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on this capital. If losses were paid on the basis of $1.25 wheat in such a period, the deficit of 70,000,000 bushels would be equivalent to $87,500,000. Of course, at present the terminal market price has been between $1.30 and $1.40.
Following the small wheat crop of 1925—this was the smallest wheat crop in recent years that came prior to the depression—the season's average price per bushel received by producers, as reported in the volume, “Agricultural Statistics, 1936”, was $1.437 a bushel. The 70,000,000-bushel deficit on the basis of this $1.44 wheat would have been $100,800,000.
That is, roughly, the basis on which it was felt that, as a protection against the possibility that the corporation might have a succession of 3 bad years on top of what we have had, it was desirable to request approximately that amount. As was suggested, it is natural to expect that in those years when you do have to pay those heavy losses, the price will be the higher price, and that somewhere in the neighborhood of the amount quoted looks like a reasonable allowance.
It should a'so be noted that there is considerable likelihood of getting more than half the acreage, as was suggested a moment ago, in the large producing high-risk States, and less than half the acreage in the small producing low-risk States. The 70,000,000-bushel deficit was based on half the wheat acreage in each section, assuming acreage would come in in the same percentage in each State. Now, to the extent that a higher percentage of the acreage comes in in the producing higher-risk States, the 70,000,000-bushel deficit after 3 successive bad years would be enlarged somewhat. So with that consideration, in addition to the consideration of possible price, it was felt that the amount quoted was practically a minimum, if the corporation were going to be protected against the contingency of possibly three bad crops in a row.
Now, if after the bad years we have had we should have some good years, of course, then, there would be net reserves instead of deficits. Had the plan proposed been put into effect in 1930, 1931, and 1932, if you will notice in table 1 (a) on page 19 of the report, you would have had premiums in excess of indemnities paid out, and would therefore have accumulated a reserve. So, with some good crop years, the reserve would be accumulating and there would be no necessity for drawing in any substantial amount on the capital.
Senator POPE. In other words, if this bill had gone into effect in 1930, you would have had excess premiums paid in, and it would not have been necessary to draw upon this capital referred to in the bill? Mr. GREEN. Right.
Senator POPE. But if it had begun at the beginning of 1935, then it would have been necessary to have the reserve to take care of the shortages, because the indemnities would have been greater than the premiums?
Mr. GREEN. Right. That was what helped wreck the private attempts that were made in 1917 up in the Dakota and Minnesota territory. It just so happened that they got started in a year that was a bad crop year in that territory, and the loss payments were heavy the very first year.
Senator POPE. Referring to figure 2 in the report, Mr. Green, which shows this same thing in graphic form, have you calculated the value of the premiums that were paid during the first 3 years, at the current price of wheat, as compared with the values of wheat if it had been paid in indemnities during the last 3 years? Have you any such calculation as that?
Mr. GREEN. Yes, assuming that the price would have been what it actually was in those years. Of course, we have no way of knowing how much operations might in the earlier years have raised price or held it up, or how much it might have held price down in the other years, but taking prices as they were, the gain due to price difference between the last 3 years when you were paying out excess indemnities, and the early 3 years when the farmer was paying in excess premiums, amounted in the seven great plains States to a little less than $35,000,000.
Senator POPE. In other words, the farmers would have received the benefit of that increase in the price of wheat to the extent of about $35,000,000, according to this table.
Mr. GREEN. Yes. In fact, they would be in the same position as the individual farmer in Kansas or some of those States that had a big crop in 1931 and was able to carry it on his own account until 1933 and 1934, when prides were better, and it would simply mean that the insured would be getting the same benefits because it has been held as a reserve for their benefit.
Senator POPE. But, in fact, since the farmer was unable to hold that surplus wheat, whoever was able to hold it, presumably, the speculator, got the benefit of that $35,000,000.
Mr. GREEN. I think that is true. I think we had in southwest Kansas, a number of counties now said to be in the dust bowl, that in 1931 alone produced enough wheat, had they been able to maintain ownership of the excess over what they needed to dispose of until 1933 or 1934, to go a long way further in maintaining themselves. They had the physical production, but the point is that at the time they had it, it was worth about 25 cents a bushel and most of it went at that price, as far as the producers were concerned.
