capital instead of calling for more Government capital. It is not only deemed necessary but is also deemed amply justified by the financial strength of the credit banks, supporting which, as hereafter explained, there is also the financial strength of the associations.

Before a Federal intermediate credit bank could suffer any loss on its financing of the production credit associations in its district, which represents about 95 percent of its financing, it would be necessary that one or more of the associations become insolvent. However, this is well guarded against because the liabilities of each association, including its liability to the credit bank, may not exceed 10 times the paid-in and unimpaired capital and surplus of the association (12 U.S.C. 1032). Overall the associations are currently operating within about a 7-to-1 debt-to-capital limitation. Their losses in the 33 years of their existence since 1933 have amounted to only eight-hundredths of 1 percent of the total cash advanced to farmers and ranchers. This has not resulted in any loss to the credit banks, which have sustained no losses on any of their loans or discounts made since 1933, when the associations came into being. Taking into account losses suffered from their organization in 1923, the net losses of the credit banks in 44 years of operation have amounted to approximately $1 for each $9,000 of credit extended. Today the likelihood of losses by the credit banks on their loans and discounts for the associations is even further reduced. As a protection for their capital and surplus, the associations have accumulated reserves for losses totaling $99.9 million, or 2.7 percent of total loans outstanding on December 31, 1967. Further, the associations in the different districts, within the past few years, have adopted either losssharing agreements, participation loan agreements, or guarantee plans, or combinations of these, in connection with their loans. While these agreements for the different districts are in varying terms, the general effect is that certain losses by one association would be made up by contributions from the other associations. In this manner, the collective financial strength of the associations in a district serves to insulate the credit bank from losses on its loans or discounts for the associations. The debentures issued by the Federal intermediate credit banks, therefore, are not only supported by a like amount of farmers' notes and the financial strength of the banks themselves, but also, to a considerable extent, by the financial strength of the associations. With due recognition of this, there is considered to be ample justification for the proposed amendment so far as concerns the financial stability of the Federal intermediate credit banks and the debentures issued by them.

While the major proposal in the bill is to increase the permissible debt-to-capital ratio of the Federal intermediate credit banks from 12-to-1 to 20-to-1, there also are amendments which would enlarge the amount of capital for the credit banks obtainable from other sources than the Government; that is, from production credit associations and other institutions that are financed by the credit banks. Section 1(b). The capital of the Federal intermediate credit banks, against which their debt-to-capital ratio must be applied, includes not only the capital stock of the banks, which is held by the United States and production credit associations, but also participation certificates, which are held by financing insitutions other than production credit associations that use the services of the credit banks. Under existing

law (12 U.S.C. 1072 (b)), these participation certificates are issued by the banks to such other financing institutions only in payment of patronage refunds that are distributed annually by each bank; and there is no provision for issuing additional amounts of participation certificates. In the case of production credit associations, patronage refunds are paid in capital stock and such associations have in the past been required and may again be required to purchase additional capital stock in the bank. The present amendment would authorize a Federal intermediate credit bank to issue participation certificates, in addition to those issued in payment of patronage refunds, for purchase by financing institutions that are entitled to receive participation certificates in payment of patronage refunds.

Section 1(c). At the end of its fiscal year, each Federal intermediate credit bank is required to apply its net earnings as specified in the law (12 U.S.C. 1072(a) (supp. II, 1967)). Some of such net earnings are retained in a reserve account where they are allocated on a patronage basis to the production credit associations and other financing institutions that borrow from or rediscount with the bank. The remainder of such net earnings, which are not applied otherwise, are distributed as patronage refunds to production credit associations in the form of class B stock and to other financing institutions in the form of participation certificates. Over the years a production credit association thus acquires interests in a Federal intermediate credit bank; that is, allocations of surplus account and class B stock which are in proportion to the business done by the association with the bank during each year. The thought has been that the interests in a Federal intermediate credit bank owned by a production credit association occasionally should be brought into proportion with its current use of the bank.

Under a 1965 amendment (12 U.S.C. 1061 (a) (supp. II, 1967)), the relative amounts of class B stock in a Federal intermediate credit bank owned by production credit associations may be adjusted to reestablish the amount of such class B stock owned by each association in proportion to the average indebtedness (loans and discounts) of each association to the bank during the immediately preceding 3 fiscal years. If and when this is done, the present amendment would authorize amounts in the reserve account that are allocated to production credit associations to be reestablished in substantially the same proportion as the holdings of class B stock.

