. Is there anyone else who would like to be heard on

this bill? If not, that will conclude the hearings.

The committee will meet in executive session at 3 o'clock this

afternoon.

(Whereupon, at 12:20 p.m., the subcommittee was adjourned, to

reconvene subject to call of the Chair.)

NI