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associations operate approximately 1,100 field offices in addition to the headquarters offices, and make loans amounting to about $134 billion annually.

Each of the 12 intermediate credit banks is responsible for the supervision of the associations in its district. This supervision covers all phases of the associations' activities and is carried out largely through the banks' officers and employees working with directors, officers, and employees of the associations. The banks place particular emphasis upon sound and constructive credit service to farmers and ranchers, efficient and economical operations, adequate capital and reserves, and an effective training program for association personnel.

Among the important supervisory responsibilities of the banks is the administration of rules and regulations prescribed by the Farm Credit Board of the district, with the approval of the Farm Credit Administration, governing lending policies and practices. Within limitations prescribed by law as to the maximum liability of a borrower to an association each production credit association has general authority to make loans upon the approval of its loan committee. Loans for larger amounts as well as loans to directors and officers require the further approval of the bank or its board of directors and, in some instances, the Farm Credit Administration.

The law requires that each production credit association be examined at least once each year by examiners designated by the Gov-. ernor of the Farm Credit Administration. Examinations of accounts, records, and financial assets are made by examiners employed by the Farm Credit Administration. The outstanding loans of each association are reviewed and classified as to quality by employees of the intermediate credit bank of the district who are designated for that purpose by the Governor. These credit examinations include a comprehensive review of credit policies and practices followed by the associations, with special attention to weak loans as well as any unsound or ineffective credit and collection practices. Thus, credit examinations made by employees of the banks serve not only to complete the overall examination of the associations as contemplated by law, but they also provide an effective means by which the banks carry out an important phase of their supervisory responsibility and, at the same time, provide helpful assistance and guidance to the associations. The cost of examinations of the production credit associations is assessed against and paid by them. The Federal intermediate credit banks perform their supervisory work with production credit associations largely through employees especially trained in agricultural credit and in other phases of association operations. In addition to assisting associations in maintaining sound and constructive lending policies and practices, the banks advise with and assist association directors, officers, and employees in such matters as building and maintaining adequate capital resources, efficient, and economical management and operating procedures; effective safeguards for funds; maintenance of necessary accounts and records; and strengthening membership relations.

Among other things the banks are responsible for prescribing minimum surplus requirements for associations, approving dividend payments, prescribing interest rates, regulating investments, and approv

ing compensation of association personnel. The banks also recommend to the Governor of the Farm Credit Administration any needed changes in association organization papers, bylaws, or regulations; the furnishing of additional capital out of the revolving fund available for that purpose; and the retirement of Government capital from any association which has resources available therefor.

OTHER FINANCING INSTITUTIONS

The Federal intermediate credit banks also maintain close contact with the financing institutions other than production credit associations to which they extend credit. Periodic examinations of agricultural and livestock credit corporations are made by the banks to determine their financial condition and the quality of their loans and discounts, as well as to see that they adhere to the terms of their agreements with the banks.

CREDIT PROBLEMS FACED BY BANKS

The cost-price squeeze has made it necessary for many farmers and stockmen who were able to operate with their own cash resources to turn to banks and other lenders for loans to finance production costs, and has made it more difficult for others to pay their obligations out of current income. Within the past few years large areas of the country have suffered extensive damage from such conditions as drought, floods, and freezes, some of which lasted for considerable periods. These adversities have caused low yields and partial or total crop failures, and their effect will be felt several years longer. The reduction in net farm income resulting from these and other unfavorable developments has created difficult credit and operating problems for the banks and associations in assisting borrowers to work out of their difficulties and to maintain their loans on a sound basis. Farmers and stockmen who are in a seriously extended debt position will require several years of more favorable conditions to recover.

ADMINISTRATIVE EXPENSES

The administrative expenses of the 12 banks are estimated at $1,693,000 for the 6 months ending December 31, 1958. The amount requested is at the same annual rate as the $3,375,000 available for 1958. All expenses of the banks are paid out of their income and not out of funds appropriated from the Federal Treasury.

