DCCUMENT RESUME 01883 - A1252234] Issues Surrounding the MNnagement of Agricultural Exports. ID-76-87; B-176943. ay 2, 1977. 2 vols. (v.1, 127 pp.; v.2, 115 Pp.). Report to the Congress; by Elmer B. Staats, Comptroller General. Issue Area: Food: Federal Invclvement i U.S. Agricultural Commercial Export Sales (1714). Contact: International Div. Budget Function: Agriculture (350). Organizaticn Concerned: Department of Agriculture; Council of Economic Advisers. Congressional Relevance: Congress. Authority: Agricultural Act of 1970, as amended; Agriculture and Consumer Protection Act of 1973, sec. 812 (P.L. 93-86; 7 U.S.C. 612c-3 (Supp. IV)). Export Administration Act of 1969, as amended (50 U.S.C. App. 2401-2413; 50 U.S.C. App. 2403(F) (Supp. IV)). B-114824 (1974). B-178753 (1974). B-159652 (1974). B-146770 (1975). B-133160 (1975). Interviews, questionnaires, nd literature reviews were utilized in an attempt to describe and evaluate: 1) circumstances surrounding 1974 and 1975 grain purchase by the Soviet Union; (2) Agricu]ture's maaagement of its export reporting system; (3) Agriculture's forecasting of foreign supply and demand; and (4) executive branch agricultural export policy and related issues. Findings/Conclusions: Fundamental improvements are needed in the ation's food export machinery. The Department of Agriculture's export reporting system needs to provide accurate and timely data on exports--a necessary input Lf the effects on dcmestic supply and price arc to be minimized. Current elements of export policy eed to be more complete and cohesive and need tc provide the flexibility necessary to meet both domestic and international objectives and changing food supply and demand situations. Export policy implementation needs more coordination, cohesion, and better timing. Recommendations: The Congress should enact legislation providing for an improved export reporting system that will function as an effective early-warning system. Congress should also establish a food export policy that protects the interests of both producers and consutmers, while simultaneously providing an effective policy mechanism for surplus and shortage market conditions. That policy should also clarify the Government's position on grain sales to nonmarket economies, including the desirability of such mechanisms as long-term agreements and government-to-government negotiations. The question of a national grain reserve, the role of multinational grain exporters in U.S. marketing, and the role that could be played in grain exporting by U.S. grain cooperatives should also be considered by the Ccongress. (Author/SC) REPORT TO THE CONGRESS "C" " BY THE COMPTROLLER GENERAL %,-_?OF THE UNITED STA TES Issues Surrounding The Management Of Agricultural Exports Volume I Agriculture's export reporting system needs to provide more accurate and timely export sales data. U.S. food policy needs more co- hesion and flexibility to meet domestic and international objectives and changing food supply/demand conditions. By legislation the Congress should an improved export reporting providesystem to for function as an effective early warning system and should direct that a food export policy be established that protects the interests of U.S. producers and consumers. That policy should also clarify the Government's position on grain sales to non-market economies. ID-76-87 MAY 2, 977 COMPTRO.LLr GENRAL OF THE UNITEDsrATES WASHINTON D.C. U B-176943 To the President of the Senate and the Speaker of the House of'RepresenCatives We have reviewed executive branch management of Russian grain sales, agricultural export reporting, and related export policy issues. Interim staff briefings were provided to in- terested Members of Congress. We testified bfore the Per- manent Subcommittee on Investigations of the Snate Committee on Government Operations on August 1, 1975. O June 24, 1976, we testified before the Subcommittee on Foreigii Agricultural Policy and the Subcommittee on Agricultural Production, Mark- eting and Stabilization of Prices of the Committee on Agricul- ture and Forestry, United States Senate. The testimony de- scribed the tentative findings of GAO's review of executive branch management of Russian grain sales, agricultural export reporting, and related export policy issues. Our review was made pursuant to the Budget and Account- ing Act, 1921 (31 U.S.C. 3), and the Accounting and Auditing Act of 1950 (31 U.S.C. 67). We are sending copies of this report to the Director, Office of Management and Budget; the Secretary of Agriculture; and the Chairman, Council of Eco ic AdvisQrs v Comptroller General of the United States COMPTROLLER GENERAL'S ISSUES SURROUNDING THE REPORT TO THE CO1GRESS MANAGEMENT OF AGRICULTURAL EXPORTS Department of Agriculture D I G E S T GAO has conducted a series of reviews of tile agricultural export situation since 1972, when Russia's massive grain urchases and worldwide changes in food supply helped to focus national attention on the challenge of allocating the Nation's food resources to meet domestic and international objec- tives. GAO's current review focused on a key element of food resource allocation--food export policy--and on executive branch management of Russian grain sales, ex- port rcporting, and related export policy issues (See pp. 1-6.) GAO found fundamental improvements are needed in the Nation's food export policy machinery: -- Agriculture's export reporting system needs to provide accurate and timely data on exports--a necessary input to aid policymakers in exercising measures to mitigate the effects which large, lump-sum purchases have on domestic supply and price. (See ch. 4.) -- Current elements of expert policy need to be more complete and cohesive, ad need to provide the flexibility necessary to meet both domestic and nternational objectives and changing food supply and demand situations. (See ch. 6.) -- Policy implementation needs more coordi- nation, cohesion, and better timing. (See ch. 6.) Agricultural Exporting Reporting Although an export reporting system has been in operation since 1973, the system cyaoe '. Upon removal, the report i ID-76-87 over should be noted hereon. does not provide reliable prospective sales data early enough to allow U.S. policymakers to make timely ecisions. The Department of Agriculture requires that export sales data be reported, but such data is often dramatically changed before shipments are made and reported too late to provide an early warning indicator. (See ch. 4.) To improve the system, GAO recommends that the Secretary of Agricul- ture require; -- Exporters to explain contract changes to the Government. This may redice modifications substantially and thereby increase data reliability. -- Exporters to advise the Government of their intent to negotiate con- tracts at the earliest possible time. This would help satisfy the ear_y warn- ing need. --Additional information on contracts to include classification of foreign buyers, disclosure of pricing terms, exact destinations and other provi-- sions. This information would greatly improve export data reliability. (See p. 114.) U.S. Forecasting ofForeign Supply and Demand Efforts in this area--particularly for the Soviet Union and other non-market economies-- should be further upgraded and improved. Better market intelligence and analysis coupled witF greater intraagency and inter- agency commun.ication and coordination is necessary and desirable. (See ch. 5.) The Executive Branch could benefit from considering some of the forecasting methodologies used by major multinational exporters, the Central Intelligence Agency, and the United Nations Food and Agricul- ture Organization. ii Substantial improvement is dependent on the Government's progress in eliciting forward estimates from the Soviet Union, as provided by the 1973 U.S.-U.S.S.R. Agricultural Cooperation Agreement. GAO therefore rcommends that the Secre- tary of Agriculture evaluate Soviet cow- pliance with the 1973 agreement to deter- mine how it has benefitted the United States and the Soviet Union, whether it is effective, and how to irsure Soviet compliance with its forward estimate provision. (See p. 115.) Agriculture Export Policy While advocating a hands-off approach to agricultural export policy, Government has intervened extensively on an ad hoc basis in the U.S. agricultural market. The GAO recommends that Government response be formulated within an agricultural policy framework with criteria designed to satisfy specific output objectives but with the flexibility to change when conditions change. Who should get what, when and why are the critical questions such a framework should address. This would allow consideration of a number of different policy actions which would be appropriate under different con- ditions. (See pp. 115-116.) Implementing Policy With 26 Federal agencies involved in agricul- tural policymaking and desite a 1976 reorgan- ization in U.S. policymaking structure, there is still uncertainty regarding how and when major policy options should be implemented. In addition to improved data reliability and an integr' ed agricultural policy, a new mechani * effectuate policy action is worth c Jeration. (See ch. 6.) GAO believes that a national agricultural policymaking system should include these essential elements: -- An early warning system for export sales. (See p. 114.) Tar Fat hm ~iii --A flexible policy framework that satisfies specific objectives. (See pp. 110, 115-116.) -- A structure and procedure for implementing policy action. (See p. 110.) -- Contingency planning to meet domestic and foreign economic policy objectives and national security needs. (See pp. 115-116.) Handling o Russian Grain Sales The Executive Branch has taken numerous actions over the past three years to im- prove its information gathering, data analysis, and decisionmaking processes. But weaknesses in these areas, cited in GAO's 1973 Russian wheat report and its 1974 soybean and commodity shortages reports, persist. Domestic and inter- national disruptions associated with the 1973 soybean embargo and Russia's 1974 and 1975 grain purchases demonstrate a lack of substantial change in the Execu- tive Branch's agricultural export policy. (See pp. 105-106.) Removal of the 1975 temporary embargo on U.S. grain expcrts to the Soviet Union coincided with a 5-year purchasing agree- ment with the Soviets. Durin- 1976-- the agreement's first year of operation-- the Soviets purchased in an orderly manner about 6 million tons of U,S. wheat and corn (the minimum required under the agreement). Because of significant in- creases in.Soviet 1976 grain production, the Soviets had no need to import large quantities of U.S. grain. Therefor - , the agreement's maximum limits were not tested. But the agreement's existence did esult in minimum Soviet purchases which tcherwise might not have been made. (See p. 07.) Prior to negotiating the 1975 agreement with the Soviets, the Government inter- vened in the grain exporting market with- out warning and in the wake of strong official statements that such action iv would be unnecessary. While the agreement has added some stabilie- to the purchasing relationship betweea the two nations, its effectiveness remains uncertain until tested under variety of circumstances. (See p. 105.) In view of the certainty associated with the 1975 agreement and in light of its significance, GAO recommends that the Secretary of Agriculture: -- Evaluate the effectiveness of the agree- ment, determining costs and benefits to producers, processors, consumers, ex- porters, and the Soviet Union. -- Submit an annual report to Congress evaluating the agreement's effective- ness. -- Require that all future long-term grain purchasing agreements between the U.S. Government and other governments be fully reviewed by relevant Executive Branch agencies and be subjected to some form of congressional consultation. -- Require that all future short-supply export control decisions be subjected to some form of congressional consulta- tion before being finalized. (See p. 116.) Matters for Consideration bythe ongress In its consideration of and deliberations over thz forthcoming Agricultural Act of 1977, GAO recommends that Congress enact legislation providing for an improved export reporting system that will func- tion as an effective