30 c Illlllll1IIIlIllllllllll LM095750 B-114824 BY THE COAPTRQLLER GENERAL OF THE UNITED STATES COMPTROLLER GENERAL OF THE UNITED STATES WASHINGTON. D.C. 20548 B- 114824 To the President of the Senate and the 5 Speaker of the House of Representatives i , *I_.: ;. This is our report on the audit of the Commodity Credit / Corporation, Department of Agriculture, for the fiscal year ended ’ ‘- June 30, 1970. The audit was made pursuant to the Government Corporation Control Act (31 U.S.C. 841). Copies of this report are being sent to the Director, Office of Management and Budget, and to the Secretary of Agriculture. Comptroller General of the United States COMPTRbLLER Gl???ERAL'S AUDIT OF COMMODITY CREDITCORPORATION, REPORT TO THECONGRESS FISCALYtAR 1970 Department of Agriculture 3-114824 DIGEST ------ WHYTHEAUDIT WASMADE The Government Corporation Control Act requires that the General Ac- counting Office (GAO) make an annual financial audit of the Commodity I Credit Corporation (CCC). The audit consists of an examination of CCC's financial statements and a review of the manner in which CCC carries out selected programs and activities. FINDINGSANDCONCLUSIONS FinunciaZ statements In view of the character and scope of CCC's operations--particularly commodity inventories and loan collateral--it was not practicable for GAO to perform all the steps of examination and verification needed to reach an independent, overall opinion concerning the accuracy and fair- ness of the financial statements. (See p. 28.) Therefore, GAO cannot express an opinion that the accompanying finan- cial statements present fairly CCC's financial position at June 30, 1970, and the results of its operations for the year then ended. GAO believes, however, that --CCC's accounting methods provided a generally satisfactory record of its financial transactions and --CCC's financial reporting system generally was adequate to supply management with information for conducting its affairs. (See p. 30.) CCC reported a record-high loss of $4.2 billion for fiscal year 1970. (Price-support and related operations normally result in a loss.) Such losses are reimbursable through appropriations. At June 30, 1970, unreimbursed losses totaled $7.5 billion--$4.2 billion for fiscal year 1970 and $3.3 billion for prior years. (See p. 18.) Matters reported by GAOto the Congress or brought to the attention of CCC I CCC needed to obtain from Federal sources information on domestic rice production, sales, and inventories and more precise information on world market prices for use in establishing export subsidy rates. In the absence of Federal information, the Department relied primarily on ___- Tear Sheet JAW.E,197a 1 unofficial and inadequate data. There was also a need for information- i on exports by types of rice. (See pm 6.) I CCC needed to (1) revise its feed grain program regulations to exclude from the program all land devoted to, or designated for, nonagricul- tural uses and (2) establish procedures to ensure that program regula- tions were uniformly and consistently applied at 'the county level. Under this program, CCC made questionable payments for diversion of land used (or designated for use) for such nonagricultural purposes as housing and commercial development, recreation, hobby farms, country estates, sod nurseries, garbage dumps, and gravel pits. This diversion did not contribute to the program goals of controlling production and maintaining farm income and of conserving land for future agricultural or related uses. GAO expressed the belief that such payments might be widespread and significant. (See p. 9.) CCC needed to eliminate promptly inconsistencies in price-support regu- i lations. The price-support rate for wheat at Gulf of Mexico ports was I equivalent to that paid at interior points plus handling charges and interstate freight charges of railroads for shipping the wheat to the I Gulf. The availability of substantial storage space at the Gulf corn- 1 bined wi.th transportation (barge, truck, or export rail) charges that ; were lower than interstate rail rates gave producers an advantage of 15 to 20 cents a Bushel if they placed their wheat under price support I at the Gulf rather than at inland points. The Department took action ; to eliminate this undue advantage but 2 days later rescinded the ac- i tion when it was informed by farm and trade groups that the movement I of large quantities of wheat had already been negotiated. This re- scission resulted in a greater investment by CCC in price-support loans. I: (See pe 12.) I1 1 CCC pays billions of dollars annually to farmers and others by use of I sight drafts. Weaknesses existed in accounting for and safeguarding I sight draft forms and in preparation and issuance procedures. (See P* 15.) CCC needed to document significant changes in contract terms. CCC paid i damages to millers (and others) because of failure to issue delivery I notices on time. It appeared that CCC did not have a legal 1iability I,1 because any damages were caused by a longshoremen's strike and not by CCC's failure to issue the notices. CCC explained that the payments were made because it had informally advised the trade that, if de- 4 livery was not feasible because of the strike, it would pay for storing i the commodities on the same basis established for liquidated damages. I, , (See p. 15.) ,1 1 RECOMMENDATIONS ORSUGGESTIONS I GAO recommended or suggested corrective action with respect to the preceding matters. (See pp. 7, 11, 13, 15, and 17.) 2 1 - -.-_ I A- .-A--_ _ __--_ .__-__ __c_____ _________ __- ,________-______----- ------------- -___------.-------__---------------------. AGENCY ACTTONS AND UNRES@VED ISSUES --_- Generally, corrective action was taken or planned. In connection with rice export subsidy rates, a new policy and revised procedures were adopted for establishing such rates. GAO estimated that the changes reduced commercial rice export subsidy payments by about $23 million in fiscal year 1970 and that substantial reductions would recur in varying amounts each year. (See pm 8.) ItMTTERS FOR CONSIDERATIONBY THE CONGRESS This report includes no recommendations or suggestions requiring ac- tion by the Congress. It is submitted to the Congress, as required by law, to disclose the results of the annual audit of CCC's financial statements and such other information as necessary to keep the Congress informed on the operations and financial condition of the Corporation. Tear Sheet Contents Page DIGEST 1 CHAPTER 1 INTRODUCTION 4 2 ORGANIZATION AND MANAGEMENT 5 3 SUMMARYOF CERTAIN MATTERS REPORTEDBY GAO TO THE CONGRESSOR BROUGHTTO THE ATTENTION OF CCC 6 Rice export subsidies reduced substan- tially 6 Improvements in administration of acreage-diversion program 9 Basis for wheat price-support loan rates revised 12 Improvement in controls over CCC sight drafts 15 Significant changes in contracts to be documented 15 4 COMMENTSON SELECTEDHIGHLIGHTS OF FISCAL YEAR 1970 OPERATIONS 18 Record-high realized loss reported by ccc 18 $5.7 billion expended for price support and acreage diversion 19 $546 million reduction in commodity loans 21 $608 million increase in commodity in- ventories 22 Storage, handling, and transportation expenses increased substantially 23 $1.3 billion in reimbursable costs in- curred by CCC for special activities 24 Receivables for Public Law 480 credit sales increased substantially 26 5 SCOPE OF AUDIT 28 Examination of CCC financial statements 28 CHAPTER Page . 6 OPINION OF CCC FINANCIAL STATEIHENTS 30 FINANCIAL STATEMENTS Schedule 1 Comparative statement of financial condi- tion, June 30, 1970 and 1969 33 2 Comparative statement of income and ex- pense, fiscal years 1970 and 1969 34 3 Analysis of deficit from inception in 1933 to June 30, 1970 35 4 Statement of source and application of funds, fiscal year 1970 36 Notes to financial statements, June 30, 1970 37 APPENDIX I Principal officials of the Commodity Credit Corporation, Department of Agriculture, fiscal year 1970 49 ABBREVIATIONS Ascs Agricultural Stabilization and Conservation Service ccc Commodity Credit Corporation GAO General Accounting Office COWTROLLERGENERAL'S AUDIT OF COMMODITY CREDITCORPORATION, . REPORT TO THE CONGRESS FISCALYEAR1970 Department of Agriculture B-114824 DIGEST ------ WHYTHEAUDIT WASMADE The Government Corporation Control Act requires that the General Ac- counting Office (GAO) make an annual financial audit of the Commodity Credit Corporation (CCC}. The audit consists of an examination of CCC's financial statements and a review of the manner in which CCC carries out selected programs and activities. FINDINGSANDCONCLUSIONS Financial statements In view of the character and scope of CCC's operations--particularly commodity inventories and loan collateral--it was not practicable for GAO to perform all the steps of examination and verification needed to reach an independent, overall opinion concerning the accuracy and fair- ness of the financial statements. (See p. 28.) Therefore, GAO cannot express an opinion that the accompanying finan- cial statements present fairly CCC's financial position at June 30, 1970, and the results of its operations for the year then ended. GAO believes, however9 that --CCC's accounting methods provided a generally satisfactory record of its financial transactions and --CCC's financial reporting system generally was adequate to supply management with information for conducting its affairs. (See p* 30.) CCC reported a record-high loss of $4.2 billion for fiscal year 1970. (Price-support and related operations normally result in a loss.) Such losses are reimbursable through appropriations. At June 30, 1970, unreimbursed losses totaled $7.5 billion--$4.2 billion for fiscal year 1970 and $3.3 billion for prior years. (See p. 18.) Matters reported by GAOto the Congress or brought to the attention of CCC CCC needed to obtain from Federal sources information on domestic rice production, sales, and inventories and more precise information on world market prices for use in establishing export subsidy rates. In the absence of Federal information, the Department relied primarily on unofficial