CHAPTER X.

FINANCING COUNTRY HOUSES.

Section 1. Sources of loans.

About 5,000 elevators and warehouses in the United States reported to the Commission as to the sources of their borrowed funds. (Cf. Appendix 2, inquiry 21.) Owing to the fact that line-elevator stations usually procure their funds for buying grain from the main office of the company, the "head office" was reported as the source of such funds by most line elevators. It is evident, however, that the funds advanced by the head office of a line company to an individual station for the purchase of grain are not in any true sense of the word loans, but instead are advances of the capital of the line company employed in the transaction of its grain business. From the standpoint of the individual station, however, the advance from the head office is somewhat similar in character to the loans procured from a source outside of the local station itself by other types than the lines for the current operation of the house.

These matters are mentioned at this point in order, since the appendices and tables refer to sources of loans, that there may be no misapprehension as to the exact character of the transaction involved in the case of line elevators reporting the head office as a source of loans.

The following table presents the percentages of elevators and warehouses in the United States reporting various sources of loans in the order of their importance, as shown by the proportion of times in which each source occurs in the schedules to the total number of sources reported in all schedules. (Appendix 2, inquiry 21.) Appendix table 20 presents the figures in detail by States and grand divisions.

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TABLE 81.-Relative importance of different sources of country elevator warehouse borrowing as indicated by the proportion of times each reported to total sources reported.

From this table it is apparent that there are only three factors of any great importance in financing the country grain business, i. e., local banks, head offices of line companies, and the commission houses. Section 2. Sources of loans by type of elevator.

LINE ELEVATORS.-In considering the variations in the sources from which various types of country elevators and warehouses procure their funds, the cooperative line and individual and line maltster types may be disregarded owing to the small number of these houses reporting and the discussion may be confined to the other five types.

Table 82, which shows the sources of loans of various types of elevators and warehouses in detail, indicates that so far as line houses are concerned the head office is by far the most frequently reported source of funds for financing.

TABLE 82.—Relative importance of different sources of borrowings by different types of country elevators and warehouses.

Total..

2.88 .61 3.31 7.63 40.00

.44 .09 41 1.69 4.32 2.71 5.50 3.67 20.00

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

100.00

Of all the sources from which funds are reported as procured by line elevator stations, the head office constitutes slightly over 80 per cent, local banks comprise about 11 per cent, and the proportion of any other one source reported is relatively insignificant. The importance of the head office as a source of funds arises from the fact that in the nature of things the head offices would normally in the operation of the business finance the requirements of their various houses and not place such a matter in the hands of the hired managers of their local elevators. If the company possesses the financial resources it may make the advances from its own funds. In other cases the head offices will borrow from various sources.

Other sources of loans than the head office reported are probably due in large part to the fact that the head offices of smaller country lines are frequently located in connection with one of the local elevators. In consequence, such parties in making the returns had knowledge of the sources of the funds procured by the head office and reported them.

INDIVIDUAL ELEVATORS.-So far as the various types of individual elevators are concerned no funds are reported as borrowed through the head office for obvious reasons, and the most frequently reported sources for the individual type are the local banks and commission houses. Of the total number of reported sources of loans of cooperative elevators, local banks constitute 56 per cent and commission houses something less than 27 per cent. In the case of the independents, however, local banks represent 70 per cent of the reported sources and commission houses only 12.88 per cent. Individual mill elevators report local banks as a source of loans in about the same proportion as do independent elevators, but borrow of commission houses in a considerably less proportion than the latter and more from both city banks and local residents.

Section 3. Sources of loans by States.

The explanation of the foregoing variations lies chiefly in the geographical distribution of these types of elevators with reference to the characteristics of the grain business in different sections. Appendix Table 20, which presents the distribution of sources of loans by States and grand divisions, reveals the fact that, broadly speaking, the proportion of commission-house financing is most important by far in Minnesota, Montana, and the Dakotas, all of which report relatively high proportions of cooperative elevators and are relatively among the least important independent elevator States. Localbank financing is most important and commission-house financing relatively unimportant in those States reporting high percentages of independent or individual mill elevators or both, and relatively smaller proportions of cooperatives. This is shown in the following table:

TABLE 83.-Proportion of elevators of specified types in specified States in comparison with the extent of commission house and local bank financing.1

1 As indicated by the ratio of the number of times commission houses and local banks are reported to the total sources reported.

Section 4. Commission-house financing.