early warning system. GAO has submitted to Congress proposed legislative language providing for needed improvements to the export reporting sys- tem. (See vol. II, app. F.) The GAO also rucommends that Congress establish a food export policy that pro- tects the interests of both producers TL !;W rv and consumers, while simultaneously pro- viding an effective policy mechanism for surplus and shortage market condi- tions. That policy should also clarify the Government's position on grain sales to non-market economies, including the desirability of such mechanisms as long- term agreements arad governlent-to- government negotiations. Other issues for Congressional considera- tion include: the question of a national grain reserve (see pp. 100-101); the role of multinational grain exporters in U.S. marketing, and the degree of concentration in this area (see p. 104); and the role that could be played in grain exporting by U.S. grain cooperatives (see p. 104). Agency Comments and GAO Evaluation Agriculture in its January 19, 1977, official esponse acknowledged the accuracy of factual material presented in GAO's report. However, it disagreed with the general thrust of the report's conclusions, recommendations, and matters for consideration of the Congress. Agriculture contended that its policy over the past 4 years has been effective and that GAO's recommendations would unnecessarily involve government in agriculture, resulting in a reduction of U.S. grain exports. GAO maintains that a balanced agricultural policy involving the governmein in a supportive role is essential to avoid recurrences of crises similar to those resulting from past Russian grain sales and export embargoes. It is also necessary if the U.S. is to preserve its market- oriented agricultural policy and provide for some form of market stabl ity in the event of extreme shortages and surpluses. (See pp. 110-114.) vi Volume I Contents Page DIGEST i CHAPTER 1 INTRODUCTION 1 GAO Studies, 1973-1975 2 Purpose of GAO Review 4 Scope of Review 6 2 GOVERNMENT'S HANDLING OF 1974 GRAIN SALES TO RUSSIA 7 Situation, Summer, 1974 7 September Developments 9 Decision on Prior Approval, September 19 10 Contacts with Exporters, September 25 10 U.S.-Soviet Government Contacts 11 Economic Policy Board Set Up 12 Reports of Soviet Interest, September 30, October 1 12 Continental's Corn Sale to Soviet Government 12 Cook Industries, Inc,, Negotiations 13 Decision to Defer Soviet Contracts 13 White House Meeting with Exporters 14 Monitoring and Approval of Export Sales 14 Guidelines 15 Approval Criteria 15 Renegotiation of the Soviet Purchases 16 Development of New U.S. Offer 17 U.S.-U.S.S.R. Grain Date Exchange 18 Country Target Levels 18 GAO Assessment of 1974 Decision- naking Process 19 GAO Assessment of 1974 Implemen- tation 19 GAO Assessment of Data Collec'ion 20 Page CHAPTEiA 3 HANDLING OF 1975 SOVIET GRAIN SALES 22 Introduction 22 Government's Discovery of Purchase Plans 23 Early Warning System 23 U.S. Contacts with Exporters 24 Contacts Between U.S.-U.S.S.R. Governments 24 U.S. Estimates of Soviet Grain Production and Demand 24 Contingency Plans-Impact Analyses 25 Price and Other Impacts of Sales 25 Summary of Events, 1975 Grain Sales 26 Suspension of Grain Sales co Poland 29 U.S.-U.S.S.R Long-Term Grain Purchasing Agreement of 1975 30 Legality of the Long-Term Agreement 32 GAO's Legal Analysis of Agreement and Voluntary Controls 33 Summary of Government Response to 1975 Grain Sale Crisis 34 Developments in 1976 35 4 AGRICULTURAL EXPORT REPORTING SYSTEM 37 Evolution of Export Reporting System 37 Commerce's Export Reporting System 39 Mandatory Export Data Reporting System, Responsibility Given to Agriculture 40 Use of Export Reporting System 41 Shifts in Organizational Responsi- bility Within the Agriculture De- partment 42 Voluntary Prior Approval System September, 1974 - March, 1975 43 1975 "Prior Approval" SysLem 45 Export Reporting System WeaKnesses 46 Internal Evaluations and Audits 48 Overview of GAO's Exporter Survey 56 GAO Analysis of Export Reporting System's Price Impact 57 Proposed GAO Amendment to 1973 Agriculture Act 58 Paqe CHAPTER 5 AGRICULTURE'S FORECASTING OF FOREIGN SUPPLY AND DEMAND 61 Export Forecasts and the Soviet Union 61 Soviet Forward Estimates 62 Effect of Long-Term Purchasing Agreement 63 Agriculture's Forecasting System 63 Statistical Reporting Service 64 System Flowcharts 65 Interagency Groups in Agriculture Department 65 Outlook and Situation Board 67 USSR and PRC Task Forces 67 Interagency Commodity Estimates Committees 68 Foreign Agricultural Service 68 Attache Reporting 68 Types of Attache Reports 70 Foreign Commodity Analysis 70 Analysis/Forecasting Methodology 72 Officials' Views of Forecasting Operations 73 Dissemination of information 74 Economic Research Service 76 Intra-Agency Cooperation 79 Problems of Coordination 81 Improvements, Continued Weaknesses 82 Other Forecasting Organizations 84 Food and Agriculture Organization of the United Nations 85 Major Grain Exporting Companies 86 6 U.S. AGRICULTURAL EXPORT POLICY 88 Flexibility 88 Foreign Policy Aspects of Food Exports 92 1975 Long-Term Grain Purchasing Agreement 93 Constraints on ree Market Agricul- tural Transactions 94 Concentration in U.S. Grain Exporting 95 Page CHAPTER 6 Government Decisionmaing 96 Views of FPcent Policy -6 Impacts of Recent Policies 99 Possible Modifications of Present Policy 100 National Grain Reserve 100 Other Optional Modifications 101 Exporters' Views of Optional Modifications 102 Summary 103 7 CONCLUSIONS, AGENCY COMMENTS AND OUR EVALUATION, RECOMMENDATIONS, MATTERS FOR CONSIDERATION OF CONGRESS 105 General Conclusions 105 Specific Conclusions 105 1974 Russian Grain Sales 106 1975 Russian Grain Purchases 107 Agricultural Export Reporting System 107 Agricultural Forecasting 109 Agricultural Export Policy '10 Agency Comments and Our Evaluation 110 Agency Comments 110 Our Evaluation 112 Recommendations 114 Matters for Consideration by the Congress 116 APPENDIX I Bibliography 118 II Letter dated January 19, 1977, from Richard E. Bell, Assistant Secretary, International Affairs and Commodity Programs, Department of Agriculture 121 II Principal Officials Responsible for Administratior of Activities Discussed in this Report 125 CHAPTER 1 INTRODUCTION Policy choices involved in massive grain sales to Russia nave been of continuing Governmental concern since the first of these purchases took tne Nation by surprise in 1972. Tn- tense national debate has centered on the impact of these and subsequent purchases in 1974 and 1975. Together with many other supply and demand variables, tne grain sales have been a factor in the unstable agri- cultural market situation of the past 3 years, a period characterized until recently by tight supplies and high prices, and by continuing general market uncertainty. How significant a factor the sales have be-i has proved dif- ficult to assess. Consumers have been quick to blame rising food prices on the foreign sales. Farmers, on the other hand, have welcomed the new market, and have reacted sharply to Government intervention. Three maritime unions, with other union backing, temporarily refused to ship U.S. grain to the Soviet Union. The fact that tne sales have improved the U.S. balance of trade Lituation must be weighed against the depletion of U.S. and world grain stocks and the decreased availability of commodities for concessional food and feedgrain exports to developing countries. One certain effect of the sales has been to force recognition of the interrelationship between domestic and international economic policy, and to elevate agriculture to a nigh priority in formulating and executing foreign economic policy. A central question is what kind of role the Executive Branch should choose in dealing with grain exports. Since 1972, Government intervention--through either voluntary or mandatory snort-supply export controls--has strained its free-market approach to grain export policy and raised the question whether established guidelines for future intervention should be assessed. Government efforts to stabilize grain marketing, through formal and informal long-term grain purchasing agreements with other countries have not met with 1 universal acceptance. Farmers, as noted, have ttacked them sharply as unwarranted interference in the free market. GAO STUDIES, 1973-1975 During the continuing controversy over grain export policy, the Congress has called on the GAO to make several investigations. The results of the first study were published in July 1973: "Russian Wheat Sales and Weaknesses in Agriculture's Management of Wheat Export Subsidy Program, (B-176943)." GAO concluded that (1) there were no guidelines for managing grain sales to non-market economies; (2) no accurate, timely, reliable and complete export data to assist decisionmakers; and (3) no systems for assessing the impact of exports on the economy. To develop a responsive governmental system for managing grain sales to non-market economies in the future, it was recommended that: -- Agriculture establish rules and procedures for transactions involving unusual purchases by state trading monoplies. The unequal bargaining power that exists when a single, fully informed buyer (such as the Russian state trading agency) confronts several partially informed sellers calls for greater government-industry cooperation. -- As part of the above, Agriculture establish an export reporting system in cooperation with private exporters so that the Government is informed of impending large sales to non-market economies. -- Agencies be required to develop definitive ground rules so that expected benefits from exports can be appropriately weighed aga4 nst their impact on various segments of the economy. In March 1974, GAO issued a report, the "Impact of Soybean Exports on Domestic Supplies and Prices, (B-178753)," reiterating the need for reporting system that provides for accurate, timely, and reliable export data. The report emphasized that such a system must provide the Agriculture Department with the information to make responsive, export- related decisions and to carry out those decisions promptly 2 to help insure an adequate domestic supply at reasonable prices. The report also suggested that the Agriculture Department adopt a more flexible export policy so that the Government would be able to respond early to unanticipated supply and demand conditions. Our April 1974 report, "U.S. Actions Needed To Ccpe with Commodity Shortages, (-114824)," also cited a variety of informational, analytical and decisionmaking weaknesses. The recommendations in that report included making improve- ments in: (1) coordination and responsiveness of the commodity decisionmaking process; (2) implementation, reporting, and evaluation of short-supply export controls; (3) capabilities, procedures, and report products of agency commodity monitor ng, analysis, and forecasting groups; and (4) data gathering, analytical capabilities, and policy coordination for l)ng-range economic policy planning efforts. As an outgrowth of our 1973 review of Russian wheat sales and the Wheat Export Subsidy Program, we further amined the role of the agricultural attache and issued ex- a report on April 11, 1975, titled, "The Agricultural Attache Role Overseas: What He Does and How He Can Be More Effective EIor The United States," (ID-75-40). In that port we commented on the attaches' information gatheringre- and reporting responsibilities, focusing particularly their operating role in the Soviet Union, Eastern bloc on countries and the People's Republic of China. We found that attaches had limited effectiveness in developing, gathering and analyzing foreign market information. We recommended that Agriculture upgrade the quality of attache reporting both in market and non-market economies. In a separate Congressional review of Russian grain transactions, the Permanent Subcommittee on Investigations of the Senate Committee on Government Operations, issued a report in July 1974 concluding: "* * *the government and specifically the Department of Agriculture (during the 1972 Russian grain sales) had no means to inform itself in an accurate and timely fashion as to the quantity of grain sales to foreign buyers which could assist in an assessment of such sales, domestic supplies and domestic prices* * *. Specifically, the Subcommittee finds that the Agri- culture Department failed to initiate even a rudi- mentary reporting sytem for grain exports." 