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While-and Mr. Hansen I think would confirm this we are not in a position to speak for the Department with respect to all of these various features, we are in a position to give the committee some of our experiences with respect to these various features of the bills that you have under consideration here.
As an agency we have concluded that there is really no way to get at this problem of making funds available to farmers for refinancing unsecured loans in the fashion that any of these bills are designed to accomplish except on a basis of direct Government loans. The main reason why we have reached that conclusion is that private creditors would not likely assume the risk that otherwise would be involved in the matter.
Mr. Jones. May I make a comment there?
Mr. Jones. I felt the same way that you have indicated except I did this, when I was down in southeast Missouri--and I can only speak for that area—but I think it would be typical—when I first began formulating the basis for this bill, many people told me and some of these people were ginners; others were implement dealers, and so forth, they said “the thing about it, the banks won't be interested in making a loan on that small margin that it will have to be made on.'
So then I went to some small bankers and to some of the larger bankers in my district and I found that they were interested in making that type of loan. They were interested only to the extent that they would make those loans to what would be a regular customer of that bank, but they would not lend money otherwise. For instance and I will use Mr. Wellman's name because I know that you do have a great respect for his opinion—I know he worked with us on some of these other policies that were adopted and that we all felt maybe would not work out so well—Mr. Wellman told me and he was the last one I went to and, frankly, I hesitated to go to him because he is a conservative banker, as you know, and I thought, well, he will tell me, “We just can't use that type of loan at all."
But to my surprise he said:
Well, I think that that plan has a lot of merit and, while our bank would not use it to any large extent, I can visualize in my mind now that we would have 6 or 8 people that we would make a loan of that type to and would participate and take the chance of losing that 10 percent. But I think it will be used.
I would like to just get your comment on that. I have a copy of a memorandum here—and this memorandum is addressed to Sherman Adams, Assistant to the President, and from Mr. True D. Morse, and just reading about 10 sentences, it says here they made a survey in southeast Missouri:
The survey showed that excessive rainfall in the entire Mississippi Delta area last fall severely curtailed the size of the cotton crop, and greatly increased the cost of producing and harvesting the crop.
Many farmers in the area will need emergency credit to finance their 1958 operations and will have to carry over sizable debts that were acquired in producing last year's crop. Many business firms in the area are feeling the pinch of the loss of farm income and need credit aid in rebuilding their inventories. Based on information from the area and to aid business firms to rebuild their inventories, the President on February 22 signed an amendment to the Small Business Act of 1953, authorizing the Small Business Administration to make smallbusiness disaster loans in areas affected by excessive rainfall. This measure authorizes the SBA to make loans to business suffering economic loss directly attributable to excessive rainfall.
The question I am going to ask you is this: Does not this letter signed by Mr. Morse indicate that your agency and the Department of Agriculture recognize the need for credit in rebuilding these inventories?
Mr. SMITH. I think that is right.
Mr. JONES. And the next thing: Does he not indicate in this memorandum that the Farmers' Home Administration and the Department of Agriculture are depending upon the Small Business Administration to make the loans which will help these business firms and to give thme the credit in rebuilding their inventories?
Mr. HANSEN. Yes.
Mr. Smith. Yes. The Department is of the opinion that if the business firms need credit as such that they should seek that credit from the SBA rather than from the Department of Agriculture,
Mr. Jones. I want to ask you this question. I know you have had this experience. Wuold you not say that, based on the experience that you have had, you know that the Small Business Administration is not going to make any loans to the type of business that we are talking about here today?
Mr. Smith. Mr. Jones, we have had some meetings with the SBA officials
Mr. JONES. I know you have.
Mr. SMITH. Just here in the last 2 weeks, and I would not be in a position to speak for that agency. However their regulations and the source of funds indicate that they will be in a position to serve business firms with needed credit.
Mr. Jones. Don't you know for a fact, though, that this small—I am not talking about the big implement dealer-I am talking about the small repair man—this small crossroads grocery, this small business that is distributing bottled gas which is used for fuel for cooking in the home, that they are not going to make a loan to that type of business and in the second place that that type of business does not have the facilities to get up the reports, the audits, and does not have the money to actually provide the application that would be necessary in order to qualify for a loan?
