TUESDAY, NOVEMBER 25, 1969. FARM CREDIT ADMINISTRATION WITNESSES HAROLD T. MASON, DEPUTY GOVERNOR FRED W. HOWARD, COMPTROLLER DANIEL L. MONSON, ASSISTANT GENERAL COUNSEL Mr. WHITTEN. Gentlemen, we are glad to have you with us. We have here Mr. Harold T. Mason, Deputy Governor of the Farm Credit Administration; Fred W. Howard, Comptroller; Daniel L. Monson, Assistant General Counsel. JUSTIFICATION MATERIAL We will include the justifications in the record at this point. (The justifications follow :) FARM CREDIT ADMINISTRATION, H. Doc.. 91-199 Appropriation: Revolving fund for administrative expenses (limitation on administrative expenses, 1970). Request, $211,000. Estimated Appropriation in latest budget submission, $3,628,000. PROPOSED LANGUAGE Limitation on Administrative Expenses In addition to the amount made available under this heading for administrative expenses during the current fiscal year, $211,000 shall be available from assessments for such expenses, including the hire of one passenger motor vehicle. PURPOSE AND NEED FOR SUPPLEMENTAL FUNDS The proposed supplemental appropriation for the year 1970 is being requested for the following purposes: 1. To hire five additional staff members and to cover the 1969 Executive pay increase $113,000. 2. Travel-$72,000. 3. Communications, services, and so forth-$26,000. The additional staff members include the following: 1. An electronic data processing specialist. 2. A research/financial economist. 3. Three trainees on the examination staff. The difference between the five additional positions requested and the seven positions justified above is accounted by two previously approved positions that are vacant and have been abolished. The number of electronic data processing installations in the banks and associations is increasing rapidly. This brings about many highly technical questions, particularly as to coordination as well as planning for the future. The equipment and its operation represent a sizable expenditure of funds. In view of these factors, it has been felt by the Federal Board, as well as the banks, that FCA should have on its staff an expert in this field to advise with the Governor and the banks on the numerous problems that are arising in connection with EDP matters. The Federal Board is continuously being faced with more and more complicated problems in carrying out its role of establishing policies to be followed by the banks and associations in credit matters. These problems are developing, of course, because of the many changes that are taking place in the technical phases of farming. In order for the board and the staff of FCA to keep pace with these changes, it is necessary to have at hand more and better information than has been required in the past. Accordingly, a well-qualified research man is needed to head up this new program. In addition, it is expected that this employee will be able to do research for the Governor and his staff in matters relating to money market affairs, and a considerable part of his efforts will be directed toward this activity. FCA has never had on its staff anyone who was particularly trained in this area. The need for such an individual is apparent when consideration is given to all the problems that are associated with the obtaining of ample funds at the lowest cost possible in order that agriculture will always have available to it a dependable source of credit. Several years ago the examination division had a trainee program. This was discontinued and is now being reinstated on a rather modest basis. It is difficult to maintain an adequately trained staff in this type of work because of the continuous travel status of the employees, particularly when it is necessary to recruit for qualified employees on relatively short notice. It has been decided. therefore, to establish a recruitment program at the trainee level. In this way, it is hoped that the quality of work in this division can be maintained. It is also expected that there will be some increase in workload because of the enactment of truth-in-lending legislation. The two additional employees in the production credit service are necessary at this time in order to (1) have adequate replacements ready in anticipation of several retirements that could come about within a year or so, and (2) provide further manpower to cope with all the new problems that are developing in connection with financing a rapidly changing agriculture. The need for additional travel funds reflects the five more employees plus the travel costs incurred by the outside members of the Commission on Agricultural Credit which is studying FCA. This Commission was appointed by the Federal Board in June of this year to study what the role of the farm credit system should be in financing the future credit needs of agriculture. Communications, services, etc.