Mr. HORAN. Did you have any information that the tobacco in question had not gone through two sweats? You were not in your present position when that situation occurred. I am aware of that. Mr. GODFREY. That's right, sir.

Mr. HORAN. Is there any record to show that this tobacco was inherently poor?

Mr. GODFREY. The tobacco, when first inspected in 1956-the 1955 crop-and again in 1957, I saw some personally so I am speaking from personal knowledge here. You would open a hogshead and 90 to 95 percent of the tobacco would show that it had gone through the sweats, and you could tell that it had aged. The sweating is the aging process.

Some other bundles of tobacco in there, if it was bundled tobacco, or if it was leaf tobacco, the leaves would show that they had not gone through the sweat. It was very similar to a piece of paper, slick, yellow. As I say, it would not have been worth the cost to go through and try to segregate out that which had been through a sweat and that which had not.

At times the co-op did do this for some tobaccos where there was sufficient evidence that there was an adequate amount of it to justify the separation.

INSPECTION OF INVENTORIES

Mr. HORAN. In view of the huge investment in private and Government-owned investments, do you make periodic and adequate checks to make sure that that given amount of wheat or tobacco is where it is listed in your records as existing?

Mr. GODFREY. Yes, sir. that there is a need for it. separate and apart.

Twice a year and more often if we feel
Plus the visit by the auditor, which may be

Mr. HORAN. We have some recent disclosures in the newspapers of irregularities?

Mr. GODFREY. I would point out that regardless of how many inspections you make, unless you are operating the facility yourself, you are going to have some people who will steal from you. You can make an inspection today and tomorrow he decides to steal from you. There is nothing you can do about it.

Mr. HORAN. That is where county committees come in handy, and I know it as well as you do. They know their neighbors, as a rule. As long as we have this program, they are an integral and very important part of this. As such, I think we will have to give them a quasi-Federal employment status, quite possibly the fringe benefits that go along with it.

Mr. GODFREY. I am sure you read the article about what happened to some of the midwestern elevator operators when they were storing with the best intentions in the world, but due to the shenanigans of some smart operators they were paying for a lot more grain than they received.

They had a two-man operated truck. One would jump out, weigh the scales, while they were weighing the trucks, and take the weights off when they were weighing the empty truck. The elevator operator turned up thinking he was buying 3,000 bushels and would actually be buying 2,000 bushels.

This was a ring of operators that operated throughout the Milwes I expect it put several warehousemen out of business.

Mr. HORAN. How were they detected?

Mr. GODFREY. One warehouseman detected the group and traced them down with the assistance of the police forces and found out it was a ring operating throughout the entire Midwest.

Mr. HORAN. Your internal audit discloses these as facts!

Mr. GODFREY. This was not a shortage against us. This was a private lessee. We had warehouse receipts. This was when he was buying himself. from another dealer, so to speak, and the dealer instead of selling him 3.000 bushels of soybeans, actually sold him 2.00) plus a thousand pounds of dead weight.

Mr. HORAN. He was the butcher with his hard on the scale?

Mr. GODFREY. Except this man crawled down under the scales, the extra man, and had rocks available down there. Of course, you can manipulate that lever just a little bit. It doesn't take much weight to change a weight of a thousand pounds. That is what was happening.

Mr. WHITTEN. If you will yield?

Mr. HORAN. Surely.

Mr. WHITTEN. Some years ago this subcommittee got into the question of investigating the storage of grain. It was just shortly after Korea. Under the average grain storage contract where they had a right to commingle, the contractor as I recall it guaranteed the Government to have on hand, on call, a given amount of grain of a given type and quality. Apparently, many of them, anticipating reduced prices in the coming year, weren't too careful as to how much grain they sold. When Korea occurred and grain prices skyrocketed, many of these warehousemen weren't able to replace Gorernment grain, which, to start with, they shouldn't have released. but did.

That was the result. The facts were disclosed by an investigation by this subcommittee.

