A NEW METHOD OF CROP FINANCING

THE FACTOR SYSTEM of credit extension, crop tie-up, and market control of the farmer predominated cotton at the time of Staplcotn's formation. Growers were inextricably tied to suppliers of between eight and ten percent credit and could exercise little choice as to where or how they did business. Small amounts of capital and limited surpluses in Delta banks were major obstacles. For example, on June 30, 1923, the total combined capital and surplus in Delta banks was only $7,327,000.

Staplcotn's response to this challenge was to establish Staple Cotton Discount Corporation, an outreach for a sound credit future for its members. Freedom from production credit restraints, coupled with well informed bargaining strength in the market, soon became identifying markers of Staplcotn members.

Staple Cotton Discount Corporation was created in response to a need. The Staple Cotton Discount Corporation was the logical answer to a problem which challenged the interest of many, but aroused the active effort of almost no one to solve.

Oscar Bledsoe was the first one in the Delta to visualize the possibilities of financial assistance to the region's cotton growers through avenues opened by the Federal Rural Credits Act of 1923. It was the same kind of forward thinking that had led him to recognize the helpfulness of a properly organized and wisely managed cooperative marketing association for these same growers.

A committee chaired by Bledsoe, and consisting of Garrard, Stone, Oscar Johnston and M. P. Sturdivant of Glendora, explored the possibilities of crop financing under the terms of the 1923 Act.

"Before we have recovered from the disaster of 1920," its report to Staplcotn's Board of Directors noted, in part, "we find ourselves facing the results of one of the shortest crops in the history of staple cotton production. As your committee sees it, the question is a far more vital one than that of merely meeting current obligations. It is primarily one of future operations. Unless the future is made secure, there is no possibility of providing for the present.

"The cotton crop of the Delta requires $20 million for its financing through the growing period alone," the report continued. "During the current year, between $3 million and $4 million of this sum were represented by idle capital, contributing nothing to current production, but merely representing an accumulation of unliquidated obligations, 'carry overs' from previous years. This carry over into 1924, in the nature of things, is likely to be augmented, rather than decreased.

"The Staple Cotton Cooperative Association's annual analysis of Delta crop mortgages for 1923 shows that the volume to Delta banks was $13,698,630. Banks outside the Delta held $1,324,619 of the total. individuals held crop mortgages to the amount of $3,924,827 Cotton Factors had $947,956. This totals $19,896,032," the committee explained.

"It would seem that a crop approximating even $40 million in value, and the Delta crop always exceeds this figure, would be ample to liquidate these obligations. But experience is definitely to the contrary. The enormous volume of the annual drain for interest on public and private debts, fire and life insurance premiums, automobile purchases and maintenance, taxes and the thousand and one other demands, serve to exhaust our production earnings, without creating reserves, or even meeting current crop obligations," Bledsoe said.

"Since this report was prepared the 1923 crop became a forgotten story; the crop of 1924 was made and disposed of, and we are rapidly liquidating the crop of 1925. Against the background of this report, what is the picture which 1925 presents?" they asked.

"We have seen that the total liens recorded against Delta crops in 1923 amounted to $19,896,032. In 1925 the figure was $22,418,741. Total crop liens to banks in 1923 were $15,023,249, leaving a total to individuals, factors and merchants of $4,872,783. Of the total crop liens of 1925, banks held $17,444,955, and individuals, factors and merchants a total of $4,973,785. Briefly analyzing these figures we find an increase in total liens of $2,522,709. Of this increase, only $101,000 was absorbed by individuals, factors and merchants.

"The balance of the 1925 increase, $2,421,706, was in favor of banks. This would suggest a normal and healthy situation. But a further dissecting of the figures discloses the fact that this increase was entirely in favor of banks actually located outside the Delta, or owned and controlled outside. In 1923 these banks held liens on Delta crops to the extent of $1,324,619. In 1925 this figure had risen to $4,902,720, an increase of $3,578,101. In 1923 Delta banks held crop liens amounting to $13,698,630. In 1925 the figure was $12,542,235, a loss of $1,156,395.

"The English of the situation is that while the total bank liens on Delta crops during the past two years have a gain of $2,421,706, the banks of the Delta have shown a loss of $1,156,395, in the total volume of this business which they have done.

"In this connection we may also add that the combined capital and surplus of Delta banks, as of June 30, 1923, was $7,327,222. The figure for June 30, 1925, was $6,614,175, a decrease of $713,047 during the two years," Bledsoe concluded.

STAPLE COTTON DISCOUNT CORPORATION IS FORMED

Bledsoe, Stone and Federal Intermediate Credit Bank of New Orleans president T. E Davis, subsequently went to Washington to discuss the matter with the Federal Farm Loan Board. On November 14, 1923, less than five weeks after the committee first met, Staplcotn's membership authorized the formation of Stapldiscount. Its first board of directors consisted of Bledsoe, Stone, G. G. Council, R. M. Dakin, Will Dockery, Dr. T. R. Henderson, Oscar Johnston, J. G. McGehee, A. M. Pepper, Senator LeRoy Percy, Ben Saunders, Alex Scott, M. P. Sturdivant and J. M. Yeager.

Anticipating concerns of Delta bankers, the December 1, 1923 issue of Staple Cotton Review suggested that Stapldiscount "deserves the careful consideration of every bank in the Delta. Its services are primarily to the grower of cotton, but they are none the less real to the banks which are called upon to finance such growers. Every bank which cooperates with the Discount Corporation has at its disposal facilities for enlarging its resources which are equal in every essential respect, in so far as agricultural paper is concerned, to those enjoyed by banks which belong to the Federal Reserve System. And this, too, without the imposition of onerous or difficult requirements and restrictions. It is just as easy to handle ten million as five. The largest grower can be financed as easily as the smallest. It is only a matter of increasing the capital stock of the Corporation. It is idle for any Delta bank to say now that it is unable to take care of the business of its customers. It can take care of every eligible account offered it, simply by availing itself of facilities already established and immediately at it disposal and command."

Stapldiscount, a wholly owned subsidiary of Staplcotn, was founded as a Mississippi corporation. It is a stock cooperative with all of the stock held by Staplcotn. A Stapldiscount borrower is not required to be a member of Staplcotn.

Stapldiscount's purpose is to provide financing at competitive interest rates to its borrowers for any agricultural- related purpose from crops to building cotton gins to land loans. All loans are submitted to a loan committee who determines the credit worthiness of each loan.

Stapldiscount pays dividends on its stock to Staplcotn and pays rebates from its earnings to its borrowers. This reduces the effective interest rate paid by its borrowers.

It is generally recognized that the success of the credit arm of Staplcotn helped to stimulate and to provide guidelines for the development of production credit associations and for its evolvement into a nation-wide farmer- owned pattern of finance organizations.