oversight

Economic Advantages of Using American Ingredients to Satisfy Milk Requirements in Western Europe

Published by the Government Accountability Office on 1971-06-03.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Economic Advantages Of Using
American Ingredients To
Satisfy Milk Requirements
In western Europe           B-172539




Department of Defense
Department of Agriculture




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES
                  COMPTROLLER      GENERAL     OF      THE      UNITED     STATES

                                 WASHINGTON.    D.C.         20548




B-172539




To the      President      of the Senate     and the
Speaker       of the    House    of Representatives

           This
              is our report       on the economic          advantages      of using
American    ingredients     to satisfy      milk    requirements         in West-
ern Europe.      Federal    participation        in this project       would   be
shared   by the Departments           of Defense      and Agriculture.

         Our review   was made pursuant     to the Budget                                 and     Ac-
counting    Act,  1921 (31 U.S.C.  53), and the Accounting                                      and Au-
diting   Act of 1950 (31 U.S.C.   67).

          Copies    of this     report   are being    sent to the Director,
Office     of Management           and Budget;    the Secretary       of State;                     the
Secretary        of Defense;       and the Secretary      of Agriculture.




                                                    Comptroller                 General
                                                    of the United               States




                        50TH    ANNiVERSARY                  1921-       1971
COMPTROLLERGENERAL'S                                    ECONOMIC ADVANTAGES DF USING MiERICAN
REPORTTO THE COYCRESS                                   INGREDIENTS TO SATISFY MILK REQUIRQdENTS
                                                        IN MESTERN EUROPE
                                                        Department  of Defense
                                                        Department  of Agriculture  5-172539

DIGEST
_-----
                                                                                  a 'P2
                                                                                      0%
WHYTHE REVIEW WASMADE                                                                    CP
        U.S. balance-of-payments        deficits    continue      to be a matter       of concern    to
        the U.S. Government.         In 1969, the United         States    experienced     the larg-
        est deficit     in its history,      nearly  $7 billion,        calcuiated     011 the basis
        of liquidity.       The deficit    for 1970 was more than $4 billion.
                                                                                                                                   2
        U.S. military        expenditures          abroad   are an important          factor    underlying
        these     continuing      deficits.          The Department      of Defense        (DOD),   together
        with    other     Government        agencies,     is constantly       searching      for practi-                *
        cable ways to reduce             the impact       of its programs        on the Nation's
        balance-of-payments            position.         One such way is to buy American                prod-
        ucts when the economics                of the situation       permit.

        Studies      made by Department            of the Army agencies              in 1962 and 7968 con-
        cluded     that     substantial        economic     advantages         could be realized               by the
        United     States      if recombined-milk           plants     were established               in Europe         and
        if our troops          and their       dependents      were supplied           with     filled-milk           prod-
        ucts which would then be produced                     by those plants            rather       than with        fresh
        whole-milk        products       purchased      from European          sources.         Filled        milk--a
        milk substitute           made from American           ingredients--is             supplied         to U.S.
        personnel       in every        part   of the world        except     Western        Europe.          (See pp.
        9 and 10.)                                                                                                             0


        In addition      to having   economic      advantages               Y fi lied milk         has certain
        outstanding      noneconomic    characteristics                   such as taste,           keeping    qual-
        i ty , appearance,      and consumer     acceptability.

        The 1962 study     concluded             that  the United     States,            by using    filled
        milk,   could reduce      its        dollar    payments    abroad           by $19 miliion          annually.
        The 1968 study pointed               to reductions      in dollar            payments     abroad       of
        $9.4 million    annually,            as well     as annual    cost          savings    of $2.8 million
        to the Government       and         $1.8 million     to military             personnel     and their
        dependents.

        For a variety     of reasons,     the Department      of the Army has continued        to
        buy fresh    whole milk    from European-sources.          In view of potential      sav-
        ings,   the General    Accounting     Office   (GAO) made a review     to -ate           the
        merits    of the Army's    arguments     in favor   of these continued     purchases?-
        abroad.


Tear Sheet
FINDINGS AND CcXVCLUSIONS

    The Department         of the Army has not disputed              the conclusion       that
    substituting      filled      milk for fresh       whole milk would result            in savings
    in direct     costs      and in reductions       in military-related          dollar     payments
    abroad.      The Army believes,         however,      that discontinuance          of its milk
    purchases     in Europe would affect          adversely        American    grain     exports   to
    Europe and that          a policy  of providing         only filled     milk would prompt
    some consumers         to buy fresh whole milk from the local                 economy instead
    of from military          sources.

    GAO agrees  that,     to the extent   that    these possibilities                        materialize,
    potential  balance-of-payments       advantages     of providing                    filled       milk
    would be reduced.        It should  be noted,     however,     that                cost savings           to
    the Army would not be reduced.

    Even after    allowances   for these factors3     GAO believes      that                     economic
    advantages    to the United    States would justify    establishing                          a capabil-
    ity to supply      filled milk in Western    Europe.

    GAO bases      its   conclusions       on the     following      considerations.

      1. The U.S. Department      of Agriculture     (USDA) believes    that   the likely
         impact  on U.S. feed grain       exports  would be small.      The impact     on
         foreign  producers    also could be cushioned       if the transition     were
         time phased to permit      an orderly    adjustment    among affected    sectors
         of the European    dairy   industry.     (See p. 16.)

      2.    If the military       were to require          that    filled       milk be served       only
            in troop     mess facilities         (which    account        for 60 percent       of the de-
           mand for milk and milk products)                  but to allow          commissary    patrons
           the option       of buying    either      fresh whole milk or filled               milk,
           diversions       of purchases       from military         supply      sources    to the local
           economy would be unlikely.                The cost advantages             of purchasing
           filled     milk would give commissary              patrons        the option     of substantial
           savings     in their     food purchases.           Since the cost of filled              milk
           would be substantially            less than that          of fresh       whole milk,     there
           should     be a demand for this           product     and economy-minded           commissary
           patrons     could save substantial             amounts.         (See pp. 16 through          19.)