Mr. WHITTEN. We shall recess until 1 p.m. tomorrow.

WEDNESDAY, MARCH 13, 1963.

Mr. WHITTEN. The committee will come to order.

Mr. HORAN. On yesterday we were checking up on the operation of the tremendously complicated and highly financed Corporation which you have the pleasure of administering.

INTERNAL AUDIT AND INVESTIGATION ACTIVITIES

Do the internal auditors review parity and support price calculations to ascertain the propriety of factors considered by CCC in arriving at support prices?

Mr. GODFREY. The internal auditors do not, no, sir. This is a matter that is reviewed by the economists within ASCS and also by the Economic Research Service, and also reviewed occasionally by the General Accounting Office.

Mr. HORAN. Well, since these determinations have a significant effect upon the cost to be incurred by CCC should there not be an independent review of the propriety and reasonableness of the factors used and calculs

Mr. GODFREY. The factors that are used are public information and available to the public at all times, and the auditors would not be qualified as economists to review the data that was used in making these determinations. You would have to employ economists as auditors in order to do this.

Mr. HORAN. And you do not?

Mr. GODFREY. I doubt that we employ economists as such for auditing.

Mr. HORAN. You just borrow them from Economic Research?
Mr. GODFREY. Yes.

Mr. GRANT. The Economic Research Service is the agency which actually computes parity prices under formulas established by law. These calculations are then provided to ASCS for use in connection with price support activities. I think this is an independent element that you are referring to.

Mr. HORAN. Well, do the internal auditors, for example, independently verify the reasonableness of the basis used by ASCS in arriving at the amount allowed for processing and marketing margins in determining the price that CCC will pay for butter, cheese, and nonfat dry milk?

Mr. GODFREY. This is not an audit function, no, sir.

Mr. HORAN. You do not think we need a doublecheck?

Mr. GODFREY. We have a doublecheck, yes, sir. We have a doublecheck, as Mr. Grant has pointed out, by the Economic Research Service and a triplecheck when it is audited also by the General Accounting Office.

Mr. HORAN. Yes, but there is a timelag in there that I trust my line of questioning was trying to point up, a timelag that might or might not exist in regular supply and demand commerce, and of course unlike any other system of economic activity in the world, the general taxpayer takes up the slack or the loss.

MILK AND DAIRY PRODUCTS

Mr. GODFREY. In our price support operations we feel that we have adequate safeguards; in fact, more than adequate in some instances. In the case of dairy and dairy products I am going to ask Mr. Lewis, who heads up our commodity operations, if he will explain to you the doublechecking that actually goes into the process of handling all of

this.

Mr. LEWIS. Sir, in the price support docket which is submitted to the CCC Board of Directors and approved by the Board before it becomes the basis for acting, the computation is made by ASCS as to a fair margin to allow in the case of dairy products, butter, cheese or nonfat milk powder, to establish a buying price for the products which will result in the support price being returned to the farmers, and this is cleared through the entire CCC Board and subjected to review by ERS as well as internally in ASCS.

When we buy dairy products in other than the standard form— that is, when we buy processed cheese, for example, for school lunch purposes or something of that kind-we buy on competitive bids, so that gives us a third check. We buy only from the lowest bidders, and we reject bids if we do not receive bids which yield only a fair margin to the processor.

Mr. HORAN. You are required by law to pass these program benefits, let us say, to the farmers, are you not?

Mr. LEWIS. We are required by law to support the price of milk and butterfat in this particular case, and in order to do that we must buy the products. Since we cannot buy the whole milk in a feasible way we must buy the products at a price which will yield to the farmers the support price established.

Mr. HORAN. You do not require certificate of performance from the processors?

Mr. LEWIS. No; we do not.

Mr. HORAN. You rely on

Mr. LEWIS. We rely on the competitive market to insure that the best price obtainable be returned in any given community. It is not infeasible to require certification in the case of dairy products because in most cases it is not possible to buy the milk directly from the processors who buy the product from the farmer.

