THE STATE OF AMERICAN AGRICULTURE

FRIDAY, MARCH 10, 1978

U.S. SENATE,

COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY,

Washington, D.C.

The committee met, pursuant to notice, at 9 a.m., in room 324, Russell Building, Hon. Herman E. Talmadge (chairman of the committee) presiding.

Present: Senators Talmadge, Clark, Zorinsky, and Dole.

The CHAIRMAN. We have 13 witnesses. The Senate goes in session at 11 a.m. which means that this meeting must be concluded by that time. I am going to have to require that the statements be limited to 5 minutes. I want to hear every witness if possible. If there are no objections, Senators will be limited to 2 minutes for interrogation of witnesses.

All the statements will be inserted in the record in full.

Senator Thurmond is the first scheduled witness and he has not arrived. We will take him just as soon as he comes.

The next scheduled witness is Mr. Bud Gerhart, vice chairman, agriculture committee, Independent Bankers Association, Newman Grove, Nebr.

Mr. Gerhart, your entire statement will be inserted in the record.*

STATEMENT OF BUD GERHART, VICE CHAIRMAN, INDEPENDENT BANKERS ASSOCIATION, NEWMAN GROVE, NEBR., ACCOMPANIED BY GLEN SWANSON

Mr. GERHART. Thank you, Mr. Chairman. I am Bud Gerhart, president of the First National Bank in Newman Grove, Nebr., an agricultural bank of $1212 million assets with approximately 90 percent of our loans made to farmers and livestock producers, primarily feed grain, soybean, hogs, beef, and dairy cattle. I appear here as vice chairman of the Independent Bankers Association of America's Agricultural-Rural America Committee.

With me this morning is Glen Swanson, manager of the Independent Bankers Association. Approximately 80 percent of IBAA member banks have assets of less than $25 million. Approximately twothirds of our members are in communities of 5,000 or less. Federal Reserve studies show that banks in this size category provide the greatest dollar volume of bank operating loans to agriculture.

The IBAA Agriculture-Rural American Committee consists of a banker from each of several agricultural States: Iowa, Nebraska, Ok

*See p. 424 for the submitted statement of Mr. Gerhart.

lahoma, Texas, South Dakota, North Dakota, New Mexico, Pennsylvania, Georgia, and Indiana. We met early this week to discuss the serious price problem affecting the agricultural economy. Additional contacts were also made with other rural bank members of our association in States principally affected by depressed agricultural prices.

A narrative survey of the banks contacted is attached as an addendum to this statement. It will be with this and I will not read this part. We appreciate the opportunity to present our views on the economic situation currently facing farmers and ranchers and thank you for calling early hearings on this vital issue.

Reports from our rural banker contacts indicate that the state of the agricultural economy is not favorable and an increasing number of our farm borrowers are in a deteriorating financial situation.

Many borrowers are taking out larger loans against their land to finance current expenses and heavy fixed obligations. Some borrowers are being referred to the Farm Home Administration as a lender of last resort. Others are voluntarily selling out and a number of forced liquidations have been reported by some of our bank members.

In the few cases where we find improvement in net worth, much of it is due to inflated land prices rather than retained earnings.

In short, many farm borrowers, especially grain producers, are not earning enough income to pay the bills. The income is just not keeping pace with the rapidly inflating costs.

A resolution passed by our convention on March 8, 2 days ago,

states:

IBAA calls upon President Carter and the Congress to give a priority position among the Nation's issues to the maintenance of agricultural prices in relative balance with other segments of the economy. Unless American farmers are given price protection on basic crops, the Nation's agricultural economy will continue on a disaster course. At present levels, farmers are in a loss position on wheat, corn, and other feed grains. The farmers' economic position will further deteriorate as production costs continue to rise. It is imperative that the U.S. Government put an adequate support price under basic crop prices.

This is the end of the quotation from our resolution and I might add personally that bankers and farmers with whom I have visited in the past weeks all seem to realize and accept the fact that reasonable controls must go along with increases in support prices.

Most of our bankers report that there is adequate credit available at the present time. The critical problem today is not so much a shortage of funds to lend as a lack of borrower profitability, especially among our grain producers.