and inadequate data. There was also a need for information on exports by types of rice. (See p- 6.) CCC needed to (1) revise its feed grain program regulations to exclude from the program all land devoted to, or designated for, nonagricul- tural uses and (2) establish procedures to ensure that program regula- tions were uniformly and consistently applied at the county level. Under this program, CCCmade questionable payments for diversion of land used (or designated for use) for such nonagricultural purposes as housing and commercial development, recreation, hobby farms, country estates, sod nurseries, garbage dumps, and gravel pits. This diversion did not contribute to the program goals of controlling production and maintaining farm income and of conserving land for future agricultural or related uses. GAO expressed the belief that such payments might be widespread and significant. (See pe 9.) CCC needed to eliminate promptly inconsistencies in price-support regu- lations. The price-support rate for wheat at Gulf of Mexico ports was equivalent to that paid at interior points plus handling charges and interstate freight charges of railroads for shipping the wheat to the Gulf. The availability of substantial storage space at the Gulf com- bined with transportation (barge, truck, or export rail) charges that were lower than interstate rail rates gave producers an advantage of 15 to 20 cents a bushel if they placed their wheat under price support at the Gulf rather than at inland points. The Department took action to eliminate this undue advantage but 2 days later rescinded the ac- tion when it was informed by farm and trade groups that the movement of large quantities of wheat had already been negotiated. This re- scission resulted in a greater investment by CCC in price-support loans. (See pe 12.) CCC pays billions of dollars annually to farmers and others by use of sight drafts. Weaknesses existed in accounting for and safeguarding sight draft forms and in preparation and issuance procedures. (See P* 15.) CCC needed to document significant changes in contract terms. CCC paid damages to millers (and others) because of failure to issue delivery notices on time. It appeared that CCC did not have a legal liability because any damages were caused by a longshoremen's strike and not by CCC's failure to issue the notices. CCC explained that the payments were made because it had informally advised the trade that, if de- livery was not feasible because of the strike, it would pay for storing the commodities on the same basis established for liquidated damages. (See p- 15.) RECOMMENDATIONS OR SUGGESTIONS GAO recommended or suggested corrective action with respect to the preceding matters. (See pp. 7, 11, 13, 15, and 17.) 2 * AGENCY ACTIONSANDUNRESOLVED ISSUES Generally, corrective action was taken or planned. In connection with rice export subsidy rates, a new policy and revised procedures were adopted for establishing such rates. GAO estimated that the changes reduced commercial rice export subsidy payments by about $23 million in fiscal year 1970 and that substantial reductions would recur in varying amounts each year. (See p. 8.) MATTERS FORCONSIDERATi-ON BY TIdECONGRESS This report includes no recommendations or suggestions requiring ac- tion by the Congress. It is submitted to the Congress, as required by law, to disclose the results of the annual audit of CCC's financial statements and such other information as necessary to keep the Congress informed on the operations and financial condition of the Corporation. CHAPTER1 INTRODUCTION The General Accounting Office has made an audit of the Commodity Credit Corporation for the fiscal year ended June 30, 1970. The scope of the audit is described on pages 28 and 29. CCC, awhollyowned Government corporation, was created as a corporation under a Delaware charter in 1933 to stabi- lize, support, and protect farm income and prices; to as- sist in the maintenance of balanced and adequate supplies of agricultural commodities; and to facilitate the orderly distribution of such commodities. CCC was reincorporated in 1948 as a Federal corporation within the Department of Agriculture, by the Commodity Credit Corporation Charter Act (15 U.S.C. 714). The principal operations conducted by CCC are price- support programs for agricultural commodities, including the storage, handling, and disposition of commodities acquired under the programs; acreage-diversion programs; and export activities under the Agricultural Trade Development and As- sistance Act of 1954, as amended (7 U.S.C. 1691)--commonly known as Public Law 480--which are financed by appropria- tions authorized under statutes providing for the activi- ties. 4 CHARTER2 ORGANIZATION AND MANAGEMENT Management of CCC is vested in a Board of Directors, subject to the general supervision and direction of the Secretary of Agriculture who is an ex officio Director and Chairman of the Board. The Board consists of six members, in addition to the Secretary, who are appointed by the Pres- ident of the United States by and with the advice and con- sent of the Senate. A bipartisan advisory board of five members, also ap- pointed by the President, surveys the general policies of CCC and advises the Secretary. Officers of CCC are desig- nated according to their positions in the Department of Ag- riculture. The names of principal officials of CCC during fiscal year 1970 are listed in appendix I. (See p. 49.1 CCC has no operating personnel of its own. Its activi- ties are carried out mainly by the personnel, and through the facilities, of the Agricultural Stabilization and Con- servation Service (ASCS) and the Agricultural Stabilization and Conservation State and county committees. Other agen- cies and offices of the Department and commercial agents also carry out certain phases of CCC's activities, ASCS administers CCC's activities through its central office in WashSngton, D.C., and its three commodity offices located in Kansas City9 Missouri; Enneapolis, Minnesota; and New Orleans, Louisiana. Responsibilities of the com- modity offices include acquisition, storage, transportation, and disposition of agricultural commodities. The Agricultural Stabilization and Conservation State and county committees carry out certain of CCC's price- support and related activities within the States and coun- ties. There are 50 State offices, an area office in Puerto Rico, and about 2,900 county offices. The State committees supervise the activities of the county committees in their respective States. 5 CHAPTER 3 SUMMARYOF CERTAIN MATTERSREPORTEDBY GAO TO THE CONGRESSOR BROUGHT TO THE ATTENTION OF CCC RC REDUCEDSUBSTANTIALLY Our review of CCC's policy and procedures for estab- lishing weekly rice export subsidy rates resulted in the adoption of a new policy and revised procedures for estab- lishing such rates-- the first substantive changes in the administration of the rice export program since its incep- tion in 1959. We estimated that the changes reduced com- mercial rice export subsidy payments by about $23 million in fiscal year 1970. Substantial reductions will recur in varying amounts each year. Prior to the change in policy, the objective of the Department's rice export program was to make U.S. rice available in world markets at competitive prices by provid- ing export subsidies to bridge the difference between the lower of U-S. domestic prices or price-support rates and world market prices. Inasmuch as price-support rates had been consistently below U.S. domestic prices, export sub- sidy rates represented the difference between U.S. price- support rates and the generally lower world market prices. During fiscal years 1964 through 1967--the period covered by our review-- CCC paid subsidies of about $142 million on commercial exports of rice. In our review we noted the following questionable sub- sidy rate decisions which were made by CCC principally on the basis of inadequate sales and inventory data or unoffi- cial world market information. 1. Export subsidy payments were continued and, in some instances, increased during the period November 1966 to May 1967, although such subsidies were generally not needed because the United States had practically no competition from Thailand, its leading long-grain- rice competitor. 6 2. Rice export subsidy rates were substantially in- creased primarily on the basis of unofficial pric- ing and other information provided by representa- tives of the rice industry. 3. Subsidy rates were increased for export of all medium- and short-grain rice on the basis of negoti- ations for a specific export transaction, rather than on the basis of more comprehensive world mar- ket pricing data. In November 1968 we proposed that the Secretary of Ag- riculture take appropriate action to obtain, from Federal sources, information on domestic rice production, sales, and inventories along with more precise world market price data for use in establishing export subsidy rates. We had pointed out earlier the need for information on exports by types--long-grain, medium-grain, short-grain, and mixed rice--for use in establishing subsidy rates. The Department advised us in December 1968 that (1) the Bureau of the Census would initiate, in January 1969, the reporting of rice exports by types, (2) efforts to obtain improved world price information would continue, and (3) a further determination would be made on the practicability of obtaining production data through Government channels. The Department did not indicate that any specific change would be made in the method of computing export subsidy rates. Following our discussions with Department officials, however, the General Sales Manager of the Export Marketing Service --a Department of Agriculture agency created in 1969 to place new emphasis on agricultural export programs-- advised us, in letters dated May 7 and July 2, 1970, that a new policy and revised procedures had been adopted by CCC for establishing weekly export subsidy rates. The new policy is designed to ensure that U.S. rice is generally competitive in world markets. Therefore, export subsidies tend to bridge only part