Mr. TORGERSON. I will be very happy to, Mr. Chairman, and members of the Committee. If it is agreeable with the Chairman, I will just highlight some aspects of our program.

Mr. WHITTEN. Your full statement will appear in the record. Handle it any way you wish.

[CLERK'S NOTE.-The full text of Mr. Torgerson's prepared statement appears on pages 44 through 49. The explanatory notes appear on pages 50 through 66.]

Mr. TORGERSON. I will proceed with a few highlights of my testimony, Mr. Chairman, and then proceed with any specific questions that you have.

We appreciate the opportunity of appearing before you and testifying on our budget request for the Agricultural Cooperative Service. I would like to introduce my colleagues here with me: Jack Armstrong, who is Deputy Administrator, and Sam Ladd, the APHIS Budget Officer who you met before. APHIS is the agency that is providing administrative services to several of the smaller agencies in the Department, and I might add, doing so very efficiently.

The Agricultural Cooperative Service, Mr. Chairman, as you know, is the Department's focal point for providing research, analysis, technical assistance and education to farmer-owned cooperatives throughout the nation. The Agricultural Cooperative Service performs research on policy analysis, on cooperative-related issues and is the primary supplier of technical advisory assistance to these farmer-owned businesses.

According to the Cooperative Marketing Act of 1926, there are five very specific missions laid out for us that we follow very closely in application internally. These include technical advisory services to cooperatives, assistance to producers interested in organizing new cooperatives, a program of research, collection and reporting of statistics annually on cooperatives; and, finally, cooperative education and information.

Our statistics show for 1983 that there are 5,989 marketing, farm supply and related service organizations operating in the country. They had combined sales of about $66.8 billion in 1983. The interesting fact about these numbers is that while sales declined about 3.6 percent from 1982, net margins of all cooperatives increased about 25 percent, to about $1.1 billion from very low levels in 1982. The saying that cooperatives cannot prosper when their farmerowners are hurting is certainly true today. Cooperatives that supply much of the producers supply needs such as feed, seed, fertilizer, farm chemicals, and petroleum products face the same financing and accounts receivable collection problems as do other rural banks and businesses that are in trouble.

STATISTICS ON COOPERATIVE LOSSES

Mr. WHITTEN. You are making a statement there very much of interest to me, and I am sure to the Committee too. Could you supply such figures as you have to support that?

Mr. TORGERSON. We can try, yes, sir.

Mr. WHITTEN. The PIK program, for instance, cut production 11 percent and cut our exports by 11 percent, while our foreign com

petitors increased their production 11 percent. I would just like to know, so far as the record shows, just what the effect was where a cooperative was serving as the store or supply station. So insofar as you have figures, we would appreciate having them.

I am sure the figures support you, but we would like to have the figures in the record.

Mr. TORGERSON. We will do that, sir.

[The information follows:]

In 1982, ACS estimated that 695 of the 6211 farmer cooperatives operating that year suffered losses. In 1983, 702 cooperatives showed losses. These figures represented eleven and twelve percent, respectively, of all farmer cooperatives. Total losses in 1983 were nearly $89 million.

Small cooperatives were not the only ones suffering losses. In 1982, 18 of the largest 100 farmer cooperatives reported losses totaling $248 million. In 1983, 12 cooperatives reported losses totaling $32.9 million. Data on cooperative losses for 1984 are not yet available.

In 1983, 8.1 percent or 492 of the 5,989 farmer cooperatives were financing their total assets with net worth of 30 percent or less. Assets of these cooperatives totaled $8.4 billion-29.3 percent of all cooperatives' assets. Net margins were $147 million or nearly 14 percent of total net margins.

More specifically, 122 cooperatives had a net worth/total asset ratio of 10 or less, 134, 10.1 to 20, and 236 had a ratio of 30.1 to 40. With relatively high interest rates and low net margins, many of these cooperatives could be facing insolvency.

