[S. 1331, 94th Cong. 1st Sess.]

A BILL To amend the Commodity Credit Corporation Charter Act

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 4(h) of the Commodity Credit Corporation Charter Act (62 Stat. 1070, as amended; 15 U.S.C. 714b (h)) is amended by inserting in the fourth proviso of the second sentence after the words "suitable storage" the following: "for dry or high moisture forage, silage, or grain".

SENATE COMMITTEE ON AGRICULTURE AND FORESTRY

STAFF EXPLANATION OF S. 1331

S. 1331 would amend the Commodity Credit Corporation Charter Act to provide specifically that the Corporation make farm storage facility loans to producers for dry or high moisture forage, silage, or grain.

DEPARTMENTAL VIEWS

In a letter to the Chairman dated May 23, 1975, the Department expressed its opposition to the enactment of the bill.

The letter notes that (1) the Corporation, under existing law, has authority to make farm storage facility loans for dry or high moisture forage, silage, or grain and (2) at various times in past years, loans were made for storage facilities for baled hay, high moisture forage, silage, as well as grain.

CHANGES IN EXISTING LAW

Changes in existing law made by S. 1331 are shown as follows (new matter is underlined and existing law in which no change is proposed is shown in roman):

(h) May contract for the use, in accordance with the usual customs of trade and commerce, of plants and facilities for the physical handling, storage, processing, servicing, and transportation of the agricultural commodities subject to its control. The Corporation shall have power to acquire personal property necessary to the conduct of its business but shall not have power to acquire real property or any interest therein except that it may (a) rent or lease office space necessary for the conduct of its business and (b) acquire real property or any interest therein for the purpose of providing storage adequate to carry out effectively and efficiently any of the Corporation's programs, or of securing or discharging obligations owing to the Corporation, or of otherwise protecting the financial interests of the Corporation: * And provided further, That to encourage the storage of grain on farms, where it can be stored at the lowest cost, the Corporation shall make loans to grain growers needing storage facilities when such growers shall apply to the Corporation for financing the construction or purchase of suitable storage for dry or high moisture forage, silage, or grain, and these loans shall be deducted from the proceeds of price support loans or purchase agreements made between the Corporation and the growers.

DEPARTMENT OF AGRICULTURE,

Hon. HERMAN E. TALMADGE,

OFFICE OF THE SECRETARY,
Washington, D.C., May 23, 1975.

Chairman, Committee on Agriculture and Forestry,
U.S. Senate.

DEAR MR. CHAIRMAN: This is in reply to your request of April 4 for a report on S. 1331, a bill providing for an amendment to the Commodity Credit Corporation Charter Act. This would provide that Section 4 (h) of the Commodity Credit Corporation Charter Act (62 Stat. 1070, as amended; 15 U.S.C. 714b (h)) is amended by inserting in the fourth proviso of the second sentence after the words

"suitable storage" the following: "for dry or high moisture forage, silage, or grain".

The Department opposes enactment of this bill.'

The Secretary presently has the authority to allow storage structure loans for dry or high moisture forage, silage, or grain. At various times in past years, the program did allow loans for storage facilities for baled hay, high moisture forage, silage, as well as grain.

The default in repayments of loans on silo-type structures has been considerably higher than on conventional grain storage structures. Silos, especially cement type, provide practically no merchantable collateral if foreclosure of the loan is needed, leading to a loss of nearly all of the government funds involved in these loans.

Hay storage buildings, by the very nature of their structure, allow for the storage of every type of machine, as well as being used for feeding, dairying and other forms of farming operations not connected with the storage of hay. For this reason, the policing of the intent of the hay storage structure program is nearly impossible.

It is the belief of the Department that, in making loans for grain storage structures, the general public is served by the fact that grain stored in these structures is saleable and usable in many forms. Such loans, thus, serve the definite purpose of encouraging the construction of facilities to store grain and oilseeds until needed by users. The forage, silage and high moisture grain stored in silo-type structures is generally available only to the farm where located. Enactment of this bill would result in an estimated increase in Commodity Credit Corporation loan outlays of $16 million for the five-year period FY 19761980, or about $3 million annually.

The Office of Management and Budget advises that there is no objection to the presentation of this report from the standpoint of the Administration's program. Sincerely,

RICHARD A. ASHWORTH,
Deputy Under Secretary.

