Mr. Miles will tell you, I am sure, that the delinquency on the part of borrowers who are members of production credit associations is for the most part very nominal, and only in actual disaster areas has there been an unusual carryover this past year.

The borrowers from the banks for cooperatives are farmers cooperative associations themselves, and their repayment record is very excellent. There is practically no delinquency among farmer cooperative associations which are borrowers from our banks for cooperatives.

AGRICULTURAL MARKETING REVOLVING FUND

Mr. WHITTEN. I notice you have two special funds. What is the use of the agricultural marketing revolving fund? How much is in the fund at this time?

Mr. TOOTELL. This gets back into history quite a little way. The funds which were used to capitalize the 13 banks for cooperatives which were created in 1933 came from this revolving fund. It came into being with the Agricultural Marketing Act of 1929 which created the old Federal Farm Board which had, you remember, a two-pronged program to aid agriculture. One was to stabilize agricultural prices and the other was to promote and encourage cooperative marketing of farm products. The latter received a good deal of emphasis. Many people have the feeling that the $500 million which Congress appropriated in 1929 for that program all went down the drain, but actually out of it was salvaged more than $180 million which was used to capitalize the banks for cooperatives.

For the technicalities with regard to the money which is in that revolving fund, I am going to turn to Mr. Bagwell, our General Counsel, who is more thoroughly familiar with that.

Mr. BAGWELL. The law provides, Mr. Chairman, that this money shall remain available for investment in stock of the banks for cooperatives if they should need additional capital. As the Government capital in these banks is retired, the money goes into the revolving fund and remains available for reinvestment in the stock of the banks. Mr. WHITTEN. Is that a security feature in this area, similar to what you did with regard to local PČA associations?

Mr. BAGWELL. That is correct. We have almost all the Government capital out of the PCA's. In fact, it was down to a little less than $2 million when the crop disaster struck this past year. It is up somewhat now. But all the while we have had a revolving fund of $60 million to take care of the PCA's in just such situations as we found ourselves in recently.

Mr. WHITTEN. In that connection and for the record, that $60 million fund and such part of it as you have used this year is not going down the drain, so to speak. In advancing that money you take a first lien, do you not, on the class A stock of the production credit associations? In other words, that becomes a preferred claim against the assets of the association. Am I right in that?

Mr. BAGWELL. Yes, that is right.

Mr. WHITTEN. In other words, you buy an interest in the local production credit associations. Since they have built up their assets to the degree that they have, in most instances you have many times as much to look to as you actually have put new money back into them. Is that correct?

Mr. BAGWELL. Yes, sir. This Government-owned stock is preferred upon liquidation if we ever reach that point.

Mr. WHITTEN. The net worth of the associations as of today is several times the amount of new money that you have advanced through this mechanism.

Mr. BAGWELL. That is correct.

Mr. WHITTEN. That would be true, would it not, for any sizable part of the revolving fund which you have to secure the future needs of the banks for cooperatives?

Mr. BAGWELL. That is correct.

Mr. WHITTEN. In other words, that has many times the value of what you would be expected to advance if ever called on by that source?

Mr. BAGWELL. That is correct.

Mr. WHITTEN. In that connection, too, you would take preferred stock or have a prior lien on the assets of that operation if you ever did step in?

Mr. BAGWELL. That stock is also preferred upon liquidation. These revolving funds are there, may I say, to assist the banks until they are able to walk alone, so to speak. Land banks, of course, no longer have need for a revolving fund and we hope that some day the banks for cooperatives and the PCA's may reach that point, but that is some distance down the road yet.

FEDERAL INTERMEDIATE CREDIT BANKS

Mr. WHITTEN. I notice you have an estimate for the Federal intermediate credit banks for only 6 months. What is the occasion for that?

Mr. TOOTELL. Again, Mr. Chairman, I would like to have Mr. Miles take that question.

