FACTORS THAT DETERMINE INTEREST RATES

Mr. DUGGAN. That is correct. The factors that determine the interest rate of the land banks, for instance, are, first, cost of loan funds, that is, the cost of borrowings including bond issues; two, the operating cost; three, the amount of reserve and surpluses they need to accumulate, and a small margin of safety. That fixes the rate that the boards determine subject to approval by Farm Credit Administration. Mr. HORAN. It is also influenced by repayments and solvency of the borrower.

Mr. DUGGAN. The size of loans and the total volume of loans affects to a considerable amount the operating cost and it so happens that in the Columbia district we have the smallest loans on the whole of any district. The New Orleans district also has small loans but the New Orleans district has built up rather large reserves, partly through income from oil and mineral holdings. We have pushed very hard to increase the reserves and surplus and net worth of the land-bank system so that it can meet a leveling off or a period of delinquent loans and not have to come back to the Government for any capital. The land banks are fully farmer-owned. They have over $300 million of capital reserve and surplus. At a ratio of 10 to 1, they could increase loans 3 times what they are today without asking for additional capital and every time they make a loan they increase the capital by 5 percent of the loan. So we arrive at the interest rate, taking those factors into consideration. And we have been able on that basis, where some of the banks had a large net worth and used part of their own funds in lending, to keep down the cost of money. That is the reason some of them can lend at 4 percent, otherwise they could not today because you cannot sell long-term bonds, 8-to 10-year bonds, for less than about 3 percent and the operating cost is more than 1 percent. I do not know anybody who can operate on a 1-percent margin.

The bonds issued in May 1952 and January 1953 to refund maturing issues, repay commercial bank borrowings, and provide new money increased the average cost of the banks' funded debt from 1.71 to 2.41 percent per annum.

When we have to refund next year and possibly borrow this year, that rate will go on up to above 2.41 possibly to 2.75.

None of the Federal intermediate credit banks increased their lending and discount rates during the past year. Two of the banks reduced their rates. Currently, 8 of the banks are charging 234, and four 25% percent. However, 1 of the banks in the latter group will increase its lending rate to 234 percent effective March 1, 1953. In comparison, the average cost of debentures issued increased somewhat, from 2.18 percent per annum in 1951 to 2.26 percent per annum in 1952. And last debenture sale was at 2.3 percent plus a tenth commission, making net cost of 2.4 percent. The operating costs of the Federal intermediate banks compared with other lending institutions, are unusually low, less than three-tenths of 1 percent per annum. If you add to three-tenths of 1 percent a present cost of 2.4, you get 2.7, so we have a very small margin when charging only 234, and within the next year we will probably have to increase that discount rate above 234 to provide reserves and surpluses.

Production credit associations made very few changes in their lending rates in 1952. The average per annum rate for 1952 was 5.8

percent, which did not include certain service fees. When these service charges are included, the average per annum rate was equivalent to a rate of 6.4 percent. Most association loans carry interest rates of from 52 to 6 percent. That means that the average was 6.4, but in some areas it is well above that. In some associations it may run, when you add the interest rate plus the fee, to 9 percent.

Mr. ANDERSEN. What areas do you mean?

Mr. DUGGAN. The Southeast. I know in Meridian, Miss., they have possibly more small loans than any association in the country. And those loans are rather heavy cost loans to supervise and administer.

Mr. ANDERSEN. Usually, the smaller the loan the higher the cost over a year's period.

Mr. DUGGAN. The rate of 6.4 percent is the actual cost the farmer pays, and he pays only for the time he uses the money, but this is on a yearly basis. If he uses $100 for 6 months, his bill would not have been, say, $6.40 but would have been only $3.20, half of it.

Mr. HORAN. Those would be marginal borrowings, would they not? Mr. DUGGAN. They have been very good borrowings. Their repayment record is very good, but they are small farmers and self-sufficient farmers; and, when they agree to pay, they pay.

Mr. WHITTEN. It may cost as much to service a $500 loan as it does a $5,000, might it not?

Mr. HORAN. That runs the cost up, and it has to be charged to somebody. There was a disposition at one time to try to reduce the cost of loans by evaluating the integrity of the borrower, and I have wondered if the repayment record is good, and why there should not be some decline in the cost of servicing the loan.