Mr. TORGERSON. I would add that despite some of these problems within the financial areas, farmers still look to their cooperatives to be as efficient and effective as possible, to reduce prices for needed supplies and attempt to get higher and fairer prices for their products.

AGENCY ACTIVITIES

I would like to provide a brief overview of our activities, Mr. Chairman. During the past year, our agency has been involved in 67 technical assistance projects involving 94 cooperatives and producer groups of which 47 of these were for emerging or developing cooperatives.

In the research area, we have provided critical information to cooperative managers and directors in such areas as the annual financial profile of the largest cooperatives in the country. These largest 100 cooperatives account for about 55 percent of total business volume for all 6,000 cooperatives in the country.

We are also involved in a number of cost studies. We have a study on the liability exposure of directors for serving in their capacity as directors of cooperatives. We developed guidelines for evaluating cooperative mergers, and we continue to do some future role studies, looking at improving the effectiveness of cooperative operations in such areas as potatoes and apples. We just completed a study in wool, among others. The results of these research and technical assistance studies are highlighted in our monthly publication, "Farmer Cooperatives," which is now in its 50th year of publication.

I would inform you that this past year ACS programs have been reviewed by an outside program review committee, chaired by Dr. Joe Coffey, Director of Planning and Economics for the Southern States Cooperative in Richmond, Virginia. This periodic review process provides much valuable feedback from the recipients of our

services. The report is being finalized, and we are hopeful that it will be available in a month or two.

To conduct the agency's activities for fiscal year 1986, we have a ceiling of 64 staff years. Our budget request for fiscal year 1986 is $3.6 million, which is $1.1 million less than the agency's fiscal year 1985 level.

In addition, we are proposing that ACS initiate a user fee program for providing its technical assistance to cooperatives, Mr. Chairman.

This concludes the highlights of my testimony, and I will be happy to respond to any questions that you might have.

COOPERATIVES IN FINANCIAL DIFFICULTY

Mr. WHITTEN. What is the effect on a local cooperative? Does it go broke, or what does it do when it gets to where finance is such that it can't continue? Is it handled any differently, or do you have banks for cooperatives, or do they have to be able to step in and help with that type of thing? How does it work? What is the effect of what we have now, a drop in farm income and a drop in production? How is that handled by the cooperative?

Mr. TORGERSON. It is handled in various ways. One of the obvious situations in which a cooperative could get itself into is that its net worth, the members' ownership capital, has eroded, and it just simply has to dissolve. That is taking place in several parts of the country today.

In other instances, however, some of these local cooperative organizations have the opportunity to merge with a nearby cooperative in the same county or general region.

Mr. WHITTEN. Where a bigger bank takes over a small bank which is behind and in bad financial shape, it strikes me that it can't strengthen the major bank. We see that all over the country. So when a bigger co-op takes over a smaller one, it is bound to weaken to a degree the bigger co-op.

Now, where does it end up? How far can it go before it goes broke or dissolves, or whatever?

Mr. TORGERSON. Each of these is on an individual basis, depending on the financial condition of the parent cooperative.

Mr. WHITTEN. The whole thing is a part of the farm credit system, is it not?

Mr. TORGERSON. Yes, it is. Many of these cooperatives are financed by the banks for cooperatives and own the banks.

Mr. WHITTEN. Describe for the record the effect of this crisis that agriculture is now involved in. You have touched, on it here, but I would like for you to enlarge on it, because we have got to correct this situation if we are going to have a prosperous country. Folks don't realize how basic agriculture is. They don't realize, if industry and labor lose their biggest market, the effect it is going to have on all of us.

Mr. TORGERSON. We have some areas in the country where we still have two cooperatives in the same town. In those situations, the handwriting has been on the wall for a long time that these two cooperatives should get together, and they failed to do so. Mr. WHITTEN. It is written in English too, isn't it?

Mr. TORGERSON. Yes, and when push comes to shove, they are finally getting together.

Mr. WHITTEN. Describe the situation for the record.