In view of the increasing volume of agricultural paper the banks are being called upon to handle and the economic conditions presently facing agriculture, with their resulting credit problems, the $1,693,000 budgeted for administrative expenses for the 6 months ending December 31, 1958, is believed to be the minimum amount needed to enable the banks to continue to maintain their lending operations on a sound and constructive basis, and to provide effective supervision of the production credit associations, to see that the system continues as a source of sound and dependable short- and intermediate-term credit for farmers and stockmen.

Mr. WHITTEN. You might touch on the highlights of this subject, Mr. Miles, since the members of the subcommittee through the years

have been familiar with your operations. We would be glad for you to point out any highlights that you might like to discuss.

Mr. MILES. Mr. Chairman, the record of the short-term credit system, the intermediate credit banks, and production associations for 1957 has been one of substantial growth and represents greater service to the farmers of our country.

VOLUME OF LOANS

The production credit associations during the calendar year 1957 lent their members $1,731 million, which is the largest amount that they have lent in their history. That compared with $1,488 million the year before. The intermediate credit banks reached a peak in their loans and discounts last year of $1,013 million, which is the first time in the history of the banks that their loans and discounts exceeded $1 billion outstanding.

From the standpoint of the capital structure of the associations and the intermediate credit banks, I think you might be interested to know that as of the end of 1957, the farmers of the country had invested in their production credit associations $113.5 million and the Government's investment at that time was $1,700,000, making them better than 98 percent farmer-owned.

Since that time, as the Governor has mentioned, we have reinvested $2 million in some of the associations in this disaster area to make it possible for them to serve their territory. At the present time we have invested in the production credit associations $3,700,000.

As far as the intermediate credit bank is concerned, as of January 1, 1957, when the Farm Credit Act of 1956 became effective, the Government owned capital in the intermediate credit banks of $87,405,000, and there was created by that act, by taking the surplus of the corporations and the intermediate credit banks, a surplus of slightly over $63 million, giving the 12 banks a total net worth of a little over $150 million.

Since that time, the PCA's have invested through purchase in these banks a total of $8,742,000, and there has been retired to the Government a total of little over $4.5 million.

At the present time the farmers through their production credit associations own about 10 percent of the stock in the intermediate credit banks.

INTEREST RATES

With regard to interest rates, you are all familiar with the fact that the cost of money until the last few months continued to increase. We reached a high as far as intermediate credit banks was concerned of 4.975 for the debentures we sold in October for November 1 delivery. Since that time interest rates have reduced, until last month we sold our debentures and had to pay a total cost of 2.55 percent.

The discount rates of the intermediate credit banks, the rates they charge production credit associations, and other financial institutions, which is a wholesale rate, is as follows: Seven banks have a 4-percent discount rate; one has a 334-percent rate; one with 434; one 414; and one 412.

We expect the boards of those that are above 4 percent to act this week to reduce those rates. We do not expect that the rates this month would be less than about 334 percent.

Mr. ANDERSEN. I note on page 9 of your explanatory notes that you

make this statement:

The average cost of land-bank bonds outstanding was 3.59 percent on December 31, 1957, as against 2.83 percent a year earlier.

Mr. MILES. That is right. I am discussing the Federal intermediate debentures.

Mr. ANDERSEN. But, generally speaking, it seems as though the cost of money has gone up, has it not, and it is still up?

Mr. MILES. It reached its peak for us in our October sale for November 1, when we paid 4.975 percent.

Mr. ANDERSEN. October of 1957?

Mr. MILES. Yes, sir.

Mr. ANDERSEN. That is when it reached its peak?
Mr. MILES. Yes, sir.

COST TO REA OF PRIVATE BORROWING

Mr. ANDERSEN. We have had considerable discussion in this subcommittee relative to a proposal to try to get private money for REA, and this subcommittee is very doubtful as to the prospect for REA securing funds at anywhere near what we consider to be their fortunate position today, and that, of course, means 2-percent loans from the Treasury.