      3.   Ingredients       for filled      milk    (vegetable       oil    and nonfat      dry       milk)
           are in surplus        supply    in the United         States,       are frequently            ac-
           quired     by USDA to support          domestic      market     prices,      and are        disposed
           of through      various     domestic      and foreign        donation      programs.           The
           use of these surplus          ingredients        would benefit          the overall          U.S.
           budget.      (See pp. 12 and 13.)

     4.    DOD Buy American          policies       authorize       the payment    of higher   prices
           for military        supplies       and equipment         of U.S. origin    for use abroad
           unless    the delivered          cost of U.S. products           is more than 50 percent
           above that       of foreign        products.        Filled   milk produced     from U.S.
           surplus     ingredients        actually      is less costly        than the fresh whole
           milk being       procured      in Europe.         (See p. 13.)

                                                 2
1
I
 I
 I
 I
 I                       The Department            of the Army has expressed                  concern      at the possible             ef-
 I
 I                       fect     that    discontinuance          of fresh       whole milk procurements                 might        have
 I                       on troop       morale       in Europe.         Although      morale       is an intangible             GAO can-
 I
 I                       not measure,           GAO believes        that     the problem          could be minimized              if the
  I                      military       were to give adequate                advance notice            of its intention             to
 I                       switch       to filled        milk and to provide            educational          material      designed          to
                         inform      military        personnel      and their       families         of the wholesome             charac-
 f
 1
                         teristics         of filled       milk,    the general        practice          of providing        filled
 I                       milk at all other              overseas      locations,       the growing           commercial         demand
  I
  I
                         for filled         milk in the United             States,     and the overall              economic        advan-
  I                      tages to the United               States     of supplying         filled       milk    in Western          Europe.
  I

  I
  I
  I              RECOb&lENDATIONS
                              ORSUGGESTIONS
  I
   I
   I                     GAO recommends            that   the Secretary     of Defense      evaluate    the Department
   I
   I
                         of the Army's           objections     to the establishment         of filled-milk     plants    in
   I                     Europe in the           light    of the additional      considerations        outlined   in this
   I
   I
                         report.   (See          p. 20.)
    I
      I                  GAO recommends         also that,     should      a decision       be made to establish                       such
      I
      I                  plants,       the Secretary      of Defense       instruct      the services        to give                mili-
      I                  tary     personnel     and their    families        adequate      advance   notification                    and
      I
      I
                         justification        for supplying       filled-milk         products.      (See p. 20.)
      I
       I                 GAO recommends         further     that         DOD establish       close    liaison    with    USDA and
       I
       I                 with     the Department        of State          to ensure    that     the transition        is timed    to
       I                 minimize     potential        economic          or political      repercussions       to broader      U.S.
       I
                         interests.        (See p. 20.)
      I
      I
      I
      I
      I          AGEUCY
                      ACTIONSAND UNRESOLVED
                                         ISSUES
      I
       I
       I                 The Department      of the Army,                on behalf       of the       Secretary      of Defense,
       I                 advised   GAO that    a decision                had been       made to       conduct      an objective
       I
       I
                         consumer   acceptance     test   in             Europe.
       I
       I                 USDA informed           GAO that  it was prepared    to cooperate                        with    DOD in      what-
       I
        I                ever decision           DOD might make in this    matter.
        I
        I
           I              The Department          of State        advised    GAO that          it    foresaw  no political
           I              repercussions          and agreed        with   the decision              made by the Secretary               of
           I
           I              Defense.
           I
           I
           I              GAO is     in agreement  with             the action         contemplated    by DOD and intends                       to
           I              follow     up on the consumer               acceptance        test    at some appropriate   future
           I
           I
                          date.
           I
            I
            I
            I
                 Tear   Sheet
            I
            1
            I
            I
            I
            I
             I
             I
             I
             I
                                                                                                   I



    MYTTERS FOR CONSIDERATIONBY THE CONGRESS
                                                                                                   I
        GAO believes    that   this    report   is of timely    importance    and interest    to   1
        the Congress    because     it presents     a way in which U.S. agricultural               I
        surpluses    can be used, the economic         burden   of stationing     U.S. troops
        in Europe    can be reduced,       and savings    by the Government      can be real-      ;
        ized,                                                                                      ;
                                                                                                   I




I                                                                                                  I




                                               4
                           Contents
                                                                    Page

DIGEST                                                                1

CHAPTER

       1   INTRODUCTION

   2       CHARACTERISTICS AND GENERALACCEPTABILITY
           OF FILLED MILK                                             7

   3       COST AND BAISiNCE OF PAYMENTSADVANTAGESOF
           USING SURPLUS FILLED MILK INSTEAD OF BUYING
           WHOLEMILK IN WESTERNEUROPE                                 9
               U.S. Army study in 1962                                9
               Army Audit Agency report of 1969                      10
               GAO Comments on economic benefits                     12

   4       ANALYSIS OF DEPARTMENTOF THE ARMY OBJEC-
           TIONS TO USE OF FILLED MILK IN WESTERNEUROPE 14
               Army position                            14
               GAO analysis  of Army position           15

       5   CONCLUSIONS, RECOMMENDATIONS,AGENCY COM-
           MENTS AND GAO EVALUATION                                  19
              Recommendations                                        20

   6       SCOPEOF REVIEW                                            21

APPENDIX

       I   Letter    dated March 12, 1971, from the Acting
             Assistant     Secretary   of the Army (Installa-
              tions and Logistics),      to the Director,     In-
              ternational    Division,   General Accounting
              Office                                                 25