Mr. MILES. The Farm Credit Act of 1956, which provided for the merger of the production credit corporations and the Federal intermediate credit bank in each of the 12 districts, provided that we would need to continue submitting budgets to the Bureau of the Budget for the intermediate credit banks until January 1, 1959. Beyond that time, the intermediate credit banks will operate in the same way as do the Federal land banks and the banks for cooperatives. They have their own boards. They will establish their own budgets. They will be reviewed by us in the Farm Credit Administration the same as we now review the budgets for the banks for cooperatives. But after January 1, 1959, they will not be required to submit their budgets to the Bureau of the Budget for review.

Mr. WHITTEN. What is the Federal intermediate credit bank investment fund? What is the occasion for that and what is its use?

Mr. MILES. That $40 million is earmarked in the Treasury for investment in the class A stock of the Federal intermediate credit banks should they need additional capital to adequately serve their respective territories.

Mr. WHITTEN. That is not the source of the funds that you have advanced to PCA's?

Mr. MILES. No, sir. We have two revolving funds-one of $60 million which can be used for investment in class A stock or class C stock

of production credit associations, and another of $40 million which can be used for investing in class A stock of the Federal intermediate banks.

I might state that none of that $40 million is being used at the present time.

Mr. WHITTEN. Is that another example of the fund you have discussed in connection with the bank for cooperatives, as well as the one you have used for the production credit associations?

Mr. MILES. Yes, sir.

Mr. WHITTEN. I believe that answers the question.

AUTHORIZATIONS TO DRAW ON THE TREASURY INSTEAD OF CASH IN HAND

Governor, I have not asked the question directly, because I think the testimony clearly shows the necessity for retaining these special funds. The action which has been found necessary with regard to the production credit associations is representative of the fact that the funds for the other two sources of credit might on occasion be just as essential. What is the status of these funds while you hold them? Are they invested in bonds or are they merely credits which you have at the Treasury where no money is actually involved?

Mr. TOOTELL. The latter is correct. They are simply an authorization which we have to draw upon the Treasury for given amounts. Mr. WHITTEN. So there is no expense involved in carrying it? Mr. TOOTELL. There is no expense involved to the Federal Government. There are no funds that are sterilized, you might say, and tied up there except as we find it necessary to call upon the Treasury for them. As Mr. Miles pointed out, there is $60 million in the revolving fund of the production credit associations, and recently we called upon the Treasury for $2 million of those $60 million to use in subscribing stock in the associations in these distressed areas.

REVOLVING FUND OF INTERMEDIATE CREDIT BANKS

There has been a little use made of the revolving fund of the credit banks in the last 3 years because of the rapid growth in volume of business of some of the intermediate credit banks. They have gotten such a big volume of business at times that their legal ratio is threatened. The legal ratio is 10 to 1. That is, the peak outstanding is not permitted by law to exceed by more than 10 times their net worth. It has been necessary to subscribe to the paid-in surplus of 2 or 3 of the intermediate credit banks in the past 2 years. Is that right, Mr. Miles?

Mr. MILES. Until the 1956 act, we had subscribed to the paid-in surplus of four of the banks, I believe.

Mr. ToOTELL. At the present time, none of the authorization in the intermediate credit bank revolving fund is being used.

Mr. WHITTEN. Governor, we wish to thank you for this fine presentation. I notice that you have some other prepared statements. We would be glad to have those presented in such way as you might wish. Mr. ToOTELL. I believe I mentioned Mr. Matthews' and mine and asked that they be entered in the record, and I should like to ask that Mr. Miles' prepared statement with regard to the intermediate credit bank system also be included in the record.

STATEMENT OF HAROLD A. MILES CONCERNING FEDERAL INTERMEDIATE CREDIT BANKS

Mr. WHITTEN. We will have Mr. Miles' statement at this time. Mr. MILES. This statement provides information concerning the functions and operations, together with the related financial requirements, of the 12 Federal intermediate credit banks. Each bank operates under the direction of a district board of directors, subject to examination and general supervision by the Farm Credit Administration. All interest costs and operating expenses of the banks are paid out of their corporate funds.