Mr. DUGGAN. They are not visited as much and they are not serviced as much; but, when you have trouble, you may have more trouble collecting it and trying to work it out than a larger loan.

Mr. WHITTEN. Mr. Horan, you made a good point there. As long as you have an overall program, applicants who do not qualify in one category may thereby qualify for another where the administrative cost and cost of supervision would be even greater.

ELIGIBILITY OF BORROWERS TO SECURE LOANS

Mr. HORAN. We have essentually that sort of a farmer's loan program now. If they cannot qualify for one of these, of course, they can possibly qualify for Farmers' Home Administration loans.

Mr. ANDERSEN. I think you gentlemen will agree that we do not want to make it impossible for the small man to make loans.

Mr. WHITTEN. If the whole purpose is to benefit the farmer and to keep a sound national economy, I suspect that it is in the small-loan field where the greatest benefits accrue. Those that are in the larger operations would in all likelihood have a better chance of doing something else than those in the smaller income brackets.

Mr. HORAN. I would like to see some of our Farmers' Home Administration borrowers graduate into these other fields. I suspect you do have some statistics on that.

Mr. DUGGAN. No; we do not. We have been unable to get statistics on it. There is a provision in the law though that, when they have reached the point that their net worth is such that will qualify them

for a commercial bank loan or cooperative loan, they are supposed to be taken off the Farmers' Home Administration program.

Mr. WHITTEN. I think you can get that when representatives of the Farmers' Home Administration appear later.

Mr. DUGGAN. We could not give it to you because we do not have it. Mr. HORAN. It is a valid principle. We know that, in a condition where a man begins to slip and he cannot borrow from Farm Credit Administration facilities, then he is eligible, if he is a good man, to go to Farmers' Home Administration. It is a poor ladder you cannot go up and down on.

Mr. DUGGAN. It will possibly take a little nudging because Farmers' Home borrowers do not have to buy capital stock, do not have to assume any liability for other members' loans, and do not have to pay as high an interest rate and possibly can get loans a little quicker because the neighbors do not have to pass on them.

Mr. HORAN. The Government pays a good share of the servicing of those loans, too.

Mr. DUGGAN. That is right.

Mr. HORAN. We tried to discuss that when we had the Extension Service with us yesterday. When we have helped a man to get on his feet, he should not expect to be a patron of the Government all his life. I know that the tendency is to get the cheapest credit you can find, but the Farmers' Home Administration is a rehabilitating loan agency, and borrowers should graduate from that into a responsible position in their own credit group or with the Farm Credit Administration or go to a private bank.

Mr. ANDERSEN. In my area, southwestern Minnesota, there is a decided trend for these Farmers' Home Administration clients to reach such a good solvent position that they can easily obtain credit with small commercial banks. I think that is the right trend.

BALANCE NECESSARY IN AGRICULTURAL CREDIT

Mr. WHITTEN. This whole farm-credit picture is rather complex. I like to see us save money, but in view of greatly increased number of debts outstanding by the farmers, it may be shortsighted economy to cut down on administrative expenditures which means cutting off people who are making collections.

Now, another thing that I think needs to be pointed out and repeated regularly is that the farm-credit system is financed by the sale of debentures. They are not guaranteed by the Government. One of our problems now is that, as most of the Government money which was originally loaned is paid back and they become farmer owned, the farmers themselves are getting about as tough as the banks ever were. This means that if they cannot go through these lending institutions of the Farm Credit Administration, of necessity they go into other Government programs. I do not say this critically of anybody; it is a natural thing. But now we have many problems connected with farm credit which do not show unless you dig into it.

Mr. DUGGAN. On that point, we have encouraged in every way we know how keeping the loans small, for associations to continue to lend to the farmer and try to work out with him a lower budget than he had last year because I think the farmer has got to do some cutting. But associations should be sure that they are financing farmers on

sound operations. We work very hard with associations for there is some tendency in some areas to get overconservative after they have paid off all Government capital. I am convinced, Congressman, that if the commercial banks and if the cooperative lending institutions do not make reasonably adequate amounts of credit available, regardless of the reasons, and if they do not lend to farmers to meet their legitimate needs, the pressure will be so heavy that the insured and guaranteed loans and direct loans on the books today are very small compared to what they will be.

