the country, we would have to get, in addition to the 13.1, 72 cents per bushel more to be equal to manufacturing; 510 more to be equal to banking.

I might add that lots of people think of grain warehousing in the same light as banking in that people put their money in the bank and they can go and get it, where they put their grain in the warehouse, get a warehouse receipt and can take it back and get the grain back. So they think of banking and warehousing as being quite similar in responsibilities.

Then the utilities were the lowest in the group, only 5.1 but this chart shows that if your industry, on the average, and I am taking only the median of the range, was to receive earnings based on those that are comparable to industries with similar risks, we would have to have a rate of 19.2 cents per bushel annually, and mind you now, there is no weighting in here for risks at all. This is just earnings. We have the same situation in chart No. 6, and I am skipping some of the text of my prepared statement here. But I go on to this: We used the same technique in this that we did in the previous chart No. 4, in which we took the median as shown by the USDA cost study. We built it up for what we thought was the proper amount of labor, the proper amount for depreciation, the proper amount for increased costs, and for shrink, and then we used the return on investment. We came up with 7.3, as compared to a figure which the Government finally announced as 534 on wheat and several other grains, 5 cents

on corn.

Now, Mr. Chairman, I would like to refer to some other material in table form that is still in this appendix, marked "Exhibit B, charts 7, and 8," which I believe further confirm the fact and support the Peat, Marwick, Mitchell report that the Government findings are open to question.

On chart No. 7 you will find calculated storage returns to Ohio country warehousemen based on costs on 68.5 percent occupancy, using data of 27 country elevators.

Now, right off the bat, I have to admit that the Government study was based on 77.3 percent occupancy but I want to point out, too, that the Government came out with an average of 8.7 and even with 9, approximately 9 percent lower occupancy on these Ohio elevators, only that small amount, they come out with 1212 cents. You could weight that down 10 percent and you would still have a cost of over 1114 cents a bushel.

On handling, the Government came out in their study with 42 for the median figures, and the Ohio study shows total calculated handling costs direct operational costs-of 913100. That is quite a difference. I know this: That Ohio cannot handle, and there are lots of other parts of the country, I think-up in your NorthwestSouth Dakota, Minnesota, Iowa, Wisconsin-all these States that have these smaller houses and some not so small, are going to have a great deal of difficulty living under the proposed figures.

Now, if you had talked to Dr. Sharp as I have, I know you would believe, as I do, that the work which he has done was extremely thorough. He is associate professor in the Department of Agricul

tural Economics and Rural Sociology at the Ohio State University. He said to me, a week ago today:

The U.S. Department of Agriculture cost study does not represent adequate methodology in taking the data. The examiners were instructed to obtain from operators their estimates of labor allocation and other expense.

It has been my experience over a 3-year period covering a research project at Ohio Agricultural Experiment Station, entitled "An Analysis of Marketing Costs and Service Charges for Elevators in Ohio" (charts VII and VIII), that to determine the costs of providing the various services offered by country elevators and in order to utilize such developed cost figures to assist in arriving at sound operational and investment decisions that would result in efficient, reliable and low-cost services to the farmer, a detailed microstudy and analysis of costs is necessary.

It is found that a warehouse manager's judgment on cost distribution is not dependably accurate unless it can be supported by carefully kept daily, weekly, and monthly records of labor transfers, together with allocation of other cost factors such as use of machinery and equipment for each of the various services performed.

I, therefore, believe that the information so hurriedly developed for the U.S. Department of Agriculture survey cannot be considered dependably accurate.

Thus it would appear based on the judgment of two such specialists as Mr. Harold Salstead of Peat, Marwick, Mitchell, and Dr. John Sharp of Ohio University, that the U.S. Department of Agriculture cost survey methodology was inadequately planned.

Dr. Sharp is a member of the North Carolina Grain Marketing Technical Committee composed of representatives from the various land-grant colleges of the area. Dr. Sharp told me last Tuesday that the USDA presented its cost study plan to the committee in session in the summer of 1959 and that members of the committee pointed out flaws in the planning and methods of the proposed survey at that time, indicating that the study might produce unreliable figures on cost.

One very significant weakness, in all the work the Government has done in its study of costs, is that these cover only 1 year-a year of particularly high use of all available storage space because it was the year of the largest wheat crop in our history.

