(A) The number of members which have almost trebled since 1926 in the face of declining farm population, number of farms and number of people employed on farms.

(B) The volume of business done, which in 1955 was about $12.3 billion, almost 5 times as much as in 1926 and 2.3 times as much as in 1945. These increases, even when adjusted for price changes, were large and cooperatives in the farm marketing field, including grain, now occupy a dominant position in many areas.

III. EXAMPLES OF COOPERATIVE GROWTH IN THE GRAIN AND FEED BUSINESS Having established the present size, importance, and growth of cooperatives, specific examples are cited to show how growth has occurred. The areas and examples selected are

(A) Regional farm supply cooperatives.-The large size of these big businesses is portrayed and the effect of income-tax-free retained earnings described. (B) Regional grain marketing cooperatives.-Growth has paralleled that of the big supply co-ops and these grain marketing businesses are now a substantial factor at every market where they operate.

(C) Farmers Union Grain Terminal Association.-The phenomenal growth of this large regional grain marketing cooperative and the contribution of tax exemption is described. Income-tax-free retained earnings are shown to be the principal source of funds.

(D) Country grain elevators.-Cooperative country grain elevators, although individually relatively small businesses, have grown and expanded rapidly and now enjoy substantial competitive advantages in comparison with their incometaxed competitors.

IV. WHY COOPERATIVES GROW AND HAVE COMPETITIVE ADVANTAGE Cooperative corporations have grown rapidly and presently have a competitive advantage in the grain business which in turn contributes to further expansion. The nature of the grain business as a large-volume low-cost operation coupled with favorable tax treatment have been the main contributing factors.

(A) How grain elevators function-where it is shown that typical grain elevators, cooperative or otherwise, buy and sell grain at the market prices in order to realize a margin for the benefit of the owners and/or patrons. These margins increase the volume of grain handled and the size of the elevator becomes larger, thus creating a pyramiding effect.

(B) The effect of tax advantage is shown by several examples which indicate that tax exemption and favorable tax treatment are translated into rapid growth and competitive advantage.

V. SUMMARY AND RECOMMENDATIONS

Position of association

This supplementary statement is submitted by the Grain and Feed Dealers National Association, a national trade association which is 61 years old, and has members in 41 of the 48 States. The members represented are principally engaged in the operation of country grain elevators and retail feedstores. They are, as a general rule, small businesses, although some members operate large flour and feed mills and terminal grain marketing facilities.

This national association has offices at 600 Folger Building, Washington, D. C.

This national association has submitted statements and appeared before congressional committees on several previous occasions, in each instance urging that cooperative corporations be taxed upon the same basis as their taxed business competitors. The approach taken has been a simple and understandable one that the same tax rules apply to competitive businesses engaged in performing the same functions. This association continues to believe that approach to be fair and reasonable.

Cooperatives generally continue to enjoy substantially the same tax advantages as they did 10 years ago, despite the effort of Congress to partially remedy the situation in 1951. The legislation adopted at that time has proven ineffective, and during all of this time cooperatives have continued to prosper and grow to the increasing detriment of their income-taxed competitors.

For many years this association has spread on its records resolutions regarding cooperative taxation. The most recent version, adopted in September of 1957, is as follows:

Whereas the grain and feed trade is conducted on extremely moderate margins and any distinction for tax purposes between competitors in the grain and feed trade becomes a very marked advantage or disadvantage; and whereas there is no justification why two firms doing the same kind of business with the same kind of facilities should pay income taxes on their profits but on different bases; therefore, consistent with resolutions of past years we urge that this national association and its members continue to put forth strong effort toward removing this Federal tax inequality and exemption accorded cooperatives.

Several important facts, basic to an understanding of this association's posi tion, are stated in this resolution.

1. The grain and feed business is tremendously competitive. Despite protestations to the contrary, margins are extremely low, a fact established on numerous occasions by the USDA as well as other responsible Government agencies. 2. The impact of income taxation under such circumstances is particularly noticeable and far-reaching in its effect. "The power to tax is the power to destroy." Chief Justice Marshall could have as appropriately said, and certainly did imply, that the exercise or nonexercise of the power to tax is the power to destroy. In the grain and feed business the nonexercise of the power to tax cooperative corporations has either directly or indirectly caused many privately owned and operated businesses to close their doors or has impaired competitive ability to the extent that such an end is imminent.

3. Finally, the resolution and the position of this association before the committee is directed only to correction of tax inequities which exist with respect to cooperatives. It is most important that the committee and Congress understand clearly that this association is not objecting to cooperation as a way of doing business, nor should this position be construed as an argument that cooperatives have no place in the United States economy. No single form of business organization (and cooperation is a way of doing business) has an exclusive right to operation and existence in this country. But by the same token, no form of organization by reason of the technicality of its business structure, should be permitted to derive an advantageous position in our economy or in the application of its laws. To allow that is to permit discrimination to develop in the application of our laws, and that in turn leads to competitive advantage not warranted by the fact of actual operating efficiency. That kind of a "chosen instrument" policy is of no long-range benefit to anyone.

