tion its fair share of all joint expenses, including administrative and overhead.

So that the comments I had about the bottom row of figures, say, in that Farm Store Merchandising article, do not apply to the figures I used to get these ratios; rather, the standard accounting procedures were used to get the net profit storage of 5,900-whatever the figure was-dollars. And this was charging storage its fair share, and all other departments their fair share of all joint expenses between the departments.

Senator PROXMIRE. These 15 and 19 percent figures that would turn on total assets and net worth then, in your judgment, are fair and complete; they are not overly conservative?

Dr. PHILLIPS. No; and they represent the best allocation we could possibly make between both for assets and expenses between storage and handling on the one hand and other phases of the business on the other.

Senator SYMINGTON. As I understand it, this is a high cost, relatively, operation; is that correct?

Dr. PHILLIPS. Well

Senator SYMINGTON. Did you not say it was a cent per bushel above average?

Dr. PHILLIPS. Yes; it was above the average in the old study, primarily because of the volume in capacity and not because of management. I think that Jones is by far better than average management.

Senator SYMINGTON. And after all charges, following Senator Young's suggestion, this is quite logical and proper; these people were making, say, roughly 63 percent on costs and 19 percent on investment, is that correct?

Dr. PHILLIPS. That is correct.

Senator SYMINGTON. The figure on investment you believe is fair and conservative?

Dr. PHILLIPS. Yes.

Senator SYMINGTON. Will you proceed, Mr. Counsel?

Senator PROXMIRE. May I just ask this? This does include shrinkage which you did not include in your 71-percent estimate? You do include it, however, in your 15 and 19 percent?

Dr. PHILLIPS. No, I do not.

Senator PROXMIRE. You do not?

Dr. PHILLIPS. No.

Senator PROXMIRE. Then we would have to make a little further computation?

Dr. PHILLIPS. Yes.

Senator PROXMIRE. And reduce that 19 percent?

Dr. PHILLIPS. Yes. We would have to use some average rate of shrinkage because he has no corn on hand.

Senator SYMINGTON. Well, for the record on that point, will you do that and put it in on the estimated shrinkage?

Dr. PHILLIPS. All right.

(The data submitted by Dr. Phillips appears at p. 21.)

Mr. SCHMIDT. Now going to the rest of your workshop, did you study any other elevator?

Dr. PHILLIPS. Yes; the Archer Grain Cooperative, which we have mentioned.

Mr. SCHMIDT. Where is it located?

Dr. PHILLIPS. Archer, Iowa.

Mr. SCHMIDT. Will you describe the facilities there?

Dr. PHILLIPS. Well, I cannot do this as precisely as the manager could.

Senator SYMINGTON. Just briefly, just to give the subcommittee a picture of this particular elevator.

Dr. PHILLIPS. They have a combination of types of storage structures there, including some that we think of as conventional structures and some of what we think of as flat structures.

Mr. SCHMIDT. What is their storage capacity, if you have it there on your worksheet?

Dr. PHILLIPS. Let me see if I have that.

Mr. SCHMIDT. Go ahead with this

Dr. PHILLIPS. The figure I have-and this would need to be checked was 462,300 bushels.

Mr. SCHMIDT. During the survey?

Dr. PHILLIPS. During the survey.

Mr. SCHMIDT. What did your survey disclose as to Archer on their costs and profits?

Dr. PHILLIPS. Well, again making no allowance for shrinkage or quality deterioration but using the actual costs incurred, the total costs, $48,694. And I do not have these on a per bushel basis. A profit of $38,064, which would make it 77-percent ratio of profit to cost for the period studied for Archer.

Mr. SCHMIDT. And did you go ahead and carry out your further percentage computations as to investment and equity?

Dr. PHILLIPS. For the Government grain at Archer, using, of the total assets, 144,173 used in the Government grain operations, this would make a rate of return on total assets of 26.40 percent, or in terms of member equity in the cooperative, which represents 66.9 percent of total assets, this would give a rate of return of 39.46 percent in the grain storage and handling operation. As compared to comparable figures for the rest of the business at Archer, the rate of return on total assets for all other departments, 13.10 percent; and on member equity or net worth in the cooperative, 19.55 percent.

