Credit outlook During 1958 the agricultural situation is likely to be characterized by a relatively stable level of farm income. Farm operating costs are expected to continue at a high level, which will make it necessary for farmers to continue to strive for efficiency of production. Therefore it is expected that the demands for shortterm and intermediate-term credit will continue at a high level to pay operating expenses and to make capital investments for improvement of efficiency and shifting to farm operations which are the most profitable. On the other hand, the demand for long-term farm mortgage loans may be affected by the continued reluctance of farmers to make long-term commitments at the currently high level of interest rates. The demand for loans from the banks for cooperatives is expected to increase because of continued high level of operating costs. Also, the banks for cooperatives probably will be called upon to finance cooperatives which are undertaking more completely integrated operations. It is probable that in 1958 the farm credit banks will be able to obtain loan funds from the investment market at rates of interest lower than those paid during the peak months of the calendar year 1957. Reductions in the rates charged borrowers, however, will not be made until the average costs of all funds borrowed are brought down to levels consistent with the rates on loans. LENDING FUNDS OF THE FARM CREDIT AGENCIES The lending funds used by the farm credit system are obtained primarily from the sale in the investment market of bonds and debentures. In this way, the farm credit agencies provide an effective link between farmer-borrowers and the investing public. The farm credit securities—consolidated Federal farm loan bonds, consolidated Federal intermediate credit bank debentures, and debentures of the banks for cooperatives-are not guaranteed by the Government either as to principal or interest but are secured principally by notes and mortgages deposited as collateral with the Farm Credit Administration. These securities are considered by the market to be prime investments. INTEREST RATES On borrowings.-Paralleling the movement of interest rates generally, the interest cost of new issues of securities by the farm credit banks rose substantially during 1957. Rates eased rather sharply in the last 2 months of the year, benefiting the Federal intermediate credit bank debenture offerings in November and December. The Federal land banks and banks for cooperatives, however, had no occasion to enter the market in those months. Rates on Federal intermediate credit bank 9-month debentures issued in 1957 rose from 3% percent on January 2 to 4% percent on November 1, then dropped to 4% percent on December 2 and to 3.65 percent for the debentures offered in December for delivery January 2, 1958. (These are face rates and do not reflect dealers' commissions.) The average cost (including dealers' commissions) of Federal intermediate credit bank debentures outstanding was 4.37 percent on December 31, 1957, as compared with 3.61 percent a year earlier. The banks for cooperatives entered the market 7 times in 1957 with debentures of various terms from 6 to 10 months. The face rates of interest ranged from 34 percent for 61⁄2-month debentures issued April 1 to 5 percent for 10-month debentures issued November 1. The average cost (including dealers' commissions) of their debentures outstanding was 4.74 percent at the end of the year as compared with 3.08 percent on December 31, 1956. The Federal land banks had 4 bond offerings in 1957, each consisting of 2 issues, and varying in term from 1 to 15 years. The face rates of interest ranged from 3% to 4% percent and the cost to the land banks (reflecting offering price and commissions to dealers) ranged from 3.98 percent for 1-year bonds issued May 1 to 4.89 percent for 16-month bonds issued October 1. It is interesting to note that on the latter date the banks issued 13-year bonds costing only 4.56 percent-a reflection of the fact that short-term rates had risen faster and exceeded long-term rates by that time. The average cost of land-bank bonds outstanding was 3.59 percent on December 31, 1957, as against 2.83 percent a year earlier. On loans. All of the farm credit banks were impelled to increase their lending rates during 1957, under pressure of the rising costs of borrowed funds. Approximately two-thirds of the production credit associations also raised their rates to their member-borrowers, either in 1957 or effective January 1, 1958. At December 31, 1957, 3 of the land banks were charging 6 percent and the other 9, 52 percent. Effective January 2, 1958, 6 of the credit banks were charging 44 percent on loans and discounts and 5 were charging 4% percent. The remaining bank is currently following a procedure on an experimental basis under which it charges interest on all loans and discounts outstanding each month at a rate calculated to cover its cost of borrowed money for that month plus a margin fixed from time to time by its board of directors, with the approval of the Farm Credit Administration. The lending rates of the banks for cooperatives at the end of the year ranged from 44 to 5 percent on commodity loans, from 41⁄2 to 5 percent on operating capital loans, and from 41⁄2 to 51⁄2 percent on facility loans. On January 1, 1958, the interest rates charged by production credit associations ranged from 5 to 8 percent, with 466 of the 497 associations in the 6- to 7-percent range. THE FARM CREDIT SYSTEM The farm credit system is comprised of 12 districts, each having a district office through which agricultural credit services are available to farmers and their cooperatives everywhere in the United States. The banks located in the 12 district offices are engaged either in making or discounting loans to farmers and their cooperatives or in the supervision of the lending activities. The agencies in the system, their activities, and recent developments are described briefly below. Federal land banks.