To summarize, this association seeks only one thing from this committee: To have cooperative corporations subjected to income taxes upon the same basis and in the same manner as are their fully income-taxed competitors.

The present size, importance, and growth of cooperatives

Cooperatives have grown substantially in recent years. This is a fact proudly proclaimed by many cooperative managers and a fact quite apparent to businessmen in competition with them; but constant changes in price, in agricultural production, and in agricultural consumption make available statistics difficult to use. In previous hearings cooperative proponents have pleaded smallness and inconsequence in defense of their position. That this is not now the case is readily capable of proof.

In order to evaluate the present size and importance of cooperatives and their rate of growth, with particular reference to grain and feed cooperatives, the most recent available statistics prepared by the Farm Credit Administration have been analyzed carefully and tabulated. Reference has been made to all cooperatives because it is difficult to examine grain and feed cooperatives alone in the vacuum of their own particular business. Cooperative interrelationships are extensive and complicated, and the business of any particular group of cooperatives must be viewed in the light of these circumstances.

Exhibits A, B and C, relating to number, memberships, and marketing and supply business of local and regional cooperatives, are appended. These exhibits relate generally to all cooperatives but include to the extent statistics are available, specific reference to cooperatives engaged in the grain and feed business.

In using these statistics to determine the present size and importance of cooperatives and their rate of growth, two main tests are available. These are (1) the

number of members belonging to such cooperatives, and (2) the total volume of business done. A third test, number of associations, although available, is of little value because of the known decrease in number of associations in the face of a substantial increase in business. This situation is quite typical in all lines of business.

The estimated total membership in all cooperatives reached 7.5 million members in 1955. This was an increase of 4.8 million members since 1926 and 3.3 million since 1945. Memberships in 1955 were approximately 280 percent larger than in 1926 and 180 percent larger than in 1945.

The rate of growth has been largest in the farm supply field, although memberships in marketing cooperatives also increased substantially from 2.4 million in 1926 and 2.9 million in 1945 to about 4.2 million in 1955.

Membership figures reported by the Farmer Cooperative Service do include some duplication for many farmers are members of more than one cooperative and, hence, are counted more than once. It is believed the duplication pattern of error is quite consistent from one year to another, however, so that even though the total membership figure may not be entirely correct, the rate of growth figure is reasonably accurate.

If the number of farmers in the United States or the number of farms or total acres in farm crops or purchases of farm supplies had increased materially during the period surveyed, a proportionate increase in number of cooperative members would have been normal. This was not the case however.

The farm population has declined steadily from 30.6 million in 1926 to 25.3 million in 1945 and 22.2 million in 1955.

The annual average number of people employed on farms (including farm workers) has decreased from 11.3 million in 1929 to 10.0 million in 1945 and in 1955 was only 8.2 million.

The number of farms has decreased from 6.4 million in 1925 to 5.6 million in 1945, 5.4 million in 1950, and 4.9 million in 1954.

The total harvested acreage of member co-ops which went to 349 million acres in 1926 and 356 million acres in 1945, had decreased to 333 million acres in 1955. In view of these facts, there is reason to believe that cooperatives, both marketing and purchasing, have grown materially in size, and that a substantial amount of such growth has been at the expense of competitive businesses operating on other than a cooperative basis. This conclusion applies equally as well to cooperatives engaged in the marketing of grain and the sales of feed, seed and similar farm supplies, where it appears that membership has almost doubled since 1945.

It is difficult to appraise statistically by reference to number of cooperative members the relative present importance of marketing and farm supply cooperatives in the farm marketing and supply field. When reviewed in relation to total farm population, number of farms, and similar statistics, however, the approximately 7.5 million members, whether adjusted for reasonable duplication or not, still indicates that cooperatives occupy a very important and substantial place in the farm marketing and supply field.

(B) Business done by cooperatives

The estimated total gross volume of business done by cooperatives was about 12.3 billion dollars in 1955, an increase of 9.9 billion over 1926 and 6.6 billion over 1945. Business volume in 1955 was about 5 times as much as it was in 1926 and about 2.3 times as much as in 1945.

As was true in connection with cooperative members, the greatest percentage increase in business volume occurred in connection with farm supply cooperatives. The marketing cooperatives continue to do the largest part of cooperative business, however, increasing from $2.3 billion in 1926 to $4.8 billion in 1945 and $9.3 billion in 1955. Gross business volume figures have been used in preference to the net business volume figures published by the Farmer Cooperative Service. Gross business volume reflects the business done at all marketing levels rather than only at the first level at which cooperatives transact business for farmers. This follows sound and accepted business and accounting procedures, for profits are made with respect to such business at each level where the business is done.

The startling expansion of business done by cooperatives as indicated by the three schedules might be misleading if either or both of two circumstances existed during the periods studied, viz:

(a) There was a substantial increase in price level causing increases in dollar volume even though physical volume remained the same or showed only minor increases, or

(b) There was a substantial growth in the total volume of business done in the farm marketing and supply field.