In the case of cheese we buy the cheese from assemblers who have assembled cheese from a large number of small cheese factories in order to make up carload lots, and for this reason it would be infeasible to require certification.

Mr. HORAN. It is certainly a complicated operation.

Mr. GODFREY. There are many facets to it.

Mr. HORAN. My former colleague who served on this subcommittee so long, the Honorable H. Carl Andersen, always used to lament annually about 75-cent eggs in Washington returning 25 to 30 cents in Tyler, Minn.

Do you consider the factors of distance in transportation in the return to the farmers?

Mr. LEWIS. Well, in the case of milk the general theory is that milk is a product which is primarily produced for local consumption rather than for export through ports or sale in cash markets through terminal markets, and inasmuch as our dairy price-support program is designed to support the price of milk rather than of the products of milk our aim is to support the price of milk to the farmers. Therefore, we do not establish differentials for location, with one exception, butter. We do have a differential which will permit midwestern butter to compete in the eastern markets with the butter produced in the East.

Mr. HORAN. What do you mean by "differential"?

Mr. LEWIS. That is, we pay a little bit more in New York for butter than we do in Chicago, about half a cent a pound, and this permits part of the transportation cost to the New York market from the Midwest to be absorbed so that Midwest butter will be competitive with eastern-produced butter in the major markets of the East.

In the case of nonfat dry milk or cheese we do not allow differentials inasmuch as our object is to support the price of milk received by the farmers locally.

Mr. HORAN. Do you have anything handy by way of tables that would more or less explain the difficulties that CCC has in equalizing a Federal law as it applies, and Federal regulations as they apply to our multiplicity of milk sheds? I am aware of the problem that must be involved in this.

Mr. LEWIS. We can get this information for you.

(The information requested follows:)

Milk prices under individual Federal orders are influenced by milk values in the heavy surplus producing area of Wisconsin and Minnesota. Class I prices in individual order markets are related to the Chicago class I price plus the cost of transportation. The Chicago market draws a substantial portion of its milk supply from Wisconsin, which is the major milk-producing State in the Nation.

Chicago Federal order class I prices are closely related to prices paid for manufacturing grade milk in Wisconsin and Minnesota, which, in turn, are primarily determined by milk price support levels.

In the attached table, class I prices in selected Federal order markets are comEpared with Chicago order class I and uniform prices paid at regulated plants located at Eau Claire, Wis., and with prices paid for manufacturing grade milk in Minnesota and Wisconsin.

Comparison of 1962 average class I prices in selected Federal milk orders with average price paid for milk by manufacturing plants in Minnesota-Wisconsin, Chicago Federal order class I, and Chicago Federal order uniform (blend) prices at Eau Claire plus transportation and a 25-cent handling charge

1 Transportation costs based on information available as to transportation rates of a large milk transporting firm. Prices include an assumed 25-cent handling charge.

Mr. LEWIS. The price of fluid milk is established under milk marketing orders which are no longer within the jurisdiction of the ASCS. They are under the Agricultural Marketing Service. That is the program that is primarily responsible for the milk pricing for fluid use in the various milk sheds. But we can get information for you. Mr. HORAN. Well, you run into some further complications there I would assume. You have given the operation and regulation of marketing orders over to the Marketing Service?

Mr. LEWIS. Yes.

Mr. HORAN. Under a law that also involves ASCS and Commodity Credit.

Mr. LEWIS. Now, this is the Agricultural Marketing Agreement Act which, of course, affects a large number of agencies in various ways.

Mr. HORAN. Why did you turn it over to the Marketing Service?

Mr. LEWIS. The milk marketing order activity had previously been under Agricultural Marketing Service. Then it was transferred to ASCS, and in a recent reorganization was transferred back to AMS in order to consolidate it with the other marketing order activities in the Department. That is the marketing order activities for fruits and vegetables, tree nuts, and so forth.

Mr. HORAN. Where price supports are involved that becomes the duty of the CCC to supply the funds, which later on after the fact,