have resulted. We want the whole story. I am asking it here so it might be contiguous to and tied in with the earlier hearings which will just preface this discussion.

Mr. Duncan, you might handle that any way you wish.

SALE OF LOAN STOCK TOBACCO

Mr. GODFREY. I would be glad to handle this.

Mr. Chairman and members of the committee, I would like to give a little background on this if it is all right.

Mr. WHITTEN. We want the full story, Mr. Godfrey.

Mr. GODFREY. We will start back with the 1955-56 crops of tobacco, because these are the two crops that are involved. I have some prepared data which I can furnish for the record if you want it, but I would like to give that background.

Mr. WHITTEN. You may go ahead and supply it to the committee.

Mr. GODFREY. In 1955 we took a 5-percent cut in Flue-cured tobacco allotments from the previous year, but in spite of this cut we actually produced 1,483 million pounds of Flue-cured tobacco, which gave us at that time a record high yield of about 1,497 pounds per acre. This was actually 236 pounds or a 19-percent increase per acre over the 1954 crop.

The price-support level on the 1955 crop was 48.3 cents per pound, which was 90 percent of parity, as required by law.

A total of 299 million pounds, or about 20.2 percent of the crop, was placed under loan that year, taken over by the Flue-Cured Tobacco Cooperative Corporation that handles the loan program.

In 1956 we took a further reduction in Flue-cured tobacco allotments of 12 percent, but per-acre yield again went up. It jumped from 1,497 to 1,625 per acre. The crop turned out to be a little bit less though because of the 12-percent cut, about 60 million pounds less. The price-support level, still under the mandatory 90 percent of parity, went up to 48.9 cents per pound. I might point out there that farmers received about 51.5 cents per pound actually, 2.6 cents over the price-support level. This year the stabilization co-op who has handled the loan program took over 320 million pounds, or about 2212 percent of the entire crop.

For the 2 years then we had a total of 619 million pounds taken over by the co-op, or roughly about 21 percent of the 2 crops.

Mr. WHITTEN. You refer to the co-op. We try to keep straight on this committee what you have reference to, but it is even difficult for us. For the record you might describe how comprehensive the co-op is.

PRICE SUPPORT MECHANISM FOR TOBACCO

Mr. GODFREY. Maybe I ought to explain the whole price-support mechanism for tobacco, which is entirely different from any other commodity.

In the case of tobacco, the CCC enters into a contract with a co-op— normally it is a co-op of farmers-to handle the price-support operation for CCC. In making price support available to producers of tobacco, with respect to any pile of tobacco, basket of tobacco, that does not bring the guaranteed price-support level for that particular grade

which is assigned, the producer has an option of selling it at the bid price or turning it over to the co-op who is handling the price-support activity and receive in return the guaranteed price-support level. The co-op then handles all of the processing of that tobacco-the redrying and the sales of the tobacco. The sale prices are published once each year, and hold firm throughout the year except for the addition of storage charges as the year progresses.

The sales prices are recommended by the board of directors for the co-op and approved by CCC, and as I say they hold firm throughout the year except for the addition of the storage charges.

Now, all of the management policies as far as selling, storing, warehousing, and looking after the commodity fall within the realm of the co-op.

Mr. WHITTEN. At that point I would like to interrupt and ask this. What is there that would cause the co-op under those conditions to include all producers in a given area, and what would make it to their interest to handle this in a practical way? At this point there is nothing to indicate that there would be any reason for them to try to look after the Government's interest. I do not mean there is not, but at this point in your statement there is nothing to indicate that they would have any financial interest or any other interest that might cause them to make every effort to try to protect the Government's investment.

Mr. GODFREY. Well, the basic premise in setting up the co-op was to handle the tobacco for the Government and to make an additional return for the farmers if they could and distribute any additional profits that they might derive from the processing and selling of the tobacco.

Mr. WHITTEN. Let me ask you one other question to clarify it. Is the average producer in that co-op in it to the extent of his production? Is there any difference, in other words, between the small producer and the big producer?

Mr. GODFREY. None whatsoever. All of his production is eligible for support if he is a member of the co-op and if he has planted within his acreage allotment.

Mr. WHITTEN. If he does not care to join the co-op, where is he? Mr. GODFREY. He is not eligible for price support in the case of Flue-cured and in the case of Burley, he does not have to join a co-op and pay a membership fee.