Mr. WHITTEN. The point I have stressed as strongly as anybody is that a farmer should not be urged to accept credit he does not need. It is not good for him. There are two sides to it and the problem is to keep a balance. People might differ as to where to draw that line. Mr. DUGGAN. Some lending rates of the banks for cooperatives were adjusted upward early in 1952 to compensate partially for increases which had occurred previously in the cost of borrowed funds. Current rates charged by the 13 banks are as follows: On commodity loans, 22 percent by 2 banks, 234 percent by 5 banks, 3 percent by 6 banks; on operating capital loans, 3 percent by 5 banks, 3/4 percent by 6 banks, 312 percent by 2 banks; on facility loans, 4 percent by 10 banks, 44 percent by 1 bank, 42 percent by 2 banks.

OWNERSHIP OF FARM CREDIT INSTITUTIONS

A primary objective of all farm credit institutions is to become wholly farmer owned through the repayment of all Government capital that the United States Government paid in or furnished through purchase of capital stock. This objective has been attained by the 12 Federal land banks and, at January 2, 1953, by 280 of the 499 production credit associations. Yet there is no provision in law for either the banks for cooperatives or the Federal intermediate credit banks or the production credit corporations to become farmer owned. The Government owns the Federal Farm Mortgage Corporation, the 12 Federal intermediate credit banks, and the 12 production credit corporations, and has the major capital interest in the 13 banks for cooperatives.

CAPITAL AND NET WORTH BY INSTITUTIONS

The Federal Farm Mortgage Corporation has been liquidating its assets since July 1, 1947. The amount of $199,990,000 of the Government's original $200 million capital-stock investment has been transferred to the surplus fund of the Treasury. As of December 31, 1952, the corporation has paid dividends of $118 million to the Treas ury—I sent in an additional million yesterday which, added to the million paid in January, brought the total paid to $120 million-had earned net worth of $26,105,569; it will continue to pay dividends to the Treasury as its cash position permits.

Mr. MARSHALL. Mr. Duggan, it is unfortunate that industry cannot show as fine a record as the farmers have shown in that regard.

Mr. DUGGAN. Federal intermediate credit banks-the Government's capital investment in the Federal intermediate credit banks at December 31, 1952, was $66,850,000 and at the peak it was $100 million, consisting of the $60 million original capital-stock investment

plus $6,850,000 of paid-in surplus supplied to 6 of the banks out of the $40 million revolving fund.

Mr. ANDERSEN. It would seem from what you have just said that there is very little subsidy in connection with credit for agriculture. Is that not a fact?

Mr. DUGGAN. That is correct. If the farm credit system were liquidated today, the surpluses and reserves would almost equal the capital. For example, in the Federal intermediate credit banks there is $66 million capital and over $44 million reserves. The Government would get that.

Mr. ANDERSEN. I often think that the word "subsidy" has been used too frequently by people who are not familiar with the situation.

Mr. DUGGAN. Production credit corporations had reduced the Government's original capital investment of $120,000,000 to $36,235,000 by December 31, 1952. This reduction reflects a transfer of $30,000,000 to the surplus fund of the Treasury and repayments totaling $53,765,000 to a capital-stock revolving fund.

The production credit_associations' initial capital stock was furnished indirectly by the Government through purchase of association stock by the production credit corporations. The corporations' investment in association capital stock has been reduced from a peak of $90,086,450 on December 31, 1934, to $7,595,800 on December 31, 1952. Possibly some associations may need additional Government capital during the year 1953 where they have had droughts, floods, or other disasters and the capital will temporarily be put back in if the local association asks for it and can justify the need for it. Other associations, of course, in 1953 and 1954 will pay back capital so I would not expect much increase but would expect a net decline.

The banks for cooperatives on December 31, 1952, had $178,500,000 of Government capital and $20,483,000 of capital furnished by farmers' cooperatives who use the banks' facilities. Plans have been considered whereby farmers' cooperative associations could become the owners of the banks for cooperatives but so far legislation concerning this matter has not been enacted. The Federal land banks have been wholly owned by farmer-borrowers since 1947, through ownership of stock in national farm loan associations.

Mr. Chairman, I have a table here giving the net worth of farm credit institutions at December 31, 1952.

Mr. ANDERSEN. We will have the table inserted at this point. (The table is as follows:)

Net worth of Farm Credit institutions at Dec. 31, 1952