Senator POPE. On that point I may say that some objections have been made to the bill by those who were sympathetic generally with the idea, on the very basis that we might have 1, 2, or 3 poor years. That is the reason why this large sum is put in there, simply as a reserve, to take care of that emergency; but if we have ordinary years or very good years, then this capital is not drawn upon.
Senator MCGILL. In fixing this capital, have you taken into consideration the expense of storing the grain?
Mr. GREEN. No, I think when you get into the bill you will find there is another provision in there on the very last page, section 15, that makes a provision for appropriation to take care of annual operating expenses.
Senator McGill. Have you gone into the subject to determine about how much that would have been? Take the year 1931 that you are speaking of, when production in western Kansas and the Panhandle was around 35 and 40 bushels to the acre; have you gone into it to determine how much expense there would be attached to that? Mr. GREEN. Yes, we have.
Senator POPE. Mr. Green, I think you might as well, since the question has been raised go into that matter. We intended to have that explained when we got to it, Senator.
Senator McGill. I am prefectly willing to wait till you reach that subject, but that just entered my mind.
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Senator POPE. I think you might as well, Mr. Green, refer now to the $10,000,000 which is provided for operating expenses. Tell us what that covers, and also give your calculation upon which the $10,000,000 is based.
Mr. GREEN. I perhaps can answer that question here by just reading from the statement before me. An estimate of operating expenses in the beginning of around $10,000,000 annually is based upon the following considerations: While provision is made for the loading of premium rates to an extent sufficient to pay the expenses of local committees and associations to administer the program—that provision is in the bill—it is felt that this actual loading cannot be included in the premium the first year or two until premiums have been tested out in practice.
After all the actuarial calculations that it is possible to make on paper, we know it will be necessary to keep account by counties, because after 3 or 4 years' experience it will be found that in spite of every effort to equalize the rate, there will be counties where consistently more has been paid out than has been taken in, and vice versa, and that there will be after 4 or 5 years, necessarily some narrow adjustment of premiums. It was felt that until you were in a position to do that, since the amount that you are going to add to take care of those local expenses would probably be one-tenth, two-tenths of a bushel an acre, it would be difficult to equitably add that small amount when you haven't your premiums equalized as between all the counties. So in the beginning that expense would not be loaded onto the premium; otherwise, premium rates are likely to be loaded so heavily the first year that there would be no farmer interest in the program. Consequently, at first there would be the expense of local offices in connection with the agricultural program to take care of crop insurance.
Based on the experience that the Government has had in handling these local associations—and I think their experience has been with between 1,300 and 1,400—we estimated that in this wheat program we would probably have, at least in the beginning, not more than seven or eight hundred local offices, not to exceed a thousand in the begin. ning, anyway. On that basis and the basis of their experience with what they have had, it is estimated that $2,000,000 would take care of the organization expense and operation of these local offices on a scale sufficient to take care of at least half the wheat acreage, or slightly more.
Since the premiums received for crop insurance are to be invested in stored grain, there will be the annual expense of storage and of handling this grain. With half the wheat acreage under insurance, the reserve stock of grain may easily vary from around 25,000,000 bushels to possibly 100,000,000 bushels. It is estimated that to store and handle properly, and properly care for these reserve stocks, would require an annual expenditure of around $5,000,000. That would vary from year to year, depending on the size of the stock. On an average stock and making an allowance of practically 10 cents a bushel, which includes not only storage but the necessary handling and conditioning and so forth, the estimate made is arrived at. In fact, the warehousemen who were here last November said very definitely that storage space could be furnished at half the commercial rates, of around 12 cents a bushel a year, but allowing 10 cents per bushel for all costs, the amount is about $5,000,000.
The last estimate is to cover State office and regional office expense, because it will be necessary to have two or three regional offices, since you are going to invest the premiums in stored grain, at certain important marketing points. The regional office is to look after the investment of these premiums in stored grain and take care of the grain.
Now, to take care of those State offices and the two or three regional offices, and such administrative expense as there would be in the Washington office, it is estimated that would take around $3,000,000. Well, that adds up to 9 or 10 million dollars. That is in the beginning. If it is possible, and that policy is followed, to load the cost of operating these local offices onto the premiums in subsequent years, that would eventually take off approximately $2,000,000.