  II       Letter    dated July 16, 1970, from the Assis-
              tant Secretary      of the Department of Agri-
              culture,    to the Director,    International
              Division,     General Accounting    Office             26
APPENDIX                                                     Page

 III       Principal  officials    of the Departments of
           Defense and Agriculture      having an interest
           in the matters discussed in this report           27

                               ABBREVIATIONS

DOD        Department    of Defense

GAO        General   Accounting    Office

USDA       U.S.   Department    of Agriculture
COMPTROLLERGZNERAL'S                               ECONOMIC ADVANTAGES OF USING AMERICAN
REPORTTO THE CONGRESS                              INGREDIENTS TO SATISFY MILK REQUIREMENTS
                                                   IN WESTERN EUROPE
                                                   Department  of Defense
                                                   Department  of Agriculture  B-172539

DIGEST
_-----


WHY THE REVIEW WASMADE

     U.S. balance-of-payments        deficits    continue      to be a matter       of concern   to
     the U.S. Government.         In 1969, the United         States    experienced    the larg-
     est deficit     in its history,      nearly  $7 billion,        calculated     on the basis
     of liquidity.       The deficit    for 1970 was more than $4 billion.

     U.S. military       expenditures         abroad   are an important          factor    underlying
     these    continuing     deficits.          The Department      of Defense        (DOD), together
     with other       Government       agencies,     is constantly       searching      for practi-
     cable ways to reduce            the impact      of its programs        on the Nation's
     balance-of-payments          position.         One such way is to buy American                prod-
     ucts when the economics              of the situation       permit.

     Studies      made by Department        of the Army agencies              in 1962 and 1968 con-
     cluded     that substantial        economic     advantages         could be realized               by the
     United     States     if recombined-milk        plants     were established               in Europe and
     if our troops         and their    dependents      were supplied           with     filled-milk           prod-
     ucts which would then be produced                by those plants             rather       than with         fresh
     whole-milk        products   purchased      from European          sources.         Filled        milk--a
     milk substitute          made from American        ingredients--is             supplied         to U.S.
     personnel       in every part      of the world        except     Western       Europe.           (See pp.
     9 and 10.)

     In addition      to having   economic      advantages,      filled milk                 has certain
     outstanding      noneconomic    characteristics         such as taste,                  keeping    qual-
     i ty , appearance,      and consumer     acceptability.

     The 1962 study     concluded           that   the United     States,     by using    filled
     milk,   could reduce      its       dollar    payments    abroad     by $19 million         annually.
     The 1968 study pointed              to reductions      in dollar      payments    abroad       of
     $9.4 million    annually,           as well     as annual     cost savings      of $2.8 million
     to the Government       and        $1.8 million      to military      personnel     and their
     dependents.

         For a variety    of reasons,     the Department       of the Army has continued      to
         buy fresh whole milk from European           sources.      In view of potential     sav-
         ings,   the General   Accounting     Office    (GAO) made a review     to evaluate     the
         merits    of the Army's   arguments     in favor    of these continued    purchases
         abroad.
The Departm?~~t        of the Army has rrot d.irputeti           the zonc7~-.io;~      that
substituting      fiiled      milk for frz7-Si-i whole milk; would result               in savings
in direct     costs      and in reductions       in military-related           dollar       p&yillentS
abroad.      The Army believes,         however,    that     discontinuance         of    its      milk
purchases     in Europe would affect          adversely        Americatl    grain     exports          to
Europe and that          a policy  of providing       only filled        milk would prompt
some consumers         to buy fresh whole milk from the local                  economy instead
of from military          sources.

GAO agrees  that,     to the extent   that    these possibilities                          materialize,
potential  balance-of-payments       advantages      of providing                     filled       milk
would be reduced.        It should  be noted,     however,     that                  cost savings           to
the Army would not be reduced.

Even after    allowances    for these  factors,      GAO believes      that                    economic
advantages    to the United     States would justify      establishing                         a capabil-
ity to supply      filled milk in Western       Europe.

GAO bases      its   conclusions        on the     following       considerations.

   1. The U.S, Department      of Agriculture     (USDA) believes    that the likely
      impact  on U.S. feed grain       exports  would be small.      The impact    on
      foreign  producers    also could be cushioned       if the transition     were
      time phased to permit      an orderly    adjustment    among affected   sectors
      of the European    dairy   industry.     (See pW 16.)

  2.    If the military       were to require          that    filled        milk be served      only
       in troop      mess facilities         (which    account        for 60 percent       of the de-
       mand for milk and milk products)                  but to allow           commissary    patrons
       the option       of buying    either      fresh    whole milk or filled             milk,
       diversions       of purchases       from military         supply       sources    to the local
       economy would be unlikely.                The cost advantages              of purchasing
       filled     milk would give commissary              patrons         the option     of substantia
       savings     in their     food purchases.           Since the cost of filled               milk
       would be substantially            less than that          of fresh whole milk,            there
       should     be a demand for this           product     and economy-minded            commissary
       patrons     could save substantial             amounts.          (See pp. 16 through         19.)

  3.   Ingredients      for filled        milk    (vegetable       oil    and nonfat      dry        milk)
       are in surplus        supply     in the United         States,       are frequently             ac-
       quired     by USDA to support           domestic      market     prices,     and are          disposed
       of throuqh      various      domestic      and foreisn        donation      orosrams.          'The
       use of these surplus           ingredients        would benefit          thk 0;erall           U.S.
       budget.      (See pp. 12 and 13.)

  4.   DOD Buy American          policies       authorize        the payment    of higher   prices
       for military        supplies       and equipment         of U.S. origin     for use abroad
       unless    the delivered          cost of U.S. products            is more than 50 percent
       above that       of foreign        products.        Filled    milk produced     from U.S.
       surplus     ingredients        actually      is less costly         than the fresh whole
       milk being       procured      in Europe.         -(3-z-? p* 13.)