Am I far off in saying this: If the REA were to go out into the private money markets of the land that it would probably cost them 5 percent for that money? Would you be prepared to say?

Mr. MILES. I would not

Mr. ANDERSEN. Would you like to put an answer of some sort in the record at this point to that question?

Mr. TOOTELL. I would be glad to make a statement with regard to it. Mr. ANDERSEN. I would like your opinion as to what the picture would be relative to REA were they to go out in the open market to get funds.

Mr. MILES. At the present time our production credit associations are charging as follows: We have 188 of the 497 charging 6 percent or less and 389 of the 497 are charging in excess of 6 percent.

Those rates are somewhat higher than they were before the cost of money started upward about 2 years ago, but if this trend and the cost of money moves down or stays where it is, these high rates can be reduced some after we have had some time to work out some of the highcost money.

Mr. ANDERSEN. If you wish to extend your remarks you may do so. Mr. MILES. I have covered the high points in my statement.

Mr. ANDERSEN. I want to joint with you in thanking these gentlemen for coming before us this morning, Mr. Chairman.

Mr. WHITTEN. You may complete your reply to Mr. Andersen at this point.

Mr. ToOTELL. A good deal would depend on the type of organization which was set up as a means by which the REA's would undertake to go into the market to get funds from the public, what type of security they were able to offer and for what length of term they would offer securities. Those things are very important.

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I would cite the fact that the 12 Federal land banks have been selling their bonds to the investing public as a means of obtaining loan funds for 41 years. The market is well established for Federal land bank bonds, and they sell very favorably in comparison with bonds of similar term that are issued by large industrial corporations. They sell more favorably. They sell almost as favorably as bonds of similar term issued by the Federal Government, although the land bank bonds are not an obligation of the Federal Government.

By the same token our Federal intermediate bank debentures have been before the public for 35 years and they are well known, they are well received, they are well collateralized, and as a result we are able to sell intermediate credit debentures at an interest rate only slightly higher than the Federal Government has to pay at the time for debentures of similar term.

Usually intermediate credit bank debentures are for 9 months. Mr. Miles indicated that last October it was necessary to pay 4.975 percent interest rate.

He also indicated that the cost of money in the money market has dropped to a point where last month it was possible to sell our intermediate credit bank debentures for an overall cost of 2.55 percent.

We are going to be selling something more than $140 million of those debentures tomorrow, and we are guessing that we will be able to sell them at 2.10 or not over 2.15 total cost, including commission, because the money market is continuing to go down.

I remind you again that these are not an obligation of the Federal Government.

Now I will go back from this point to my original statement that it would make a tremendous difference as to what type of security the REA's offered in the market. Perhaps it would be a Government guaranteed security.

Mr. NATCHER. At that point, just assume that to be true.

Mr. TOOTELL. If the REA were to set up some sort of corporation, or however it might choose to do this, and issue a security which was guaranteed by the Federal Government, I would say that such a security would sell in the open market, even though it was a brandnew security, at perhaps even more favorable terms than our farm credit securities because it would be fully guaranteed as to principal and interest by the Federal Government. That would be our assumption. If it did not have that Government guaranty, however, I would not hazard a guess as to what it would sell for because there would be no telling what kind of security there would be behind it and how the public would look upon it.

If it did not have a guaranty, I feel sure it would take it a number of years to become established in the market and get so that it would compete on terms anywhere near as favorable as those which we are able to command in the farm credit system.

INTEREST RATES

Mr. VURSELL. What are the interest rates in the farm bank? Mr. TOOTELL. Our present cost of money for intermediate credit bank debentures which we will be selling tomorrow, Mr. Vursell, we believe we will be able to sell them with a coupon of not over 2.05 percent, and then there will be a one-tenth commission on top of that.

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