Mr. SCHMIDT. There is considerable difference then between the grain storage operations and the rest of his operation?

Dr. PHILLIPS. Yes. All these ratios are good. I think they reflect the fact that Archer is very effectively managed and way above average for country elevators in Iowa.

But perhaps the best comparison here would be between the figures quoted for the Government grain part of the business and the rest of the business.

Mr. SCHMIDT. Now, this shows that of his gross profit margin, 33.4 percent comes from storage and 43.4 percent of his net profits come from storage.

Dr. PHILLIPS. That is correct.

Senator PROXMIRE. You say Archer is away above average in management?

Dr. PHILLIPS. Yes.

Senator PROXMIRE. Does this necessarily mean that their profits are away above average?

Dr. PHILLIPS. Well, insofar as the job of the salaried manager is to make the assets entrusted to him for the owners, whoever they are, as profitable as he can, as productive as he can

Senator PROXMIRE. I understand that. But there are other factors as we all know, that are involved.

Dr. PHILLIPS. Yes.

Senator PROXMIRE. Do you have any basis for determining whether this is a high-cost or low-cost operation?

Dr. PHILLIPS. Yes. Well, generally speaking, I think that it is probably a relatively lowcost and relatively high profit, not only in Government storage but in the rest of the business as compared to averages for Iowa.

Senator PROXMIRE. Is there any basis at all, any kind of a study that has been made that is available, indicating the general profits, the profits of just one or two or three or four of these operations?

Dr. PHILLIPS. I have not made any or been involved in any such study. Unfortunately, in our old study we did not get measures of equity or assets in the grain storage or the business.

Senator PROXMIRE. It seems to me it would be easy to pick it up just from the standpoint of patronage dividends in the cooperative. Dr. PHILLIPS. Yes.

Senator PROXMIRE. Nothing like that has been done?

Dr. PHILLIPS. Not to my knowledge. I am not familiar with current studies being made in grain costs to know whether these things are being included or not.

Senator SYMINGTON. Will you proceed?

Mr. SCHMIDT. Dr. Phillips, in the light of your studies, would you say that the grain operators are receiving a fair rate of return on Government grain storage?

Dr. PHILLIPS. Well, it seems to me in these two operations, at least, they are higher than the rate of return in the rest of the business. I would think probably, knowing the risks, looking at this ahead of time, that they need to be somewhat higher but, it seems to me, not this much higher than the rest of their business."

Mr. SCHMIDT. In other words, they are too high, in your opinion? Dr. PHILLIPS. Yes. I would think that maybe 1 or 2 percent more, higher rate of return or expected rate of return for Government storage might be enough to induce an elevator operator to use his facilities for Government storage rather than to use them for other purposes. I think they would have to be some higher because he faces the uncertainty as to whether the Government will have grain for him to store in the future. And when he makes a longrun investment, as particularly he would in conventional storage, which may last 20 or 50 years even, if he did not have expectation that it will be used more than a year or two, he must expect a somewhat higher return to use them for this purpose than he would to use them for, say, grain merchandising or commercial storage.

Mr. SCHMIDT. The importance of this rate becomes readily apparent, as the chairman stated at the opening of this hearing. Each 1 cent of the storage rate represents an expenditure of over $25 million a year of the taxpayers' money.

Dr. PHILLIPS. Yes.

Mr. SCHMIDT. I have no further questions.

Senator PROXMIRE. Can you evaluate this in terms of the supply of storage space that has been made available and in view of the fantastic increase in the grain that has to be stored? Has this been so inviting that there has been a good increase in the storage facilities?

Dr. PHILLIPS. Well, I think this, coupled with other incentives that have been made available to elevators to erect storage facilities for the purposes of storing Government grain, such as the accelerated depreciation, guaranteed occupancy, and so on, all together have combined to perhaps not overbuild but to bring quite a response in new storage construction.

Senator PROXMIRE. Now, how about this overbuild; I understand that there is only one section of the country in which there are ample facilities available, in spite of the enormous increase in the surplus. Dr. PHILLIPS. Yes. Well, this is a very hard one to measure in concrete terms, I think.

In order to handle, say, some ordinary variation from year to year, because of weather factors we need to have excess storage capacity as defined by, say, an average production year in order to be able to handle these peak years.