                                              2
       The Department            of the Army has expressed                  concern      at the possible            ef-
       fect      that    discontinuance         of fresh       whole milk procurements                might        have
       on    troop     morale      in Europe.         Although     morale        is an intangible           GAO can-
       not measure,           GAO believes        that     the problem          could be minimized             if the
       military        were to give adequate               advance     notice       of its intention             to
       switch       to filled        milk and to provide           educational           material     designed          to
       inform       military       personnel      and their       families         of the wholesome            charac-
       teristics         of filled       milk,    the general        practice         of providing        filled
       milk at all other              overseas      locations,       the growing           commercial       demand
       for filled          milk in the United            States,     and the overall             economic        advan-
       tages to the United               States     of supplying         filled       milk in Mestern            Europe.


RECOMMENDATIONS
            ORSUGGESTIONS
        GAO recommends          that   the Secretary     of Defense      evaluate     the Department
        of the Army's         objections     to the establishment          of filled-milk     plants    in
        Europe in the         light    of the additional      considerations         outlined   in this
        report.   (See        pa 20.)

        GAO recommends         also that,     should      a decision        be made to establish        such
        plants,       the Secretary      of Defense       instruct       the services        to give mili-
        tary     personnel     and their    families         adequate      advance   notification     and
        justification        for supplying       filled-milk          products.      (See pa 20.)

       GAO recommends         further     that        DOD establish       close    liaison   with   USDA and
       with     the Department        of State         to ensure    that     the transition       is timed    to
       minimize     potential        economic         or political      repercussions       to broader     U.S.
       interests.        (See p0 20.)


AGEUCY
     ACTIONSAND UNmSOLlrED
                         I;SSUES
        The Department      of the Army,              on behalf       of the Secretary            of Defense,
        advised   GAO that a decision                 had been       made to conduct            an objective
        consumer   acceptance     test in             Europe.

        USDA informed         GAO that  it was prepared    to cooperate                       with     DOD in what-
        ever decision         DOD might make in this    matter.

        The Department          of State  advised GAO that                  it    foresaw  no political
        repercussions          and agreed with the decision                      made by the Secretary               of
        Defense.

        GAO is     in agreement  with            the action         contemplated    by DOD and              intends          to
        follow     up on the consumer              acceptance        test    at some appropriate                future
        date.


Tear Sheet




                                                             3
MATTERSFOR COX5'IDERATION
                        BY THE CclNGRESS
    GAO believes    that this report  is of timely   importance  and interest   to
    the Congress because it presents      a way in which U.S. agricultural
    surpluses    can be used, the economic burden of stationing     U.S. troops
    in Europe can be reduced,     and savings  by the Government   can be real-
    ized.
                               CHAPTER 1

                             INTRODUCTION

       Continuing   deficits      in the U.S. balance-of-payments        po-
sition   in recent years have focused attention            on the need to
identify    and act on those areas where the United States could
reduce its dollar     outflow.       The Department of Defense has
been in the forefront        of Federal agencies mindful        of the need
to take all reasonable         steps to alleviate    our Nation's
balance-of-payments       problems because of the substantial           dol-
lar drain involved       in stationing    troops abroad.      DOD follows
a general policy     that purchases of supplies         for use outside
the United States shall be restricted            to U.S. end products;
in furtherance     of this policy,      in 1965 DOD adopted an in-
terim measure whereby a differential           of 50 percent      in favor
of U.S. end products was to be applied.

       Various exceptions    to this Buy American policy        are pro-
vided for in current     DOD procurement   regulations.       One ex-
ception permits     the purchase of perishable      subsistence      items
for use outside     the United States if it is determined          that
delivery    from the United States would destroy or signifi-
cantly   impair the quality    of the items at the point of con-
sumption.

       In October 1967, DOD outlined       a program to reduce inter-
national   balance-of-payments     expenditures     for subsistence   in
foreign   countries.     Under this program all items being pur-
chased overseas were to be evaluated         as to whether an accept-
able product could be delivered        from the United States to
meet the requirements      of the military    consumer.    The intent
of the plan was to minimize offshore         procurement   of subsis-
tence items for troop issue and commissary resale purposes.

       Specific    guidelines      included:   (1) eliminating   those
items where no valid need existed,             (2) determining   which
items could be supplied          from the United States without        sig-
nificantly      impairing   their     quality,  and (3) determining     what
items could be replaced by items available               from the United
States.

      One of the largest      subsistence items procured in Western
Europe by DOD in fiscal       year 1969 was fresh whole milk, for
                                     5
which approximately      $13.5 million   was spent.        The procure-
ment of whole milk has been gradually          declining     over a pe-
riod of years, mainly because of troop reductions              in Europe.
Nevertheless,    because of the still-significant           amount in-
volved and because of our feeling        that a suitable       domestic
substitute    is available    this report presents       the case both
for and against procurement of fresh whole milk in Western
Europe.




                                    6
                                   CHAPTER 2

           CHARACTERISTICS AND GENERAL ACCEPTABILITY

                            OF FILLED MILK

      Filled  milk--a    substitute     for whole milk--looks      like
milk,  tastes like milk,      and feels in the mouth virtually          the
same as milk.      It provides     nonfat dry milk plus a vegetable
oil in place of butterfat.          The Armed Forces provide filled
milk to their    troops and commissary patrons        in virtually      all
overseas locations     except in Western Europe.          There, because
of its general availability,         fresh whole milk is purchased
for troop consumption and for sale to commissary patrons.