3 In an effort to provide the executive branch with constructive alternatives for dealing with future grain sales to the Soviet Union, the Subcommittee recommended: (1) GAO review Agriculture's export reporting system-- which was established as a result of an act of Congress in September 1973--to determine that its information is accurate, complete and timely; and (2) interagency coor- dination and oversight of large grain sales be initiated to reconcile conflicting goals of U.S. foreign, agricultural, transportation, economic and social policies at the outset of trade negotiations. As a result of significant unanticipated purchases of U.S. grain by the Soviet Union in 1974 and 1975, the Sub- committee convened hearings in October 1974 and again in July and August of 1975 to reexamine the government's management of grain sales to the Soviet Union. In each case the Subcommittee found that the substance of the recommendations had been only partially implemented. Purpose of GAO Review Our review was made in response to the Subcommittee's 1974 recommendations and also in response to the request of several Members of Congress to review Agriculture's implementation of GAO's 1973 Russian Wheat Repnrt recom- mendations and the circumstances surrounding the 1974 and 1975 Russian purchases of U.S. grain. Since starting our review we have briefed several Members and committees of Congress on arious aspects of Russian grain sales. On August 1, 1975, we testified before the Permanent Subcommittee on Investigations of the Committee on Government Operations of the United Sates Senate to describe the status of our on-going efforts. On March 3, 1976, we issued a separate follow-up re- port concerrning our 1973 Russian Wheat Sale Report recom- mendations on the Wheat Export Subsidy Program, titled, "Agriculture's Implementation of GAO's Wheat Export Subsidy Recommendations and Related Matters, (B-176943)." We reported that: -- Agriculture had not evaluated the former subsidy program. 4 -- Agriculture officials contended that there was no need to systematically evaluate the former subsidy program (which was suspended in September 1972) nor to subsequently develop a new, standby program because they believed the tight wheat supply and high demand situation existing since 1972 would continue, precluding the need to reestablish export subsidy. -- Agriculture's policy provides no adequate policy alternatives for'disposing of surplus wheat. -- Current Federal investigations of U.S. grain inspection practices raised the question of re- covering Federal subsidy payments on grain exports. Based on our findings and continuing concern for more effective programs, we recommended that the Secretary of Agriculture (1) conduct an evaluation of the former subsidy program, and (2) nitiate appropriate action to insure that any future program will be effective and ef- ficient. We also suggested to Congress that it might wish to reexamine the entire subject of agricultural export subsidies and to determine whether legislation should be considered as a means for insuring a more effective and efficient subsidy program, should one become necessary in the future. On June 24, 197G, we testified before the Subcommittee on Foreign Agricultural Plicy and the Subcommittee on Agricultural Production, Marketing and Stabilization of Prices of the Committee on Agriculture and Forestry, United States Senate. The testimony described the tentative findings of GAO's review of executive branch management of Russian grain sales, agricultural export reporting, and related export policy issues. Our current report is a detailed and in-depth extension of that testimony. The report attempts to describe and evaluate: (1) circumstances surrounding 1974 and 1975 grain purchases by the Soviet Union; (2) Agriculture's management of its export reporting system; (3) Agriculture's forecasting of foreign supply and demand; and (4) executive branch agricultural export policy and related issue.. As part of this project, we developed and sent a questionnaire to approximately 300 exporters of U.S. grain 5 (the entire U.S. export market) requesting information on various aspects of grain export policy. (See pp. 56, 57, Chap. 4 and Volume II, Appendix G.) We also provided legislative language to amend Section 812 of the Agricultural Act of 1970 as added by the Agriculture Act of 1973 (P.L. 93-86), which strengthens Agriculture's Export Reporting System rgulations. (See Vol. II, Appeneix F.) SCOPE OF REvIEW During the cou.se f our review of Russian grain sales, export reporting and t!ted export policy issues, we inter- viewed numerous pb}. oiicy experts, agricultural policy specialists, agricu-. dal economists, agricultural commodity analysts and other representatives of the agricultural sector. The officials we contacted are associated with or employed by the following organizations: PRIVATE SECTOR All Exporters of U.S. grain Farmer Cooperatives (Approx. 300) Agricultural Economists Grain Exporter Associations Commodity Traders Agricultural Trade Associations Private Commodity Fore- casting Organizations U.S. GOVERNMENT White House Agriculture Department Council of Economic Advisers State Department Economic Policy Board Labor Department National Security Council Treasury Department Council on International Economic Federal Trade Commission Policy Relevant congressional Special Representative for Trade entities Negotiations Federal Maritime Central Intelligence Agency Commission Commodity Futures Trading Commerce Department Commission Food and Agriculture Organization of the United Nations The study also covered various executive branch docu- ments and files and, on occasion, some documents and publica- tions of the private sector. We also contacted knowledgeable congressional staff members and reviewed relevant congressional hearings and reports. Interviews, questionnaires, and reviews of written material were extensive. 6 CHAPTER 2 GOVERNMENT'S HANDLING OF 1974 GRAIN SALES TO RUSSIA SITUATION, SUMMER, 1974 As evidence of a potential tight supply situation for wheat, corn, and soybeans emerged in June 1974, the President established a Cabinet-level Committee on Food, appointing his Counsellor for Economic Policy as Chairman. The Com- mittee was formed to review Government activities signifi- cantly affecting food costs and prices and to provide coordi- nation for the Nation's policy relating to (1) domestic and international food supplies and (2) food costs and prices, The Committee's functions were transferred to the Economic Policy Board (EPB) in October 1974. On June 21, 1974, the Chairman of the Committee estab- lished a working group--the Deputies Group--composed of representatives from member organizations and chaired by representatives from the Council of Economic Advisers. The Deputies Group began meeting on a biweekly basis shortly after the President's Committee was established. From early August the Group focused on (1) the U.S. crop shortfall and its implications for export policy, (2) Public Law 480 1/ policy and (3) domestic food prices. Beginning in mid-August meetings were stepped up to a weekly schedule to keep abreast of the domestic crop situation. Information was presented on export commitments from the Agriculture Department's export reporting system, export shipments, domestic and foreign production, food aid commitments, and domestic consumption. Analysis conducted by the Deputies Group in August, September and October reflected a rapid increase of pro- jected corn and wheat exports and a dramatic decrease in projected domestic carryover levels. The following table provides a detailed breakdown of the deteriorating market condition. l/Provides for U.S. agricultural exports on a concessional basis to foreign nations. 7 Supply and Demand for Maor U.S. Crops .. 974:75-(note- - (milion busnels) wheat 9 / 15 /74---I/13L 8/11/74Supply: Supply: 4 10/27/74 Beginning stocks 249 249 249 249 Production 1,840 1,792 1,781 ;,781 Imports 1 1 1 1 Total supply - r a7 Demand: Domestic 808 815 813 Exports: 738 Cumulative exports 117 228 311 352 Undelivered sales 339 389 434 465 Total exports 456-- 7T 7 Total demand 1,242 , I,55 T75 Carryover 826 610 473 476 Corn Supply: Beginning stocks 428 428 428 Production 481 4,966 4,995 4,718 4,718 Imports 1 1 1 1 Total supply 5,17 ____ Demand: eeed 3,830 3,859 3,607 Food, ind. and seea 3,535 455 455 455 455 Total domestic 4,85 4,3I4 Exports: 3,99 - - Cumulative exports - - 24 50 Undelivered sales 608 1,055 1,096 1,125 Total exports - 6 -6 1T,120 TI Total demand 4,8 9I 5 TM Carryover ,-- 5,165 502 55 35 Soybeans Supply: - beginning stocKs 160 160 172 Production 172 1,314 1,316 1,262 1,262 Total supply 1-. T71 Demand: 4 1 -- Crusning.s 805 805 805 Seed, feed, and 805 residual 84 86 84 84 Total domestic --- -- - - s 99 Exports: - Cumulative exports - 13 43 61 Undelivered sales 449 595 614 614 Total exports 449 -- m ~--' - 7 Ti-al demand 1338 1,546 Carryover T43U -11 - T a/Prepared by GAO from information provided by the Department of Agriculture. 8 As the domestic carryover situation continued to deteriorate, policy decisions were made to avoid imposing export controls and to begin consultations with major U.S. trading partners to share the adjustment burden required by the U.S. crop shortfall. First discussions were conducted in late August by the Secretary of Agriculture and repre- sentatives from the Council on International Economic Policy (CIEP) with Japan, the European Community, and the Soviet Ambassador in Washington. The U.S. representatives inquired about Soviet intentions to purchase U.S. grains, but the Soviet Ambassador said he had no instructions. SEPTEMBER DEVELOPMENTS Responses from Western trading partners were generally favorable and informative. An indepth review was made by the Deputies Group in early September and an option paper was prepared for the Food Committee. The Committee decided in mid-September to continue the strategy designed to avoid export controls by facilitating market adjustments and main- taining close consultations with U.S. trading partners. The Deputies Group repeatedly expressed concern about the reliability of the export demand data reported by the Agriculture Department. Generally, it was felt that this data presented an exaggerated demand picture in view of other indications of reduced export demand for U.S. grains and continuing stable prices. The export reporting system was changed on September 12, 1974, to require that previously unreported export sales be reported within 24 hours whenever the quantity of a sale or sales to any destination during any calendar day equals or exceeds 100,000 metric tons. Reports were re- quired for exports of wheat, corn, grain, sorghum, soybeans, and soybean meal to permit the Government to deal with any exceptional orders. In the meantime, the Deputies Group's September assess- ment efforts were also being plagu-A oy varying reports of the 1974 Soviet grain crop. In early September, the Agriculture Department estimated it would be 210 million tons. It also reported that the 1973 crop had permitted the Soviet Union o increase stocks by an estimated 11 million tons. The Department estimated that Soviet feed- grain imports would be only about a fifth as large as the 5 million tons imported in 1973-74 and that the Soviets would purchase only 50,000 tons of U.S. corn. 9 However, other information available to the Deputies Group indicated reduced Soviet production and greater demand for U.S. grains. On September possibly cultural attache in Moscow confirmed his 20 the agri- estimates that Soviet production would earlier (June 1974) range from 195 to 205 million tons. The Deputies Group also had to consider the Soviets had been a major the fact that buyer of U.S. corn over the previous three years, with imports averaging tons per year. 3.5 million DECISION ON PRIOR APPROVAL, SEPTEMBER 19 The Food Committee recognized that the to major threat ts mid-September strategy, aside from setbacks, was possible purchases by the further U.S. crop Soviet Union, the People's Republic of China (PRC) and the Persian Gulf oil- exporting countries. Consequently, on September 19, 1974, the decided to have the Secretary of Agriculture Committee major exporting companies to inform them contact the expected prior pproval on exceptional that the Government countries. sales to these The Committee also decided a formal approach made to the Soviet Union to clarify snould be the U.S, crop situation and to obtain advance knowledge of Soviet import needs if pur- chases were expected. The Departments of State and Agri- culture were designated to carry out this directive. CONTACTS WITH EXPORTERS, SEPTEMBER 25 The September 19 directives of the Food Committee were implemented by the Secretary of Agriculture's sations with major grain exporters and phone conver- formal, approach to the Soviet Union. by another, more The Secretary called Cook Industries, September 25, 1974, and inquirrd about Inc., on were possibly going to buy. He learned what the Soviets that expected the Russians to purchase 2 million Cook officials tons of U.S. corn, as well as 4 to 6 million tons of world market to support their developing corn from the cattle-feeding programs. The Secretary broiler and pany to notify him immediately if it soldrequested the com- amount of grain. a significant "Significant" was defined as over 1 million 10 tons. The Secretary did not request the company to obtain clearance before finalizing any sale. Tha day he also called Continental Grain Co., as well as the other major exporters, and asked Continental to inform him before concluding any sale. U.S.