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little more discretion with the Department of Agriculture Advisory Board.
The CHAIRMAN. I did not get that:
Senator YOUNG. I think there should be more discretion with the Department of Agriculture, or at least with an advisory group in supporting prices.
Senator BUSHFIELD. I agree with what Senator Lucas has said. We must recognize the fact that the seasons are going to control.
Senator AIKEN. I do not understand, Mr. Davis, that you recommend anything different for the basic commodities, putting them in the same class with the nonbasics?
Mr. Davis. We are not recommending it at all.
Senator AIKEN. You mentioned hogs down here, and corn. As a matter of fact, when you support the price of corn you pretty nearly support the price of hogs, because a very small percent of the corn leaves the farm anyway.
Mr. Davis. That is true. Senator LUCAS. Do you contend the price of corn follows the price of hogs or does the price of hogs follow the price of corn?
Mr. Davis. The prices of corn and hogs are closely related accord -ing to a long series of economic studies.
Senator AIKEN. If you examine the effects of the parity formula which we provide for in the bill, you will find that the parity price of hogs is raised and corn drops slightly, the purpose being to encourage marketing that corn in the form of hogs when you have too much of it.
Mr. Davis. We strongly support the principle of the automatic carry-over provisions of section 32 funds as outlined in the bill.
This fund can be of great help in relieving distressed conditions of commodities not covered by mandatory price supports. The need for section 32 funds varies from year to year which necessitates a carryover of funds.
We believe also that a revision of section 22 of the Agricultural Marketing Agreement Act of 1937 should be included in S. 2318. We urge the inclusion of language such as the following:
Whenever the Secretary of Agriculture certifies that the volume of competitive imports of any commodity or group of commodities, the domestic production of which is equal to domestic consumption, or to a substantial part thereof, or necessary to the national defense, places or threatens to place a disproportionate burden upon domestic producers of such commodities, such imports should be limited to such definite quantities in relation to prewar imports and domestic supplies as will enable American producers to maintain a position of economic equality with other American social groups.
Senator AIKEN. How much does that differ from the recommendation of the Department of Agriculture? I believe the Secretary recommended something of that nature.
Mr. Davis. I am not sure.
Senator AIKEN. And also the Farm Bureau's testimony, I think,. recommended this.
Mr. Davis. I have not checked them against this to know.
Senator Lucas. Let me ask you about that language you want to include.
Mr. DAVIS. Yes.
Senator LUCAS. You would do that on any crop, regardless of what it is?
Mr. Davis. That is right.
Senator Young. If that principle were applied, you would not need any program for wool.
Mr. Davis. That is right. The wool people helped to draft this.
, now, I am not so sure. That is all. Mr. DAVIS. Some of the members of the National Council of Farmer Cooperatives are interested in securing more information on supplemental-income or compensatory-payment plans for perishable commodities. We suggest that the Department of Agriculture make a thorough study of these plans and present definite information on them, and report to this committee the feasibility of such programs.
With respect to building better farm markets or improving quality or reducing the cost of farm supplies, we believe that farmer cooperatives provide the most effective tools.
We were indeed pleased to see the many sound references to farmer cooperatives which this committee included in the report on the hearings on the long-range program.
Through their cooperatives, farmers can help themselves by injecting into the farm supply or marketing fields competitive service which they own and control. This they had to do of their own initiative without direct Government assistance or regulation. In order to increase their income or profits from farming, farmers operate their cooperatives on a nonprofit basis, refunding the savings back to themselves in proportion to patronage.
Senator Lucas. That is not true with respect to all cooperatives, is it?
Mr. Davis. Well, it is generally true with farmer cooperatives.
Senator Lucas. What do you mean by "generally true”? There is a big attack in Congress about taxing cooperatives. You know about that.
Mr. Davis. I would say it is almost universally true with farmer cooperatives.
Senator LUCAS. That has been my understanding, too; and I have been wondering why there was this severe attack by Fulton Lewis, for instance, on the radio, on cooperatives. We have a committee over in the House of Representatives that is out after cooperatives.
Mr. Davis. Their program is not one of taxing any money that is not untaxed, either to the farmer or the cooperative, but these people want to define all net savings as profits and tax them before patronage refunds are paid out to the farmer, even though it is the farmer's income. We are opposed to that.
Senator Lucas. Will you restate that, please?
Mr. Davis. The issue raised by the National Tax Equality Association is not one of trying to tax money that is escaping taxation because of any exemption under 101.12. They say that is not important, that is insignificant. It is in their testimony before the Ways and Means Committee.
They would like to arbitrarily define by law all net savings of a cooperative as corporate profits and require the total amount to be taxed in the hands of the cooperative, even though 100 percent of it, say, is paid out that year as patronage refunds to the farmers.
Senator Young. Would that be before any part was used for plant expansion! Sometimes cooperatives, rather than pay dividends, use the money for plant expansion.
Mr. DAVIS. It would be before that. Your present law requires that money used for capital expansion be taxed in the hands of the farmer, even though it is not paid out.
Senator YOUNG. It is taxed after the farmer gets it?
Mr. Davis. No, it is taxable to the farmer. It is his money. It amounts to a constructive payment and reinvestment.
Senator Young. There is a way of getting around that, though, is there not?
Mr. Davis. How?
Senator Lucas. They want to tax the patronage dividends that go back to the farmer from these cooperatives.
Mr. Davis. That is right. They want to tax all the savings of cooperatives. That is the issue they raise.
Senator THYE. They want to tax, notwithstanding the fact that a certificate of indebtedness will be issued the patron who earns the dividend. Then if the cooperative should retain any part of that for plant expansion or for entering into new fields, it is still loaned back, you might say, to the association by the patron who accepted the certificate of indebtedness for his share of the patronage refund.
Mr. Davis. That is right. In most cases the contract between the patron and the grower is of such a nature that the retention of capital amounts to the
Senator THYE. Did you misspeak yourself when you said “patron and grower! They are the same.
Mr. Davis. I will state it again.
The contract is such that the money retained is, in effect, money that is received from the grower. It was paid out. The court would say it was a constructive payment and reinvestment.
Well, of course, no invested capital is taxable to a corporation.
Senator THYE. The use of the earnings of the members of the cooperative in this way is nothing more or less than partners agreeing to what they are going to do. It is not a corporate transaction because they are not in that sense a corporation.
Mr. Davis. That is right.
Senator THYE. It is just their agreeing, "We will leave this much in, and we will have a certificate of indebtedness that shows the proportionate share of refund each member left in there."
Mr. Davis. That is right. It would be taxable on that year to the farmer
Senator THYE. As the producer.
Senator BUSHFIELD. Is it true these dividends you mentioned are not paid to the farmers at all, but are held by the Association ?
Mr. Davis. Well, most of them are paid to the farmer, but a new cooperative, one that is expending, sometimes retains maybe all of it. However, it is the farmers that make the decision to retain it. They want the services of the cooperative for the same reason that they want a new tractor or a new piece of machinery. They are willing to invest their money into it.
Senator AIKEN. It cannot be legally retained unless the agreement between the cooperative and its members provides for it. It has to be a contract proposition, and if it is retained, the member has to pay.
his tax on it. Senator BUSHFIELD. I heard someone say that these dividends were held by the Association and never were delivered to the farmers themselves.
Mr. Davis. I have heard that, too; but it is not true. If it is true, the farmers elect to do it that way, knowing it is their money.
Sanator Lucas. If these patronage dividends were taxed before they left the cooperative and got into the hands of the farmers, it would be a pretty serious blow to the cooperatives, would it not?
Mr. Davis. It would, and you would be setting up this new precedent, I think: You would be taxing as income that which was not income.
Senator Lucas. After the patronage dividend reaches the hands of the farmer, his income tax includes that income that he receives from the cooperative.
Mr. Davis. That is correct. Senator Lucas. I want to say that the cooperatives in my section of the country are very valuable institutions, in so far as the farmers and the public as a whole are concerned.