Mr. SMITH. They informed us they had two forms of application plans. One for these very small business firms that I have reference to, and more detailed application forms for the larger firms. And I am certainly under the impression myself that they are equipped to handle both types.
Mr. Jones. Let me ask you this then, Do you have any knowledge that there has been a single loan made to that type of small business?
Mr. SMITH. As you well know we have been very busy-
Mr. SMITH. Trying to do our job. Frankly, I don't know whether they have made any loans or not. I have looked at their regulations and I have discussed the matter with the officials in the SBA and I am under the impression that they are equipped legislativewise and moneywise to serve the needs.
Mr. Jones. I know we have equipped them but I will say there has not been a single one of those loans made and, if I am any judge of what they are going to do in the future by what they have done in the past, I think they will make some loans in this section but they will be large loans.
Mr. Smith. I wonder if you would permit me to make a statement now on the insured part of it?
Mr. Jones. I would like to have you do that. I went into that with your counsel down there.
Mr. Smith. If we understand your bill correctly, the section that has to do with the secured loans, section 3, essentially it would amount to this, that private credit institutions would realize a 2 percent interest on loans that they make and serviced and would take a risk up to 10 percent loss on those loans. The 10 percent risk would mean that even if 95 percent of the advances they made were collected, they still may have a 10 percent loss in the 5 percent leftover. There would have to be 100 percent collection on the loans before the banking institutions would not stand to lose anything. The banking institutions or credit institutions would make and service loans for 2 percent interest rates but they would take the risk over and above the Government's guaranty of 10 percent on the loans. The reaso that I merely say here that we doubted that credit institutions would be interested in such loans is that the Farmers' Home Administration now guarantees 100 percent of insured loans, we make and service the loans ourselves.
The banking institution or the credit institution gets 312 percent net for its funds. Even when interest rates are somewhat unfavorable to that type of loan we have not been able to get too many local banks interested in advancing funds for these loans for those kinds of insured loans.
So this is much less favorable to the banking institution than the insured loans we now have available.
Mr. Jones. May I say to you that I visited two Production Credit offices in southeast Missouri, and it just happened that I was there at one of them when they were having their board meeting and they assured me that they would utilize this type of credit, that they would make loans, realizing that they might incur some losses.
The bankers—and I talked to not many--but to those that I talked to, they said that they would be willing to make that type of loan even realizing that they would lose the money but they felt that the overall effect in the community would justify them and that they had an obligation along with the Government to try to do it.
The fact of your taking the position that they are not going to use this money, I don't think that that should be the thing that would cause you not to want to cooperate with us, to make the money available. If you have done that, then you have done your part. Then if the bank does not want to do it, why then, that is another thing and they will have to go to the Farmers' Home Administration and the Farmers' Home Administration loan will be a 100-percent-guaranteed loan.
We are trying to relieve you of some of the responsibility and, also, to try to maintain and not have the bank or PCA tell us that we were driving people into the Farmers' Home Administration and not permitting them to share their responsibility. That is what I was trying to do.
Mr. Smith. Mr. Jones, we were not trying to oppose that section of the bill. We were merely trying to be helpful to you to indicate
to you that it would not likely result in many loans being made because of the character of the risk involved to the private lender.
Mr. Poate. Mr. Jones, do you not think that the answer to that is the rate of interest that the banks can get?
Mr. Smith. That would certainly help. This bill provides, I think, that the farmer would be paying about 51/2 percent.
Mr. Poage. Did you say that the farmer will not pay 8 percent to get the loan and therefore he does not get it? Down in my part of the country they are paying 10 percent now.
Mr. Jones. I would say that there is another feature in this bill. I did not propose to tell this committee that this bill was in perfect form or that I wanted this committee to report the bill out without some changes. And, as I told Mr. Campbell at the time that this bill was drafted, the people would be willing to pay up to 8 percent, if we felt it was necessary to make it that, so we would not get onto the position of the veterans' loan and some of our other housing loans, where loans were ot being made because the interest rate was not high enough to attract the capital, that it is possible that we would be compelled to change the interest rate. What I am trying to find out from you, and I think that Mr. Morse has admitted it in this letter, although he says that they should not make the loans, he has admitted that the need is there.