Senator POPE. Now, Mr. Black, as a member of the President's committee, you reported, or made a recommendation, that the expenses which have been detailed by Mr. Green be borne by the Federal Government. Would you care to tell the committee why you arrived at that conclusion, as to why these expenses should be borne by the Federal Government rather than loaded onto the premiums of the farmers?
Mr. BLACK. The reason the committee decided on that, I think, was substantially this. That over the past 10-year period expenditures for agricultural relief due to crop failures have been substantial. Similar expenses have been going on for a much longer time, but we did look into the expenditures for 10 years, looking back to 1926 or 1925. The Government has disbursed some $600,000 in these payments of various kinds because of disasters, crop disasters primarily.
Those, of course, have usually been rather emergency disbursements and we felt that at least some saving in such appropriations should result if a successful crop insurance program were established in this country, because we believe that, in these territories especially, the Federal Government would have to make similar disbursements. Because of the real possibility that we think exists of eliminating, not all of them but a certain part of them, we thought that the Government could well afford to assume the expenses of operating a program of this kind, on the assumption that there would be at least as much saved in reducing the size of relief appropriations which are made from time to time. And the committee, I think, was convinced that the saving would be substantially more than the amount necessary to pay the expenses.
That was the primary reason, I would say, for recommending that the administrative expenses be borne by the Federal Government.
Senator Pops. I note on page 29 of your report you set out the amount of seed loans, rehabilitation credits, outright grants and all that sort of thing during the past 10-year period, and as you say, they amount to $615,937,000, which would amount to an average of over $61,000,000 a year that now has been appropriated during the past 10-year period for this sort of relief to the farmers. The amount that is contained in the bill is $10,000,000 for these operating expenses. Since a substantial portion of these relief appropriations would be saved to the Government, it would seem fair the Government could undertake to pay the administrative expenses.
Senator McGill. That amount, Senator, has been expended for relief on all classes of farmers?
Senator POPE. Yes. Mr. BLACK. Of course, we are not suggesting that all of those similar expenses would be eliminated in a program of this kind, because we don't look on this as primarily a relief measure, but we do feel that a good many of the loans and the grants similar to crop and seed grants—the necessity for those would be eliminated in certain territories. And in any case that type of need would be much more systematically handled under this procedure than it necessarily had to be when these things came along as emergency measures from time to time, when all of the waste and inefficiency incident to getting very rápid action on a rather wide front, of course, comes into the picture.
We have thought, too, that there is a certain measure of public welfare in this whole thing, not only to farmers but to consumers as well, in the stabilizing effects that a broad crop-insurance program would have. There are certain public-welfare factors, very definite public-welfare factors, involved here, and we thought that it was not unreasonable to expect the general public to partake of some of that expense.
Senator SCHWELLENBACH. Is it your idea that the Government should permanently pay?
Mr. BLACK. I think that in our discussions it was felt that eventually the local organizations should assume their local expenses, but whatever overhead organization and overhead expenses were necessary, that that probably should be paid by the Federal Government as a continuing proposition.
Senator SCHWELLENBACH. I just have this thought, that I would have no objection to the idea that the Government should pay it permanently, but that if it was the idea that after a few years the Government is not going to pay the expenses, that if we were setting up a private company we would figure out our necessary reserves and figure out our operating losses during the period of time that we expect the company would have operating losses, and we would include that all in the capital, and it seems to me that if this is to be a temporary proposition, from the point of view of good bookkeeping it might be better to increase the amount of capital in the relation that during the first period of years that capital would be depleted to the extent of operating losses.
Mr. BLACK. I don't know what the policy of Congress would be with reference to that. I think the committee felt that the local expenses at least ought to be borne by the local associations eventually, because in other similar operations it is found that where the local associations do bear those expenses, there is considerable incentive for good local operation. There has been a precedent set for the Government to pay the general administrative expenses for enterprises of this kind. There is, for example, the war-risk insurance and other similar types of activity, where the Government has paid the general overhead expenses of institutions which have seemed to be in the general public interest.
I think that this measure has more significance than just to benefit farmers. I think it is very definitely in the public interest and should not necessarily be looked on merely as a farm program of interest to and benefit exclusively to farmers.
I think the general public is very definitely concerned in it and is in a position to reap very definite benefits from a successful cropinsurance program.