-$26,000-This increase is due to higher rates for penalty mail and telephone, to generally higher costs for necessary services and items which we are required to purchase, and to additional printing necessitated by activities of the Commission on Agricultural Credit. Change in language. It is requested that the budget language for 1970 be changed to include permission for the Farm Credit Administration to hire an automobile. This is not a request for an additional car but would permit FCA the use of a medium sedan. GENERAL STATEMENT Mr. WHITTEN. You may proceed in your own way with your general statement. Mr. MASON. Thank you, Mr. Chairman. I have a brief statement and I would like to read it to the committee. I am appearing before you today to request additional funds in the amount of $211,000 for the 1970 budget of the Farm Credit Administration. This agency is responsible for the supervision and examination of a coordinated system of farm credit banks and associations that make loans to farmers and their cooperatives. The expenses of Farm Credit Administration are paid from funds provided by assessments collected from these banks and associations. Although the expenses are subject to annual limitation set by the Congress, they do not affect the Federal budget. The supplemental amount requested when added to the 1970 budget of $3,628,000 will increase that limitation to $3,839,000. As is true with our regular budget, this supplemental request has the approval of the Federal Farm Credit Board which is the governing body of this agency. The justification for additional funds also has the support of the farm credit banks and associations. Very briefly, Mr. Chairman, the request for supplemental authorization is made up of the following: The additional salary cost is accounted for primarily by a net increase in personnel of five positions. We are requesting seven new positions and are abolishing two positions presently authorized but vacant. Of the seven new positions, two are for staff specialists to carry out new supervisory responsibilities for the Farm Credit Administration. The first of these is a top computer specialist who is technically qualified and management oriented. The farm credit banks and associations are in the process of expanding their electronic data processing centers. This represents a considerable expenditure of funds and brings about many highly technical questions. The Federal Board, as well as the banks, feel that the Governor of Farm Credit Administration should have on his staff an expert in this field to advise with him. and the banks on numerous problems that arise in connection with computer activities. The other position is that of a financial economist who will head a research program in which primary emphasis will be given to long-range planning of the financing activities of the Farm Credit System. The need for this position has been brought into clear perspective by the critical monetary situation that has prevailed during the past year. The remaining new positions are for examiner and credit trainees. The examination or audit staff performs probably the most important single function of our total supervisory responsibility. It is essential, therefore, that the staff be kept at relatively full strength. Because they are in a continuous travel status, it is difficult to recruit field examiners, and there has been a greater turnover than usual in recent years. It is the conclusion of the Federal Board that this staff should be backstopped by at least three trainees who will be able to assume full responsibility as vacancies occur. Two trainees for credit specialists are also necessary for the production credit staff in anticipation of several retirements within a year or two. The increase of $72,000 in travel includes (1) travel expenses of the proposed additional personnel, (2) upward revision in travel of the Federal Farm Credit Board, and (3) nonrecurring travel expense of the Commission on Agricultural Credit. The latter is a commission of 27 agricultural and financial leaders appointed by the Federal Board to advise it on future credit needs in agriculture and how the cooperative Farm Credit System can help meet those needs. The increase in "Communications, services, etc." is due to rate increases for penalty mail and telephone, to generally higher costs of necessary goods and services, and to additional printing necessitated by activities of the Commission on Agricultural Credit. We have also requested that the budget language for 1970 be changed to include permission for the Farm Credit Administration to hire an automobile. This is not a request for an additional car-we have only one-but would permit FCA the use of a medium sedan. Gentlemen, I will now be glad to answer any questions you may have regarding my testimony. CURRENT FARM CREDIT PICTURE Mr. WHITTEN. For the record, as I recall it the Farm Credit Administration has the supervisory responsibility over the whole Farm Credit System, which includes the intermediate credit banks, the production credit associations, and the Federal Land Bank and any other activity that falls in the