of the difference between domestic and world market prices for rice. In contrast, the previous policy had been designed to provide export subsidies which would make U.S. rice fully competitive in world 7 markets; but, as previously pointed out, such subsidies were, in some instances, higher than necessary to make U.S. rice fully competitive. Notwithstanding the substantial reduction in subsidies resulting from the new policy, U.S. commercial rice export sales in fiscal year 1970 were about the same as the annual average during 1964-67, the period covered by our review. Under the procedures now being followed, the Depart- ment continues to rely on an advisory committee of its rice marketing specialists. In arriving at its recommendations for weekly rice subsidy rates, the coAmmittee considers sev- eral factors not previously considered, including (1) the availability of U.S. rice for export, by types, (2) the re- lationship of export sales to export subsidy rates, by types of rice, for use in determining if U.S. rice is gen- erally competitive in world markets, and (3) the degree to which U.S. rice has become established in foreign markets. These factors are consistent with the information which we proposed should be obtained and used in establishing sub- sidy rates. The General Sales Manager estimated that, under the new policy and revised procedures, subsidies for fiscal year 1970 commercial rice exports would be about $12.5 million. This amount was about $23 million less than the annual aver- age of $35.5 million in commercial export subsidy payments made during the 1964-67 period for about the same quanti- ties. In our opinion, the estimated $23 million reduction in subsidy payments under the new policy is conservative be- cause (1) if the previous method of computing export sub- sidies had been applied to fiscal year 1970 exports, the resulting subsidy payments would have been considerably higher than the annual average of $35.5 million for the 1964-67 period, in view of increasing world rice production and decreasing world rice prices and (2) it does not in- clude any amount for the reduction in subsidies paid on Public Law 480 rice exports since the competitive situation for such exports is not the same as for commercial exports, although the subsidy rates are the same. Subsidies paid on Public Law 480 rice exports during the 1964-67 period amounted to about $84 million. IPPROVEHENTSIN ADMINISTRATION E ---- ACREAGE-DIVERSION PROGRAM In a report to the Congress on objectives of the feed grain program not being attained because of inclusion of nonagricultural land (B-114824, January 19711, we commented that, in 14 counties in 6 States covered by our review, we had identified substantial payments for the diversion of land from agricultural production although the land was being used, or designated for use, for nonagricultural pur- poses. From discussions with program officials, reviews of lo- cal ASCS records, and information otherwise coming to our attention, we identified for the 1969 crop year questionable diversion payments totaling about $618,000 made to 938 farm owners or operators in the 14 counties covered by our review. Of these payments, we selected for detailed review payments totaling about $189,000 made to 215 individuals or organiza- tions. We identified 136 payments totaling about $116,000 which were made for the diversion of land used, or designated for use, for such nonagricultural purposes as housing and commer- cial development, recreation, hobby farms, country estates, sod nurseries, garbage dumps, and gravel pits. About $87,000 was paid for the diversion of certain of these tracts in prior years. Because these uses of the land prevented the growing of feed grains or because the intended future uses were incon- sistent with crop production, the diversion payments did not contribute to the accomplishment of the principal objective of the diversion portion of the feed grain program--control- ling production. Because most of the diversion payments identified were made to recipients engaged in nonagricultural businesses or occupations, such payments also were inconsis- tent with the program objective of maintaining farm income. Further, the making of diversion payments for land al- ready being used, or intended for use, for nonagricultural purposes did not aid in attaining the secondary program ob- jective, set forth in program regulations, of conserving land for future agricultural uses or related uses. 9 Examples of diversion payments for nonagricultural land enrolled in the feed grain program were as follows: --$1,484 was paid in 1969 for the diversion of 25 acres which were being developed as part of a residential community. During visits to the property in 1970, we found that a substantial amount of construction had been completed and that much of the land was not suit- able for cultivation due to construction activities. --$I.,000 was paid over an 8-year period on a 7-acre tract which had been converted from agricultural land to a nudist camp. --$1,400 was paid over a Z-year period to a garbage disposal company. We inspected the diverted acreage and found that the owner was selling the topsoil and that he planned to use the excavated area as a gar- bage dump. --$2,000 was paid in 1969 to a participant for the di- version of leased land within a privately owned ord- nance proving ground. The ordnance manufacturer had described the proving ground--which was not readily accessible because of fences and padlocked gates--as a completely equipped facility for the loading and testing of ordnance devices ranging from small caliber ammunition to bomblets, grenades, land mines, and fuses of all types. We found that the ASCS regulations governing the eligi- bility of land for diversion payments were being subjected to various interpretations by ASCS county offices and Agri- cultural Stabilization and Conservation county committees, both of which had responsibilities over the local administra- tion of the program. Also, ASCS's national and State offices were not providing needed guidance to the county offices and committees in interpreting the regulations uniformly. Because the diversion payments we reviewed were selected on a judgment rather than a random basis, our findings did not permit statistical projections either nationwide or by State or county. Yet, because of the payments made for 10 nonagricultural land in each of the 6 States included in our review and because of the weaknesses noted in ASCS regula- tions and procedures, we stated our belief that such payments were widespread and could be significant. We recommended that ASCS (1) revise the feed grain pro- gram regulations with a view toward excluding from the pro- gram all land devoted to, or designated for, nonagricultural uses and (2) establish review procedures at the State and national organizational levels to ensure that adequate sur- veillance was being maintained over the land placed in the program and that regulations were being uniformly and con- sistently applied. In a reply dated September 23, 1970, the agency informed us that it agreed with our conclusions and that certain ac- tions had been taken or planned to implement our recommenda- tions, namely (1) State offices were instructed to direct county committees to review all cases of the type described in our report and to recover, where appropriate, any over- payments or unearned payments, (2) regulations were to be reviewed with the aim of more clearly defining farms inel- igible for the program, and (3) administrative controls at the national and State levels were to be strengthened to en- sure that county committees uniformly applied the regula- tions and maintained adequate surveillance of land and promptly identified those tracts shifting from agricultural to nonagricultural uses. 11 BASIS FOR WHEATPRICE-SUPPORT LOAN RATES REVISED In a letter dated March 23, 1970, to the Executive Vice President, CCC, we commented on a decision made by the De- partment of Agriculture in June 1969 to rescind an announce- ment involving a proposed reduction in theCCCprice-support loan rate on wheat stored at terminal warehouses located at ports on the Gulf of Mexico. We recommended that CCC adopt a policy which would provide for the prompt elimination of inconsistencies in price-support regulations that result from differences in freight rates or other factors. The price-support rate for wheat at Gulf of Mexico ports was equivalent to the price-support rate at interior points plus handling charges and interstate freight charges of railroads for transporting the wheat to the Gulf. The availability of substantial storage space at the Gulf com- bined with transportation (barge, truck, and export rail) charges that were lower than the interstate rail rates, gave producers an advantage of 15 to 20 cents a bushel if they placed their wheat under price support at the Gulf rather than at inland points. To discourage this direct flow of wheat to the Gulf, the Department in June 1969 proposed to reduce the loan rate at the Gulf to compensate for the difference in freight rates. The Department estimated that, otherwise, the to- tal direct movement of 1969-crop wheat to the Gulf for price support could be 15 to 20 million bushels. If such a move- ment of wheat occurred, CCC would disburse about $3 million of additional price-support loans on wheat stored at Gulf locations because of the freight differential. Whether this additional investment would be recovered would ultimately depend on export sales and the extent to which the value of the wheat had been increased by virtue of its location. The Department also wanted to discourage the direct flow of wheat to the Gulf for storage as loan collateral because the Department believed that wheat handlers who had Gulf storage space available and who controlled barge trans- portation facilities would have a competitive advantage over other wheat handlers. 