Mr. WHITTEN. I believe the testimony in this case shows that this was altogether Flue-cured tobacco.

Mr. GODFREY. This was all Flue-cured tobacco. In the case of Fluecured he pays a $5 membership fee, and that is good for life. Mr. WHITTEN. So it means all producers who do belong

Mr. GODFREY. Generally, all producers do belong. All producers are eligible for price support if they plant within the acreage allotment.

Mr. WHITTEN. All right. Continue.

Mr. GODFREY. Now, after the 1955-56 takeover of about 619 million pounds of tobacco, it became apparent that, due to the introduction of some high-yielding varieties of tobacco which at that time had poor trade acceptance because they were lacking in flavor and aroma, we had to do something about it.

CHANGE IN TOBACCO DEMAND PATTERN

I might interject here that for years the domestic producers of cigarettes had asked the plant breeders to develop a variety of Fluecured tobacco that was light in flavor and light in aroma.

Beginning about 1953, however, we had our first health scare attributed to smoking of cigarettes. The cigarette-buying companies then switched their buying patterns from buying what we call a lightbodied and light-flavored and light-aroma cigarette. They began using filter tips. If I recall the figures correctly, the change went from about 4 percent of the total cigarettes being filter tip to-now it is almost 60 percent being filter tip.

With the switch over to filter-tip cigarettes you need a heavier bodied tobacco and highly flavored and heavy aroma back of the filter is needed. A little heavier body is needed because the smoke has to be pulled through a filter.

This changed their buying pattern and made it necessary then that we take a look at these high-yield varieties which were light in flavor and had a light aroma. All segments of the industry were contacted. After several meetings it was agreed that we would discount these high-yielding varieties which we were producing, of light flavor and light aroma. When I say "discount," I mean that we would support them at only 50 percent of the regular support price. For example, Coker 139, Coker 140, and Dixie Bright 244 were the three varieties of tobacco which had been determined to be light in flavor, light in aroma, and of the high-yielding, disease-resistant varieties. If they were supported at a particular grade at 50 cents a pound in 1955 and 1956, and if a farmer elected to grow those in 1957 and put them on the warehouse floor, we would support it at only 25 cents a pound. This for all practical purposes stopped the growing of these three varieties of tobacco. Less than 500 farmers out of the almost 200,000 Flue-cured farmers grew these high-yielding varieties in 1957. But here we were with these two crops of tobacco, and about 90 percent of them were of these high-yielding varieties in the co-op stocks or in Government stocks.

So in addition to discounting we took a further cut in acreage allotments to try to get supply in line with demand. We took a 20-percent cut in acreage allotments for 1957. I would remind you now that is 5 percent in 1955, 12 percent in 1956, and 20 percent in 1957, all taken without any payment for the land taken out of production of tobacco. We hoped then to bring our total suppply in line with demand. We did, through the discounting of these particular varieties. For the succeeding years 1957, 1958, 1959, 1960, and 1961 we actually produced less tobacco than the market consumed. We reduced our stocks. Therefore, we had a sale for some of this 1955-56 crop tobacco.

It has been traditional in selling crops of tobacco up until 1959 to add the processing charges, all storage charges, interest charges, and any other charges to the investment in the crop in establishing the sales price. This worked satisfactorily until 1959 because until 1959 we had a gradual increase in the price-support level for tobacco each year. It was being supported at 90 percent of parity, mandatory. But beginning in 1959 we had a move afoot to stop the yearly increase in the price-support level of tobacco, and, as a result of this move, a

freeze was placed upon price-support levels. That freeze has resulted at the present time instead of tobacco being supported at 90 percent of parity, Flue-cured tobacco is being supported at 78 percent as of February, and burley at 77 percent as of February.

At the same time that we were producing these high yielding varieties there was much concern expressed by our foreign buyers. At that time about 35 percent of our domestic production of Flue-cured tobacco was being exported. Most of this, I might say, was being exported for dollars, hard dollars. Much concern was expressed by them that the high yielding varieties were not producing the kind of tobacco that they wanted, that they could buy what we call a medium flavor tobacco in other countries at a cheaper price. So they asked then that we discourage these high-yielding, low-flavored, and low-aroma tobaccos in order that they could acquire the higher flavored, high aroma tobaccos which they would blend with other tobaccos they might produce or buy in the manufacture of their cigarettes.