     A comparison of filled-milk  and whole-milk   characteris-
tics made by an Army procurement  activity  in Japan reveals
that a strong case can be made for using filled   milk.     The
study disclosed:

          Characteristic                           Finding

     Price                                 Very inexpensive
     Taste                                 Comparable to whole milk
     Keeping quality                       Above normal
     Component stability                   Very stable
     Appearance                            White
     Bacteriological     quality           Superior   to whole milk
     Consumer acceptability                Excellent

       In the United States,      milk substitutes       are among the
most rapidly    accepted new products       in the food industry.
Although production      of imitation     and/or filled      milk currently
is limited    to nine states,     a U.S. dairy specialist          has pre-
dicted that sales will        be nationwide    within    the next 2 years.
In a recent study by Messrs. R. F. Holland and D. K. Bandler
of the Department of Food Science at Cornell               University,      it
was disclosed     that filled    milk had captured about 15 percent
of the fluid-milk      market in Arizona and that sales were in-
creasing    at a steady 0.2 percent a month.           In Hawaii,      filled
milk accounts for 25 percent of the market.                The reason for
the rapid increase      in sales of filled      milk can be attributed
fundamentally     to its lower price.

                                       7
        We were informed by officials           of dairy product manufac-
turing    firms as well as by researchers           that there was no
distinguishable       difference     in taste between chilled     filled
milk and chilled       fresh whole milk.         A supply officer   of a
large U.S. Navy carrier          told us that he had received no com-
plaints     from the crew on those occasions when he had served
filled    milk because of the unavailability            of fresh whole
milk.     He stated that on such occasions the milk had been
served chilled       or as chocolate     milk and that the crew could
not tell      that they were drinking       filled   milk.

      A USDA official    commented:

     'IAs to acceptability      of filled    milk versus natu-
     ral milk,     a number of factors      govern.    Usually
     these include the quality         of raw material    and
     their   freedom from developed flavors         and odors.
     Another condition      is temperature.       Producers of
     filled    milk usually   offer    it chilled   which masks
     any difference     which the consumer might detect.
     With high quality      raw materials      and cool tempera-
     ture,   the average consumer would not know the dif-
     ferencemsv

      Finally the Council on Food and Nutrition    of the Ameri-
can Medical Association,   in a study entitled   "Substitutes     for
Whole Milk,"  concluded that filled  milk contained    as much
nonfat milk solids as did skim milk, was fortified       with vi-
tamins A and D, and was a nourishing   product giving a price
advantage to the consumer.
                                CHAPTER 3

            COST AND BALANCE-OF-PAYMENTSADVANTAGES

            OF USING SURPLUS FILLED MILK
                                    -    INSTEAD OF

           BUYING FRESH WHOLEMILK IN WESTERNEUROPE

      Studies made by Department of the Army agencies have
concluded that substantial     budgetary and balance-of-payments
advantages could be realized     if fresh whole-milk    products
being purchased in Europe were replaced with filled-milk
products reconstituted   with American ingredients       shipped to
Europe.    Despite the indicated    economic advantages,     the Army
had decided to continue    its offshore   procurements    because
of a number of factors   which are discussed in this report.

      In fiscal year 1969, approximately            $13.5 million  was
spent by DOD for fresh-milk   products--60           percent for troop
mess facilities  and 40 percent for sale            through commissaries.

U.S. ARMY STUDY IN 1962

       In 1962 the U.S. Army studied the balance-of-payments
benefits   of supplying      filled    milk in place of purchasing
fresh whole milk from European suppliers.                 Investigation
disclosed   that U.S. owned or leased land would have been
available;    that suitable       prefabricated     buildings     could have
been constructed;     that no local laws, regulations,               or agree-
ments would have prohibited           the establishment       of milk plants;
and that an initial      investment        of about $4 million       would
have been sufficient       to establish        the eight plants then con-
sidered necessary to meet milk requirements                 in Germany,
France, and Italy.       The price of filled          milk would have been
equivalent    to fresh whole milk procured under then-existing
contracts.

       An estimated    $19 million   a year in dollar      expenditures
abroad would have been avoided.          Cost advantages had seemed
likely   if existing    European dairies     had converted     their    op-
erations    to process U.S. furnished      filled    milk, but the
balance-of-payments      advantage would have been only $14 mil-
lion compared with the $19 million         reduction     possible    if
U,S, facilities      had been constructed,
         The Army report concluded that, despite the feasibility
of establishing      recombined milk plants in Europe, the pos-
sibility     of adversely    affecting     existing   favorable    U.S. grain
exports to Europe was sufficient            reason to not discontinue
purchases of whole milk in Europe, which purchases then
totaled     about $22 million      a year,     The report recommended,,
however, that packaging materials,             butter   for resale in com-
missaries,     and butterfat     for ice cream manufacture         be pro-
cured from the United States, which would reduce dollar                   ex-
penditures     abroad by approximately         $4,8 million     annually,

ARMY AUDIT AGENCY REPORT OF 1969

        In May 1969, the Army Audit Agency issued a report on
certain    aspects of the Army food program.         This review, be-
gun in 1968, included a study of Army milk purchases 1 and
reconfirmed     the findings    of the 1962 study--that     it was
economically      feasible   to replace European purchases of fresh
whole milk with U.S.-supplied          filled milk.

      As a result      of troop reductions     after    1962, gold-flow
savings in 1969 were estimated          at $9.4 million     a year.     cost
savings not available        in 1962 were now possible,        however,
since the price of fresh whole milk had risen to an average
18.4 cents a quart, while filled          milk could have been sup-
plied at between 8 to 12 cents a quart,             depending on produc-
tion levels.       Using a conservative      cost estimate     of 12 cents
a quart,   filled-milk      procurement could have saved about
$4.6 million      a year-- $2.8 million    in direct     budgetary savings
for mess hall consumption and $1.8 million             in savings avail-
able to commissary customers.

       The Army Audit Agency calculations       of economic benefits,
based on fiscal   year 1969 estimated     requirements,    are shown
below.


1Army milk purchases represented          more than 90 percent of
 milk purchases by the military          services  in Europe in fiscal
 year 1969.