12 The Department, 2 days after announcing the proposed change in wheat price-support regulations, rescinded it on the basis of verbal information received from farm and trade groups indicating that the movement of about 2 or 3 million bushels of wheat had already been negotiated. Agency officials informed us that at this stage the Depart- ment, after considering theadvisabilityof establishing a cut-off date for making the proposed change effective, de- cided that such action would result in inequities among pro- ducers. On this basis, it was decided that any adjustment action should be withheld until the 11970 crop. At September 30, 1969, the quantity of 1969-crop wheat recorded by CCC as in storage at Gulf locations was about 2.9 million bushels. The quantity in storage increased to about 5.1 million bushels at December 31, 1969. This in- crease of 2.2 million bushels during the quarter ended De- cember 31 indicated that, if the Department had made a timely reduction in the loan rate for wheat at Gulf port terminal warehouses, as was originally contemplated, CCC could have avoided making a greater investment in wheat loans, We agreed that there should be no inequities in CCC's treatment of producers. We stated the belief, however, that an excessive loan rate for a particular geographical area should be adjusted to the proper level as soon as prac- ticable. Such adjustment would not deny producers the price support to which they were entitled and would avoid extra outlays of CCC funds. We recommended in our letter of March 23, 1970, that CCC adopt a policy which would provide for the prompt elim- ination of inconsistencies in price-support regulations that result from differences in freight rates or other factors, with due consideration for commitments already made. In April 1970 CCC advised us that a broad change was needed in the entire loan structure for several grains and that it had adopted a different method of establishing and applying price-support locational differentials for 1970- crop wheat and other terminal-market-oriented commodities (grain sorghum, barley, rye, and flaxseed). 13 Under the new method, according to CCC, the locational differentials generally reflect no more than minimum trans- portation costs to recognized markets and eliminate the in- consistencies in the regulations commented on in our letter. CCC advised us further that the new method would not provide a monetary inducement that could encourage abnormal move- ments of grain for placement under CCC loan. ,. 14 - IMPROVEMENTIN CONTROLS OVER CCC SIGHT DRAFTS In a letter dated July 16, 1970, to the Executive Vice President, CCC, we pointed out a need for stronger controls over CCC sight drafts. Sight drafts are issued by ASCS State and county offices to pay farmers and others under CCC and ASCS programs. In calendar year 1969 these offices is- sued 7.4 million sight drafts amounting to $6.1 billion. Our review showed weaknesses in (1) procedures and practices regarding blank sight draft forms, (2) safeguard- ing of sight draft forms, (3) draft preparation and issuance procedures, and (4) accounting for missing sight draft forms. Also, there was a lack of assurance that computer tape reels containing information from certain drafts prepared by the ASCS New Orleans Data Processing Center were being trans- mitted promptly to the ASCS Kansas City Data Processing Cen- ter. These reels are the means for recording the draft transactions in CCC's accounting records maintained at the Kansas City office. We made specific recommendations for correcting the weaknesses. By letter dated August 31, 1970, the Executive Vice President expressed general concurrence with our rec- ommendations and advised us that actions had been or would be taken to eliminate the weaknesses. SIGNIFICANT CHANGESIN CONTRACTS TO BE DOCUMENTED In a letter dated March 12, 1970, to the Executive Vice President, CCC, we expressed views on CCC's payment of liquidated damages claimed by processors, mainly flour mil- lers, on the basis that CCC delayed issuing Notices to De- liver. The liquidated damage payments totaled about $200,000. CCC entered into contracts with flour millers and other processors to purchase processed commodities for export pro- grams. Under the contractual terms and conditions, the processors were required to make delivery at export points by certain dates specified in the contracts and CCC was 15 required to issue Notices to Deliver to the processors in I sufficient time to meet the specified delivery schedule. The contracts provided that failure of CCC to issue Notices to Deliver timely would make CCC liable for payment of liquidated damages. Processors' shipments of commodities to Atlantic and Gulf ports were stopped about December 20, 19653, because of a rail embargo resulting from a strike by longshoremen at export points. In view of the strike and rail embargo, CCC did not issue Notices to Deliver. Neither the processors nor CCC had any control over the embargo or strike. After the strike was settled at the various ports, around Febru- ary or March 1969, CCC issued Notices to Deliver. It appeared to us that CCC had no legal liability to pay liquidated damages because any damages were, in fact, caused by the rail embargo resulting from the strike and not by CCC's failure to issue Notices to Deliver timely. In our letter of March 12, 1970, we proposed, therefore, that CCC take steps to recover the amounts paid as liquidated damages. The Executive Vice President, by letter dated May 7, 1970, informed us that CCC had advised the processors that, if delivery was not feasible because of the strike, it would pay them for storing the commodities on the basis established for liquidated damages. CCC considered such payment to be less than the costs CCC would incur in taking delivery of the commodities during the strike. The Executive Vice President explained that the processors would have been inclined to increase their bid prices if, in view of the possibility of a longshoremenUs strike, CCC had not given assurance of either accepting delivery while the strike was in process or, in some way, reimbursing the processors for storing the com- modities. At no time during our review of this matter at the ad- ministering office-- the Minneapolis Commodity Office--in- cluding discussions with officials and personnel of that office, were we informed that CCC had given the processors such assurance. Also, there was no documentation indicating that the contracts had been so revised. We were informed by the national office in Washington in response to our inquiry concerning the nature of CCC's advice to the processors that (1) such assurance to the trade was given during a meeting held at the Department of Agriculture with a miller association and (2) other trade groups and vendors were similarly advised in telephone con- versations. The Executive Vice President in his letter of May 7, 1970, explained also that there was no general prohibition against shipping commodities to port in trucks and that, consequently, a processor could have attempted the formality of delivery by truck. Our comparison of transportation charges for a typical shipment of flour by rail and by truck indicated that shipment by truck would have been unlikely because it was prohibitively expensive. Also, we believe that delivery by truck would not have been feasible, even if economical, because of the necessity to cross picket lines established by the strikers and because terminals at many ports do not accept shipside delivery by truck. In a letter to the Executive Vice President dated June 25, 1970, we expressed the view that the liquidated damage matter might not have been administered in a reason- able manner and suggested that significant changes in con- tract terms should be documented, rather than handled orally, to ensure that all parties would be treated equitably and would be made fully aware of their rights and obligations. In August.1970, the Executive Vice President advised us that, in his opinion, the action taken by CCC was in the best interest of the Government and the program. He ac- knowledged that significant changes in contract terms should be documented so that all parties would be aware of their rights and obligations. 17 CHAPTER4 COMMENTSON SELKTED HIGHLIGHTS OF FISCAL YEAR 1970 OPERATIONS RECORD-HIGH REALIZED LOSS REPORTEDBY CCC CCC's price-support and related operations normally re- sult in a loss. For fiscal year 1970, CCC reported a record- high realized loss of $4.2 billion (recorded loss before adjustment of allowances for losses on loans, commodity in- ventories, and receivables). CCC's comparative statement of income and expenses for fiscal years 1970 and 1969 is presented on page 34. Most of the loss resulted from direct price-support and acreage-diversion payments to producers, totaling about $3 billion. Also, interest expense amounted to $616 mil- lion, of which $578 million was on borrowings from the U.S. Treasury. The Treasury interest rates ranged from 7 to 8-l/4 percent, compared with a range of 5-3/8 to 6-3/8 per- cent in fiscal year 1969. In fiscal year 1969 CCC made a change in its accounting policy (with which we agreed) to provide that advance pay- ments to producers for acreage diversion or price support be recorded as an asset and be written off as an expense upon compliance by the producers with program provisions. Under this policy, advances totaling $369 million that had been treated as expenses for acreage diversions in fiscal year 1968 would have been expenses in fiscal year 1969. Therefore the realized loss for 1969 comparable to that for 1970 would be $3.5 billion rather than $3.1 billion as shown in the comparative statement of income and expenses on page 34. At June 30, 1970, there were no advance payments to producers. In fiscal year 1970 the Congress appropriated $5.2 bil- lion to reimburse CCC for realized losses, compared with a reimbursement of $4.2 billion in fiscal year 1969. A sum- mary of changes in the amount of unreimbursed losses during fiscal year 1970 follows. 