PRICING LOAN STOCK TOBACCO

Now, in setting the sales prices, as I pointed out a few moments ago, we act upon the recommendation of this board of directors, who is interested first in supporting the tobacco to growers under a contract with the Government, second in making money for the co-op so they can distribute the additional profits back to the growers-and by the way they were able to distribute profits on every crop up through 1954. They made money on every crop and were able to distribute the profits back to farmers through the 1954 crop. Thirdly, they were interested in not building their stocks too high, because any stock that they build too high was an overburden on the market and would actually be reflected in the market pattern for the particular year. We were able to sell some of the 1955-56 crops down through the years because it could be blended in with stronger flavored tobaccos until, when I came in to Washington in January of 1961, they had been picked over to such an extent by the buyers, because they actually come into the warehouse and take off the cover and look at the tobacco in the hogshead-they had been picked over to such an extent that what we had left were more or less remnants of the crop.

I might point out there that tobacco normally improves with age during the first 2 years that you store it, because it goes through two sweats a year, and this is what they call aging of the tobacco. So you could very easily set your sales prices to reflect your total investment, including processing and storage and interest, and this was what we were doing. But after 2 years or after four sweats there is no material improvement in the quality of the tobacco. In fact, after a 5year period tobacco begins to deteriorate materially to where if you keep it beyond the 5-year period you are losing. You could lose in the 6th year 30 percent of the value of the tobacco because of the deterioration. We don't know what the maximum loss is, but you might get to 10 years before you would lose it all. We do not know just how far we could go because we have not kept it that long.

As I say, in 1961 it had been picked over quite a bit. We lowered the price a little in 1961. I had better illustrate what I mean by this. At that time we had the original investment of an average of 48 cents in the 1955 crop, plus 6 years of storage at about 3 cents would

be 18 cents, which would run you about 68 cents, including carrying charges of 312 percent interest, plus insurance, to where the price of a pound of tobacco from the 1955 crop that would be offered for sale in 1961 was 10 to 20 cents a pound in excess of what we could have bought good 1961 tobacco for. This is the 6th year now, and tobacco would start deteriorating rapidly.

We felt we should begin getting these prices more in line, so we approved a reduction in price in 1961, that they recommended to us in 1961.

TWENTY-PERCENT SUBSIDY ON EXPORTS OF 1955-56 CROP TOBACCO

In addition to that, we had some requests that we use section 32 funds under the authority that is granted in the act for section 32 to move this tobacco into export, as much of it as we could, so it would not displace current production.

The reason for this was two-fold. First, we had not shared in the expanded world markets for Flue-cured tobacco. In the early 1950's we had 69 percent of the world trade in Flue-cured tobacco. At the current time we are down to less than 50 percent of the world market. Other countries have taken this over. Rhodesia primarily has expanded tremendously in the production of Flue-cured tobacco, and they have taken over much of the market that we should have been sharing in.

Secondly, we wanted to get it into the world market rather than the domestic market, because every pound that was sold in the domestic market would displace current production.

Authorization was given for a 20-percent export subsidy on all of the 1955-56 crop that would move into export channels. This did not move much of the tobacco. In fact, under this I think we moved less than 20 million pounds of Flue-cured tobacco, under the export subsidy provision. As a result of the subsidy, 22,643,000 pounds moved through March 7.

When the prices were being set for calendar year 1963, the board of directors of stabilization submitted a proposal that the price for the 1955-56 crops, because of deterioration and because of the current value of the crop, be set at a realistic level which would permit it to move out into trade channels. The actual price that would move it into trade channels was unknown. It had been picked over to the extent that we were down to about 102 to 104 million pounds. We did have prices available though for other tobaccos. The average export price for Rhodesian tobacco was roughly $39.4. If this tobacco was being currently supported by us it would be supported at roughly 28 cents a pound, if it was currently being produced.

TWO METHODS AVAILABLE FOR DISPOSING OF TOBACCO

We considered two methods-the setting of an arbitrary price which we thought it was worth, offering it for sale, and continuing the export subsidy in order to get it out of the country. The other method was a bid method without an export subsidy.

We discussed this considerably around the Department, and it was finally decided that we definitely wanted this tobacco to move into foreign trade channels. We wanted it to move out of stocks because