One fact which is often overlooked is that the balance sheet of the warehouseman lists only those assets and liabilities which have been recognized on the books and records. It should be borne in mind that in the grain warehousing business any statutory, contractual, or common law liability for grain stored in the warehouse for the account of others is not recognized nor is it expressed in dollars and cents among the current liabilities listed on the balance sheet.

Any undisclosed liability of a warehouse is simply not apparent in 1 year selected from the middle of a continuing storage operation. This liability is in fact not entirely disclosed until the grain is delivered, the house is empty and the obligation 100 percent discharged. I would like to go into this accounting thing a little more in detail. And what I am going to say is not in my prepared statement.

In grain warehouse accounting, the total number of bushels of grain on hand in a warehouse as disclosed by the records, is shown in bushels. It is not the practice to assign a per bushel value to quantities of grain at the close of a fiscal year, or an end of an interim accounting, but instead to mention in the report the quantity of outstanding warehouse receipts covering grain stored for others.

Unless the accounting firm making the report has had an opportunity to apply appropriate accounting checks, to records of official weigh-up

58385-60-21

of all the grain on hand, the report will be qualified to that extent. However, an accepted practice now is that of measurement of grain on hand in storage warehouses where, for good and valid reasons, it is inappropriate or impossible to conduct a weigh-up in order to determine any such undisclosed liabilities.

It is considered by supervisory personnel of the various State warehouse licensed agencies in the area in which I am familiar, that measurement represents merely an approximation of the quantity on hand. And it is considered that such measurements cannot possibly approach in accuracy an official weigh-up.

It is my considered opinion, therefore, that in expense statements which are examined for purposes of evaluating costs of operation in cases where the firm under examination has not had an official weighup or clean-out, is completely valueless. Any such study would merely take into account only the financial transactions which had actually passed through the books and records, without giving any weight to undisclosed liabilities, even though the statements for the period have been adjusted for an estimated amount of variety between the total of outstanding warehouse receipts and the total of any measured inventory.

This is one of the risks and hazards of the business. As one further clue to how others view this risk of liability, may I refer to exhibit C showing some interesting developments in an attempt to buy insurance coverage for such a typical risk.

This is a part of the appendix. It is a letter, actually, and I am referring to exhibit C-2.

(The document referred to will be found in the appendix at p. 534.) Mr. LAYBOURN. We asked our insurance broker to canvass the domestic market in an effort to get a quotation on such risk coverage. A large group of domestic grain insurance companies was asked to quote. The matter was presented to its board and the request was declined. Our broker continued by exploring the London market.

That risk coverage that I asked for was for the coverage for deterioration in quality while in storage, and subject to seizure by Pure Food and Drug Administration on any grain while in storage or when loaded out of storage is found to be actionable under the Federal Food, Drug, and Cosmetic Act. And the loss of grain in handling in excess of one-eighth of 1 percent. The people who were asked were people who were experienced in this kind of handling of this kind of insurance, the Grain Dealers Mutual Insurance Co., and they wrote on March 2, as shown in this exhibit C-2:

The underwriter's committee reviewed the question of providing coverage which would indemnify a warehouseman for deterioration in quality of storage grain, for the loss in grain handling, and for seizure of contaminated grain by the Pure Food and Drug authorities.

It was the consensus of the committee that no rate would be sufficiently high to cover these hazards at a profit to the insurance carrier. That is, when I speak about a rate being high enough, it would be a rate which would be acceptable to the insuring public.

The committee decided unanimously that the providing of coverage against deterioration was also an almost impossibility.

The upshot of the whole meeting was that the committee declined to recommend that these types of coverage be written.

One of the member companies represented on the committee has had a very unsatisfactory experience on what was thought to be quality business on one of the phases of the coverage, that is, seizure of contaminated grain,

At this point I would like to read an excerpt from a letter I received from Mr. Joseph Gregg who has appeared before this committee. It

states:

Under the Delaney amendment, any fumigant or pesticide could be declared to be a carcinogen, even though it only caused cancer through injecting of laboratory animals, but if this occurs, then any grain treated with this fumigant or pesticide that shows any residue of such chemical would be subject to seizure, without any question of doubt, as probably could not be induced into even feed channels.

This same problem would carry over under the Miller amendment, and if future laboratory experiments would show that the present tolerance variance should be lowered, then any grain with a residue in excess of these tolerances is also seizable by the Food and Drug Administration.