18 Amount (billions) Unreimbursed losses, June 30, 1969 $8.5 Less reimbursements in fiscal year 1970 5.2 3.3 Plus realized loss in fiscal year 1970 Unreimbursed losses, June 30, 1970 (sch. 3, P. 35) $7.5 In addition to incurring a realized loss of $4.2 bil- lion in fiscal year 1970, CCC incurred costs of $1.3 bil- lion for special activities authorized by various statutes and financed through special appropriations. Comments on these activities begin on page 24. $5.7 BILLION EXI'ENQ$D FOR PRICE sumom m@ AC~~~EYDIVERSION In fiscal year 1970 CCC expended $4.7 billion for the price supportlof agricultural commodities through nonre- course loans, purchases, and direct payments. Also, CCC made direct payments totaling $1 billion to producers for diverting acreage from production of certain crops. Most of the expenditures pertained to feed grains, up- land cotton, and wheat. Loans to producers and purchases of commodities totaled $2.7 billion; direct payments to producers totaled $3 billion. 1 The loans are referred to as nonrecourse because CCC will accept the commodity collateral in full settlement of a loan. 19 A summary of the expenditures by commodity follows. Acreage Price support _ diver- Total Di- sion-- ex- rect direct pendi- Pur- pay- pay- tures Total Loans chases ments ments (000,000 omitted) Feed grains $2,236 $1,320 $ 582 $ 10 $ 728 $ 916 Cotton, up- land 1,211 1,184 383 801 27a Wheat 996 925 519 4 40Zb 71 Soybeans 422 422 407 15 Dairy prod- ucts 253 253 253 Tobacco 217 217 217 Rice 132 132 I.13 19 Peanuts 80 80 54 26 Wool 53 53 Flaxseed 35 35 34 1 Other 99 99 29 70 Total $5,734 ~ $4,720 ___ $2,338 $1,984 ~ $1,014 - aThis amount was paid to operators of small farms on the basis of the projected yield from a portion of their cotton acreage. Payments were made under statutory provisions pertaining to acreage diversion, but diversion was not re- quired. b Net after deduction of $389 million collected by CCC for certificates soid to wheat processors under the wheat mar- keting allocation program, 20 $546 MILLION REDUCTION IN COMMODITYLOANS At June 30, 1970, CCC's investment in commodity loans amounted to $2.8 billion, a reduction of $546 million from the investment at June 30, 1969. The major loan decreases were $447 million for soybeans and $153 million for upland cotton. Commodity loan activity during fiscal year 1970 is sum- marized as follows: Other Feed To- soy- Upland commod- Total grains bacco --- Wheat beans cotton ities (000,000 omitted) Loan balance, June 30, 1969 $3,334 $871 $761 $583 $322 $2 1970 fiscal year activity: Loans made 2,338 582 217 519 383 230 Repayments -1,786 467 -127 -326 -248 -179 Loans can- celed by CCC's acqui- sition of collateral -1,073 -5 -288 47 Loans charged off -23 -1 -22 Other trans- actions -2 I Net change -546 84 -18 Loan balance, June 30, 1970 $2,788 $9 $845 $24 CCC's investment in grain loans at June 30, 1970, to- taled $1.8 billion. Of this amount, $1.3 billion repre- sented loans that had been extended by CCC beyond their original maturity dates. The collateral for the grain loans of $1.8 billion ag- gregated 1.6 billion bushels of grain, of which 1.2 billion bushels, or 75 percent, were stored on farms and the 21 remainder were stored in commercial warehouses. Producers ' were earning storage income from CCC on about 800 million bushels of farm-stored grain serving as collateral for loans that had been extended beyond their original maturity dates. $608 MILLION INCREASE IN COMMODITY INVENTORIES At June 30, 1970, CCCDs investment in commodity inven- tories amounted to $1.9 billion, an increase of $608 million over the investment at June 30, 1969. The major increases were $239 million in soybeans and $206 million in upland cotton. CCC's inventory activities during the year ended June 30, 1970, are summarized in the following tabulation. Additions Loan col- Inventory lateral Deductions Inventorzy June 30, acquired Inventory Donations June 30, Commodity 1969 Purchases (note a) sold (note b) 1970 (000,000 omitted) Feed grains $ 588 $ 11 $ 130 $126 9 2 $ 601 Wheat 229 7 213 44 - 405 Soybeans 138 15 422 195 3 377 Cotton, upland 2 302 96 208 Dairy products 169 261 - 176 120 134 Flaxseed 20 1 27 s 48 Rice, rough 30 9 7 4 1 41 Oils, mainly tung and linseed 40 28 11 44 10 25 Other 36 -220 7 -193 - 49 - 21 Total $1,252 $552 $1,119 $gg $185 $U aIncludes $46 million of collateral in excess of value of loans ($1,073 million) defaulted. b Includes inventory adjustments. 22 STORAGE, HANDLING, AND TRANSPORTATION EXPENSES INCREASED SUBSTANTIALLY Costs incurred by CCC for storing, handling, and trans- porting its commodity inventories and for storing grain col- lateral for its price-support reseal loans (loans extended beyond the original maturity dates) totaled $356 million in fiscal year 1970, an increase of $108 million over the costs for fiscal year 1969. The major increase in costs was $57 million for the storage and handling of CCC inventories. The cost for storing collateral on reseal loans in- creased by $21 million to a record high of $144 million. These costs consisted of $104 million for collateral stored on farms and $40 million for collateral stored in commercial warehouses. A summary of CCC expenses for storing, handling, and transporting commodities in fiscal years 1970 and 1969 fol- lows. 1970 1969 Storane and handling. Transpor- Storage and handling Transpor- Reseal tation Reseal tation ccc loan of ccc ccc loan of ccc Total itNell- collat- inven- Total inven- collat- inven- Commodity expense Total tories & tories expense --Total tories era1 m tories (000,000 omitted) Feed grains $172 $149 $ 69 s 00 523 $141 $130 $55 $ 75 $11 u-heat 99 76 27 49 23 66 55 17 38 11 Soybeans 47 39 24 15 0 23 18 0 10 5 Cotton, up- land 15 13 13 - 2 - - - - - Dairy prod- ucts 11 3 3 - 13 5 8 Other - 12 - 9 - 9 -- - 5 - 3 1 23 $1.3 BILLION IN REIMBURSABLECOSTS INCURRED BY CCC FOR SPECIAL ACTIVITIES Under various laws, CCC performs special activities and receives appropriated funds either as partial reimbursement for costs incurred or as advances. Because the special ac- tivities are financed separately from CCC's price-support and related programs, the costs of special activities are not included in CCC's loss from operations, as shown in schedule 2. Costs of the special activities were $1.3 billion for fiscal year 19700-about the same as for fiscal year 1969. This represents a leveling off of costs after a downtrend since fiscal year 1962 when such costs were $2.3 billion. The principal special activity pertained to exports of ag- ricultural commodities-- at a total cost of $1.2 billion-- under Public Law 480. Title I of the law provides for CCC to finance the sale of agricultural commodities for dollars on credit terms or for foreign currencies. Title II of the law provides for Government donations of agricultural com- modities for distribution in foreign countries. A summary of costs incurred under Public Law 480 during fiscal year 1970 follows. Title I Title II Total -(OOO,OOO omittedj- Commercial export sales of agri- cultural commodities (suppli- ers' invoices) $781 $ - $ 781 Payments to suppliers for export differentials 41 41 Disposition of CCC inventories (included as sales in CCC's statement of income and ex- pense) 262 262 Ocean transportation 87 160 Other 2 2 Total $895 $351 Z $1,246 24 About 45 percent of the total cost under Public Law 480 pertained to the export of wheat and wheat products. The following tabulation shows the total cost by commodity or by other category. Amount ItEm (000,000 omitted) Wheat (and products) $ 538 Rice 182 Cotton 112 Dairy products 93 Feed grains 76 Soybean oil 63 Vegetable oil products 30 Blended food products 25 Tobacco 23 Tallow 10 Other 46 1,198 Ocean transportation on commodities donated through nonprofit voluntary agencies 46 Other 2 Total $1,246 A summary showing the costs incurred and the funds re- ceived by CCC for the special activities during fiscal year 1970 follows. Unreimbursed costs Unreimbursed costs (appropriated funds Fiscal year 1970 activity (appropriated funds In sdvance of ex- Appropriations in advance of ex- penditurec-11 at Costs and other funds penditurek1) at Activity and aiithorlty June 30, 1969 -incurred -received June 30. 1970 (000,000 mitted> Public Law 480 (7 U.S.C. 1691): Title I--sales of commodities for foreign currencies and for dollars on credit terms -5168 $ 095 s 729 s -2 Title II--donations to furnish enagency assistance to friendly peoples -198 351 - 500 - 49 30 1,246 1,229 47 National Wool Act of 1954 (7 U.S.C. 1781) 68 56 68 56 Other A 1 1 -I Tote.1 $2 Sm $1,298 $103 25 RECEIVABLES FOR PUBLIC LAW 480 CREDIT SALES INCREASED SUBSTANTIALLY At June 30, 1970, CCC's accounts and notes receivable amounted to $2.6 billion, including $1.8 billion in receiv- ables (principal and interest) for Public Law 480 credit sales for dollars, an increase of about $500 million during fiscal year 1970. Under this sales program, CCC finances commercial ex- ports of agricultural commodities under long-term credit agreements. Payments are to be made periodically in dollars by the purchasing governments or foreign trade entities over periods not to exceed 40 years, The accounting treatment for these Public Law 480 re- ceivables is explained in note D to the financial statements. (See p. 39.) As stated in the note, past due installments on principal and interest at June 30, 1970, amounted to $8.4 million, The most significant delinquencies were (1) $645,000 due from the Dominican Republic whose debt was $31.6 million and (2) $3.7 million due from the United Arab Republic whose debt was $16 million. In July and August 1970, CCC collected $4 million on delinquent accounts but none of this amount pertained to these two debts. A summary of the activity in the Public Law 480 accounts during fiscal year 1970 and the balances due from the debt- ors at June 30, 1970, follows. 26 1970 fiscal year activity Balance Net Balance June 30, Financing increase or June 30, 1969 by CCC Collections decrease(-) 1970 (millions) Principal $1,301.9 $494.9 $48.7 $446.2 $1,748.1 Interest 16.2 32.8 26.2 6.6 22.8 Total $1,318.1 $527.7 $74.9 $452.8 $1,770.9 Analysis by debtor Foreign governments: Indonesia $126.7 $ 329.0 India 92.3 264.5 Yugoslavia -7.8 231.9 Brazil 16.2 103.5 Israel 40.6 103.3 Korea 39.1 96.7 Pakistan 50.4 90.7 Chile 7.1 48.1 Turkey 29.4 43.8 Morocco 2.7 37.0 Tunisia 14.5 35.8 Ceylon 7.2 35.6 Dominican Republic 4.8 31.6 Congo 1.5 29.9 China -1.9 27.9 Philippines 5.7 25.5 Columbia 4.1 24.4 U~guaY .3 19.0 Bolivia 6.5 18.4 Greece -1.1 16.2 United Arab Republic (increase in 1970 was for interest) .4 16.0 Ghana 8.5 14.1 Iran -. 