                                    10
                                                                                                   Amount
                                                                                            (000     omitted)

      Cost    of whole milk                                                                                $14,000
      Less    cost of filled           milk                                                                   9,437

                  Net      cost    savfngs       from    using    filled    milk                                4,563

      Net    cost of U.S. products         used:
             Filled      milk products    bought in the United,
                  states                                                           $6,134
             -L&s U.S. products        used in whole milk                           1,202                       4,932

                  Net      reduction         in dollar      expenditures
                        abroad                                                                             $A 9 495



       In view of the substantial    economic advantages that
could be realized,     the audit report recommended that filled
milk be procured from U.S. processors       as a substitute   for
fresh whole milk currently      being purchased in Europe.      The
Department of the Army rejected      this recommendation,   and no
change in European milk purchases was contemplated.         The
reasons for the Army's decision not to implement this ap-
parently    advantageous proposal are discussed further     in the
next chapter.




                                                                           11
GAO COMMENTSON ECONOMIC BENEFITS

       There is little  doubt, from the studies made, that sub-
stantial    economic benefits  would accrue to the United States
if DOD were to supply filled     milk rather  than purchase fresh
whole milk in Europe.

       A further     significant        factor which, we believe,       should
be considered      is the role of the USDA price-support               program.
Millions    of dollars        are spent annually by the Commodity
Credit Corporation          for the purchase of nonfat dry milk, the
principal     ingredient       in filled     milk, under its price-support
program.     USDA    officials      advised     us that they had consistently
supported the price of nonfat dry milk in past years and
that there was reasonable             expectation     that purchases of non-
fat dry milk by the Commodity Credit Corporation                  would con-
tinue in the foreseeable            future.      The same situation     applies
to soybeans9 one possible             source of the vegetable       oil used
in the production         of filled      milk.

        Assuming that there is a relationship  between the
amounts of nonfat dry milk and soybeans consumed and the
amounts needed to be purchased by USDA to support market
prices,    it could be argued that,  if DOD acquired these sur-
plus commodities from commercial sources in the United
States for consumption in Europe, the need for USDA to
acquire as much of them for price-support     purposes would be
reduced.

     From a Government-wide  standpoint,             therefore,    overall
expenditures would be reduced.

      Another possibility   would be for DOD to acquire sur-
plus commodities from USDA, which would involve a transfer
of funds from one Government agency to another, with a
comparable economic effect.

        Although there would be no budgetary         savings to DOD
beyond the inherent     price advantage of filled         milk over
fresh whole milk (about $2.8 million          for fiscal     year 1969),
the Government as a whole would save on the cost of ingre-
dients.      Thus the overall  appropriation      needs of USDA
(and interest     costs for financing      the national    debt) would
tend to be reduced.       The significance      of the potential

                                     12
savings can be gauged from calculations      prepared by the
Army Audit Agency, shown on page 11, which indicate        that
about $6 million    in surplus U.S. ingredients    could have been
used if filled   milk had been supplied in fiscal      year 1969.

      Another important     consideration       which seems not to have
been given sufficient     weight is the DOD policy of favoring
U.S. procurement to obtain balance-of-payments            benefits,
DOD, in furtherance     of its Buy American policy,        is willing
to pay up to 50 percent more to favor the use of American
products.    The continued purchase of fresh whole milk in
Western tirope    seems to indicate       that the Army unduly em-
phasized taste rather     than emphasized economy and D0D's
Buy American guidelines,      since American products could be
supplied at less cost than foreign           products.




                                   13
                                 CHAPTER4

       ANALYSIS OF DEPARTMENTOF THE ARMY OBJECTIONS TO USE

                    OF FILLED MILK IN WESTERNEUROPE

           The Department of the Army position   on the Army Audit
    Agency recommendation that "filled    milk be procured from
    U.S. provisions    as a substitute for fresh whole milk cur-
    rently   purchased in Europe" is presented below.

    ARMY POSITION

               "For reasons stated in subsequent paragraphs,
         the Army currently  plans to continue to use fresh
         whole milk for troop consumption and commissary
         resale where it is available  locally.

         1. "Fresh whole milk has been procured in Europe
             for over 20 years.    This is primarily    true be-
            cause the supplying countries      have milk sheds
            that are capable of furnishing       high quality
            product,  comparable to that found in the United
            States.    Since this capability     is not available
            in other areas of the world, the military         must
            obtain milk from recombining      plants.   These
            plants were constructed,    not for reasons of
            economy, but as a practical      source of whole
            milk substitute   otherwise   unavailable   to our
            forces."

         2. "The foreign   milk supplying       countries    place
            economic reliance      on thesesales      and this per-
            mits them to import foodstuffs          (feedgrains)
            from the United States.         This, in turn, cre-
            ates a healthy    international      balance of trade."

        3. "Of the anticipated    budgetary     saving of
           $4.6 million,    $1.8 million    represents    commis-
           sary resale which is reimbursed         to the gov-
           ernment in its entirety       and reflects    no
           actual savings (to the Government)."
i


                                     14
      4. "Additionally,     if the European Exchange Ser-
         vice sales outlets       werepermitted     to continue
         the sale of fresh whole milk while the troop
         dining facilities      and commissaries      could only
         utilize    filled  milk, there would be justified
         cause for dissatisfaction.           Commissary cus-
         tomers desiring      whole milk would be forced to
         pay higher prices in the Exchange or on the
         local economy which further          impacts unfavor-
         ably upon gold flow.        Also, if fresh whole milk
         were available     locally    but not in the troop
         dining facilities,       the soldier    would be apt to
         feel that he was being treated          as a fsecond
         class citizen'     as compared to his continental
         U.S. counterpart,      with a deleterious      impact on
         morale."