PRODUCTION CREDIT ASSOCIATION AMENDMENTS

Section 2(a). Each borrower from a production credit association is required to own, at the time the loan is made, class B stock of the association in an amount equal to $5 per $100 or fraction thereof of the amount of the loan (12 U.S.C. 1131g). Class B stock entitles a holder to vote (one vote per holder) and may be purchased only by farmer borrowers from the association and individuals eligible to become borrowers; and within 2 years after a holder of class B stock has ceased to be a borrower from the association, such class B stock must be exchanged for nonvoting class A stock of the association which may be purchased and held by investors (12 U.S.C. 1131e). The present amendment concerns a provision in the law (12 U.S.C. 1131g) that the class B stock of a production credit association owned by a borrower from

the association "shall not be canceled or retired upon payment of the loan." Immediately after the quoted words would now be added "or otherwise, except as may be authorized under rules and regulations prescribed or approved by the Farm Credit Administration." This would make it possible to authorize retirement of the stock upon payment of the loan, as may sometimes be in the best interest of both the borrower and the association. The amendment would also permit retirement of the stock for application of the proceeds in partial or final payment of the loan and in other circumstances as authorized under the rules and regulations.

Section 2(b). Production credit associations are specifically authorized to borrow from, and rediscount paper with Federal intermediate credit banks. Except with the approval of the Governor of the Farm Credit Administration (12 U.S.C. 1131h, second sentence), such associations may not borrow from or rediscount paper with any other bank or agency. It has not been considered within their authority to borrow from investors generally as by the sale of capital notes. The proposed amendment would specifically authorize a production credit association to issue its capital notes for sale to borrowers and others. This new authority would be subject to rules and regulations prescribed by the Farm Credit Administration, and the capital notes outstanding at any one time, together with other liabilities of the association, may not exceed 10 times the capital and surplus of the association.

This concludes my prepared explanation of the bill and we hope that the committee may see fit to act favorably on it.

The CHAIRMAN. Thank you, Governor Tootell.

Do you want us to proceed with Mr. Boddy before we proceed to ask anybody questions?

Mr. TOOTELL. Just as you wish, Mr, Chairman.

The CHAIRMAN. I think it would be better to get all the background statements in here before we go into questioning.

We will now hear from Mr. Boddy, chairman of National Advisory Committee of Production Credit Associations.

We will be glad to hear from you now, Mr. Boddy.

STATEMENT OF H. M. BODDY, CHAIRMAN, NATIONAL ADVISORY COMMITTEE OF PRODUCTION CREDIT ASSOCIATIONS

Mr. BODDY. Mr. Chairman and members of the committee. I represent the National Advisory Committee of Production Credit Associations which is composed of the committeemen from each of the 12 districts and they represent, in turn, the 370,000 production credit association members.

These members are chosen in each district. They operate very closely together. They are members of their own production credit associations and also are committeemen.

At our annual meeting the 1st of April here, the primary interest of our members, 370,000 production credit association members, was this matter of capitalization and particularly the matter of the ratio requirements. The people from every area brought with them a mandate from their own associations to go into this matter, and at the suggestion of one of the districts we passed a resolution which was adopted which says, basically, three things:

That the present 12-to-1 ratio is overly conservative and restrictive; That the proposed 20-to-1 ratio will be adequate in view of past and projected loan losses by production credit associations;

That conservative loan loss projections are reasonable in view of the sound financial position, successful management, and mutual loss sharing plans that have been adopted.

We feel that the Federal intermediate credit bank system varies from other lending institutions in many ways:

In the first place, we are doubly capitalized by the members investment in the stock of both the production credit associations and the Federal intermediate credit banks. So, you have double-duty dollars; you have a doubling of the capitalization by the members in these associations. A reduction in Federal intermediate credit bank capital ratio will lessen the demands for additional capital at a time of large expense and small profit by agriculture.

Second, the investing public is insulated from any kind of loss by three layers of reserves, surplus, and capital; first, the capital of the bank, then by the capital of the association, and then by the farmer members of that association.

The loans are made on the land and the livestock, the cattle of the members. These notes in turn are placed or pledged with the association which, in turn, pledges their surplus which has been contributed by the same members, and a reserve has been built up. It is placed in the credit banks which in turn place it in their reserves.