-SOVIET GOVERNMENT CONTACTS A cable to the U.S. Embassy in Moscow on September 25 instructed the Embassy to explain to the Soviet Government: -- the tight supply/demand situation for U.S. grains and the need for information on Soviet intentions to purchase U.S. grains, -- that other countries had provided the United States with such information and that the request was instructed by Washington, and -- that since the U.S. market was tight, the Government was not sure that it could service large requests. Thus it wished to know to the degree of possible Soviet purchase intentions. The Soviet Deputy Minister of Foreign Trade responded that: -- the Soviet Union did expect to purchase some grains in the United States but its requirements would be considerably below previous purchases; -- the Soviet Union did not wish these quantities to be burdensome to the United States and would like to know the U.S. view of what a reasonable amount would be; -- since Soviet crop data was not in, specific Soviet requirements were as yet unknown, but would be conveyed to the U.S. when the Soviet trading agency contacted U.S. grain exporters. The Soviet Ambassador informed the Secretary of Agriculture the same day that the Soviet Union would wish to purchase modest quantities of U.S. grain and that it wished to have a statement of the U.S. position. The Secretary told him that the U.S. market remained tight with the recent frost and that it would be preferable to delay 11 any purchases in the market until after the Government had a clearer crop report and knew the real situation. told the Ambassador that as a tentative estimate He also he believed that modest quantities, perhaps on the order of one million tons of wheaL, could be accommodated sometime later in the year. Not utlci after the Soviet Union's purchases were held up in early Octcber did the U.S. Government adequately address the problem of responding to Soviet questions about acceptable levels of feedgrain purchases for the remainder of the crop year. There was some discussion of this issue before the September 25 cable to Moscow, but no quantity was agreed upon. The reasoning may have been that specifying a quantity would be the equivalent of a purchase guarantee. ECONOMIC POLICY BOARD SET UP On September 30, 1974, the President issued Executive Order 11808, which established the President's Economic Policy Board (EPB). The Board was composed Cabinet and White House officials, with the of various Secretary of the Treasury as Chairman and the Assistant to the for Economic Affairs as Executive Director. President EPB advised the President on all aspects of national and international economic policy; oversaw the formulation, coordination, and implementation of all U.S. economic policy; and served as the focal point for economic policymaking. REPORTS OF SOVIET INTEREST, SEPTEMBER 30, OCTOBER In response to the Secretary's SepL..bAr 15 request, Continental Grain Company informed the Agriculture Depart- ment on September 30 that there appeared to be a strong possibility that the Soviet Union was interested in re- ceivina offers of U.S. grain during the next seven to ten days. On October 1, Continental told USDA hat it had again advised Soviet representatives that the U.S. grain situation was tight and that USDA officials opposed large sales. CONTINENTAL'S CORN SALE TO SOVIET GOVERNMENT when the Soviet representative asked what quantities the company was prepared to offer, Continental Grain Company proposed to the Agriculture Department that it confine its offer to 1 million tons of corn. The Secretary 12 of Agriculture areed to approve this sale, but it is unclear whether his approval covered only Continental's proposed sale or whether i: was meant to cover total U.S. sales to te Soviet Union. In any case, the Secretary told Continental officials on October 3 that he could not approve a Soviet Did that day for an additional two million tons of wheat. Later that day, Continental Grain Company informed U.S. Government officials that the terms and conditions for the sale of one million tons of corn had been finalized and filed the required formal notification of the sale with the Agriculture Department. Since this sale was at variance with established policy (to get other countries to follow the U.S. action to reduce consumption of feedgrains and share some of the adjustment necessitated by the shortfall in U.S. crop production), the Deputies Group, meeting that day, decided to contact the Secretary of State and the National Security Council. State's representative to the Deputies Group also prepared a memorandum on the Russian grain purchase for the Secretary which included recommendations to contact the Soviet Union. The Deputies Group met again on the morning of October 4 and prepared an options paper for consideration by the Economic Policy Board's Executive Committee on Continental Grain Company's finalized corn sale and proposed wheat sale. COOK INDUSTRIES, INC. NEGOTIATIONS Cook Industries, Inc., concluded its negotiations with the Russians at 11:45 a.m. on October 4, for the sale of 1,300,000 tons of corn and 900,000 tons of wheat. The company called the Agriculture Department about 1:30 p.m. and was told that the Department had to notify the White House immediately. While representatives of the Deputies Group were waiting at the White House for a scheduled meeting with the Economic Policy Board's Executive Committee, they were informed of Cook's sale to the Soviet Union. The Deputies Group representatives then informed the Executive Committee of the situation. Contact was made with the other major U.S. exporters, who advised that additional Soviet purchases of corn and wheat in the range of six to eight million tons were expected. DECISION TO DEFER SOVIET CONTRACTS Subsequent Executive Comrittee discussions initially focused on the use of licensing and export controls. A 13 Deputies Group representative argued that across-the-board export controls were unnecessary but that Soviet purchases should be held up. Following consultations with the Secretaries of Treasury and State, the President agreed. After the discussion, the Secretary of State Soviet Ambassador to the United States and iiformedcalled the him of the U.S. Government's decision. He told the Ambassador that the magnitude of these contracts was more than the American market could stand at that time. The Ambassadcr still thought they were modest quantities and no resolution was reached. The Secretary of State told the Ambassador that the Secretary of tne Treasury would discuss the question of grain sales with Soviet officials while in Moscow the following week. WHITE HOUSE MEETING WITH EXPORTERS Ccntinental Grain Company and COOK Industries, Inc., officials were invited to a White House meeting on October 5. A statement released by the White ouse Press Secretary on this meeeting stressed the President's expression of strong concern and the grain companies' responsiveness to this concern. The statement also reported that the two companies were arranging to cancel these contracts, and that Government-to-Government discussions would be undertaken with Soviet officials during the Secretary of Treasury's trip to Moscow. On October 7, an official letter was sent to the two grain companies (reportedly at their request) by the Secretary of Treasury (as Chairman of the Economic Policy Board) stating the President's strong concern over the potential impact of such exports when the United States had experienced a disappointing harvest of feedgrains. The letter also stated that the contracts were not in the national interest at that time and that the compani s should not implement them. Further, the letter formally and officially confirmed the Government's request that the companies not ship the grain. MONITORING AND APPROVAL OF EXPORT SALES As a result of the decision to hold up the Russian purchases, an ad-hoc export sales approval group was es- tablished in early October at the Secretary's suggestion and with the President's approval. Initially, the group consisted of representatives from the Council of Economic 14 Advisers, the Office of the Special Representative for Trade Negotiationn, the National Security Council, and the Departments of State and Agriculture; Treasury was subsequent- ly added. The group was originally chaired by CEA, but was subsequently transferred to USDA. GUIDELINES On October 8, 1974, the Agriculture Depar':ment announced new guidelines for the voluntary prior approval system for large export contracts. Exporters of wheat, corn, grain, sorghums, soybeans, and soybean oil cake and meal were requested to obtain USDA approval prior to making: 1. export sales which would either: a. exceed 50,000 tons of any one commodity in one day for shipment to any one country of destin- ation, or b. cause the cumulative quantity of sales of any one commodity made to any one country of destination during any one week (Monday through Sunday) to exceed 100,000 tons; and/or 2. any change to a known country of destination from a country of destination (including unknown destina- tions) previously reported to USDA in Form C.E. 06-0098 cover ing export sales if the change(s) for any one commodity exceeding 50,000 tons in any one day accumulates to exceed 100,000 tons during any one week (Monday through Sunday). It was also requested that neither offers nor sales made under Title I, Public Law 480 neec e reported under this voluntary system. It was further requested that exporters make tneir offers under a tender issued by a foreign buyer (usually a foreign government) subject to USDA approval. How- ever, exporters were informed that USDA would not knowingly approve offers or sales made under a tender that lacked such a condition. APPROVAL CRITERIA The ad hoc approval group developed criteria for approving large sales. Guidelines for prior approval issued by USDA on October 9, 1974, stated: 15 "In determining which proposed sales will be given prior approval and which will not, the Department will consider the total annual requirements involved and the extent to which of the country those already covered. Factors, in addition requirements are availability, will include the level to the U.S. of the foreign country's 1974-75 crop; its stocks on hand; existing purchase contracts calling for future jected consumption; and the pattern delivery; pro- of imports during recent years." RENEGOTIATION OF THE SOVIET PURCHASES Aftet the October 5 meeting at the White House, the Deputies Group prepared an options paper grain could be exported to the Soviet on how much U.S. submitted to the Executive Committee Union. The paper was Policy Board and was discussed with of the Economic the President, who gave the Secretary of the Treasury instructions sions in Moscow. for his discus- The options included questions of quantity and composition of the purchases.timing and the question was whether to defer Soviet The timing the October crop report or until purchases until after quantity and composition question after January 1, 1975. The Soviet purchases of 5,000 tons of was whether to (1) permit corn, Agriculture's original estimate of Soviet demand, purchases of one million tons of (2) permit Soviet corn of wheat, the current USDA proposal, and 1.5 million tons purchases under existing contracts or (3) permit Soviet and obtain agree nt that no ditional sales would be made. The Deputies Group concluded that could approve a Soviet purchase the United States of 500,000 tons of corn and 1,000,000 tons of wheat for immediate possibility of up to 500,000 tons export, with the later--but only if more of corn and more wheat availabilities and importinformation about Soviet crop requirements was forthcoming. Also, it was to be made clear to that they should not offer to buy the Soviet representatives the levels approved for immediate additional amounts beyond export without prior consultation between he two Governments. clusions were reached on the domestic Other con- need for a public statement, Commodity price impact, the financing, and contract problems Credit Corporation involved. for the grain companies 16 The Group's recommendations were essentially adopted and provided the instructions for the Secretary of the Treasury. The Secretary met with the Soviet Minister of Foreign Trade on October 14 and 15 and discussed outstanding problems of U.S.