8 11.0 Guinea 2.2 10.9 Other (23 governments, each under $10 million) 1.6 82.7 450.2 1,747.5 Foreign trade entities 2.6 23.4 Total $452.8 $1,770.9 27 CHAPTER 5 SCOPE OF AUDIT Our audit of the Commodity Credit Corporation consisted of two major phases: (1) an examination of CCC's financial statements as of June 30, 1970, modified as required by cir- cumstances (see below) and (2) a review of the manner in which CCC carried out selected commodity programs and activ- ities, including the controls for safeguarding CCC's assets and protecting the Government's interests. Our examination of the financial statements was made in accordance with the principles and procedures applicable to commercial corporate transactions. It was performed at the headquarters office in Washington, D.C.; the commodity of- fices in Kansas City, Missouri; and New Orleans,Louisiana; and the data processing center in Kansas City. We reviewed and appraised work performed by the Office of the Inspector General, Department of Agriculture. Where appropriate, we relied on this work and modified the scope of our audit. EXAMINATION OF CCC FINANCIAL STATEMENTS Our examination of the CCC financial statements was di- rected primarily toward arriving at a conclusion as to their reliability and usefulness for disclosing financial informa- tion with respect to CCC's affairs. The examination in- cluded such tests of the accounting records and such other auditing procedures as we considered practicable and reason- able in view of the effectiveness of CCC"s internal control and the audit work of the Office of the Inspector General, Department of Agriculture. In view of the unique character and vast scope of CCC's operations--particularly commodity inventories and loan col- lateral --it was not practicable for us to perform all the examination and verification steps which would be necessary to reach an independent, overall opinion concerning the ac- curacy and fairness of the financial statements in present- ing the financial position of CCC at June 30, 1970, and the results of its operations for the year then ended. 28 The principal step omitted was an independent verifica- tion of CCC-owned commodities and of commodities stored as collateral for loans. Such work would have been not only costly but extremely difficult because of such factors as the great n;mber and diversity of storage facilities and lo- cations; the general impracticability of determining by in- dependent confirmation, inspection, or other means the quan- tity and condition of grain stored in public warehouses on a commingled basis or stored on farms; and the large quantities of commodities in transit. Periodically, the Consumer and Marketing Service, De- partment of Agriculture, physically examines CCC commodity inventories and collateral stored in comnercial warehouses to verify the quantity and quality of these commodities. During fiscal year 1970, examinations by the Consumer and Marketing Service covered 10,000 warehouses storing grain, cotton, and other agricultural commodities. This number in- cluded 1,900 warehouses examined by States under cooperative agreesnent s e On the average, the warehouses were examined twice during the year. We did not verify the reasonableness of GE's substan- tial allowances for losses on disposition of price-support inventories and loans. The allowances are based on estimates which are not susceptible of audit verification., For ex- ample, the amounts that CCC realizes on disposition of its commodity inventories depend on a number of complicated and interrelated factors; such as changes in domestic and world- wide supply and demand, various legislative restrictions on dSsposal of commodities, time and manner of disposal, and ef- fect of commodity dispositions on domestic and world prices. For these reasons, the actual losses can differ materially from the amounts estimated by CCC even though the procedures followed in computing the allowances indicate that the esti- mates are reasonable in the light of the information avail- able at the time they were prepared. 29 CHAPTER 6 OPINION OF CCC FINAJXIAL STATEMENTS The financial statements-- Comparative Statement of Fi- nancial Condition (schedule 11, Comparative Statement of In- come and Expense (schedule 21, Analysis of Deficit (sched- ule 31, and Statement of Source and Application of Funds (schedule 4)-- and the notes to financial statements are the same as those published in the Commodity Credit Corpora- tion9s Report of Financial Condition and Operations as of June 30, 1970. CCC's loss from operations does not include costs of special activities carried out by CCC, which are paid by CCC from appropriated funds received in advance of expenditures or as reimbursements for financing extended. Comments on these costs, which are accounted for separately by CCC, be- gin on page 24. For the reasons explained under 99Examination of CCC Fi- nancial Statements" (see p. 281, we cannot express an opin- ion that CCC's financial statements (schedules 1, 2, 3, and 4) present fairly its financial position at June 30, 1970, and the results of its operations for the year then ended. We believe, however, that CCC's accounting methods provided a generally satisfactory record of its financial transac- tions and that its system of financial reporting was, in gen- eral, adequate for the purpose of supplying CCC9s management with information for conducting its affairs. 30 WCIAL STATEMENTS 31 COUHODITY CREDIT CORPORATION JUNE 30, 1970 AND 1969 June 30. 1970 June 30. 1999 ASSEIS CAsn $ 114.075.898 S 6~,416,641 CQUODIlYLoANS 8 2.700,353.901 s 3.334.02A.797 Less allowance for Lxses hlxC 8) 25.9X.000 2.762.421.901 25.702.000 3.30.9,322.797 sNR.KE FACILITY AND WJXPHENT UUHS 164,129,970 158.542.540 UM TO SECRTTARY OF ACR1CuLm 27,200,000 30,000,000 I&N TO FARHERS HME ADtlLNISIRATION 30.000,000 CWICOITY LNVEXTORIES (cost) (note A) 1.86D.271.182 1,251,883,964 Less allowance far losses (note B) 76.620.000 1.?83,651,182 122.146.OOQ 1,129.737,964 se ACCQUNIS AND NOTES RECEIVABLE 2.592.922.633 2.149,193,171 Less dlouancc for losses (note a 10.607.000 2,582,315,633 12.042.000 2,137,151.171 umuEDrssRs 37,030,356 32,582,936 Fxxm ASSETS bet) 13,938,077 17.525.982 ADVANCE PAYMXYS TO PRODUCERS 407.639.055 OmER ASSETS 11.693.649 17.554.79~ TOYAL ASSET.9 SL.354,4;7>-3 LIABILITIES AccauKfS PAYABLE 5 218,189.559 5 207.899,995 ACawwLxARILIn&S 636.142.848 389,617,239 IRUSI MD DEPOSIT LIABILITIES 178,071.945 3X.426.736 OBLICATIONTU REDEMCERITFICAlZSOFIn- YEREST IN CUWODIlY LOANS (note El 1.589.544.96s 08LIwLTION TO ISSUE EXPORT WEAT MARKET- ING c&RrIFIwsrRs bot.2 Fl 4,206,S69 4,206,569 DEFERRED CREDITF0RP.L. 480 RECfXVMJL.ES-- CREDIT SALES fOR DOLIARS hotc D) 1,770,919.065 1,318,150.145 mmLImILInES 16.987.696 17,519,189 DEFERRED INCQ(E 155.209 - 0FU.S. COVERNMR4T: Borrowings from Unfed States Trea- 12.261.583.968 12.114,932.669 ajzl stock loo .ooo .ooo 100 .ooo .ooo 12,361.583,968 l2.214.932.669 Less deficit (schedule 3) 7.609.646.984 4.671.938.984 8.738.978.838 3.475.953.831 rol-AL I.IA3ILITIEs sL.356.xaLu3 Ib zmtes following schedule 4 are an integral part of this statement. 2k General k-ting Office opinion on this statement is included ln chapter 6. 33 SCHEDULE 2. COnnODI?r CREDIT CORPORATION COHPARAIIVE STATEKENT OF 1E;cO.S AZD EXPENSE FISCAL TEARS 1970 ASD 1969 Fiscal Fiscal xe:eor 1970 year 1969 REALIZED CAIHS Am LOSSES--PRocwLY: Codity invenrory o?eratrons hmte 0): Sales of cc~itles s a801425,422 s 491,900,049 Cost of sales 881.994,513 541.332.018 Net loss on sales l&9,091 49,431,96¶ cost Of COtrxdities donated 184,715,004 236,053,250 Storage and t'andling expense 145,198,939 'X,570,674 irmsportation expense 66.784.603 364650.897 Net loss on co=odicy invenroy operations 398n267.637 410.716.790 Producer and other payaenrs: coccon price-support payrsnts 800,886,656 642,784,058 Feed grain price-support pay-ents 727,750,666 626,424,279 Yheat prtce-supporr pay;enrs 602,264,804 362,669,422 Export payTents 100,719,6L~ 33,003,FJ'J4 Cotton diversion and sxll fam payments 2b,b78,21* 88,307,699 Feed grain diversion pawent, 915,827,252 425,377,:1& Yheat dlverslon payx~~nts fl.S18,302 -10,614 W~fIOnol UOOL Act paynenro S2,643.584 bS.O66,52 Total producer and other payments 3.098.289.098 2.243.b?2.097 Other program cosu (-,ainsl and adJustz.ents: Reseal Loan storage ex>ensc 363,754,503 '22<$,63;; Eeaesreh experues 507,535 LOan and or.her cksrge-offs 25,012,6SD 29,045:211 Llveatock feed prograa upcnse 264,832 -0,962 O&r costs 9,306,?9r) z,a5zJz Total other progro cosu and adjustments L79.?46.560 L53.?89"3il Specie1 recoverlea l uchorired (gslna): Research experues 825,576 -951,695 NA3fLOML UOOl Act 52.643.584 b5.066.53> ioocol special recoveries authorized 53.469.160 64.114.850 fleaet realized loss--progran, 3.622.334.135 IHco?E AND ExPExsE--cE~RAl.: Iruou: Interest on Loans 51,478,646 Other interest lncoms 28,907,799 Ocher lncozie 479,435 iota1 incw R.D.865.880 55.029.579 General overhead expense [net) (note P) Other expense Total crpense 671.862- 423.971.540 Net expense--general 530.997.010 368.941.961 ior& REALIZED Loss 4.213.331.145 3,113,~56.169 &J.,."SMh?s (-GAINS) OF ALUJWt'KES FOR LDSSES--PROGRAW Allo"ence for Losses on Loans 230,000 AIlo~ace for losses on comodity inventories -45,526,OOO ~&~,~ce for losses on accounts and mxes receiveble -1.435.000 Net ,,dj,,stment of allouanCeS for loSSe.%-,XOg+m 46,73l.@DO -188.182.0D0 m loss 'IFANSF'ERRED 'IU DEFICIT (schedule 3) $4.166.600.145 $2.924.974.169 -e ¶i?e notes follovtng schedule 4 are m integral part of this Statemat. The General Arcouming Office ophiot~ on this statement is included in chapter 6. 34 SCHEDULE3 COnt4ODITY CREDIT CORPORATION ANALYSIS OF DEFICIT FROM 1NCEPTION IN 1933 TO JUNE 30, 1970 Cuoul8eive to Cumulative to June 30. 