We believe that increased Government loans and guarantees offer only temporary relief and that reasonable profits by way of higher grain prices are the only long-range solution.

In short, more credit is not the answer for a borrower who is going broke. The farming operation must earn enough to pay the bills. Many are not doing that today.

The CHAIRMAN. Mr. Gerhart. I have to call time on you.

Mr. GERHART. Mr. Chairman, I have just said the most important things I wanted to say.

The CHAIRMAN. And I certainly agree with it. I addressed your association in New Orleans, as I recall, about a year ago and as you know, banks came forward to lend much money when they knew the prospects of repayment are slim. Is that an accurate statement?

Mr. GERHART. That is a very accurate statement.

The CHAIRMAN. Are most of the banks renewing loans to the farmers who are in distress?

Mr. GERHART. We are trying all we can to renew those loans, but it is getting to be a tougher problem.

The CHAIRMAN. Let me ask you to confirm something I have heard. Normally, you know, you have a flow of capital from rural banks to the urban centers. I understand it is the reverse this year. Rural banks are pretty much loaned up to capacity. Is that accurate?

Mr. GERHART. No; we are finding-in my own shop we have plenty of credit right now available to lend. Our farmers are cutting back considerably because they just are not making enough money to go out and take some expansion steps.

The CHAIRMAN. I think that is an accurate statement.

Senator Dole.

Senator DOLE. Well, I just glanced at the statement. Are you going to be around a while? I have a staff member who has worked a lot on the credit side and I would like to have him visit with you after while. I am trying to find him right now.

Mr. GERHART. I will be happy to do that.

The CHAIRMAN. I want to insert at this point statements for the record from Senators Bayh and Tower.*

The next witness is Mr. Robert Curry, executive vice president, First National Bank, Pulaski, Tenn.

Mr. Curry, you may insert your full statement in the record and summarize it in 5 minutes, if you will please.*

STATEMENT OF ROBERT CURRY, EXECUTIVE VICE PRESIDENT, FIRST NATIONAL BANK, PULASKI, TENN.

Mr. CURRY. Mr. Chairman, I am Robert M. Curry, executive vice president of the First National Bank of Pulaski, Tenn. I was born and raised on a farm in Giles County and still live on that farm and work with my family on a 150-head dairy farm.

My bank has assets of $57 million, loans of $36 million of which 26 percent are to farmers. The full-time farmer in my county is in trouble, and briefly I would like to express to you two things: The current status of that farmer and what my bank has done to try to prevent what has happened to him.

Sixty-five percent of the agribusiness in our county does business with my bank and mostly large farmers in our county do business with our bank and I would classify this farmer whose credit may be $100,000 or more during the year.

They are the best credit risks that our bank has. My bank has never lost a dime to a full-time farmer. And the problems with the farmers are the good farmers in our county. Ninety percent of our 1977 crop loans was carried over to 1978. Our farm loans increased $2.3 million during the year, of which $1.9 million was in farm real estate and that was a direct result of farmers having to give long-term mortgage on their property to cover short-term losses.

*See pp. 427-443 for the letter and material from Senator Bayh; pp. 444-448 for the letter and material from Senator Tower, and p. 448 for the submitted statement of Mr. Curry.

A good acre of good corn in our county brings $1,000. Three years ago, it would have brought $500; the price of corn we are getting is still basically the same. If the 10 largest farmers that do business with my bank were to quit, we would have a major land depression in our county which would affect the whole economy. And I believe this could happen.

Specifically, we have several farmers that owe us $400,000. That is the limit that we, as a national bank, can loan. Several farms have a $100,000 carryover on their 1977 crop. Most farmers I have talked to lost from $25,000 to $100,000.

One farmer told me that his son is now the fifth generation that has farmed the same farm in our county and this son lost in the last 3 years what it took the first three generations to accumulate. Our county was a disaster area and we qualified for Small Business loans at 3 percent. I personally helped over 20 farmers in paying $1 million loans through them. However, there are some shortcomings in that they have had to mortgage what remaining equity they had in their farms to make the 1978 crop. They have given second, third, and fourth mortgage to SBA.