ORGANIZATION AND FUNCTIONS

The Federal intermediate credit banks, which were established by the Agricultural Credits Act of 1923, serve as banks of discount for agriculture and do not make loans directly to individuals. These banks are an increasingly important factor in furnishing a continuing supply of short- and intermediate-term credit to finance farmers and stockmen. They discount agricultural and livestock paper for and make loans to production credit associations, agricultural credit corporations, livestock loan companies, commercial banks, and similar local financing institutions, with their endorsement. The credit banks are the only source from which the 497 production credit associations borrow to meet the credit requirements of their stockholder-members; and approximately 100 other agricultural credit organizations finance most, if not all, of their agricultural loans by borrowing from or rediscounting paper with the banks. In order to more effectively utilize surplus cash which arises from time to time in the farm credit system, the intermediate credit banks were authorized by the Farm Credit Act of 1956 to make loans to and to borrow from the Federal land banks as well as the banks for cooperatives.

Since January 1, 1957, the banks have had the added responsibility of supervising and supplying assistance to the production credit associations which, prior to that date, were supervised by the production credit corporations. It is estimated that these associations will extend over $134 billion of credit to farmers and stockmen during fiscal 1959, and will have upward of $1 billion of loans outstanding at the end of that period.

LENDING OPERATIONS

The banks' volume of business is governed primarily by the demand for credit which, in turn, is a reflection of general agricultural and economic conditions, volume of agricultural production, the level of production costs, crop yields, prices of agricultural commodities, and other factors over which the banks have no control. The volume of credit extended by the banks has increased sharply during the past 10 years. The $2,286 million of credit extended in fiscal year 1957 was greater than in any prior year in the history of the banks, and was more than twice the amount of credit extended in 1947 (10 years earlier). The 1959 budgets of the banks are based upon an estimated loan volume of $2,500 million for the year, of which $1,172 million is expected to be handled during the first 6 months. Continued high farm operating costs in relation to the level of commodity prices, together with unfavorable growing and harvesting conditions in some areas, tend to maintain credit needs at a high level.

FINANCIAL REQUIREMENTS

The paid-in capital of the Federal intermediate credit banks, together with their accumulated surplus reserves, constitute the capital base upon which they finance their lending operations. Lending funds are obtained by the banks through the issuance and sale to the investing public of consolidated collateral trust debentures and by other borrowings, and thus do not affect Treasury expenditures. Liability on the part of the United States Government for the debentures and other obligations of the credit banks is expressly denied in the law. No Federal intermediate credit bank may have outstanding at any time debentures or similar obligations in excess of 10 times its surplus and paid-in capital. The peak debt-to-capital ratios ranged among the banks from 4.7 to 1 to 9.9 to 1 during the year ended June 30, 1957, and was 6.4 to 1 for the 12 banks.

As of January 1, 1957, upon merger of the production credit corporations in the credit banks, the banks had total net worth of $150,471,704 consisting of $87,405,000 of class A stock held by the Governor of the Farm Credit Administration on behalf of the United States and $63,066,704 of permanent surplus. No part of this surplus may be distributed as patronage refunds or dividends. The foregoing figures do not include subscriptions by production credit associations to class B stock in the banks or any payments received thereon. As required by the 1956 act, the associations subscribed to class B stock in the credit banks as of January 1, 1957, in the total amount of approximately $13.1 million, of which one-third was paid at the time of the subscription, one-third by December 31, 1957, and the remainder is payable on or before December 31, 1958.

Class A 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.

From January 1 to June 30, 1957, the Federal intermediate credit banks retired $4,501,130 of the class A Government-owned, capital stock. By June 30, 1958, a further substantial payment will be made to the Treasury in retirement of capital stock. These payments derive principally from payments made by production credit associations on their subscriptions to class B stock of the banks. When all class A stock is retired 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.

Pursuant to the Farm Credit Act of 1956, the Federal intermediate credit bank revolving fund of $40 million, which was established in 1934 to provide additional capital to the Federal intermediate credit banks if needed, will be increased eventually to $70 million as the last $30 million of the Government's investment in class A stock of the banks is retired.

SUPERVISION OF PRODUCTION CREDIT ASSOCIATIONS

On January 1, 1958, there were 497 production credit associations making short and intermediate-term loans to farmers and ranchers throughout the continental United States and Puerto Rico. These