An important thing here is, it seems to me, we have a situation in which a farmer stores grain on his farm, and in an effort to protect it, to keep it from spoiling, to keep insects from getting into it and damaging it, he applies a pesticide or an insecticide to it. My understanding is that all of the insecticides have to be labeled and to be approved by the Department of Agriculutre. I feel that this is a tremendously important thing, because there is no test which an elevator man can make for residue, and it subjects the industry to a great deal of hazard in this question of grain spoilage.

He reported that London would not write such coverage direct but indicated they would consider reinsuring a line if written by a domestic carrier considered an expert in that field of coverage. Later, he reported by telephone that while he had no firm quotation, in his opinion the coverage might possibly be placed on the basis of the assured carrying the first 25 percent of the line, and probably at a rate of 20 percent of market value. London might be interested in the 75 percent remainder of the line. At 20 percent per dollar of insured risk coverage, the quotation was entirely out of line.

That would work about to about 30 cents per bushel, and that is several times what we get paid under the Uniform Grain Storage Agreement.

However, at this opint I would like to refer you to exhibit D which illustrates the portion of net income attributable to cover risk.

(The document referred to will be found in the appendix at p. 538.) Mr. LAYBOURN. I will not bore you with this. It is extremely technical and difficult to understand.

I have here taken the storage income for 1 year under the present contract, based on the 1956 Uniform Grain Storage Agreement, which is 0.168 cent, and have applied our adjusted cost which would bring a result of net profit before taxes of 0.037 cent per bushel.

Then assuming that we were to allow interest at 6 percent on the invested capital, and including working capital, we would have 0.024 cent. And the net profit before taxes to cover risk, would be 0.013 cent per bushel.

Now then, if you take 1 bushel of $2 wheat on $1 of liability per bushel, the amount which would be attributable to risk before taxes would be sixty-five one-hundredths of 1 cent. When you take a bigger amount and you apply your taxes to it, it would be different. And all this talk about the money that people have been making in our business before taxes, that is, it has been before taxes, and it has been before a lot of other expenses have been applied to it. And it has given the

public a very bad opinion of our industry, as if we are a bunch of profiteers. I do not feel that that is true. I think that if the people who have been so critical were faced with the necessity of assuming the risk on a considerable amount of the grain that is stored, they would think twice before they would take those risks.

Mr. LAYBOURN. In this illustration it shows that the warehouseman assumes 100 percent of the risk for which he earns sixty-five onehundredths of 1 cent for each dollar of total risk. It appears to me that this illustration serves to put this element of risk in clear, sharp focus and to show by comparison the small amount of cost, or premium, which depositors actually pay when they shift such risks from their own custody, care, and control to that of the warehouseman. Perhaps your committee will look into what is happening to working capital in warehousing firms, as I have. Last month I had occasion to discuss this matter about financial statements of warehousemen with some of the people in the Kansas State Warehouse Division at Topeka. I asked whether they had observed any sharp increases or decreases in working capital shown on the new balance sheets which accompanied warehousemen's applications for renewal of licenses.

The answer given was that new balance sheets received since the first of the year showed generally no improvement or only slight changes up or down in the working capital position of most Kansas warehouse applicants, compared to the previous year.

I would like to ask you to look at exhibit E which quotes excerpts from letters received from two bond underwriters.

(The document referred to appears in the appendix at p. 539.) Mr. LAYBOURN. This points out the problem that the bonding people face in coverage, because every warehouse has to be bonded before it can be licensed. The position of the trade is such that it is not showing the improvements that it should if large profits were being made and retained. And if, under the present rate that is proposed to go into effect July 1 by the Government, we find or it is found that warehousemen begin to lose money, we are going to see the bonding companies take a new look at this thing. And I would say that this is an area where your committee, Mr. Chairman, could be a fine service to the Department of Agriculture, perhaps, to bring them up to date on what these things are that are happening, and as to what is happening.

The importance of this matter should not be ignored. If warehousemen, as the result of the cut in rates, operate at losses, dissipating working capital, it is quite possible that a good many operators will be unable to qualify for warehouse bonds, and without securing a bond they cannot secure a warehouse license. Those of us in the industry who work closely with country warehousemen are perhaps more aware of consequences of such a predicament.

Last Thursday I received the following comment in a letter from Dr. Richard Phillips of Iowa State University, who has testified here before your committee on the subject of grain storage costs:

Personally, I am in full agreement with your making your case on the basis of average costs, or the costs for the average warehouse as you do. Everyone concerned is well aware of the deviation from these averages, I am sure. But any system to move away from a uniform agreement would have the effect of discouraging efficiency and increasing warehousing costs. I feel that any such