While the variations in the character of the agreements employed are considerable, the form of contract shown in Appendix 8 illustrates the general nature of such arrangements.

SUPERVISION OF FINANCED ELEVATORS.-The risk involved in the financing of country elevators by commission houses is considerable and the severity of the competition between such houses tends to increase this risk through the fact that it leads to concessions in regard to the security for loans.

The affairs of elevators financed by commission houses are usually carefully watched by the financing house. Often the elevator, especially if financially weak, is required to submit detailed daily reports of its operations similar to those made by line stations to the head office (Ch. VI, sec. 2). These reports, and also the books of the elevators, are checked up more or less frequently by the traveling solicitors of the commission houses, and thus it is ascertained whether the purchases of grain shown by the books equal those reported. Country elevator agents are as a rule adverse to making out daily reports for the financing house and competition leads to the elimination of the report feature in certain cases.

A number of commission houses also insist upon the elevator pursuing a rigid policy of hedging in connection with its grain purchases. As previously explained, the northwestern terminal market grain dealers are very much inclined to regard the buying and selling of grain without hedging as speculation. In consequence, they are usually loath to finance elevators which do not hedge or which engage in speculation. If an elevator is found to be speculating or endangering in any way the capital advanced by the commission house, the latter is very likely to withdraw its aid and demand the payment of the amounts loaned. The extent to which the affairs of financed elevators are supervised is likely to be governed in no small measure by the relative financial strength of such elevators. Commission houses, chiefly by reason of this financing, are able to influence the policies of the elevator not only as to hedging, but also as to prices, competition, etc.2

The development of the business of the commission house in the Northwest has thus become, in a large measure, dependent upon financing.

Section 5. Contrasts between northwest and other areas.

With some exceptions the principal grain States outside of the Northwest, especially those east of the Mississippi River, are relatively older grain-producing territory than the Northwest, have accumulated a larger volume of local capital and can, in consequence, finance through the local banks to a greater extent. In addition, there is outside the Northwest, either a very much greater volume of local business or of direct selling to the terminal markets (Ch. VI, secs. 7 and 15), and consequently a much less development, on the whole, of the consignment business. The result is a higher proportion of financing through local banks and a much lower proportion through commission houses than is the case in the Northwest territory.

2 For further details on commission-house financing consult Vol. III of this report.

Section 6. Country-elevator interviews on sources of loans.

The interviews had by the agents of the Commission and of the Bureau of Markets with country elevator operators confirm the data obtained by schedule. Of 87 of the elevators visited in Illinois and Iowa, 73 reported that they borrowed from local banks, 11 from local individuals, and only 3 from commission firms or houses. Out of 122 elevators in the Northwest interviewed on this same subject, 101 borrowed from commission houses, 52 from local banks, and 8 from individuals.

In parts of South Dakota and southern Minnesota the elevators do not borrow from commission houses to such an extent as in other sections of the Northwest. The freight rates in this area permit the grain to move advantageously to two or more markets-Minneapolis, Duluth, Chicago, Milwaukee, and Omaha. Many of the elevators employ more than one market, and this situation tends to preclude the commission house from receiving as much of the grain as it would consider necessary to justify the financing. This same territory is also the oldest portion of the Northwest, and the local banks, having larger resources, finance the elevators to a larger extent than in the remainder of the Northwest. Few Northwest elevators are financed entirely by local banks, and when this occurs the elevators usually require little capital owing to either a small grain business or a large capital of their own, or both.

As a rule the northwestern country elevators prefer not to borrow from the local banks. The requirements as to security are usually severe and the interest rate charged is often very high, especially as compared with the rate offered by the commission houses.

Time and demand notes, both unsecured and secured by a mortgage of the elevator, are given in return for loans. Often the personal notes of directors, and even stockholders, are required; but, on the other hand, there are cases where the commission houses do not ask for any security whatever, but simply instruct the financed. elevator to draw on them as they need funds.