-Soviet trade, including the question of Soviet grain purchases. The Minister pressed for an increase in the quantities offered and the Secretary presssed for an exchange of information as agreed upon in the 1973 agreement on agricultural cooperation. The Soviet representatives had originally contracted for 2.3 million tons of corn, and 900,000 tons of wheat, but reduced their request to 1.5 million tons of corn. The United States offered a compromise of wheat for corn, as follows: 1.2 million tons of wheat, 1 million tons of corn, and 1 million tons from other exporting countries or deferred U.S. delivery until the new crop year. No agreements were reached during these talks. DEVELOPMENT OF NEW U.S. OFFER In a subsequent discussion with the President, the Secretaries of Treasury and State recommended an increase in the quantities originally approved for export to the Soviet Union. The President agreed to an increase from the originally approved 500,000 tons of corn to one million tons and from one million tons of wheat to 1.2 million tons and the remainder for delivery from other exporting countries. It appears that this decision was made partly out of concern for existing contracts and partly for foreign policy reasons. The Soviet Union agreed to accept this U.S. offer, and details were announced in Treasury's October 19 press release. The agreement provided that the Soviet Union would make the ecessary purchase arrangements with U.S. export firms and would make no further purchases in the U.S. market during the 1974-75 crop year. Further, the Soviet Union agreed to work toward the development of a grain exchange system between the two Governments. Part of this agreement was modified in February 1975, when the Soviet Union requested the grain companies to substitute 200,000 tons of old crop wheat for new crop corn, for delivery starting in October 1975. Their request was made in two separate, 100,000-ton transactions. The grain companies submitted both requests for U.S. Government approval. The Grain Monitoring Group approved the first 100,000-ton request without delay and made the situation known to the Secretaries of the Treasury and Agriculture. 17 Approval for the second 100,000-ton request was delayed until after Government-to-Government discussions in Moscow during the meeting of the Exports Group under the Long Term Cooperation Agreement. After receiving information that Soviet desires were based upon commercial grounds, the second request was approved. Also, a problem with the quality of some U.S.-origin corn shipments resulted in non- U.S.-origin corn replacing part of the one million tons originally approved for sale to the Soviet Union. This U.S.-Soviet agreement on grain purchases applied only to the 1974-75 crop year. U.S.-U.S.S.R. GRAIN DATA EXCHANGE The Government's problems in anticipating and re- sponding to Russian grain purchases in 1974 would have been simplified by an adequate data exchange program (as agreed upon in the 1973 Agricultural Cooperation Agreement). U.S. dissatisfaction with the workings of this exchange were discussed during the Moscow meetings of October 1974 and and Washington of December 1974, and in other meetings in February and April 1975. (For further discussion, see chapter 5.) COUNTRY TARGET LEVELS The Executive Committee of EPB directed the Grain Monitoring Group in December 1974 to establish country target levels of estimated U.S. exports for the 1974-75 crop year. Once these target levels were established, they were not to be changed without the Group's approval. These target levels served as the basis for the Group's discussion and approval of export sales of U.S. grains. The approval system (which was operative from October 1974 throigh March 1975*) was basically a check against anticipated or estimated exports by country developed by Agriculture's Foreign Agricultural and Economic Research Services. In essence, the system tracked exports against Agriculture's estimates of demdnd. Weaknesses in this data base are discussed in GAO's a .sessmenton pages 43-45. Declines in U.S. consumption of feedgrains permitted elimination on March 6, 1975, of the system of prior U.S. Government approval for large export orders for wheat, feedgrains, and soybeans. 18 GAO ASSESSMENT OF 1974 DECISIONMAKING PROCESS The executive branch showed certain improvements in deal- ing with the 1974 grain sales to Russia. The decisionmaking process was more formalized than it had been in 1972, and was less crisis-oriented. There was a more deliberate process for weighing options and for devising responses to 'he developing shortage situation. This process led to the requests for self-imposed limits on both importers and ex- porters and for the deferment of existing contracts, and eventually to the temporary voluntary prior approval sys- tem. On the other hand, the Government demonstrated a continued reluctance to intervene in the market with firm policy guidelines until faced with major isruptions, such as the 1974 Soviet grain purchases. As a result, its response to the crisis created problems similar to those of 1972 (general uncertainty about future Government moves and their possible effects on the market). The decisionmaking process was also hampered by inter- aqency discord. Disagreement over the composition of the ad hoc monitoring group, for example, led to the three shifts in the chairing of this group. There was similar friction over the makeup of the team sent to the U.S. discussions with European Community oficials on feedgrain exports. Another point of disagreement involved changes in authority to approve or not to approve export sales. GAO ASSESSMENT OF T1974 IMPLEMETATION In the view of the GAO, a fundamental difficulty in implementation stemmed from the lack of any compliance program. This led to problems including simple but signi- ficant failures of communication and inadequate control of shipments. Although the decision was made to inform grain companies that prior Government approval was expected on exceptional sales to the Soviet Union, Cook Industries, Inc., was not so informed before its sale had been made. 19 The monitoring system for agricultural exports did provide any control of diversions and/or transhipments. not Members of the Deputies Group were concerned about the practical value of compliance checks, since there was a voluntary approval system and no mandatory licensing requirements under the Export Administration Act or similar authority. As a result, it is unclear whether, and the extent to which,there may have been diversions and/or transhipments. There were rumors, but no evidence, of such transactions. The CIA checked for transhipments, but its investigations applied only to sales after the prior approval system put into effect. was There seems to have been no evidence as of December 1974 of any diversions to Cuba or to Eastern Europe. The Agriculture Department was asked to talk with West German officials about this question because of the large number of sales destined for delivery to Rotterdam and Hamburg. Another implementation problem involved U.S. feedgrain and soybean meal exports to the European Community. A November 1974 report to the Economic Policy board stated that U.S. sales to the Community were exceeding the quantity that had been earlier agreed could be safely exported. Since this situation was considered a political issue, an informal compromise was worked out and it was agreed to reexamine the situation in March 1975. GAO ASSESSMENT OF DATA COLLECTION The data base for decisionmaking had improved since 1972. Export information developed by the Agriculture Department's newly established export reporting system was used in coordination with information of export ship- ments, domestic consumption, food aid requirements, domestic production, and probable foreign production and demand. The usefulness of the data base was, however, impaired by two serious weaknesses. One major weakness had to do with the Ariculture Department's estimates of consumption within individual foreign countries of destination. (See ch. 5.) The absence of accurate estimates and the effort spent in obtaining them created confusion about whether a problem did, in fact, exist, and delayed the Government's eventual response once the situation had been clarified. 20 A second problem was the lack of confidence reliability of the Agriculture Department's in the export demand. figures on (For reasons, the Deputies Group were agreed see ch. 4.) Members of that there were inaccura- cies in the system but did not agree tion or even on whether it could b on corrective ac- done. much discussion of possible improvements, In spite of taKen except to consult with U.S. trading no steps were partners in an effort to get better information. The Economic Policy Board cc recting inaccuracies in the expressed concern about sytem, especially figures for exports to the European Community. representative met with Community An Agriculture officials to get cooperation on the deletion of but failed inflated figures from the reporting system. The ad hoc approval group used additional other sources to modify Agriculture's data from export figures. The group attempted, through this means, to avoid unusual transactions, stockpiling, and other abnormal trends. 21 CHAPTIER 3 HANDLING OF 1975 SOVIET GRAIN SALES I'TRODUCTION The Soviet Union's purchase of approximately tons of U.S. grains in 1975 was in some 16.5 million ways similar to its 1972 and 1974 purchases and accentuated policy and implementation weaknesses. many of the previous was again surprised by the size and The executive branch makeup of the purchases-- despite the existence of an export reporting communication with U.S. grain exporters, system, better lations with the Soviet Union. and improved re- There were, however, several notable differences in tne 1975 purchases; especially as compared situation: to the 1972 (1) Soviet purchases were not facilitated Government credits, but were made strictly by U.S. (', an export reporting system was on a cash basis; outcome of the 1972 sales; (3) the operative, largely as an 1973 had been signed by the Soviet Agricultural Agreement of Union and the United States (committing oth parties to cultural information); (4) tne salesexchanging valuaole agri- cutive branch agencies, whereas, in involved several exe- 1972 the Department of Agriculture was the primary agency Government export subsidies were paid involved; (5) no U.S. wheat prices were two to three times to export firms; (6) higher than in 1972; and (7) at the time of the sales, there what total U.S. supply would be, since was more doubt of production was uncertain and stocks were one-third as high in 1972. To better understand the circumstances Soviet reemergence in the U.S. grain surrounding nigh level Agriculture, State, and market, we asked such key questions as: white House ofLicials -- When and how did the U.S. Government first receive any indication of Soviet buying intentions? -- How effective, as an early warning system, had the agricultural export reporting system proved to be? -- Had there been any formal or informal between grain exporters and the U.S. communications If so, with what results? Government? 