Mr. TORGERSON. The situation, I would say, Mr. Chairman, right now is that with the strong dollar, export markets are off. We have an overcapacity situation in many grain elevators and farm supply firms. We are finding the cooperatives are faced with the necessity of selling or mothballing certain assets.

Mr. WHITTEN. You are bound to bring that kind of information together for the operation of your own agency. For the record, when this comes back to you, could you give us numbers, percentages, and what ever you have?

Mr. TORGERSON. Yes. We will try to do the best we can based on the information we have.

Mr. WHITTEN. Governor Wilkinson, of the Farm Credit Administration, came before us, and it is evident that they are in bad shape. Last year his testimony was that Production Credit Association lost 40 percent as much in one year as they had in the 50 years they had existed. You are part and parcel of that. I would like the same type of information from the cooperative standpoint. Mr. TORGERSON. All right.

[The information follows:]

During the 50s, 60s, and 70s, cooperative assets increased, while return on these assets, as reflected by net margins, gradually declined, from about 10.0 percent to 6 percent. Then, beginning in the 1980s, total assets in cooperatives began to decline or remain relatively stable while earnings (net margins) fell to the 3-5 percent level. These declining margins caused by the recent past economic conditions in production agriculture have resulted in many cooperatives having to sell assets and further cut back on employees, services, and facilities expansion. Also, many cooperatives have either merged with other cooperatives, been acquired by them, or been liquidated as indicated by the continued decline in numbers of cooperatives.

Mr. WHITTEN. What was your fiscal year 1986 budget request of the Assistant Secretary, the Secretary, and your request of the Office of Management and Budget?

Mr. TORGERSON. The request to the Assistant Secretary and Secretary was $4,196,000. The estimate to the Office of Management and Budget was for $3,659,000.

USER FEES

Mr. WHITTEN. Has anyone agreed to introduce your user fee legislation in the House? What is the basis for your expectation that this legislation will be enacted by next October 1?

Mr. TORGERSON. At this time the legislation has not been finalized. We do not have a sponsor to date. We do not know if the legislation will be enacted by October 1.

Mr. WHITTEN. Please submit for the record detailed user fee schedules which represent the alternatives you are considering for raising $1,565,000 during fiscal year 1986.

Mr. TORGERSON. It has been estimated that $1,565,000 of our $3,565,000 budget could be covered by a user fee program. The fee structure, the services that would be covered, and who would be charged to fully implement this program have not been determined. Also implementation costs have not yet been estimated. We do not anticipate hiring any additional personnel to implement the user fee program.

FARM CREDIT ACT AMENDMENTS

Mr. WHITTEN. Several years ago, amendments to the Farm Credit Act expanded the authority of the banks for cooperatives in connection with the export and import of agricultural and aquatic commodities and products and farm supplies. Please describe in some detail the purpose and the effect of these amendments with regard to farmers more fully benefiting from export sales by retaining ownership of their commodities as they go further into marketing channels. Under these amendments, have producers actually been able to increase the marketing of goods abroad through their own cooperatives?

Mr. TORGERSON. Since the 1980 amendments to the Farm Credit Act, the banks for cooperatives have loaned more than $2.7 billion assisting cooperatives to expand international trade. Since the first loans were made in 1981, the banks for cooperatives have steadily increased their export financing services and volume. This has occurred despite declining export trade by the U.S. over the same period. Today, the banks for cooperatives offer letters of credit, standby letters of credit-bid performance bonds, bankers' acceptances, foreign trade receivables financing, and term loans.

Most export transactions to date have been supported by GSM102 guarantees by the Commodity Credit Corporation. In addition, the banks have established one of the largest exporter credit insurance policies issued by the Foreign Credit Insurance Association. This policy is used by farmer cooperatives to assist financing exports to markets not covered by GSM-102 guarantees.

With the authority granted in the 1980 amendments, the banks for cooperatives have been able to offer advantageous financing rates when compared against other U.S. based bankers. In exporting commodities where financing costs are large, as is frequently the case with grains and oilseeds, this beneficial financing rate has