I do not quite understand why this attack is being made on them.
Senator AIKEN. You have the same thing in the case of the Federal Reserve Bank and its members. The earnings of the Federal Reserve Bank are not taxed before being distributed to their members, whatever is coming back to them; but the members themselves pay the taxes after they get it.
Senator Hory. Do the cooperatives, as a general proposition, follow the policy of handling the products of their members, confining their operations largely to either the things that are produced by their members, or to the things they furnish to them; or do they do business with the whole works?
Mr. Davis. All of them, I would say, almost universally do the big bulk of their business with members.
In the case of a purchasing cooperative, they are not entitled to exemptions under 101.12 if they do more than 15 percent with nonproducers. If they do not do 100 percent of their business with farmers, in the case of a marketing cooperative, they are not eligible for exemption.
Senator HOEY. I was interested in that phase of it. Mr. Davis. They cannot qualify under 101.12 if they are not bonafide nonprofit organizations.
While the business methods and physical operations of farmer cooperatives are very similar to those of competitors in the same field, there is one important difference. The third party who handles the farmers' products does so for the purpose of maximizing his income as a merchandizer. On the other hand, the farmers operate their cooperatives for the purpose of maximizing their incomes as farmers. The third party is primarily interested in fixed margins times large volumes, whereas the farmers are interested in minimum margins for handling farm supplies and products and maximum net returns to themselves as producers.
Senator Young. Is that always true? There are some cooperatives where the parent organization gets 5 percent of the profits for an educational fund which they can use in almost any way they want. They are not always interested in the lowest margins. I think that is where they sometimes get into a little trouble.
Mr. Davis. I think you have some State laws which complicate that picture. You have a few State laws where there is a required educational fund. I do not know whether your State is one of those or not.
Senator Young. It is at least optional.
Senator AIKEN. Maine has a law which provides for a deduction of so much a bushel of potatoes in publicizing Maine potatoes. I think that is true.
Senator Young. If it were always used that way, they would save themselves a lot of trouble; but sometimes the money can be used for politics or anything else.
Mr. Davis. I do not know that I am familiar with the case you have in mind. I think that is the exception rather than the rule.
Senator Young. I am sure it is.
Senator Lucas. Of course, these exceptions are what always get you into trouble.
Mr. Davis. That is true.
Senator AIKEN. Generally speaking, any deduction authorized by State Law, is intended to publicize the product. That pays the cost.
Mr. Davis. I think the farmers need to take a page from the history of the industrial merchandizing. In other words, they need to assume more responsibility for building demand for their own productcommodity by commodity. In the case of a few products, farmers have already demonstrated the feasibility of such a program, particularly in the case of citrus, nuts, cranberries and certain dairy products. What these producers have done is inspiring.
We believe that through their cooperatives, farmers can thus minimize the need for quotas, controls and the like.
Again I want to commend this committee for the constructive contribution it has made to long-range agriculture by preparing the bill under discussion.
The CHAIRMAN. Does that conclude your statement?
The CHAIRMAN. We thank you. You have made a very interesting statement, and we are pleased to have it.
Mr. DAVIS. Thank you.
The CHAIRMAN. The committee will adjourn until tomorrow. We will have a statement tomorrow from the National Farmers Union.
(Thereupon, at 11:45 a. m. an adjournment was taken until Thursday, April 15, 1948, at 10 a. m.)
SUPPLEMENTARY STATEMENT. FILED BY JOHN H. DAVIS, EXECUTIVE SECRETARY,
NATIONAL COUNCIL OF FARMER COOPERATIVES, WASHINGTON, D. C.
APRIL 23, 1948. Hon. ARTHUR CAPPER, Chairman, Senate Committee on Agriculture,
United States Senate, Washington, D. C. MY DEAR SENATOR CAPPER: Since S. 2318, the bill to provide a coordinated agricultural program, was introduced in the Senate, our members who are engaged in marketing fruit and edible tree nuts, have been actively studying the price