its credit services to farmers and ranchers has been due in a great measure to the constructive type of supervision which has placed emphasis on local responsibility, training, decentralization, and farmer ownership, with the objective that each individual association will so conduct its operations as to provide a well-rounded, shortterm-credit service at reasonable cost.

Adequate supervision of the same constructive type-in working with the farmer directors and officers who make the credit decisions is essential in the future if the associations are to continue to perform their intended functions. Proper management of the affairs of production-credit associations involves heavy responsibilities (279,500 loans for $1,342,000,000 in the calendar year 1952).

Like other businesses, there is a continuing turnover on the associations' boards of directors and among the officers and employees. The changing economic conditions and important shifts in type of agriculture require continuing reappraisal of policies and practices if the credit services are to be of most value to the individual farmers. Occasionally the affairs of an association get into a serious condition, due to a breakdown of local management or the sudden development of problems which are beyond the capacity of that management, requir ing intensive supervision by the production-credit corporation in the interest of the association and its credit service to farmers.

The need for supervision is accentuated by current economic conditions. In the past year or more, net income of many farmers and ranchers has been seriously reduced. Drought over wide areas has cut back crop yields and greatly limited feed supplies for livestock in those regions. Severe drought still presents great hazards in some large areas. Declining prices have prevented many operators from meeting their full anticipated loan repayments. These conditions have combined to cause substantial carryovers in many associations. The number and amount of problem loans are increasing, and the need for close and constructive attention to loans facing difficulties is urgent. In this situation the need for the experienced supervision of the corporations is more pressing than at any time in recent years. It is very important that the corporations be able to spot unfavorable trends or serious weaknesses in association operations and to help the associations to take corrective action before major problems or losses develop.

Even in more normal periods, crop and credit conditions change from year to year. Credit supervision is not a matter of routine but varies widely with the years and with the different areas and types of agriculture. This supervision is directed toward the maintenance of the balanced loan policies under which the extension of credit is kept on a sound basis both for the lender and the borrower and under which special care is taken to avoid unwise liquidation of loans and unwillingness to make loans which should properly be made.

THE JOB OF SUPERVISION

The production credit corporations are responsible pursuant to specific provision of law and delegations by the Governor for the establishment of basic policies for the production-credit associations in their respective districts and they supervise the operations and lending practices.

A basic job is to help the associations set and follow sound loan policies: Under a board of farmer directors and with the supervision of the production-credit corporation of the district the executive committee of each individual association has full authority and_responsibility in making loans within broad policies except that loans to directors and officers and loans which are large in relation to an association's capital structure can be made only with the approval of the production-credit corporation of the district and in some instances also with the approval of the Production Credit Commissioner.

The production credit corporations make credit examinations of the associations: In supervising credit, designated field representatives of the corporations, in addition to their regular supervisory contacts from time to time during the year, make an annual credit review of the policies and procedures of each association. This includes a credit examination of the outstanding loans which constitutes part of the annual examination of each association as required by law, the cost of which is assessed to the associations. The reports of these credit examinations are utilized by the boards of directors of the associations in making provision for actual and estimated losses on loans in addition to other uses.

These field representatives review their findings with the association boards of directors or executive committees and with association personnel. This affords an opportunity for thorough consideration of the credit policies and practices of the associations illustrated by specific examples and serves as a basis for supervision and training activities throughout the year.

The production credit corporations have important responsibilities for the capitalization of the associations: These include practical action in encouraging the associations to build reserves and increase stock ownership by members, for getting the associations into a position where they are able to retire their corporation-owned capital. After that they help the associations to continue to provide necessary capital structure from local sources so that their future demands for supplemental capital from the corporations will be unnecessary or if necessary in individual cases will be held to a minimum. Thus, the supervisory responsibilities of the corporations with regard to association capitalization continue after associations become wholly member-owned, inasmuch as it is necessary for all associations to build and maintain net worth in a reasonable ratio to the amount of outstanding loans.

In addition to the foregoing the production credit corporations have other specific supervisory responsibilities and duties of importance to the successful operation of the system: These include prescribing the amount of certain association reserves; regulating association investments; and approving or disapproving dividends and the compensation of personnel.

In supervising the general operations of the associations, field accountants and other specially qualified personnel of the corporations make periodic reviews of operating methods and procedures, office management, accounting, budgeting, and means of safeguarding funds.

Practical training programs promote sound credit, efficiency, and economy: In carrying out the objectives of the legislation under which the associations were organized, it is the purpose of the corporations

to see that the directors, officers, and employees of the associations, particularly new incumbents, receive necessary training for the proper discharge of their duties and responsibilities. Thus, the corporations conduct certain essential training programs and encourage the associations to supplement this work of the corporations, at their own expense, by additional training activities designed to meet the particular requirements of individual employees or groups of employees.

ADMINISTRATIVE EXPENSES, 1954

The revised 1954 budget provides for $1,465,000-an average of $122,083 per production-credit corporation-to meet salary costs, travel, and other administrative expenses for the year ending June 30, 1954. The job of carrying out necessary supervision of the production-credit associations places very heavy workload on the personnel of the corporations as provided for in the budget.

The personnel strength of the 12 corporations for 1954 as provided for in the revised budget is 171 (man-years). This is an average of 14 per corporation as compared with 25 in 1940. This reduction in personnel has taken place notwithstanding the fact that loans made by the associations per year have increased 22 percent in number and more than 4 times in amount since 1940 and that the need for close supervision of the lending activities of the associations has been increased by the more difficult credit situation as discussed above.