      5. "The adverse effects     upon troop morale and com-
         missary customer satisfaction       are considered
         valid factors    and were previously    verified    in
         a similar   matter concerning    ice cream.      In
         that case the Department of Defense authorized
         the European Command to manufacture        ice cream
         instead of imitation     ice cream for troop and
         commissary resale consumption based on surveys
         taken in that area."

GAO ANALYSIS OF ARMY POSITION

      Our comments are numbered to correspond           to the objec-
tions presented by the Army.

1. Availability of high-quality
   fresh whole milk in Europe

       Although it is true that filled-milk         plants were con-
structed     in other areas of the world, not       for reasons of
economy but as a practical       source of whole     milk not other-
wise available,      we submit that this is not       a logical     reason
why the economics of the situation        should    not prevail,       since
filled    milk is acceptable   from a nutritional        standpoint     and
since its use has generally       been acceptable      at other over-
seas locations.


                                   15
 2. Milk   sales permit     import   of
    U.S.   feed grains

        Responsible officials     at USDA advised us that the po-
tentially    adverse effects     on U.S. feed grain exports to
Europe should be minimal,        based on the economics of the Eu-
ropean milk industry.         They explained    that feed grains were
consumed primarily     by meat animals,      rather than by dairy
animals,    and that U.S. exports had been declining,         primarily
because of increasing       European production     and European pro-
tectionist    policies   and subsidies.

       It is noteworthy   that the value of whole milk purchased
in fiscal   year 1968 from the Netherlands,     which supplied
more than 40 percent of the total      U.S. Army milk require-
ments in Europe, represented      less than 1 percent of that
country"s   estimated   annual milk production.

        In any event, we believe that,  if the impact on for-
eign producers were a cause for concern to USDA and the De-
partment of State, such an impact could be cushioned if the
transition    were time phased to allow for orderly  adjustment
among the affected     sectors of the European dairy industry.

3. Savings     disputed

       We agree that $1,8 million      of the $4.6 million      savings
reported by the Army Audit Agency represent           commissary re-
sales, the savings on which are passed on to individual              pa-
trons and do not accrue to the U.S. Government.             The remain-
ing $2.8 million    which would be savings to the Government,
together with an estimated       $9.4 million   reduction    in dollar
expenditures   abroad, would still       be compelling    economic rea-
sons for switching    to U.S. ingredients.       Also, as noted on
page 12, DOD would be buying surplus commodities and there
would be substantial     additional   budgetary advantages avail-
able to the Government as a whole through a reduction             in
USDA expenditures    and appropriations.

4. Purchases     on local   market   will   reduce
   gold-flow     impact

       It seems to us that the Army is unduly pessimistic in
its   speculations.  About 60 percent of the milk is consumed

                                     16
in troop mess facilities,       so fresh whole-milk       purchases for
these outlets      could be cut substantially     with little     danger
of market displacement.        Moreover it does not follow that
all the commissary customers now buying the remaining
40 percent of the whole milk consumed would refuse to buy
filled    milk if it were available.        The potential     35- to
55-percent price differential        might very well make filled
milk an attractive      bargain ) particularly    since the eharac-
teristics     of filled  milk compare favorably      with those of
whole milk.

     According to the 1969 Army Audit Agency report,    filled
milk has proved to be an acceptable substitute   in U.S. mili-
tary commands outside Western Europe.   It seems logical     to
suppose that filled  milk could gain equal acceptance in
Western Europe.

5, Troop morale and
   commissary customer      satisfaction

       Although morale is an intangible        that we cannot mea-
sure, we believe that the potential         problem could be mini-
mized if the military       were to give adequate advance notice
of its intention      to switch to filled    milk and to provide
educational     material   designed to inform military        personnel
and their families       of the wholesome characteristics         of
filled    milk, the general practice      of providing    filled     milk
at all other overseas locations,        the growing commercial de-
mand for filled     milk in the United States, and the overall
economic advantages to the United States of supplying filled
milk in Western Europe.

        As for commissary customers, the proposed substitution
of filled     milk for whole milk need not be an "either       or"
proposition.        Both whole milk and filled   milk could be made
available     to these customers, if necessary.       U.S. dairy of-
ficials     have advised us that, where filled     milk enjoys a
significant      price advantage, demand for this product can be
expected.       Currently  there is no means by which a European
commissary customer can register       his feelings    as to the ac-
ceptability      of milk products.   In our opinion,    the true
test of a commodity's acceptability         takes place in the mar-
ket, and we believe that the commissary patron should be
given the option of purchasing either filled          or fresh whole
milk,     This option would permit commissary patrons to save
significant    amounts on their  food purchases if they choose
to, and it could be argued that this saving would be a mo-
rale booster.

        As a further    indication   that filled     milk can be com-
petitive    with fresh whole milk in Europe, we have found
that an American dairy firm presently            is contemplating
building    filled-milk     plants throughout      central Europe.




                                 18
                               CWTER     5

        CONCLUSIONS, RECQi!PIXNDATIQNS,AGENCY C0mNTS,

                         AND GAQ EVALUATION

       The Department of the Army has not disputed the Army
Audit Agency9s conclusions     that a substitution     of filled
milk for fresh whole milk would result       in direct   cost sav-
ings and reductions   in military   dollar   payments abroad,     The
Army believed,   however, that discontinuance      of its milk pur-
chases in Europe would adversely     affect   American feed grain
exports to Europe and that some consumers would continue to
purchase fresh whole milk on the local economy,

       To the extent that these possibilities     materialize,   we
agree that potential   balance-of-payments    advantages of pro-
viding filled  milk would be reduced.      It should be noted,
however, that cost savings to the military      would not be re-
duced.

       The major ingredients     of filled    milk--nonfat     dry milk
and vegetable   oil --are in surplus supply and are included in
the USDA's price-support     program,      These commodities are dis-
posed of through various     domestic -and foreign       donation pro-
grams.   The use of these ingredients        would benefit      the over-
all U.S. budget and would reduce interest           costs on the na-
tional  debt.