1969 Fiscal year 1970 June 30, 1970 TOTAL REkLXZED LOSS EXCLUSIVE OF COST OF UARTIHE COLSUUERSUBSIDY PROCRAH S38.097,220,830 $4,213,331,145 542,310,551,975 COST OF UARTI!G CONSUMERNBSIDY PROCRAH 2,102,281,073 2,102,281.073 40,199,501,903 4,213,331.145 44,412,833,048 ALLOWANCES FOR LOSSES--PROGRAM 159.890,000 -46,731.000a 113,159,000 NET OPERATING LOSS 40,359.391,903 4,166,600.145 44,525.992,040 Reimbursement for net realized loss (15 U.S.C. 713a) 31,022,257,834 5,215,934,000 36,230,191,834 Appropriatlon for the postvar price sumore of agriculture (60 Stat. 8) 500,000,000 m 500,000,000 Loss-&covered-under the Foreign Aid ke of 1947 (22 U.S.C. 1411) 56.239.432 56,239.432 Recovery of emergency feed prograa losses (69 Stat. 62) 41,915.799 - 41.915.799 31.620,413.065 5.215.934.000 36.836.347.065 Net deficit (schedule 1) s 8.738.978,038 S1.049,333.855 S 7.689.644,983b aRepresents adfustment of allouances for losses. b Comprised of the folloving: Unreseord realized losses by fiscel year : 1968 8 249,998,669 1969 3,113,156,169 1970 4.213.331,145 7,576,485,983 Allovances for losses, June 30, 1970 113.159,ooo Net deficit, June 30, 1970 $7,689,644,983 The notes folloming schedule 4 are an integral part of this statement. The Ceoeral Accounting Office opinion on this statement is included in chapter 6. 35 SCHEDULE4 COMMODITY CREDIT CORPORATION STATEblENT OF SOURCE AND APPLICATION OF FUNDS FISCAL YEAR 1970 FUNDS PROVIDED: Borrowings from U.S. Treasury $ 9,462,x6,169 Reimbursement for realized losses by appropria- tions 5,215,934,000 Sales of commodities 880,303,551 Inventory settlements for differences in grade, location, and quantity (net) 3,930,094 Proceeds of domestic wheat marketing certificates 389,425,494 Repayment of loans by producers 1,832,930,114 Repayment of loans by Secretary of Agriculture 30,000,000 Repayment of loans by Farmers Home Administration 30,000,000 Interest income 80,386,445 Other 1,973,197 Total funds provided $15.926.839,024 PUNDS APPLIED: Repayment of borrowings from U.S. Treasury $ 9,315,504,870 Cost of commodities purchased 552,283,409 Acquisitions of loan collateral in excess of value of loans defaulted 46,308,843 Storage, transportation, and processing expenses 215,346,160 Loans to producers 2,388,544,432 Reseal loan storage expense 143,754,503 Loan to Secretary of Agriculture 27,200,OOO Export payments 100,719,620 Payments under the cotton, feed grain, and wheat programs 3,334,351,369 Interest expense 615,599,405 State and county office expenses 22,414,682 Custodian and agency expenses 383,094 Administrative expenses 31,962,742 Purchases of nonexpendable equipment 807,427 Other 14,320,182 Increase in working capital items 1,117,338,306 Total funds applied $15,926,839,024 The notes following schedule 4 are an integral part of this statement. The General Accounting Office opinion on this financial statement is included in chapter 6. 36 COMMODITYCREDIT CORPORATION NOTES TO FINI$NCW STATEJ%ENTS JUNE 30, 1970 A. Commodity inventories Inventories are valued at acquisition cost plus the cost of any packaging or processing performed after acquisi- tion. The amount of cost allocated to dispositions of commodities, acquired under price-support programs and generally stored without lot or crop year segregation, is computed on the basis of national average unit cost of the oldest crop year of the commodities for which any quantity remains in the inventory accounts. Cost allo- cated to other dispositions from price-support invento- ries is computed on the basis of actual lot cost or aver- age unit cost for the crop year inventory from which the specific lots were removed. Actual lot cost or average cost, without regard to crop year, is the basis for cost- ing dispositions from supply and commodity export pro- gram inventories. B. Allowances for losses on loans and inventories Allowances for losses on commodity loans and commodity inventories are the estimated loss on ultimate commodity dispositions. However, the corn leaf blight epidemic that has hit most of the main corn-producing areas of the U.S. is a factor which has not been considered in de- termining these allowances. At the time these allowances were determined, sufficient information was not avail- able to realistically appraise the effect that this ep- idemic may have on the ultimate disposal of the Corpora- tion's commodity loans and inventories. To the extent practicable, these estimates are based on estimated re- coveries from foreseeable dispositions of the commodi- ties. Estimated recoveries for commodities which are in excess of foreseeable dispositions are generally based on the lowest of cost, market price, or the Corporation's price for export sales. Allowances are not established for commodities in the supply and commodity export pro- gram inventories because they are usually acquired 37 pursuant to commitments providing for disposition on a. basis calculated to recover full costs to the Corpora- + tion. (GAO note: The corn leaf blight has no physical effect on previous years' corn serving as collateral for loans or corn owned by CCC. The blight, however, could affect market conditions which in turn could affect the redemption of loan collateral by producers and the sales value of CCC-owned corn.> C. allowances for losses on accounts and notes receivable Allowances for losses on accounts and notes receivable are based on the estimated recovery value of the respec- tive assets. No allowance has been provided for possible losses on re- ceivables established under the Agricultural Trade and De- velopment and Assistance Act of 1954, P.L. 480 credit sales for dollars, as explained in Note D. The allowance provided for possible losses under the Corporation's export credit sales program is based on estimates of the recovery value of accounts in default or past due at June 30, 1970. All receivables under the program are covered by commercial bank letters of credit and the Corporation looks primarily to the banks for pay- ment. Receivablesunderthe export credit sales program covered by letters of credit issued by the New York Branch of Intra Bank, S.A.L., Beirut, Lebanon, which ceased opera- tions October 15, 1966, amounted to about $21 million. Accrued interest through that date totaled $747 thousand. CCC and the three other major creditors of Intra Bank (the Governments of Lebanon, Kuwait, and Qatar) have en- tered into an agreement for the settlement of claims of CCC and other creditors against Intra Bank. The agree- ment provides, among other things, that CCC will be an organizing stockholder in a new investment corporation to be established under Lebanese law. The agreement by its terms does not prevent CCC from pursuing its rights under United States law with respect to assets of Intra Btank in the United States, which rights are currently being 38 pursued by the Department of Justice, and also gives rec- ognition to the claim of CCC against Intra Bank, Beirut. The Corporation expects to recover a substantial amount on its claim from the liquidation of assets of Intra Bank in New York by the New York State banking authori- ties. Although the remainder may ultimately be recovered through the new investment corporation, an estimated amount has been established as an allowance on this re- ceivable. Drafts equal to 90 percent of installments on receivable under the export credit sales program guaranteed by the National Bank of Egypt, Cairo, which is owned by the Government of the United Arab Republic, have not been honored since the UAR severed diplomatic relations with the United States early in June 1967. Drafts issued for 10 percent of the installments have been honored by the banks in the United States which confirmed 10 percent of the letters of credit. As of June 30, 1970, $63.0 mil- lion in principal and $15.5 million in interest was due. Pending further developments regarding possible resump- tion of diplomatic relations between the two governments, the Corporation does not have an adequate basis for es- timating the amount of loss, if any,which may be sus- tained on receivables guaranteed by the National Bank of Egypt* D. Receivables for Public Law 480, credit sales for dollars Amount to be-paid in dollars by foreign governments and private trade entities for agricultural commodities and products thereof delivered under agreements entered into pursuant to P.L. 480, are carried as receivables on the books of the Corporation, pending payment under long- term credit arrangements. Accrued interest is added to such receivables on June 30 each year. Because collec- tion on such receivables are to be applied as reductions in the amounts to be appropriated by the Congress for P.L. 480 programs, the total amount of the receivables is offset by a deferred credit account. As of June 30, 1970, past-due installments of principal and interest on re- ceivables due from foreign governments amounted to about 39 $8,426,000. Of this amount, $4,013,000 was paid during ~ July and August 1970. E. Obligation to redeem certificates of interest in commodity loans The certificate of interest program was discontinued in fiscal year 1970. F. Obligation to issue export wheat marketing certificates Under wheat marketing allocation programs the Corporation collected from wheat exporters the cost of export wheat marketing certificates which the exporters were obligated to acquire, The amount collected or due from exporters on wheat exported during the period July 1, 1968,through June 30, 1969 was first applied to offset the cost of wheat export subsidies earned by exporters during the same period. The amount by which the proceeds of export wheat marketing certificates exceeded the cost of subsi- dies is recorded as a liability. For the period July 1, 1969,through June 30, 1970, the amount of export wheat marketing certificates did not exceed the cost of wheat export subsidies earned by exporters. G. Liability for payments under the 1970 feed grain program Pursuant to legislation applicable to the 1970 crop of feed grains, the Corporation makes diversion and price- support payments to producers by issuing negotiable payment-in-kind certificates, or by making cash advances in lieu of issuing certificates to producers who elect in advance to have the Corporation market their certificate rights. The Corporation was contingently liable at June 30, 1970, to make diversion and price-support pay- ments in an estimated amount of $1,490 million. Such payments were not due and the amounts cannot be deter- mined until compliance With the terms of the program has been accomplished and verified. The estimated amount is not recorded as a liability in the accounts. 