THE CAPITAL RESOURCES OF THE PRODUCTION CREDIT CORPORATIONS SERVE AS A BACKLOG OF FINANCIAL STRENGTH TO THE SYSTEM

Adequate capital structure in relation to loans is necessary in each association as a matter of sound financial management and to provide a satisfactory ratio to support rediscounting of farmers' notes and other borrowings from the Federal intermediate credit bank of the district.

It is a recognized objective that farmer stockholders of each associa tion should build and maintain adequate capital in their associations; however, providing supplemental capital is a function of the production credit corporations when such a step is the only recourse in the interest of dependable credit service. An example is seen in the Kansas flood in the summer of 1951. The Production Credit Corporation of Wichita, with the consent of the Governor of the Farm Credit Administration, made a commitment to supply additional capital up to a total of $2 million to provide immediate financial support to 8 production credit associations located in the flood area based on requests of the associations and on-the-spot appraisal of need by the president of the production credit corporation in collaboration with the association boards of directors. Only $975,000 was invested in capital stock of these associations, of which all but $150,000 has since been retired, but the authorization and availability of the larger sum was an important factor in meeting the conditions which attended that disaster. Through the corporate powers and funds of the production credit corporation these commitments were made and the additional capital supplied immediately.

In such cases promptness of action is of the highest importance. The existence of standby capital resources in the production credit

corporations available for immediate use in case of need is an element of great strength to the system.

OVER TWO-THIRDS OF THE INITIAL GOVERNMENT CAPITAL HAS BEEN

RETURNED

The paid-in capital of the production credit corporations has been reduced from the maximum of $120 million as authorized by the Congress in 1933, to $36.2 million at present, and is expected to be further reduced to $31.7 million by June 30, 1954. Of the $88.3 million reduction, $30 million was returned to the surplus fund of the Treasury and $58.3 million will have been returned to the Treasury revolving fund established in 1933 for the production credit system. The present paid-in capital of the corporations is intact.

From their capital funds provided by the Government, the corporations have maintained certain investments in the capital stock of the production credit associations. These investments have been reduced from a peak of approximately $90 million in 1934 to less than $8 million at present and are expected to be further reduced to $4 million in 1954.

I have here a short supplementary statement which I would like to insert in the record at this point to complete my remarks. Mr. ANDERSEN. That will be satisfactory. (The information referred to follows:)

SUPPLEMENTARY DATA REGARDING PRODUCTION CREDIT ASSOCIATION OPERATIONS

Appraisal of the work and responsibilities of the production credit corporations can best be made through a review of the operations, problems, and progress of the production credit associations which they supervise. The following summary gives general information regarding the operations of the associations as an indication of the scope and significance of the supervisory job of the production credit corporations and the effectiveness of their leadership and supervision in carrying out the responsibilities placed upon them.

1. The 477,000 farmer-stockholders of the 499 associations own $90.4 million of capital stock of the associations.

2. The investment of the production credit corporations in the capital stock of the associations has been reduced to $7.3 million.

3. Accumulated earnings total $80.4 million.

4. Two hundred and eighty associations are wholly farmer-owned.

5. The associations made 279,500 loans for $1,342,000,000 in the calendar year 1952.

6. Half of the loans made in 1950 (latest data available) were for less than $1,225 each, including all advances during the year.

7. Most of the loans are made on a budgeted basis with an average of more than 4 advances and 4 repayments per loan. Borrowers pay interest only for the time the money is outstanding.

8. Loans are made for general agricultural and production purposes and, with few exceptions, have a maturity not in excess of 1 year.

9. A typical association serves 6 counties; the 499 associations maintain over 1,500 offices (some of them part time), and there are many other points where applications for loans may be made.

10. Responsibility for the operations of each of the associations rests in a board of directors, usually consisting of five members, elected by and from the farmer-stockholders of the association. Loans are made and disbursed by the associations under the authority of their executive committees with no other approvals except for loans to directors and officers and loans of unusual size.

11. Losses are chargeable first against reserves and the class B capital stock owned by farmer-stockholders before there is any loss on the class A capital stock, if any, owned by the production credit corporations.

12. Total losses and estimated losses on association loans from organizations to December 31, 1952, have amounted to about one-seventh of 1 percent of the cash advanced.

13. The associations obtain most of their loanable funds by discounting farmers' notes with and other borrowings from the Federal intermediate credit banks. The current discount rate charged by the credit banks is 2% to 24 percent.

14. Associations pay their operating expenses, and interest on borrowed funds, absorb losses, and build reserves from the interest and fees paid by farmers and from interest on investments. The current interest rate of most associations is 51⁄2 to 6 percent. The average cost of loans to members in 1952, including amounts paid for record searches, filing, or recording mortgages and other fees was 6.4 percent per annum.

15. Every borrower must own stock in the association equal to at least 5 percent of the amount of his loan; many members not currently borrowing continue to retain their stock.

16. All associations are subject to taxes on real and tangible personal property. Associations that are completely member-owned pay Federal, State, and local taxes like other comparable privately owned businesses.

17. No impairment exists in the capital stock of any association. The rapid progress toward farmer-ownership of the production credit associations during the last 6 years is shown by the following table which reflects the latest available information:

Number of farmer-stockholders.

Capital stock owned by farmer-stockholders (par value).

Percent of total net worth..

Total legal reserves and surplus.

Percent of total net worth..

Capital stock owned by production credit corporations (par value).
Percent of total net worth..

Total number of associations.

Number of associations having attained complete farmer-ownership. Number of other associations where the capital stock owned by farmerstockholders plus total accumulated earnings represent 75 percent or more of the total net worth.

1 Includes 13 associations which fully repaid the corporations' class A stock investment on Jan. 1, 1953. Supplementing the preceding tabulation there follows a table showing, as of December 31, 1952, by Farm Credit districts and States, the number of production credit associations, total number of their member-stockholders, and capitalstock investment in these associations.