In general, the commission houses apparently get as much as they can in the way of security, but competition for the business of the elevators tends to make their requirements as to such security less severe, on the whole, than those of the local banks. An exception, perhaps, is to be found in cases where the financial condition of the elevator is not good.

A number of country elevator operators that carry side lines borrow from both commission houses and local banks. The funds secured from the former are used to finance grain purchases, and those obtained from the latter to finance the side lines. One concern in North Dakota which borrows from both sources stated that the local banks would finance the side lines of an elevator, but not its grain business. On the other hand, the commission house is willing to finance the grain business of the country elevator so as to handle a part or all of its grain. Sometimes, however, the elevator, without the consent of the commission house, uses a part of the funds advanced by it in financing side lines, and also for other purposes.

* Including 6 reporting as borrowing from the Equity Cooperative Exchange of St. Paul.

Section 7. Maximum amounts of capital borrowed.

The Commission endeavored by its country elevator and warehouse schedule to ascertain something about the seasonal variations in borrowed capital, together with the maximum and minimum amounts borrowed (Appendix 2, inquiry 21). The returns were so few regarding the seasonal variations, however, and so many elevators returned a maximum and no minimum amount borrowed, or vice versa, that the returns were tabulated only for the maximum amounts reported as borrowed. The results appear in Table 84.

TABLE 84.-Number and proportion of elevators in specified States reporting borrowed funds and average maximum amounts borrowed in the crop years 1913-14 and 1916-17.

From this table it appears that most elevators rely largely upon borrowed capital in financing their business. The average maximum amount borrowed per elevator in 1913-14 was $12,301. In 1916-17 this amount had increased over 40 per cent, to $17,309. The quite generally larger amounts borrowed in 1916-17 in practically every State, as compared with 1913-14, may be attributed, of course, to the great increase in grain prices subsequent to the outbreak of the European war.

Section 8. Rates of interest.

RATES REPORTED.-Maximum and minimum interest rates for two crop years were reported by several hundred individual elevators (cooperative, independent, mill, and malster). (Appendix 2, inquiry 21.) Table 85 presents the results by States.

TABLE 85.-Average maximum and minimum rates of interest paid by country elevators on borrowed funds in the crop years 1913-14 and 1916–17.

This table indicates that the country grain business was financed during both of the years in question upon a basis slightly in excess of 7 per cent, though in several States it was considerably below this figure and in others considerably higher. It will be noted that in a general way the interest rates conform to the age of the territory (Ch. II, sec. 8). Thus the rates are lowest in the five States east of the Mississippi-Wisconsin, Illinois, Indiana, Michigan, and Ohioand are considerably higher west of that river. The highest rates reported are in Oklahoma, one of the latest grain-producing areas to develop. Montana is of almost equally recent development, but shows a relatively low rate as compared with Oklahoma. This may be probably attributed to the existence of commission-house competition in financing in the Northwest.

By types the average variations in interest rates are even less than between States, as appears from the following summary statement: *

• Individual maltsters not included on account of insignificant number of reports.

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COUNTRY ELEVATOR INTERVIEWS ON INTEREST RATES.-The operators of independent and cooperative elevators of the Northwest who were visited by the agents of the Commission reported that interest rates varied considerably as between the different factors which finance country elevators. The most common rates charged at that time (1918) by individuals were reported to range from 5 per cent to 8 per cent; by commission houses from 5 per cent to 8 per cent, with 6 per cent and 7 per cent as the most prevalent rates. The interest rate which commission houses charge is influenced not only by the general demand for capital and the supply of it available, but also by the competition between them in financing the country elevators in order to secure their grain business. A country elevator which is efficiently managed and does a large business is in a position to obtain a lower rate of interest than one which is operated in a less efficient fashion, because commission firms will compete to a greater degree with each other in the former case.

The interest rate of the local bank in the Northwest was claimed to be higher than that charged by any other factor, in many instances as high as 10 per cent being asked.