Senator DOLE. Our first witness is Mr. Elvin J. Person, Deputy Administrator for Programs, ASCS, U.S. Department of Agriculture. You may proceed any way you wish, Mr. Person. You have a very short statement. You may want to read it, and then we may have some questions.

STATEMENT OF ELVIN J. PERSON, DEPUTY ADMINISTRATOR FOR PROGRAMS, AGRICULTURAL STABILIZATION AND CONSERVATION SERVICE, U.S. DEPARTMENT OF AGRICULTURE

Mr. PERSON. I believe I will read my statement, Mr. Chairman. We appreciate this opportunity to testify in regard to S. 1331. The adoption of S. 1331 would require the Commodity Credit Corporation to make loans to farmers to finance storage facilities for the storing of dry or high-moisture forage, silage or grain on the farm.

The Department opposes enactment of S. 1331.

Under the Commodity Credit Corporation Charter Act, we are required to make loans to grain growers needing storage facilities. when such growers shall apply to the Corporation for financing the construction or purchase of suitable storage. The Charter Act further provides that these loans shall be deducted from the proceeds of price support loans or purchase agreements. Therefore, it appears to be quite evident that the intent of the storage facility program was to complement the price support program. High-moisture forage, silage and grain are not eligible for price support and therefore, loans for construction of storage facilities for these commodities would not in any way be related to Commodity Credit Corporation authorized functions.

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We believe that loans for facilities for the storage of dry commodities as presently authorized, complement the orderly marketing concept and serve the interest of the general public because commodities that are stored dry are readily salable and usable for all marketing purposes. Loans for dry storage encourage construction of facilities to store grain and similarly handled commodities until needed by the various on-or-off farm uses. Loans for wet storage and high moisture facilities encourage the construction of on-farm facilities which store high-moisture forage, silage or grain in the form or manner which limits the marketability of the commodity to a localized area, generally to the farm where the structure is located.

Our experience indicates that the risk factor for loans on the highmoisture type of storage structures, particularly those of concrete or cement type, is greater than it is for the conventional dry commodity storage facility. The high-moisture facility generally has less merchantable collateral than the coventional or dry type of facility. As of the last program report, loans for the wet storage type structures on which loans were last authorized in 1972, represent only 6.1 percent of the dollar amount of the total outstanding loans, whereas such structures represent 16 percent of the dollar amount of defaulted loans transferred to claims in the current fiscal year.

We believe it unwise to provide a special credit service to such a narrow segment of the industry-some farmers and the manufacturers of wet storage structures. In addition, enactment of this bill will force the Government to become the prime source of finances for the marketing of wet storage structures. The Department feels that the regular commercial and other existing governmental agricultural credit institutions can best serve the needs of this segment of the storage trade. With no change in other program provisions, enactment of this bill would result in an estimated increase in Commodity Credit Corporation loan outlays of $16 million for the 5-year period fiscal years 1976-80, or about $3 million annually. However, if overall program provisions were changed to be similar to those in effect in the 1973 fiscal year, loan outlays due to this bill could range from $15 million to $20 million annually in fiscal year 1977 through 1980.

That concludes my statement, Mr. Chairman.

Senator DOLE. I appreciate your statement, which is much like the position letter from USDA that has been inserted, and raises some valid points that maybe we could clarify with questions. You indicate a higher percentage of defaults on silo loans made by the Department in the past than other types of grain storage facilities. Is it because of the way they are constructed that they make rather poor collateral? Is that the basic reason?

Mr. PERSON. That would be part of the reason. I think another part of the reason is that generally speaking those producers who construct dry storage have participated in our price support program and in our set-aside programs, and we have had opportunity to set off payments on the facility loans to those producers. Generally, owners of wet storage structures are not participants in our price support program, so we have no set-off potential and we have to actually go out and collect, which makes it a little more difficult. But our experience is real brief. As you notice, our last exposure was during 1971-72. Some of those loans have not run over a long period of time, but initially it

looks like our claims would be slightly more than they would be under the regular dry-type storage.

Senator DOLE. Would you say 16 percent?

Mr. PERSON. Well, we show that the volume is 6 percent of our outstanding loans, where our claims represent 16 percent of our claims so far this fiscal year-how significant this is at the present time is hard to tell but it does indicate

Senator DOLE. What would that be in dollar figures? Do you have that?

Mr. PERSON. I believe we have outstanding about $12 million in the wet storage and our claims or transfer to claims at the present time represent somewhat in excess of $50,000, so it is not a large amount. Senator DOLE. Can anything be done in this bill to reduce the likelihood of default? Is there some provision that could be added?

Mr. PERSON. Not that I know of. I think to get the full picture, we should recognize that facilities for dry storage have a capacity of 300 to 10,000 bushels. They are quite easily dismantled and moved. If a farmer goes out of business and does not need them anymore, you can dismantle them and sell them. They are quite salable, compared to a more permanent type structure, which usually involves wet storage, they are not as salable. We try to set aside a small portion of land and take a real estate mortgage on that piece of land, but nobody really has use for an acre of land with a silo on it on somebody else's farm.

Senator DOLE. Have you actually had to go to court? Have you disposed of any in that fashion or not?

Mr. PERSON. We have at the present time I believe, some claims where we are asking our attorney to proceed and foreclose on

structures.

Senator DOLE. How many? Can you give us that for the record? Mr. PERSON. I do not have that figure.

Senator DOLE. Also for the record, how many wet storage loans may have been made, because you talk about 16 percent. That in itself is rather significant. When you say that default is only about $50,000, that may not really be very significant.

Mr. PERSON. I do not have those figures.

Senator DOLE. You can supply those for the record.

[The following material was subsequently received for the record:]

Available information on wet storage loans from fiscal year 1972 to date, (as of Apr. 30, 1975)

1 $52,419 of this amount has been transferred to claims in fiscal year 1975. The $52,419 represents 16 percent of the total amount of $328,000 transferred to claims from all farm facility loans so far in fiscal year 1975, and is the origin of the 16-percent figure referred to earlier in the statement.

Senator DOLE. You have indicated that at least it is USDA's position that part of the opposition to the bill is due to the problem of equity in silos, that if there is a default, there is almost no value in the facility for resale even though you may have an acre of land.

But as far as you know, none of these have gone through foreclosure to determine whether or not there has been a loss to the Department? Mr. PERSON. Not any number of them, at least at the present time. Generally speaking, it is our feeling that on the more permanent type structures such as silos, cement type structures that are not movable, they really should become a part of the producers total real estate obligations or his real estate mortgage.

Senator DOLE. What about other grain storage facilities on which loans are being made presently? It is impossible to sell them also, I assume, for the same reason grain pits and concrete foundations and certain weighing facilities; they are essentially permanent.

Do they become part of the real estate?

Mr. PERSON. On our present dry storage program we exclude loans on the foundation and on the wiring and so on so that the structure itself can be dismantled. We also get a subordination agreement or a severance agreement which separates it from the real estate so that we have a first lien on it and it can be repossessed or moved quite easily, whereas this becomes more difficult when we become involved in total real estate mortgages. Farmers Home Administration, of course, is involved in the total real estate financing, along with Federal Land Bank, and of course commercial banks are more involved in the total real estate financing than we are in ASCS. We confine our operations pretty much to those price supported commodities, except for the exceptions where we have expanded our program.

Senator DOLE. What are the terms for storage facility loans presently?

Mr. PERSON. 5 years, first payment due in four equal installments beginning 12 months after the first year of the loan. So it is a total of 5 years repayment schedule.

The current interest rate is 61% percent. At the present time the rate is adjusted every 6 months, depending upon the cost of money to the Government, and we loan up to 70 percent of the total cost of the structure exclusive of foundation and wiring.

Senator DOLE. How does the USDA arrive at the figure that this bill would require $3 million annually in additional expenditures? It is not the intent, as far as I know, nor is it the intent of Senator Humphrey or other cosponsors to increase expenditures, but simply to require that loan funds are available, loans for silos and similar storage facilities as an option for farmers.

I do not understand. The record should show why this bill would necessitate an increase in expenditures, And if it does, is there any suggested modification that would avoid such an increase?

Mr. PERSON. Well, we could increase our restrictions on loans by increasing the required downpayment or other restrictions that would limit the availability of the loans. We use Commodity Credit Corporation funds and are reimbursed for the losses. The only control we would have would be setting program limitations to limit access to the loan program, which we can do if we increase the downpayment, for instance, from 30 percent to 40 or 50 percent. There would be less farmer interest in the loan program.

Senator DOLE. Right.

Mr. PERSON. So we can control it to some extent but of course it does also limit the availability of dry storage facilities because we have treated them in one package in the past.