        DOD follows     a general policy of favoring    purchases of
U,S.-produced      supplies which allows the purchase of American
items even though they may cost 50 percent more than like
foreign     items,   Not only is a suitable   U.S. item available
within    the 50-percent    cost margin, but also the U.S, sup-
plies actually      cost less than the foreign    supplies now being
procured.

         In view of the growing acceptance of filled         milk at
home and abroad--because        of its cost advantage,    taste com-
parability,     nutritional    value, and keeping qualities--it
seems that commissary patrons in Europe should be accorded
the opportunity        to save on their food budgets,     As for the
possible    adverse effect     on the morale of troops,     we believe

                                    19
that the problem could be minimized          through   adequate   ad-
vance notice and education,

RECOMMENDATIONS

          We recommend that the Secretary        of Defense evaluate
the Department of the Army"s objections            to the establishment
of filled-milkplants          in Europe in the light    of the additional
considerations       outlined    in this report.

         We recommend also that,   should a decision be made to
establish     such plants, the Secretary      of Defense instruct    the
services to give military     personnel and their        families  ade-
quate advance notification      and justification      for supplying
filled-milk     products.

          We recommend further    that DOD establish    close liaison
with USDA and with the Department of State to ensure that
the transition      is timed to minimize potential      economic or
political     repercussions    to broader U.S. interests.

AGENCY COMMENTSAND GAO EVALUATION

       A draft of our report      was sent to DOD, USDA, and the
Department of State.

        USDA informed us that it was prepared to cooperate
with   DOD in whatever its decision might be in this matter.

       The Department of the Army, on behalf of the Secretary
of Defense, advised us that a decision had been made to con-
duct an objective   consumer acceptance test in Europe.

          The Department of State advised us that it foresaw no
political     repercussions    and agreed with the decision made by
the Secretary      of Defense.

      We are in agreement with the action contemplated  by
DOD, and we intend to follow up on the consumer acceptance
test at some appropriate   future date,




                                  20
                              CHAPTER 6

                          SCOPE OF REVIEW

        Our review was directed       toward an evaluation    of whether
it would be to the advantage of the U.S. Government, from
the standpoint     of dollar     costs and balance-of-payments      con-
siderations,     to buy U.S. surplus agricultural        commodities
for use in producing      filled     milk in Western Europe as a sub-
stitute    for fresh whole milk being bought from European sup-
pliers.

        Our review included an examination     of available    records
and discussions     with military, commercial,    and civilian     of-
ficials    in Europe and in Washington,   D.C., and other loca-
tions in the United States.




                                   21
APPENDIXES
                                                                           APPENDIXI


                      DEPARTMENT OF THE ARMY
                OFFICE OF THE ASSISTANT SECRETARY
                            WASHINGTON.      D.C.   20310




                                                                         12 March 1971




Mr. Oye V. Stovall
Director,  International Division
U. S. General Accounting Office
Washington, D. C. 20548

Dear Mr. Stovall:

        This is in reply to your letter  of 18 June 1970 to the
Secretary of Defense requesting comments on your draft report
titled:     "Economic Advantages of Using American Ingredients  to
Satisfy Milk Requirements in Western Europe" (OSD Case f3130).

      In view of your recommendation that the Secretary of Defense
evaluate the Army's objections,   a decision has been made to con-
duct an objective  consumer acceptance test in Europe.

     You will     be advised of the results           of this   test     upon completion.

     This reply     is made on behalf        of the Secretary          of Defense.

                                              Sincerely     yours,


                                   L.5gI-A                                     '\
                                               Vincent P. Huggard
                                 Acting      Assistant   Secretary of the Army
                                          (Installations    and Logistics)
                                   DEPARTMENT          OF AGRICULTURE
                                        OFFICE    OF   THE   SECRETARY

                                        WASHINGTON,          D. C. 20250




                                                                                    July 14 1970



        Mr. Oye V. Stovall,      Director
        International   Division
        U. S. General   Accounting        Office
        Washington,   D. C.      20548

        Dear    Mr.   Stovall:

I       This is in       reply    to your letter      of June 18 enclos ing a draf t of a
        Comptroller        General's    report   to the Congress    on the economic
        advantages       of using American       ingredients   to satisfy   milk requirements
        in Western       Europe.
,       As you point        out,    the draft  deals with matters        which are mainly     the
I       responsibility         of the Department       of Defense.     This Department     is
1       prepared       to cooperate     with the Department        of Defense  in whatever
j   .   its decision       may be in this      regard.
I
        We appreciate       your    giving       us the      opportunity   to   comment   on the
        proposed    report.

        Sincerely,




                                                        26
                                                                  APPENDIX III


                                 PRINCIPAL OFFICIALS OF

                              THE DEPARTMENTOF DEFENSE AND

                              THE DEPARTMENTOF AGRICULTURE

                             HAVING AN INTEREST IN THE MATTERS

                                DISCUSSED IN THIS REPORT


                                                      Tenure of office
                                                      From             -To
                                  DEPARTMENTOF DEFENSE

SECRETARYOF DEFENSE:
   Melvin R. Laird                                 Jan.    1969     Present

ASSISTANT SECRETARYOF DEFENSE
  (INSTALLATION AND LOGISTICS):
     Barry J. Shellito                             Feb.    1969     Present


                                DEPARTMENTOF AGRICULTURE

SECRETARYOF AGRICULTURE:
   Clifford M. Hardin                              Jan.    1969     Present

ASSISTANT SECRETARY, INTERNATIONAL
  AFFAIRS AND COMMODITYPROGRAMS:
    Clarence D. Palmby                             Jan.    1969     Present




U.S.   GAO   Waah..   D.C.


                                             27