22 -- Had there been any furmal or informal communications between the U.S. and the U.S.S.R. Governments? If so, with what results? -- What was the nature of U.S. Government involvement in the grain sales? -- How accurate were U.S. Government estimates of Soviet grain purchases in 1975? -- how accurate were U.S. Government forecasts of Soviet crop production? -- Had the U.S. Government developed any contingency plans in the event the Soviet purchases exceeded estimates and precipitated a potential short-supply/ high price situation? Had the U.S. Government, in anticipation of such a development, completed impact analyses reflecting the differing effects of varying sizes of purchases on the domestic economy? -- What were the price and other impacts of the sales? -- Was there any interagency monitoring of the current sales? GOVERNMENT'S DISCOVERY OF PURCHASE PLANS We found that the Government had not received advanced notice of the nature and extent of Soviet buying intentions. U.S. officials learned through a published news story (Journal of Commerce, July 7) that Soviet representatives were ar- ranging for shipments of rain from Canadian and U.S. ports. Before then there had been only one or two clues to the Soviet crop situation: U.S. Air Force reports of deterior- ating weather conditions in Russia, and rumors that the Soviet Government was selling considerable amounts of gold in the world market for hard currency. EARLY WARNING SYSTEM With the ending in March 1975 of the Prior Approval System, the only potential mechanism for alerting the Government to extraordinary sales was the agricultural export reporting system. This system failed to provide any advance 23 notice. Voluntary submission of Government-requested from major grain companies did not constitute data warning system. a formal early Government officials contended that tne system was not designed to reflect Soviet--or any foreign--buying L il after a written contract had been intentions entered into and re- ported to the Dep tment of Agriculture. The fact remains, however, that in 1975, 1974, there was no formal system to provide as in 1972 and decisionmakers with accurate, timely and complete information. there was the same uncertainty and confusion As a result, as had been the case with earlier sales. U.S. CONTACTS WITH EXPORTERS We found that the Agriculture Department informal communications had established with multinational grain exporters several months before the impending grain sales were publi- cized. These informal contacts also failed warning clues to Soviet intentions. to provide any CONTACTS BETWEEN U.S.-U.S.S.R. GOVERNMENTS Throughout the summer of 1975, there cussions between U.S. and Soviet officials,were informal dis- and Moscow. But despite repeated U.S. botn in Washington requests about the probable extent of Soviet purchases, for nformation agreements to provide such data under and despite the 1973 Agricultural Cooperation Agreement, no satisfactory answers were obtained until August. At that time Soviet officials the first time preliminary production data provided for on area zones with a breakdown by types of grain. U.S. ESTIMATES OF SOVIET GRA;-N PRODUCTION AND DEMAI western agricultural specialists in Moscow counting poor weather reports, predicted in May, dis- Soviet Union. The first offical U.S. a bumper crop for the crop yield, published in June, called estimate of the Soviet for 200 million tons. An earlier USDA preseason projection of 210 million tons was based on a "normal" weather assumption. After the Soviet crop data was provided, subsequent estimates downward on several occasions, with the were revised last (December 9, 1975) being set at 137 million tons. 24 The initial U.S. forecasts of Soviet grain demand, based on informal discussions with U.S. rain exporters and with Soviet embassy officials, anticipated Soviet purchases of U.S. grain of approximately 5 million tons. It snould be noted that forecasting grain supply and de- mand is always complicated by the difficulties of predicting weather condiCions at critical periods. The Soviet Union's needs for extraordinarily lan;e quantities of U.S. grain in 1975 can be traced primarily to the drought in the spring and summer of 1975. The U.S. response to the sales was also shaped to some extent by uncertainty about how the weather would affect the size of the available U.S. crop. Chapter 5 provides a detailed discussion of the problems of forecasting grain demand. CONTINGENCY PLANS-IMPACT ANALYSES We found that neither contingency plans nor impact analyses ad been developed prior to July 1975. Therefore, when it became clear that the Soviet Government would be buying unspecified larger-than-anticipated quantities, the executive branch was not prepared to determine quickly what acceptable level: of exports would be. PRICE AND OTHER IMPACTS OF SALES Th.? effect of the sales on U.S. food prices is by far the hmost controversial issue in the U.S.-U.S.S.R. grain trade. The 1972 sales were a factor in the highest food price in- creases since 1947. It should be noted, however, that in that year total U.S. grain exports to other countries, es- pecially Japan and Western Europe, were considerably niigher than the shipments to the U.S.S.R., and must bear a propor- tional share of the responsibility for the food price in- creases. Nevertheless, the news of the mid-July 1975 sales pro- voked a wave of protests based on fears--which proved to be exaggerated--that they would have the same domestic infla- tionary repercussions as those in 1972. Due to the volatility of the commodities market, the mere announcement of Soviet entrance tends to send commodity prices up. For example, the cash price of wheat in Kansas City rose 25 from $.08 to $3.96 per bushel from July 1 to Co-.1 in Cnicag- jumped from $2.78 to $3.14 per July 29, 1975. nigher cost of corn, the basic livestock feed, bushel. The helped to keep the price of fattened cattle from dropping as much been anticipated. as had The chairman of before a congressionalthe Federal Reserve Board in testimony committee on September 4, that U.S. grain sales to the Soviet Union in 1975, said 1975 might lead to a rise in food prices on the order of 2 or 2-1/2 percent in 1976. A study by Agriculture's Economic Research Service, in late July 1975 estimat d that a sale of approximately 10 million tons would meat a 1 to 1-1/2 percent increase, about $3-4 billion in additional food costs for consumers. A similar study, prepared for the use of the Economic Committee in Congress, making a projectionJoint based on a 10-million ton ale, projected the resulting food prices at 1.0%. The study projected a rise rise in retail in farm prices of feedgrains and wheat of 10-12 percent and a rise in realized net farm income of 10 percent. The income gain was expected to go mainly to crop producers, while producers might face possible losses. livestock Actually, food prices rose only slightly wonths. That slight rise may be attributable in subsequent to an improved supply situation reflecting generally high levels of world production. The sales also may have had an imFct n foreign policy. Although executive branch officials generally considered the sales to be a separate issue from overall U.S. with the Soviet Union, one official claimed that relations fluenced the Soviet Union not to interfere with the sale in- the U.S.- engineered 1975 Sinai Agreement. SUMMARY OF EVENTS, 1975 GRAIN SALES The following is a brief narrative summary of events. For a more detailed chronology, see Vol. II, Appendix n. Only a week after the first sale of 2 million tons announced on July 16, the International Longshoreman's was Association (ILA) voted to refuse to load American Canadian grain on ships destined for Russia. They and cated that the ban would be lifted if "the interestsindi- of the American people were adequately protected." 26 The next day the Under Secretary of Agriculture asked exporters to notify the Department before making major grain sales to the Soviet Union. Two other maritime unions--the Seafarer's Association and the Maritime Engineers Benevolent Association--a'so voted to refuse to load grain unless assured the sales would not substantially raise food prices. The unions were also openly dissatisfied with the Soviet Government's reluctance to agree to a new set of shipping rates more favorable to American shipping. (See Vol. IT, Appendix K) There was a brief work stoppage on August 7, followed by another on August 18, at which point a temporary Federal Court injunction on behalf of the shippers was issued. There was strong criticism of the boycott from the admin- istration and from farm organizations. The boycott had the complete support of the A.F.L.-C.I.O., which took the position that the U.S. was facing the prospect of massive grain sales to the Soviet Union with no assurance that national interests would be properly safegaurded. The A.F.L.-C.I.O. pressed for full disclosure of the ex- tent of the prospective sales, a policy to protect American companies from unfair competition with state-owned monopolies, an offensive policy to deal with commodity cartels such as the OPEC rations, and an investigation of the extent to which American corporations ae participating in and supporting such cartels. On August 11 the Secretary of Agriculture called on ex- porters to withhold further sales to the Soviet Union until U.S. crop production figures were known. The announcement pleased labor, consumer groups, and various members of Congress who nad urged government action out of concern about food prices and the availability of U.S. commodities. Farm spokesman expressed strong disapproval, based partly on the fear of extensive government intervention should sini- lar situations arise in the future. Farmers were also afraid that the suspension would force traditional buyers to seek other sources ot supply, and that once sales resumed, farm prices would e lowered. 27 Various veiwpoints on grain export policy were expressed at hearings July 31 and August 1, 1975, before the Senate Committee on Government Operations, Permanent Subcommittee on Investigations. The Assistant Secretary of Agriculture for International Affairs and Commod .ty Programs said that "American farmers must export in order to maintain the incen- tives to generate *** high levels of roduction ***. Any potential impact on prices must be balanced against the need for farmers to receive full returns***." Arguing for a tempc-ary sales limitation, pending crop developments, John A. Schnittker, former Under Secretary of Agriculture, cited the risk of serious food price inflation. He went on to say: "*** while export sales should be care- fully managed to preserve relatively stable food prices, farm price support ought to be raised substantially to pro- tect farmers." A number of critical decisions were made on September 9 and 10. After a meeting between AFL-CIO President George Meany and the President, it was announced that the President would explore the possibility of a long-term grain purchasing agreement with Soviet Union. At the same time the President extended until i]-October 1975 the moratorium on sales. As of that date, the Soviet Union had purchased 10.2 million tons of grain. In response to the President's announcement, the AFL- CIO announced the lifting of the boycott. The next day, without a public announcement, the State Department requested through the Polish Embassy that Poland halt grain buying in the U.S. (See below, pp. 29 and 30.) News stories of the suspension did not begin to surface until September 22. Also on September 10, the Under Secretary of state for Economic Affairs left for Moscow to begin negotiations on the long-term grain trade agreement. The President also announced the creation of a special board to consider related questions of agricultural exports and