40 I-I. Liability for payments under the 1970 wheat program Pursuant to legislation applicable to the 1970 crop of wheat, the Corporation makes diversion payments to pro- ducers for acreage reduction of wheat and will purchase domestic wheat marketing certificates to be issued to producers during the 1970 marketing year. The Corpora- tion was contingently liable at June 30, 1970, to make diversion payments in an estimated amount of $67 million. . In addition, the Corporation was contingently liable at June 30, 1970, to purchase wheat marketing certificates from producers in an estimated amount of $832 million of which it is estimated $397.5 million will be recovered by the sale of certificates to processors. Such payments were not due and the amounts cannot be determined until compliance with the terms of the program has been accom- plished and verified. These estimated amounts are not recorded as liabilities in the accounts. I. Liability for payments under the 1970 cotton programs Pursuant to legislation applicable to the 1970 crops, the Corporation makes price-support and small farm payments to producers of upland cotton and price-support payments to producers of extra long staple cotton. The Corpora- tion was contingently liable at June 30, 1970, to make small farm payments in an estimated amount of $25 million and price-support payments in an estimated amount of $882 million to producers of upland cotton. In addition the Corporation was contingently liable to make price- support payments in an estimated amount of $3.7 million to producers of extra long staple cotton, Such payments were not due and the amounts cannot be determined until compliance with the terms of the program has been accom- plished and verified. The estimated amounts are not recorded as liabilities in the accounts. J. Commitments to acquire or dispose of commodities Contracts to acquire commodities are not reflected in the accounts, but the smounts of firm contracts are consid- ered as contingent liabilities. The approximate contract values of undelivered commodities and materials under * . firm contracts to acquire such commodities and materials as of June 30, 1970, were as follows: Commodity Value Blended food products $ 868,323 Butter 4,954,584 Cheese 8,668,961 Corn products 1,411,657 Milk, dried 24,2X,274 Rolled oats 877,621 'I&eat products l&282,429 Strategic and other materials 78,855 Total $59,358,704 Sales commitments and other disposition commitments are not shown in the accounts but are considered in estab- lishing allowances for losses. K. Letters of commitment Letters of commitment issued to banking institutions authorizing the banks to reimburse exporters in dollars for sales of commodities made under P.L. 480, are not shown in the financial statements. As of June 30, 1970, the amount of outstanding letters of commitment was $81,327,342. L. Export payments The Corporation was contingently liable at June 30, 1970, to make export payments on sales registered or declared, or export offers accepted, for which documents evidencing exportation had not been submitted, in the following ap- proximate amounts: Commodity Amount Rice $ 6,406,007 Wheat 17,421,757 Wheat flour 2,108,552 These contingent liabilities are not shown in the finan- cial statements, 42 M. Claims Amounts due the Corporation arising from claims that are definitely known or can reasonably be established are recorded currently as accounts receivable. On claims established under programs for which the Corporation will be reimbursed on an actual cost basis and on certain claims established in the maximum mount chargeable, not- withstanding improbability of collection, credit is de- ferred until actual recovery is made. This deferred credit is shown under "Other Liabilities."' An allowance for losses is provided on other claims where collection is doubtful. Amounts of claims on which adequate proof has not been established are not recorded as accounts receivable but are recorded for control purposes. It is estimated that such claims amounted to $13,013,788 as of June 30, 1970. Claims against the Corporation for which the amounts are definitely known or can reasonably be established are recorded as accounts payable. Amounts of claims which are not considered valid by the Corporation are not shown as accounts payable but are recorded for control purposes. Claims in this category were estimated at $2,495,704 as of June 30, 1970. N. Potential value of freight transit rights The Corporation had substantial quantities of grain and relatively small quantities of other commodities stored in commercial warehouses at inland locations with freight bills covering the inbound shipments registered for tran- sit purposes under arrangements which permit use of the registered freight bills to reduce the freight costs on outbound shipments. Because of uncertainty as to when outbound shipments will be made and as to the ultimate destinations, it is not practicable to place a dollar value on the potential freight reductions to be realized from the registered freight bills. No value is recorded in the accounts for such potential savings. The Corporation also had cotton stored in commercial ware- houses at inland locations which had been shipped in by rail under tariffs providing for transit rights. Part of 43 the costs of inbound freight on such cotton may be sub-. , ject to refund after the cotton is shipped out. The Corporation usually obtains any recoveries of cotton transit value in connection with sales of the cotton. Potential recoveries on cotton in inventory at June 30, 1970, have been estimated at $1,887,356. IhLs amount is not recorded in the accounts. 0. Commodity inventory operations Cost of sales and cost of commodities donated, as shown in the Comparative Statement of Income and Expense, rep- resent the acquisition cost of the commodities plus the cost of any packaging or processing performed after ac- quisition. Cost of storing, handling, and transporting inventories are shown separately in this statement, P. General overhead expense The general overhead expense for fiscal year 1970 and for 1969 excludes $20.3 million and $20.5 million, respec- tively, of expenses financed with funds appropriated to the Agricultural Stabilization and Conservation Service WCS> * Substantially all of CCC's operating expenses are paid, as authorized by law, from an ASCS consolidated fund ac- count covering operating expenses for both CCC and ASCS activities. This consolidated account is funded by an ASCS appropriation and by transfer of CCC corporate funds subject to limitations specified in the annual appropria- tion act. The amount of operating expenses is distrib- uted to CCC and ASCS activities on the basis of budget- ary workload statistics. For expenses in fiscal year 1970, CCC transferred the maximum amount authorized--$63,782,000--to the consol- idated account. The cost distribution showed that ex- penses applicable to CCC activities amounted to $84.1 mil- lion, or about $20.3 million in excess of the amount con- tributed to the expense fund by CCC. 44 . Q. Pooled payment-in-kind certificates Pursuant to legislation authorizing issuance of payment- in-kind certificates, the Corporation assists producers in marketing their certificates by making cash advances to them for the full value of the certificates. The cer- tificates are pooled and marketed from the pools for im- mediate use by the purchasers to obtain delivery of com- modities from the Corporation's inventories. Because the certificate payments for which advances were made have been recorded as expense and the amounts advanced are not repayable, the advance and the offsetting obligation to redeem pooled certificates are not shown in the Statement of Financial Condition. At June 30, 1970, the amount of the obligation to redeem pooled cotton and feed grain certificates was $1,053,314,374 and $7,647,834,079 re- spectively. The corresponding amounts at June 30, 1969, were $1,137,368,087 and $6,399,595,319. The same amounts had been advanced. APPENDIX 47 APPENDIX I Page 1 PRINCIPAL OFFICIALS OF THE COMMODITYCREDIT CORPORATION DEPARTMENTOF AGRICULTURE FISCAL YEAR 1970 Appointed BOARD OF DIRECTORS Clifford M. Hardin (Secretary of Agricul- ture) Jan. 1969 J. Phil Campbell (Under Secretary of Agri- culture) Jan. 1.969 Clarence D. Palmby (Assistant Secretary of Agriculture) Jan. 1969 Richard E. Lyng (Assistant Secretary of Agri- culture) Mar. 1969 Thomas K. Cowden (Assistant Secretary of Ag- riculture) Sept. 1969 Kenneth E. Frick (Administrator, Agricultural Stabilization and Conservation Service) Apr. 1969 Don Paarlberg, (Director, Agricultural ECO- nomics) Mar. 1969 OFFICERS (note a) PRESIDENT: Clarence D. Palmby (Assistant Secretary of Agriculture) Jan, 1969 EXECUTIVE VICE PRESIDENT: Kenneth E. Frick (Administrator, Agricul- tural Stabilization and Conservation Service) Mar. 1969 49 APPENDIX I Page 2 PRINCIPAL OFFICIALS OF THE COMMODITYCREDIT CORPORATION DEPARTMENTOF AGRICULTURE FISCAL YEAR 1970 (continued) Appointed OFFICERS (note a> (continued) VICE PRESIDENTS: Raymond A. Ioanes (Administrator, For- eign Agricultural Service) Feb. 1962 Roy W. Lennartson (Administrator, Con- sumer and Marketing Service) Feb. 1969 Carroll G. Brunthaver (Associate Administra- tor, Agricultural Stabilization and Conser- vation Service) Feb. 1969 Clifford G. Pulvermacher (General Sales Man- ager, Export Marketing Service) Apr. 1969 aOfficers of the Corporation are designated according to their positions in the Department of Agriculture. U.S. GAO Wash., D.C. 50
Audit of Commodity Credit Corporation, Fiscal Year 1970
Published by the Government Accountability Office on 1971-01-15.
Below is a raw (and likely hideous) rendition of the original report. (PDF)