Prices received by farmers for the products they sold did of course increase during the period 1926-55. For example, the index of prices received by farmers for all farm products was 146 in 1926, 207 in 1945, and 236 in 1955. Price increases also occurred in many of the component commodities whose indexes make up the one for all farm products.

A similar situation existed with respect to the many commodities bought by farmers from suppliers for use on their farms or in their homes. Thus, the index of all commodities bought for use in production and family maintenance was 150 in 1926, 179 in 1945, and 262 in 1955.

Exhibit C indicates, however, that despite price increases there has been a very large increase in the physical volume of products sold by both marketing and farm supply cooperatives. In this schedule the volume of business done by cooperatives during 1926, 1945, and 1955 has been adjusted by using price indexes applicable to prices received and paid by farmers. This eliminates the effect of price changes.

The total adjusted volume of business done by all marketing cooperatives in 1955 had increased $2.4 billion as compared with 1926 and $1.6 billion as compared with 1945, increases of 159 and 69 percent respectively.

Grain marketing cooperatives also showed substantial real gains in business volume; 1955 business being 107 percent larger than 1926 and 60 percent larger than in 1945.

The most striking increases are of course found in the farm supply field where general changes in consumption patterns in addition to price had a substantial effect.

The price adjusted data may be misleading if there has been a growth in the total valume of business done in the farm marketing and supply field. For example, so far as the farm supply cooperatives are concerned, the use of commercial fertilizer almost doubled between 1945 and 1955. Quite naturally this has a direct bearing on fertilizer sales by cooperatives. On the other hand, the increase in sales of total tons of commercial feed was relatively slight.

Actually there have been only slight changes in the volume of physical production of crops and livestock when 1955 is compared with 1926 and 1945. For example, the production of wheat in 1955 was actually less than in 1945. Similarly, the farm production index for food grains, including, of course, wheat, was 80 in 1955 as compared with 89 in 1945. Production of feed grains on the other hand had increased about 14 percent in comparing the feed grain index in 1955 (111) with 1945 (97). Other typical farm production and output indexes in 1926, 1945, and 1955 (using 1947-49=100) are as follows:

With the real increase in business volume cooperatives have become increasingly more important in the farm marketing field. Although it is difficult to appraise statistically their relative present importance, it is believed that farm marketing co-ops now occupy a dominant position in many areas. This is particularly true with respect to grain-marketing cooperatives which at the present time in the United States as a whole are doing approximately one-third of the grain-marketing business at the country level. In certain important commercial-producing areas such as Minnesota, the two Dakotas, Montana, Ne braska, Kansas, Oklahoma, Iowa, Indiana, and Ohio where cooperatives have been established for many years, substantially in excess of that amount is handled at the country level by country-grain elevators.

The statistics which have been outlined confirm the opinions of a number of people actively engaged in the grain and feed business in all areas of the country. These persons, who are experts in their fields, state without dissent that the volume of business done by cooperatives as a percentage of the total grainmarketing business has increased materially, and that at the present time co

operatives as a group are the most important single factor in the grain-marketing field.

Examples of cooperative growth in the grain and feed business

The present size, importance and growth of cooperatives generally having been established, specific examples of cooperatives in the grain marketing and feedsupply business will be examined to show how these cooperative corporations have grown as well as to indicate the principal factors which have contributed to such growth.

(A) Regional farm supply cooperatives

Exhibits D, E, and F report financial information for a group of 17 major regional farm supply cooperatives. The most important conclusions are:

I. With a few minor exceptions, these cooperatives are large, profitable, incorporated going businesses.

2. There has been a substantial growth in the 10-year period 1945– 55 both in earnings capacity as well as in total assets.

3. A large part of the business done by these cooperatives involves the sale of feed, fertilizer, insecticides, fungicides, and seed, items commonly handled by our members in the grain and feed business. The sale of these items has made a major contribution to the growth and present earnings capacity of these cooperatives.

Exhibit E shows the large increase in members' equities during the 10-year period. The reports from which these exhibits were prepared indicate that this increase is attributable almost entirely to the retention of earnings in these businesses, such retained earnings being evidenced by stock issued, certificates of indebtedness, surplus allocations, or the like, all common and well-known financing devices used by cooperatives. Had these retentions been subjected to corporate income tax at the rates prevailing in those years, expansion would have been less rapid and on a basis more comparable to that of the income-taxed competitors of these cooperative corporations. The important thing is that with few exceptions substantially all of these earnings were retained tax free.

(B) Regional grain marketing cooperatives

Regional grain marketing cooperatives are important factors in the area in which they operate and are becoming increasingly more so as they continue expansion on income-tax-free retained earnings. The most recent published analysis of the financial position of these 17 regional grain cooperatives was outlined by the Farmer Cooperative Service of the Farm Credit Administration in 1952: