CONSERVATION OF MINERAL RIGHTS UNDERLYING FARM LANDS FRIDAY, FEBRUARY 24, 1933 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE, The subcommittee met, pursuant to call (at 10 o'clock a. m.), in room 212, Senate Office Building, Washington, D. C., Senator Frederick Steiwer presiding. Present: Senators Steiwer (presiding) and Gore. Senator STEIWER. The committee will come to order. The subcommittee is meeting this morning to consider S. J. Resolution 247. I will ask the reporter to include the resolution at this point in the hearing. Also at this time, I will hand the reporter a copy of the letter written to the chairman of the committee by Mr. G. R. Cooksey, secretary of the Reconstruction Finance Corporation, under date of February 24. Apparently this letter constitutes a report of the Reconstruction Finance Corporation on this resolution. (The resolution and letter referred to are here printed in full as follows:) [Senate Joint Resolution 247, Seventy-second Congress, second session] JOINT RESOLUTION To provide protection and relief to farmers by aiding them to conserve and liquefy their mineral rights through recognized and established cooperative agencies engaged in the pooling of mineral rights underlying farm lands. Whereas the mineral resources underlying farm lands in America have been made the subject of an official investigation and report published as Senate Document Numbered 93, Seventy-second Congress, first session; and Whereas the investigation revealed that the profits in oil royalties from farm lands, "particularly in the new fields, have been made by others than the landowners and that, as a class, farmer-landowners have benefited far too little from their mineral rights" and that, unless the farmer “has the advantage of organized bargaining power" he is forced to dispose of them (mineral rights) at sacrifice prices; and Whereas the investigation revealed further that farmers can effectively secure such organized bargaining power by cooperatively pooling their mineral rights and that such "pooling increases the market value of mineral rights in a way analogous to that in which fire insurance increases the value of individual buildings"; and Whereas the investigation revealed further that with "his (the farmer's) mineral rights secured in a cooperative pool the farmer would have a business stake in the natural resources of the country upon which he could realize an income in much the same manner as does a large royalty corporation" that has substantial resources back of it; and 1 Whereas present depressed conditions have made it increasingly difficult and costly to secure finances to defray costs of organizing cooperative pools at a time when it is most opportune and economical to render this protection to the farmers: Therefore be it Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That the Reconstruction Finance Corporation is hereby authorized to make adequately secured loans to recognized and established managing agencies of farmers' cooperative mineral rights pools. Resolved further, That for the purposes of better carrying out the objects of this resolution the Reconstruction Finance Corporation is authorized and empowered to avail itself of facilities and services of other governmental agencies in the formulation of rules and regulations for carrying forward the purposes of this resolution and in establishing the conditions under which loans may be made available to qualified applicants and in making public such information as will encourage farmers to pool their mineral rights in sound cooperative mineral rights pools. RECONSTRUCTION FINANCE CORPORATION, Washington, February 24, 1933. Hon. PETER NORBECK, United States Senate, Washington, D. C. MY DEAR SENATOR: Your letter of February 1, inclosing Senate joint resolution No. 247 for a report of the corporation, has been carefully considered by the board of directors. This resolution would authorize the corporation to "make adequately secured loans to recognized and established managing agencies of farmers' cooperative mineral rights pools" and to make public information encouraging farmers to "pool their mineral rights in sound cooperative mineral rights pools. In so far as this joint resolution involves questions of public policy within the province of the Congress, the board does not feel that it is in a position to make recommendations. There are, however, certain aspects of the matter which the board believes should be considered by the committee. The enactment of this joint resolution into law would involve a radical extension of the functions of the corporation into a field quite different from those in which it was designed to operate. Under the Reconstruction Fiannce Corporation act and the emergency relief and construction act, the corporation is authorized to make "fully and adequately secured" loans to well-recognized and well established institutions and public bodies. This resolution would authorize the corporation to lend to a form of cooperative endeavor, operating in the comparatively speculative field of oil and gas royalties, which Senate Document No. 93 (referred to in the resolutoin) would indicate is relatively new and untried on any extensive scale. As a matter of fact, the purpose of this resolution would seem to be the undertaking of an experiment with this form of cooperative enterprise. There would seem to be little actual experience of operations of such cooperatives to afford much guidance to the corporation in meeting their peculiar problem or even in determining whether, as required by the resolution, such loans would be “adequately secured". Administratively, therefore, the problem of handling such loans may be very difficult and expensive, requiring expert assistance of a kind not now available to the corporation. Furthermore, the purpose of promoting a new system of marketing oil and gas royalties would not seem to be of the same emergency importance at this time as other purposes for which the corporation is already authorized to make loans and for which the demands upon the corporation are heavy and uncertain. If, therefore, the bill should be favorably considered and the corporation were to undertake the financing of such promotion, it would seem that the measure should provide the funds to accomplish its purposes. Respectfully, Senator STEIWER. I am advised that the proponents of the resolution desire first to have Dr. W. A. Hartman called. The committee is not advised of the nature of your statement, Doctor, so I think it is altogether better that you proceed in your own way and make such explanation and statement in connection. with this matter as you may think proper. STATEMENT OF W. A. HARTMAN, SENIOR AGRICULTURAL ECONOMIST, DIVISION OF LAND ECONOMICS, BUREAU OF AGRICULTURAL ECONOMICS, UNITED STATES DEPARTMENT OF AGRICULTURE, WASHINGTON, D. C. Mr. HARTMAN. With your permission, I have a brief prepared statement here that I should like to present. Senator STEIWER. You may do that. Mr. HARTMAN. Senate Joint Resolution 247 provides for the protection and relief to farmers by aiding them to conserve and liquefy their mineral rights through recognized and established cooperative agencies engaged in the pooling of mineral rights underlying farm lands. It is my understanding that this resolution is the outgrowth of the study made in response to Senate Resolution 377, Seventy-first Congress, third session. The resolution was submitted to the Committee on Agriculture and Forestry, December 17, 1930. It was reported, considered, and passed February 17 (calendar day, February 26), 1931, reading as follows: Resolved, That the Secretary of Agriculture be, and he is hereby, requested to investigate, through the agency of the Bureau of Agricultural Economics, the mineral resources of the country as related to farm lands both as to the extent and as to the value of such resources as a farm asset, and to report such findings to the Senate and to recommend any legislation which may be deemed practicable and desirable to encourage cooperation among farmers with a view to the more efficient use of such resources as assets. It was my privilege to make the study called for by Senate Resolution 377, and to prepare a report incorporating the results of that study. That report has been published as Senate Document 93, Seventy-second Congress, first session. As pointed out by Mr. Nils A. Olsen, chief Bureau of Agricultural Economics, to the Senate Committee on Agriculture and Forestry, in the department's letter of February 25, 1931, a survey of the extent and value of the mineral resources underlying farm lands is largely outside the usual activities of this department. It was then pointed out, also, that a comprehensive and complete study of cooperative pooling as a means of conserving for farmers the mineral rights in their lands could not be made with present facilities. As no additional facilities were provided for making this study, the report submitted is based upon such data as could be assembled without undue sacrifice of the bureau's regular work. No attempt was made to answer the technical, geological, and legal questions in connection with legislation which may be deemed practicable and desirable to encourage cooperation among farmers with a view to the more efficient use of such resources as farm assets. Those subjects lie outside the province of my experience. However, the geological data necessary for immediate consideration of the farmers' interest in potential petroleum resources are already available. The availability of geological data for considering the farmers interest in other potential mineral resources has not been investigated and I am not prepared to report thereon. The scope of my inquiry was limited to ascertaining in so far as was possible in the comparatively brief period spent in field investigation how the farmers may best utilize their equities in unmined oil and gas. In substance this investigation, though in no sense exhaustive, indicated that mineral rights underlying farm lands represent great potential wealth in which farmers too often share inadequately. With agricultural incomes at low ebb there is unusual temptation at this time for farmers to sell mineral rights for whatever may be offered. The investigation revealed further that the cooperative pooling of farmers' mineral rights under proper safeguards provides an effective method of securing for them a fair share in this potential wealth. I believe that Senate Joint Resolution 247— To provide protection and relief to farmers by aiding them to conserve and liquefy their mineral rights through recognized and established cooperative agencies engaged in the pooling of mineral rights underlying farm lands— is a step in the right direction. The individual farmer is handicapped seriously in estimating the value of his royalty rights. In fact, with all the known methods of ascertaining whether oil or gas is likely to be found under a given tract of land, geologists and oil and gas mining engineers can not be positive that a producing well has been located until the drill actually strikes producing sand. Although geologists and oil and gas mining engineers can not locate oil or gas in advance of the drill, they can locate areas in which oil and gas are probable and possible. A map showing the distribution of these areas reveals that all but a few States have some probable or possible producing lands. (See p. 6, S. Doc. 93.) Probably only a small percentage of the most likely oil and gas territory will actually produce, but the map tends to confirm the statement frequently made by geologists and others consulted in the course of my study that a large part of whatever petroleum may be mined in the future will be mined from lands now being used for agricultural purposes. It is an established fact among oil operators that during recent years the big money in royalties, particularly in the newer fields, has been made by others than the landowners, and that, as a class, farmer landowners have benefited far too little from their mineral rights. For example, an oil play may last only a few weeks or it may take several years to develop. A farmer who is experiencing difficulty in maintaining his equity in his property, because of crop failure, low prices for farm products, or other reasons, is tempted to sell his royalty rights at the first opportunity. He is not in position to profit by the fact that under proper organization and direction he could safely capitalize his mineral rights, and figuratively speaking, engage in "2-dimension" farming. As a consequence, even if his royalty is not practically lost, it gets into the hands of buyers and scouts for large royalty companies at a nominal price before drilling operations are begun and before such royalty rights begin to bring high prices on the market. Since the limits of any oil or gas pool can be determined definitely only after extensive and costly drilling operations, the practice of producing companies and other agencies that operate in the oil business is to acquire leases on many tracts of land in potential producing areas at the lowest possible price in the hope that enough oil and gas will be found on one or more tracts to repay richly the cost of all. The nature of the petroleum industry is such that even an unmined potential supply may become of great value before any oil or gas is produced. For example, the large oil companies, realizing that new fields can not be delineated or even located definitely in advance of actual production, lease large acreages in the path of development. A large spread of acreage in a general oil and gas belt, has an average market value per acre that is greater than any particular tract would have. Petroleum appraisal engineers recognize in their appraisals that thousands of tracts of land in the potential mineral-producing belts have little or no market value as separate units but have great value when pooled or held in a large spread by common ownership and management. In fact, a large spread of acreage held under one management increases the market value of mineral rights in a way analogous to that in which fire insurance increases the value of individual buildings. That is why large oil companies and mineral-right leasing agencies "checkerboard" their interests in potential producing areas. That is also one substantial reason why farmers will benefit by cooperatively pooling their mineral rights. One other reason for the greater value of a spread of acreage over a similar total acreage owned and held as separate units is that the spread can be leased for development purposes more advantageously. If farmers should pool their mineral rights, the major oil companies, which now acquire spreads through direct contact with farmers, would get their spreads from the farmers' pool. In fact, the mere pooling of potential producing lands which have no value as individual tracts creates value because such individual tracts become part of a spread which one or more operating companies may want. Senator STEIWER. Do you mind an interruption, Doctor? Mr. HARTMAN. No, sir. Senator STEIWER. Ín your statement, are you going to develop in a more concrete way what that increased valuation may amount to? Mr. HARTMAN. I can do that right now, sir. Senator STEIWER. You may do it now, or later. I was just wondering if you are going to do it. I should like to have it done some time in your statement. Mr. HARTMAN. Yes, sir. Senator STEIWER. It is quite too general for my consideration for you to make the statement that it increases the value of the oil rights to bring the individual properties into combination. I am not disputing the fact that it does make such increase, but I have no way of appraising the increase, or measuring its value to the farmer. So, at your convenience, I would like to have you make a more concrete statement, and possibly submit to the committee certain illustrations. Mr. HARTMAN. I might do that, then, at the conclusion of these other remarks, if you so desire. Collective bargaining power obtained from a mineral acreage pooling organization should bring the farmer better lease terms and drilling contracts, as a result of which he would obtain higher bonuses, rentals, and royalties. In this way he would liquefy what otherwise, to him, is a frozen asset. By so doing, he would place himself in a position to receive a more or less steady income from pooled mineral rights. With his mineral rights secured in a cooperative pool, the farmer would have a business stake in the natural resources of the country upon which he could realize an income in much the same manner as does a large royalty corporation that has millions back of it. Whether this income may be smaller or many times larger than the income he |