field. Further, while you give them this supervision, is the cost of your operation paid for by the system itself, by the banks? Mr. MASON. Yes. Mr. WHITTEN. I understand you have explained to the committee in your detailed justifications the purposes for which these funds will be used, and further, that the banks that will be assessed to pay for these activities have agreed this request is in order and is needed. Mr. MASON. That is correct, Mr. Chairman. Mr. WHITTEN. How does your credit picture look? We all realize we are suffering from inflation. We know, for instance, of the increase in the per diem allowed Federal employees when away from home. We can see the constant rise in the price of consumer items. Are you experiencing any change in the farm credit picture that causes more work on your part or is it the inflation trend plus your emphasis on the need to train people to have them ready? There has been no serious deterioration in the last 2 months beyond normal in the farm credit picture, has there? Mr. MASON. No, Mr. Chairman, no deterioration. As you know, our No. 1 problem is the cost of money we loan to farmers and cooperatives. We have seen successively new high rates of all time on what we have to pay for money. The most recent issues, for example, of the bonds and debentures of our three banking systems, the land banks had to pay 8.45 percent, the banks cooprative 8.45 percent, and the intermediate credit banks had to pay 8.75 percent for the last issue of 9-month debentures they put out this month. This has created a serious operating problem in our system, particularly in the case of the land banks. As you know, our land banks market bonds of varying maturities and some of them are fairly longrange maturities, and so in effect they are boxed in, whereas our credit banks and banks for cooperatives operating on an average maturity of much smaller length do not get caught this way. Our land bank system at the present time, Mr. Chairman is, I believe, probably operating at a slight loss. Mr. WHITTEN. Is my memory correct, the land banks are paid out now insofar as Government capital is concerned? Mr. MASON. That is correct. STABILITY OF LAND BANK SYSTEM Mr. WHITTEN. I think we all know that when the Production Credit Association lends money, they take the notes which in turn are used as collateral for the sale of debentures, and then the debentures are sold on the open market. At the outset the Government had capital in the Federal land banks, which lend money on land primarily and cattle. These banks make loans for longer periods of time and they get their money by issuing bonds due to the fact they operate over a longer period of time. Which leaves you where? If you borrow money for long periods of time at high rates, it would appear to be somewhat risky for the borrower as well as the banks. You say you are operating at a loss. Does this impair the structure of the system at all? Mr. MASON. There is no danger of anything of that sort, no, sir. It is just the basic philosophy of the Cooperative Farm Credit System to provide necessary credit to farmers and their cooperatives at the lowest possible cost, and in very adverse times such as we are experiencing at the present, it is not against our rules to take a small operating loss in a given year, but this will not impair the structure of the Land Bank System at all, sir. Mr. WHITTEN. Mr. Natcher? Mr. WHITTEN. Mr. Evans? NO CALLABLE FEATURE IN LAND BANK LOANS Mr. EVANS. On these long-term bonds and debentures you spoke of, do you have any prepayment privileges written into those instruments? Mr. MASON. No, Mr. Evans. You mean a callable feature? Mr. EVANS. Yes, sir. Mr. MASON. No, sir, we do not. Mr. EVANS. They go for full term at the interest that the market requires at the time? Mr. MASON. I think we have in the past maybe had one or two issues that had a call feature, but the additional cost you have to pay to get that written in I think at least in the last 10 years is not commensurate with the advantage of being able to call. Mr. EVANS. What do you anticipate you may have to do suddenly if, after floating a number of these bonds and debentures for a long period of time at a high rate of interest, the money market could weaken, and people who borrow from you then find they only have to pay 6 or 612 percent? How are you going to cover that margin? Mr. MASON. Mr. Evans, we cannot do much about what we have done in the past, but currently we are not going long in the market. on land bank bonds. Mr. EVANS. What are your terms? Mr. MASON. Anywhere from a year to 21 months. Our last issue was 21 months. Mr. EVANS. I have no further questions. Mr. WHITTEN. Mr. Langen? MANPOWER NEEDS AND ELECTRONIC DATA PROCESSING EQUIPMENT Mr. LANGEN. Mr. Chairman, one point of curiosity. I noted the need for increased staff and a top computer specialist. This always puzzles me, supposedly computers and other electronic gadgets are to be labor-saving devices, but when you get to looking |