domestic food prices. Agriculture had been the Government agency primarily involved in the sales during July 1975. However, the Economic Policy Board and the Deputies Group had begun meeting 28 regularly in mid-July to discuss the grain sales, and it was the Board which made the decision to order suspension of the sales in mid-August. The decision was reluctantly agreed to and announced by the Secretary of Agriculture, a Board member. Another Board member, the Secretary of Labor, was the primary negotiator between the AFL-CIO and the Government con- cerning the llgshoremans boycott, revised shipping rates, and the long-term agreement. The new unit created on September 10 was the Economic Policy Board/National Security Council Food Committee. It was expected to develop negotiating strategy for the grain sales and to monitor those negotiations. It should be noted that the new Food Committee involved little change in membership. Nine of the ten members of the Food Committee were also members of the 14-member Economic Policy Board. One important difference was that new group was chaired jointly by the Secretaries of State and the Treasury. This enabled the State Department to initiate and carry out the grain embargo on Poland, over the objections of the Secre- tary of Agriculture. SUSPENSION OF GRAIN SALES TO POLAND The official explanation of the suspension of grain sales to Poland was that the suspension was necessary until the size of the U.S. corn crop became clear. There has been speculation, however, that the decision to suspend grain sales to Poland was taken primarily to put pressure on the Soviet Union to cooperate in negotiating the long-term purchasing agreement. The suspension met with some criticism because of the secrecy under which it was imposed and because of its possible conflict with U.S. international treaty obligations. Foreign Agricultural Service officials said that this type of suspen- sion was arbitrary and contrary to: (1) U.S. initiatives to expand its trade relationship with the Polish Government, and (2) the General Agreement of Tariffs and Trade (GATT), of which Poland is a member. The latter agreement is multilateral and therefore the United States is bound to abide by set criteria covering em- bargoes stemming from short supply situations. 29 On October 10 the President announced he was lifting the suspension on sales because the Agriculture Department's October 1 crop estimates showed record harvests for wheat and corn. The Under Secretary of State for Economic Affairs had announced on September 16 that the Soviet Government had agreed in principle to a long-term grain trade agreement, and the text of the U.S.-Soviet agreement on shipping rates of $16 a ton was released three days later. U.S.-U.S.S.R. LONG-TERM GRAIN PURCHASING AGREEMENT-OF 975 The long-term grain purchasing agreement between the United States and Russia was signed on October 20, 1975, to take effect on October 1, 1976. This agreement committed the Soviet Union to purchase a minimum of 6 million tons of wheat and corn annually through 1981, and allows the Russians to purchase an additional 2 million tons annually without Gov- ernment consultation, plus additional amounts with consulta- tion. The United States may reduce the quantity to be sold in any one crop year if the estimated total U.S. grain supply is less than 225 million tons. Shipments are to be in accord with the U.S.-Soviet Maritime Agreement. Executive branch officials justified signing the agree- ment on the grounds that it regularizes Soviet purchases and minimizes associated disruptions. Officials also argued that the agreement: -- assures U.S. farmers a market in Russia for 6-million tons of wheat cnd corn a year for the next 5 years; -- provides additional assured demand which will assist farmers in making planting decisions; -- protects U.S. livestock producers and consumers and other foreign customers from large Russian purchases of U.S. grain without prior consultation; -- provides the United States with $4 billion to $5 billion in potential foreign exchange earnings (at prevailing prices) over the next 5 years; -- assures that sales under the agreement will take place at the prevailing market price through tradi- tional exporter channels; 30 -- reduces price fluctuations in United States and world markets by smoothing out Soviet purchases oL U.S. grain, and thus protects American farmers, consumers, and live- stock producers as well as foreign customers; -- stimulates not only agriculture but such related enter- prises as farm machinery and ocean transport; and -- strengthens cooperation between the two countries by stabilizing the important grain trade between them. 4 Farmer representatives have been highly critical of the agreement, which they view as another government export con- trol that will restrict exports and markets and depress prices. One spokesman accused the administration of yielding to unjustified pressure from consumer groups and the maritime unions, and interfering unnecessarily in the grain market. Other critics of the agreement, including consumers and congressmen, contend that it has created additional uncer- tainty rather than resolving the disruptions associated with massive grain purchases. Various criticisms leveled at the agreement include: -- limits the President's authority to impose short--supply export controls on corn and wheat. -- fails to include substitutable commodities, such as soybeans and soybean meal. -- fails to clearly cite the authority for such an agree- ment. -- was negotiated and signed without the advice and con- sent of the Congress. -- is unenforceable because grain is a fungible commodity distributed by multinational corporations whose market activities are not regulated by the agreement. -- fails to provide for Soviet disclosure of forward estimates and stocks as promised in the 1973 Joint Agricultural Cooperation Agreement. -- fails to protect U.S. domestic consumer interests by not restraining the volume of Soviet sales in the event such sales create unacceptably high levels of infla- tionary food prices domestically. 31 -- fails to comment on the potential for shipments of subsidized grain in the event market conditions change during the term of the agreement. -- represents increasing government intervention in the market, gives the Soviets privileged market status, and establishes a precedent for government-to-govern- ment, long-term grain purchasing contracts that may cause other major importers of U.S. grain to seek such agreements and privileged market status. Despite considerable discussion about linking an agree- ment on Soviet oil sales to the U.S. grain agreement, no such accord has been finalized. Negotiations on a long-term agree- ment for Soviet oil exports to the U.S. are continuing. (See Vol. II, Appendix I, for text of the Agreement.) Legality of the Long-Term Agreemert The decision to send negotiators to Moscow was apparently made before the legal jusitification of a grain agreement was determined. The State Department did not complete its legal analysis until several weeks after the agreement was signed. According to this analysis: -- The legal basis for this executive agreement is the President's authority under Article II of the Con- stitution to negotiate and conclude appropriate agree- ments with foreign governments. -- It is consistent with the Agricultural Marketing Act of 1946, the Export Administration Act of 1969, as amended, the General Agreement on Tariffs and Trade and all other relevant U.S. statutes. -- The agreement is legally binding on the governments involved, but upon no individual under U.S. domestic laws. -- The U.S. Government will not interfere with any private commercial transaction made under the agreement and will, in fact, facilitate such transactions. -- The President, however, does retain the authority to impose export controls under the Export Adminis- tration Act, if such controlv become necessary. 32 GAO'S LEGAL ANALYSIS OF AGREEMENT AND VOLUNTARY CONTROLS Following the grain agreement and the Government's voluntary export restraints in 1975, the Congress expressed concern over their legality. Consequently, we prepared a legal analysis of the Government's actions in these two instances. (The complete analysis appears in Vol. II, Appendix J.) From our analysis we concluded that: -- The President has authority under the constitution to negotiate international agreements affecting for- eign commerce, notwithstanding the constitutional responsibility of the Congress "to regulate Commerce with foreign nations." -- The suspension of sales to the Soviet Union was based on voluntary action by exporters at the request of the executive branch. Since the suspension was not legally binding, it was a lawful exercise of executive branch authority. --The President has independent constitutional authority to enter into such an executive agreement as the long-term Soviet grain purchasing agreement which af- fects foreiqn commerce and such action on his part is not precluded by the Export Administration Act. However, the U.S. Government does retain its statutory authority under the Export Administration Act to im- pose export controls should Soviet purchases be of the nature to necessitate such actions. -- The President's authority to institute legally binding and enforceable export controls is derived from and dependent upon the authority delegated to him by the Congress in the Export Administration Act. The National Association of Wheat Growers has considered taking legal action against the executive branch because of the Agreement and the grain sales moritorium that preceded it. The Association believes that by establishing terms on which grain commerce between the two countries is to be con- ducted, the agreement regulates commerce, which the President cannot do without congressional consent. The Association rejects the argument that the agreement does not involve regu- lation of commerce in that it does not create restraints on commerce under domestic law. 33 The State Department has acknowledged that whatever President's inherent authority to affect commerce the foreign relations powers may be, that authority under his may be pre- empted by legislation--which, according to State, occurred in this case. The Association believes, has not however, that the President's authority has been preempted by the Export Administration Act, which governs the regulation U.S. exports. of The Association holds that the prior approval implemented in 1974 and the 1975 sales moritorium system sistent with the Export Administration Act. The are incon- Act provides that nothing in the Act or in the rules and regulations thereunder should be construed to require authority or permis- sion to export, except where required by the President the provisions of the Act. under The Association may also take legal action eral grain exporters. It contends the exporters against sev- violated the Sherman (Antitrust) Act when they may have voluntarily agreed to cease exports of grain during the 1974 and 1975 moratorium--the implication being that the exporters not have agreed to stop their exports unless all would agreed. SUMMARY OF GOVERNMENT RESPONSE TO 1975 GRAIN SALE CRISIS The 1975 grain sales to Russia, in exceptionally quantities, caught the Government offguard and without large adequate data base, background studies, or policy an guidelines. Because of this lack of preparation, uncertainty total U.S. grain production, and unreliable estimates over Soviet production prospects, the Governmert had of its responses. to improvise The July 24 request for prior sale contracts created an informal notification of major grain prior approval system. The latter requests for suspensions of sales to Poland fllowed. Russia and to In taking these steps, the Government was forced modify its reiterated commitment to a free market to economy with minimum government intervention, in order to potential domestic and international disruptions. minimize 34 Significant segments of society--farmers, labor, con- sumers, and legislators--were at odds over the handling of the grain sales, specifically, and over grain export policy, generally. Labor leadership and boycotting unions exerted powerful influence over negotiated shipping rates and the long-term grain purchasing agreement with the Soviet Union. This agreement and the one signed with Poland were hailed in some quarters, criticized sharply in others. GAO's assessment of the Government's 1974 and 1975 experiences with the grain sales, as they bear on agricul- tural export policy, is set forth in Chapter 6. DEVELOPMENTS IN 1976 On March 5, 1976 the President again reorganized food policy groups. The Economic Policy Board/National Security Council Food Committee was consolidated with the International Food Review Group (established in November 1974, primarily to coordinate follow up to the World Food Conference). The new consolidated unit was the Agricultural Policy Committee, chaired by the Secretary of Agriculture. The other memiers included: Secretaries of State, Treasury, and Commerce; Presidential Assistants for Economic Affairs, Domes- tic Affairs, National Security Affairs, and Consumer Affairs; Chairman of the Council of Economic Advisers; Director of the Office of Management and Budget, and the Executive Director of the Council on International Economic Policy. The appointment of the Secretary of Agriculture to the chairmanship of the new Committee appeared to return Agri- culture to the position of primary maker of food policy. This position had been eroded by the events of July, August, and September 1975. The Agricultural Policy Committee was formed to con- solidate agricultural policymaking into one group reporting directly to and advising the President on the formulation, coordination and implementation of all agricultural policy, including both domestic and international issues. The Deputies Group became the Agricultural Policy Working Group, and provided staff assistance by monitoring agricul- tural developments and preparing issue papers and other analyses. 