So that it makes a difference whether we are viewing the short run or the long run. If we look at last year's production and present storage or last year's needs for storage and present facilities, we might come up with one answer. If we looked at variation in production and therefore the demand for storage over a time, we might come up with another.

Senator PROXMIRE. You are working into a situation where you have some excess capacity and where you have therefore, a matter of judgment on the part of the Department of Agriculture when it negotiates for storage space and it does so with a fixed price which is high enough to provide a very substantial profit as compared with other uses for these facilities.

Dr. PHILLIPS. That is true.

Senator PROXMIRE. Therefore, if not an opportunity for favoritism, it requires a great deal of carefulness on the part of the Department of Agriculture to make sure that they are very fair in allocating this very, very profitable business.

Dr. PHILLIPS. Yes. And I think it is true that it takes a lower rate to

Senator PROXMIRE. In other words, you do not have the discipline of a low rate, which would make it easier than you would on a firstcome, first-served basis or on a competitive basis?

Dr. PHILLIPS. Right.

And assuming society wanted more storage built, I think it would take a higher rate to do that than it would to cause present commercial storage in Government hands, once the decision has been made, to invest substantial funds and build facilities. Then the operator's view toward it is different than if he is contemplating building these originally.

So that if the present rate, for example, were designed to encourage the building of new storage, and we now want no new storage, it would perhaps take a lower rate to induce, or be sure that the present

facilities would be used for storage of Government grain rather than

other purposes.

Senator PROXMIRE. But the present rate has been ample to provide, apparently enough storage facilities in spite of the terrific increase, perhaps unforeseen increase, in the production of grain?

Dr. PHILLIPS. Yes, sir. This plus the other things that I mentioned-the fast writeoff and the guaranteed occupancy.

Senator SYMINGTON. Dr. Phillips, do you know why, based on your study-I notice the return before costs, say in 1940, for the five districts is 7.4 cents, 8 cents, 84 cents, 812 cents; and in 1956 that increased, talking respectively, to 7, 8, 8.5, 17.9, 18.6, 19, 19.4, 20.1, income before costs. And that is on rail received. It is even greater on truck received, sections 1, 2, 3, and 4 of the country are 10, 11, 1134, and 12. We will have another figure for the section 5 area. In 1940 that jumps to 22.1, 22.9, 23.7, 25.1, and 25.8. In 1956-the following percentage increases run in chronological order: 148, 123, 141, 128, 122, 99, 102, and 110 percent. Do you know why there has been this very large increase in the return per bushel of grain stored?

Dr. PHILLIPS. No, I cannot answer directly. I am not familiar with the mechanics under which these rates are negotiated.

I do know that commercial storage rates made some increase over this same period of time, presumably based on inflationary forces causing certain cost items to go up at the same time.

Senator SYMINGTON. There is no question about that. There should have been an increase. There has been an increase in costs; we all know that. But the degree of the increase in return, based on these figures, can you explain that?

Dr. PHILLIPS. No, I cannot. And I know nothing, as I say, of the actual mechanics under which these are negotiated.

Senator SYMINGTON. Thank you, Doctor.

Senator YOUNG of North Dakota. I have a question.

Senator SYMINGTON. Yes.

Senator YOUNG of North Dakota. Do you have any figures on the amount that the grain storage capacity of Iowa has been increased in the last 10 years?

Dr. PHILLIPS. No, I do not have those figures with me. I have seen published reports.

Let me see, I think the census study, for example, showed both the bushels and the percentage increases in commercial storage facilities since, I believe 1954, or some rather recent period. But I do not have those at my fingertips.

Senator YOUNG of North Dakota. The storage capacity has been increased several hundred percent.

Dr. PHILLIPS. It has been a very marked expansion, yes.

Senator YOUNG of North Dakota. But if we got back to normal again with respect to surpluses, all this additional storage capacity would represent quite a loss to companies in the storage business, would it not?

Dr. PHILLIPS. Yes, I think so.

Now, perhaps we should point out here that our advice to elevator people in working with them to help them on management is to hedge on this as much as possible by building multiple-purpose type structures wherever they can. So if they put up, say, quonset buildings for