CAUSES.-The extensive commission-house financing so largely prevalent in Minnesota, Montana, and the Dakotas has undoubtedly

resulted from and been affected by a considerable variety of factors. The indications are that originally, owing to the lack of development of this area, it was difficult and in many cases impossible to borrow money locally because there was little or no accumulation of local capital. The opinion is quite generally expressed by northwestern grain men that even to-day the local banks in the grain territory to the south and east are better equipped to finance the grain business than those in the Northwest on account of larger deposits and capital. It is stated that many Northwest banks have comparatively small capital and that their deposits are not large; also that they are frequently under such limitations in regard to the amounts which may be loaned to a single organization as to render their resources inadequate to the financing of the country grain business.

Owing to the relative scarcity of local capital, moreover, it is asserted that the local banks are frequently able to obtain higher rates of interest than the grain people are willing to pay for the financing of the crop.

Another factor mentioned which is probably of importance is the time the grain is in transit. In the Northwest the distances to the terminals from much of this territory are considerably greater than in the grain areas tributary to other markets, with the result that grain is in transit longer and capital is correspondingly tied up for a longer period. It is stated that Montana figures upon from 1 to 13 per cent interest charges merely for the time during which the grain is in transit to the Minneapolis and Duluth terminals.

However important historically the scarcity of local capital was, and perhaps is even to-day, in developing commission-house financing, there is every indication that two of the important factors in preserving the system are the consignment business and the competition of the commission houses. Probably as a result of the scarcity of local capital the country grain handlers in the Northwest originally turned to the terminal markets for financial assistance, and thus developed these terminal connections. Owing largely to the preference of the Minneapolis mills for country-run grain, however, there developed in the four Northwestern States more extensively than elsewhere the practice of selling on consignment. (Ch. VI, sec. 16.) Under this method the grain was consigned to the commission house and sold by sample on the floor. This method possessed an advantage to two distinct groups: To the mills and other consumers in that they could thus purchase virgin grain after an examination of its peculiarities and characteristics with reference to conversion; to the country elevator or shipping producer in that it enabled these sellers occasionally to realize premiums for grain of especially good quality or certain peculiar characteristics for conversion purposes.

So large a volume of consignment sales, however, tended to make the business profitable. The result was the multiplication of commission houses and the development of the commission business on an extensive scale at both Minneapolis and Duluth. The country elevator in need of funds naturally turned to the commission house handling its shipments, and thus terminal market connections began to be built up by the country elevators. This in turn led to competition among the commission houses in financing the country elevators, such

financing being offered as an inducement to the country elevator to ship its grain to the financing house. The interviews clearly indicate that this competition is very sharp.

METHODS. All the larger commission houses usually maintain at least two or three solicitors (often more). One of the chief functions of these solicitors is to procure new business. Many commission houses send them to the different elevators during the summer months soliciting grain business by offers to finance. When possible these solicitors attend the annual meetings of the stockholders of the elevators and also directors' meetings, with the proposals of their principals as to the amounts of the loans which the latter are willing to make and the terms and conditions under which such amounts will be advanced. Some elevators request financial aid from commission houses, but usually the latter offer to finance the former.

After agreeing upon details a contract is usually drawn up and signed by the officers of the elevator and the commission firm. Such contracts with cooperative concerns are signed by the board of directors and manager, while those with independent elevators usually by the owners. In some cases there is no formal written contract and the advances are made upon the basis of an oral agreement or understanding as to the proportion of grain which the elevator will ship to the financing commission house. Where there is no contract or agreement, as is occasionally the case, the financing house usually obtains the bulk of the elevator's business because the operators of such elevators usually feel obligated to give them the greater part of it.

The contracts state the amount of money that will be advanced and the method of repayment. Sometimes the commission house advances outright a specific amount. More often, probably, the elevator is given an open account under which it can draw against the commission house up to a certain amount, as business requires.

Some of the contracts prescribe a fixed percentage of its grain which the elevator must ship to the commission house in question. The proportion thus demanded in return for financing varies as between different commission houses and depends considerably upon the severity of the competition of the commission houses in different sections. Usually it runs from 60 per cent to 80 per cent, but larger proportions are not infrequently agreed upon. Thus, one country elevator operator interviewed contracted to ship 90 per cent of his grain to the commission house which financed him, while another reported that a mutual understanding existed that the commission house should receive all his shipments. Some of the contracts, however, merely demand that a reasonable percentage of the shipments shall go to the commission house, and various other variations are found, as, for example, that the value of the grain which the elevator ships to the commission house shall be as great as the amount of money advanced, etc.

A few firms were found that had at various times maintained as many as six solicitors, and one firm at the time of the Commission's investigation reported that it had ten men building up the business in the country. Usually the solicitors are comparatively highly paid, salaries reported being practically never below $200 a month and customarily ranging as high as $350 a month and in exceptional cases even higher.

For further details, see the discussion of receiving on consignment in Vol. III.