The Federal Intermediate Credit Banks capital surplus and reserves must disappear before any investor looses a dime. For the Federal intermediate credit bank capital to disappear the same amount of reserve surplus and capital in the Production Credit Association must disappear. This would mean the loss of all equity in land and chattels of the individual members. Thousands of farmers and cattlemen must go broke, hundreds of Production Credit Associations must go broke and some Federal Intermediate Credit Bank must lose all it has before any investor is in jeopardy.

If an association goes broke, no one is affected, no one loses; no deposits are involved, no third parties are involved, and if an association goes broke, which would be a first, the only thing that would be involved would be the capital of the farmer members that they have already put in.

On June 30, the Houston Federal Intermediate Credit Bank will repay to the Treasury all the Government capital invested in it. Within 5 years, all the Government capital in all other Federal intermediate credit banks is scheduled for repayment.

With no Government capital at risk, no depositors or third party funds at stake, with investors protected by this pyramid of reserves, and with proven management and credit know-how it would seem that farm credit is justified in requesting this ratio change.

So, with these differences between our system and ordinary banking systems, the members of the National Advisory Committee would like to urge your consideration of this legislation.

(Following is a resolution passed by the National Advisory Committee of Production Credit Associations:)

Resolution of the National Advisory Committee of Production Credit Associations urging the passing of Federal legislation to change the Federal Intermediate Credit Bank maximum loans and net worth ratio from 12 to 1 to 20 to 1.

Whereas the present limitation of 12 to 1 is unnecessarily conservative and too restrictive if the credit banks are to continue to meet the increasing needs for agricultural financing without calling on the government for more capital while returning within a reasonable time the government capital they now have, and

Whereas the major reason for having a ratio requirement is a protection against loss for investors and stockholders, based on loss experience and the probability of future losses, the 20 to 1 ratio is adequate, and

Whereas the Production Credit Associations, the primary lenders in our System, are required to maintain sound financial structures and sizeable provisions for bad debt losses; and,

Whereas most Production Credit Associations have joined in a program for sharing of losses thereby spreading the risk of their lending business, and

Whereas it has been determined that because of the strong financial position of Production Credit Associations and their sound lending policies over the years, the changing of the ratio would not have an effect upon the debenture market, and

Whereas to ask farmer-members to invest additional money to capitalize Production Credit Associations and the Federal Intermediate Credit Bank, when it is not necessary, will put an additional financial burden on them: Now, therefore, be it

Resolved, by the National Advisory Committee of the Production Credit Associations, That Federal legislation be passed changing the present Federal Intermediate Credit Bank maximum loan to net worth ratio of 12 to 1 to 20 to 1.

The CHAIRMAN. Thank you, Mr. Boddy.

I think we might now ask questions of our panel and then call upon the representatives from the Farm Credit districts.

Do you think that is a proper way to proceed, or would you rather hear from the others at this time?

Mr. TOOTELL. I think there is merit to directing questions to those of us who are here at the present time and then proceed to the district people.

The CHAIRMAN. I was interested in Mr. Bice's statement.

On page 4, you have a statement about a membership of 548,279 at the end of 1967, and, of that number, there were 322,700 borrowing members of the associations. Now, how did you get that difference between the two groups, those that were and those that were not borrowers? They would have to be a borrower of the association to be a member, would they not?

Mr. BICE. That comes about in two ways, I would think.

A lot of these 548,000-odd that I have mentioned repay their loans before the end of the year so that the number is reduced. They are members at one time but not necessarily so at the end of the year, and then they would be in and out a year or two, just as their needs might require. So long as they retain their class B stock they are members. They are not voting members when they own class A stock, but they are members. So they come in and out. I think that is the answer to this discrepancy in the figures.

The CHAIRMAN. Does a man cease to be a member when he converts his class B stock into class A stock? He ceases to be a voting member. How does he cease to be a member?

Mr. BICE. Well, eventually, that stock can be offered for sale and picked up by another member. Under the proposed act it would be provided that his B stock may be retired as a part of his last payment on his loan. So then, of course, he would cease to be a member when the last payment was made.

The CHAIRMAN. Of course, when he comes to pay off the land bank loan, you can use that last 5 percent to pay the loan?