-The Federal land banks make amortized real estate mortgage loans through national farm loan associations which are credit cooperatives located in farm communities to provide convenient service to farmers. The banks have been wholly owned by farmer-borrowers since 1947, through ownership of stock in national farm loan associations. As authorized by the Farm Credit Act of 1955 (69 Stat. 664), and to improve credit service, the banks may now make loans based on security appraisal reports made by persons other than land-bank appraisers, but subject to their review. Normal agricultural values used in such appraisals were recently reviewed by Farm Credit Administration to reflect the current situation. Maximum loan limits were raised to $200,000 subject to review by Farm Credit Administration of loans over $100,000 to one person. Abolishment of Federal Farm Mortgage Corporation The Federal Farm Mortgage Corporation has been inactive, except for the liquidation of its loans and the program of the sale of its mineral reservations, since July 1, 1947, when its authority to make mortgage loans expired. Effective September 7, 1957, mineral reservations remaining unsold were transferred to the Secretary of the Interior in accordance with the provisions of legislation enacted in September 1950 (7 U. S. C. 1035). The Government's remaining investment in the capital stock of the Corporation, which had been reduced from $200 million to $10,000 at June 30, 1957, was retired during September 1957. The Corporation has authority, subject to the approval of the Secretary of the Treasury and limitations in appropriation acts, to issue and have outstanding at any one time federally guaranteed bonds in an aggregate amount not exceeding $2 billion, to make collateral loans to the Federal land banks, and to purchase their bonds. Banks for cooperatives.-These banks make loans to finance the operations of farmer cooperatives. Title I of the Farm Credit Act of 1955 (69 ̊ Stat. 655), provided for several changes, the more important of which are provisions for permanent investment in the banks by borrowing cooperatives and others and retirement of the Government's investment, the selection of up to 6 of the central bank's 7 directors by the district banks and cooperatives rather than appointment by the Governor of the Farm Credit Administration, and limitation on central bank to make loans only when not practicable for district banks to lend. The banks had $25.2 million of capital owned by cooperatives on June 30, 1957, and $147.3 million owned by the Government of which an estimated $5.7 million will be repaid in 1958 and an additional $5 million in 1959. Federal intermediate credit banks.-Pursuant to the Farm Credit Act of 1956 the 12 production credit corporations were merged in the 12 Federal intermediate credit banks as of January 1, 1957. With minor exceptions all assets, liabilities, and functions of the production credit corporations were transferred to the credit banks. Capital stock of production credit associations formerly held by the production credit corporations was transferred to Farm Credit Administration, effective January 1, 1957, and any future investments by the Government in class A or class C stock of the associations, will be made by the Governor of the Farm Credit Administration out of the PCA revolving fund in the United States Treasury. The banks provide discount facilities for production credit associations and other financing institutions making loans to farmers and stockmen. They also supervise the operations of the associations, including all phases of their lending activities and furnish various services to assist the associations in conducting their operations. As of June 30, 1957, the Federal intermediate credit banks had $82,903,870 of Government capital, represented by class A stock. This stock is to be retired over a period of years out of the proceeds of purchases by production credit associations of class B stock in the banks and from net earnings of the banks, after which the banks will be wholly owned by the production credit associations. Net earnings of the banks will be distributed as patronage refunds in the form of class B stock to production credit associations and participation certificates to other financing institutions, which will replace the class A stock being retired. Under the provisions of the Farm Credit Act of 1956, the production credit associations were required, within 60 days after January 1, 1957, to subscribe to class B stock in the credit banks in the total amount of approximately $13.1 million, of which one-third was to be paid at the time of subscription, one-third by December 31, 1957, and the remainder by December 31, 1958. Of the 497 production credit associations, 455 were completely member-owned at December 31, 1957 and the remaining 42 associations had a total of only $1,700,000 of Government capital at that date. Net worth of farm credit institutions at June 30, 1957 131 percent of total net worth is capital paid-in by the U. S. Government. * Less impairment of class B stock of $52,435. Selected data on operations.-Farm credit system activities are further illustrated in the following tables: Farm credit system-Amount of loans and discounts made, fiscal years 1954 through |