This is only a short-term solution to a long-range problem, in my opinion. The four banks in our county are 70 to 80 percent loaned up, which is too high.

And briefly, what my bank has tried to do is try to educate the farmer and help him make a profit and we have failed to do that. We spent $25,000 a year just promoting agriculture. We were the first commercial bank in the United States to have a bull lease program which was originated by our bank in 1963. And we have invested over half a million dollars in bulls which we lease out to the farmers.

The best farmers in our county still are not making a profit. My personal view on it, low-interest loans-even a loan with no interest is not the answer because you have got to have a realistic price to pay those loans back. In 1978 our farmers at current prices will lose in excess of $2 a bushel on beans and 75 cents a bushel on corn.

I am watching them mortgage away their equity while the cash flow is decreasing, and this cash flow is what they have got to have to pay those loans back.

I appreciate being here today.

The CHAIRMAN. Mr. Curry, I congratulate you on an excellent statement.

Did I understand you to say 90 percent of your farm loans made last year had to be renewed this year?

Mr. CURRY. Yes, sir.

The CHAIRMAN. Ninety percent.

I agree with you that credit loan is not the answer. A credit is needed. Of course, you cannot farm without the credit. Farm income and the profit is the ultimate answer, is it not?

Mr. CURRY. Yes, sir.

The CHAIRMAN. Senator Dole?

Senator DOLE. I have no questions except to indicate that there has been a little strength in the market price. Somebody has put together the most recent figures, soybeans are back up to $6.37 from the low of $4.97; wheat is still not very high but it is $2.98 as compared to

$2.44; and corn as of March 10 is $2.33 as compared to $1.86, 6 months ago; and cotton 55 cents as compared to 49 cents. So there has been some improvement.

I think we are not out of the woods by any means. And the credit needs are real and we hope to have some action next week on a piece of legislation that might be helpful.

Mr. CURRY. I read your proposal and I agree.

Senator DOLE. Thank you.

The CHAIRMAN. The next witnesses are Mr. Jerry Stillman, representing Cotton Exchange Bank, Kinnett, Mo., and Mr. Jerry Paul Combs, a Baker Implement Co., Kinnett, Mo.

Gentlemen, come around and divide your 5 minutes any way you see fit. Your statements will be inserted in the record.*

STATEMENT OF JERRY STILLMAN, COTTON EXCHANGE BANK, KENNETT, MO.

Mr. STILLMAN. Mr. Chairman, I appreciate the opportunity to appear before this distinguished body on behalf of the Midsouth farmer and smalltown banker.

By heritage, background and tradition, I am a farmer. My family has been extensively engaged in farming and farm-related business in southeast Missouri since 1925.

I am a lawyer and practice law in Kennett, Mo., and I am also a director and legal counsel for a bank in Kennett which has assets of approximately $25 million. I am in daily contact with the bank loan officers and have contact with two other banks in southeast Missouri by representation.

The typical farmer in southeast Missouri farms 400 to 800 acres of highly productive farmland. He is a hardworking, independent, and resourceful farmer. And he is most assuredly in a severe financial crisis.

During 1977 our country bank extended several million dollars in loans to area farmers. These were for crop production and farm equipment loans. Most of these farmers raised well above average crops of cotton, soybeans, wheat, and milo. And due to the price existing in the marketplace and the low loan levels of the USDA approximately 75 percent of these loans made by our bank were not met as scheduled. The cost of production, coupled with living costs, simply exceeded the amount they received for their crops.

The final page of my testimony contains projected production costs for 1978 as prepared by the University of Missouri extension farm management specialists and economists. The projected income was determined by one of our bank officers as he normally would when considering a production loan.

The result shows a loss of $50 an acre for cotton, $35 an acre for soybeans, and $32 an acre for wheat. Considering that farming is already a risky enterprise, due to droughts, floods, frosts, freezes, hails, and other uncontrollable elements, the 1978 crop loan looks extremely unsound from the bankers' viewpoint.

*See p. 452 for the submitted statement of Mr. Stillman, and p. 454 for the submitted statement of Mr. Combs.