What I would like for you to tell the committee is where you think this need is going to be met if we do not have some kind of legislation, either this or something similar to it?
Mr. SMITH. Mr. Jones, under your bill, or under the methods that are being employed at the moment, the farmer will still owe the debt. It is a question as to whom he will owe it to.
Mr. Jones. Do you not think that it is better he have his debt consolidated and to know thaat he has a 5-year period in which to pay it rather than have half a dozen creditors over him all of the time and going about as Mr. Poage suggests, trying to feel that he has to duck his head to get around these fellows because he can't pay them and to give him a little more feeling of responsibility, he can say, "I have got these fellows paid off, I have got this one big note to pay.” It might be a $500 of $1,000 note, but if he has 5 years or 3 years of a normal crop, he can pay that off.
Mr. Smith. We do not have any evidence that any farmers are being put out of business because of these unsecured debts that were left over from the 1957 crop year. The Department's loan program plus the loans from private sources are keeping farmers in business.
Mr. Poage. May I interject right there? Maybe you are not familiar with the way farmers do down in our part of the country. A tenant farmer who gets into this shape where he owes everybody in the community, the classic remedy for that man is to get up and move. That is exactly what he does do in all too many cases.
I think you create more stability when the debt is consolidated and he owes the same lending agency, and I think you will find a whole lot more farmers staying where they are with that stability. But if you just have everybody nagging him, it is just human nature to get up and leave.
Mr. Smith. The type of loan that the committee has under consideration here, of course, is a far different type of loan than the Farmers Home Administration has ever been making before. The reason our Mr. Ellis. Well, the total carryover, we did make an estimate & while back would be, I believe, 17,250,000 hundredweight rough equivalent. Mr. SATTERFIELD. That is August 1, 1958. Mr. PALMBY. He wants 1959. Mr. GATHINGS. For 1959. Mr. SATTERFIELD. Seventeen million. Mr. GATHINGS. You figure 17 million? Mr. SATTERFIELD. Yes.
Mr. GATHINGS. That has not changed from the figures that you had given me earlier ?
Mr. Ellis. No; there would not be any reason to change that.
Mr. THOMPSON. This situation in India interests me very much. Apparently, there is a demand in India that would absorb all of our surplus. Apparently, there is an effort being made to give them some wheat which they do not want under any circumstances. Or at least, which they are very reluctant to take.
Mr. PALMBY. I think I disagree with that statement that they do not want it. I did make the statement that on wheat their first preference has been soft wheat. As I understand it, the Indians want that for various reasons. But they are buying hard wheat. And as far as we can determine without any reluctance at all.
Mr. GAITHINGS. That has not changed from the figures that you had
So I think it is a fair statement, too, that they would take more cereals than they are presently getting, but there is this overall limiation of how it can be supplied; in other words, there is always a limit on the allocation that we have. I would like to just make a comment or two again on our total supply percentage of some crops. The supply percentages for price support purposes as of normal on wheat was 144.5 percent, as of July 1, 1957, and on corn again, it was 126.3 percent, as of October 1, 1957, on cotton it was 127 percent, and on rice it was 117 percent. These are percentages of normal.
We must take this situation into consideration in allocating commodities for programing to FAS.
Mr. THOMPSON. It is very difficult to accept that in the rice industry when it will have such a disastrous effect on the whole industry next year. As I told you a little while ago, there is no inclination on the part of this committee to criticize anybody who is here. We are only trying to establish the fact. We, naturally, want some kind of relief so that the Department won't use a set of artificial surplus figures, to keep down the acreage on rice, and keep down the support price.
The fact still remains that the world at large needs all the rice that we can produce next year. That is without any question.
Mr. PalMBY. Again, I would like to make the statement, Mr. Thompson, in defense of what we have made available for programing, cer: tainly, the same can be said of some classes of wheat, what you said here of the almost unlimited demand, provided the funds are there It does become one of fitting the commodities into this limitation.
Mr. Thompson. What is the situation in Korea ? Have they had some rice under Public Law 480 ?