35 No major foreign agricultural during 1976 to test the operational policy crises erupted capabilities of the Agri- culture Policy Committee. According to White officials, the Committee met rarely and then House staff only for cere- monial reasons. These officials stated that Committee's existence, the Economic Policy despite the Board President reviewed and decided major agricultural of the policy matters throughout 1976. The Economic Policy tinually received analyses of major policy Board con- issues from the staff level Agricultural Policy Working Group. The complexity of food policy is illustrated fact that two executive branch groups and by the several subgroups, composed of representatives from as many as agencies, have dealt with food policy. The 26 government units and the shifts in recent years attest creation of new to of developing effective food policy mechanisms. the difficulties During 1976, the first year of operation of term purchasing agreement, the Soviet Union the long- orderly manner about 6 million tons of U.S. purchased in an This was approximately the minimum amount wheat and corn. required under the agreement. Because of significant increases in Soviet and world grain supplies and the continuing high production, no unusual circumstances emerged level of U.S. in 1976 to test the agreement's endurance. 36 CHAPTER 4 AGRICULTURAL EXPORT REPORTING SYSTEM Evolution of Export Reporting System For approximately three decades prior to the 1972 Russian Sales, the U.S. had virtually continuous agricultural sur- pluses. Except for brief intervals, bountiful surplus enabled the U.S. to satisfy domestic and foreign demands and retain large quantities as a domestic buffer stock. Government policy focused on problems of over-supply and low farm prices, and ways to expand exports. There was rarely a need to keep close track of exports, and no system existed to do so. Agriculture's Interagency Commodity Estimate Committees then and now develop projections for total crop production, domestic use, exportation, and arryover. Crop and marketing year estimates are revised periodically to reflect various changes in supply and demand. Before 1972, errors in esti- mates of foreign demand caused little concern in the Govern- ment because surpluses always existed to satisfy increases in demand not reflected in estimates. Another means of assessing export levels prior to 1972 was by reviewing export shipment data compiled by the Census Bureau and the Agricultural Marketing Service. However, data provided b these two agencies has never been current. Because a 1 tc .- month time lag usually exists in the publi- cation of this information, it is of little use to decision- makers faced %w.h assessing current crises. It is, of course, useful in analyzing historical records and trends. Some agricultural export data also has been available as a result of past and current government concessional ex- port programs. Between 1949 and 1967, the Wheat Export Sub- sidy program provided urrent export sales information, as did corn, feedgrains, ice and tobacco subsidy programs which are either being phased out or are terminated. According to Agriculture, data on export sales activity under P.L. 480 and the CC Sales Program has also been available for the past 20 years. Although all of the above programs provided export sales information, their primary purpose was not data collection. As a conisequence, such information was generally not utilized 37 as a means of monitoring the export market, but used almost solely to verify qualification to participate export programs. in one of the The only other means of developing export prior to 1972 was Agriculture's market information intelligence ties, primarily reports from the Agricultural activi- conversations with grain exporters and attaches and ture has for many years based its export importers. Agricul- informal communication with these groups estimates on its export data. Agriculture officials and on historical export estimates were based primarily informed us that USDA on such factors as for- eign production prospects, likely consumption requirements, existing reserve stocks, and prospective available for export in exporting countries.quantities of grain only rough approximation of export These yielded demand. analytical model has existed for developing N specific more refined data. The Foreign Agricultural Service's tor for Commercial Export Programs Assistant Administra- when he wrote in 1975. summed up the situation "It is really Sales Reports provednot surprising that the Export difficult to interpret. Until recently no such data existed. of public cr official interest Pe-icds of commodities have been highly ininfrequent-- export sales ususally restricted to wartime or rare peace- time intervals of short commodity supplies, and no systematic effort was made to monitor them. Commodity analysts are now confronted statistical tool. They need time to with a new test Reliability under various market conditionsits well as to explore its possibilities as casting help. as a fore- Export sales data has been available accidentially--and spasmodically--in only the usually as a byproduct of one or another past, the export assistance programs for of agricultural commodities* * Immediately following the 1972 grain creased inside and outside government sales, pressure in- for the development of an export reporting system to provide current, accurate and reliable export information. Agriculture opposed to it. They believed that officials were the 1972 sales were highly unusual and that situations requiring current export data 38 occurred too infrequently to justify the costs of adminis- tering such a program. It was the mounting concern over strong foreign demand for U.S. soybeans in the Spring of 1973 that led Agri- culture to announce its intention to establish a voluntary export reporting system. However, the increasingly critical soybean supply condition preempted such a voluntary system. COMMERCE'S EXPORT REPORTING SYSTEM On June 13, 1973, the President authorized Commerce to establish a temporary mandatory export reporting system. Under the Export Administration Act of 1969, Agriculture assisted in developing the system, under which exporters were required to report sales contracted for shipment in the coming crop year for soybeans, cottonseed, and their products. A variety of problems plagued the system while it was administered by Commerce. For example, Commerce's export reports differed consistently with Agriculture's interagency export estimates. Commerce's export reports reflected soy- bean and soybean meal export sales considerably in excess of levels projected by Agriculture's interagency estimates com- mittee. Making an accurate assessment was crucial to decision- making. For example, if Commerce's xport reports were cor- rect, most of the Nation's soybean crop for 1973-74 had been committed for export by July 1973. The Secretary of Commerce based his judgment on these figures, rather than on Agri- culture's estimates, when he decided on June 21, 1973, to impose export controls on soybean and cottonseed exports and the related products. These controls were not lifted until October 1, 1973. Some Agriculture officials claimed that Commerce's statistics were unrealistically inflated because foreign importers were overbuying in anticipation of having their contracts cut by export controls. These officials also con- tended that grain exporters were registering grain for ex- port which would eventually be resold to the domestic market. However, in an August 1973 meeting involving Commerce, Agri- culture, and the grain trade, exporters insisted that all export sales reported were bonafide contracts that would be fulfilled. 39 The failure of Commerce and Agriculture to reconcile their differences over the accuracy of reported exports was due, in p. t, to an interagency conflict that emerged over the question of which agency was ultimately responsible for interpreting export information gathered by the Office of Export Administration. Agriculture contended that it was responsible because of its extensive experience in grain export marketing. Commerce maintained that it was respon- sible because of its short-supply authority under the Export Administration Act of 1969 and the Presidential directive of June 13, 1973, ordering it to establish an agricultural port reporting system. ex- Mandatory Exort Data Reporting System, Responsibility Given to Agriculture The problems with accuracy of reported export data remained unresolved and the debate over expected export amounts continued into the Fall of 1973. In August 1973, the Agricultural Act of 1970 was amended to authorize the establishment of a mandatory export reporting system in the Department of Agriculture. In Congressional hearings before its passage, Agricul- ture officials reiterated opposition to mandatory export re- porting, but began in October to develop a system to comply with the new law. The new system d1i not become fully opera- tive until November 1973. Under the Act, all exporters of wheat and wheat flour, feed grains, oil seeds, cotton and related commodity pro- ducts (as well as other commodities designated in need of export reporting by the Secretary of Agriculture) are quired to provide Agriculture wth weekly export sales re- Information supplied by exporters includes: data. (a) type class and quantity of the commodity sought to be exported, (b) the marketing year of shipment, and (c) destination, if known. All exporters of agricultural commodities produced in the United States are also required, upcn request of the Secretary of Agriculture, to immediately report to the Department ditional export sales related information. The Secretaryany ad- also empowered with the authority to modify weekly export is reporting to monthly export reporting if he determines the domestic supply of a commodity is "substantially inthat excess" of the quantity needed to satisfy domestic utilization and foreign demand. Such a determination would also have to 40 be made with the understanding that requiring exports to be reported on a weekly basis would "unduly hamper export sales." Individual exporter sales data is processed as confi- dential information by Agriculture and aggregated before release for public information in the Weekly Export Sales Report. Failure knowingly to report export sales data as required by the Act is a crime punishable by a fine of not more than $25,000 or imprisonment of not more than 1 year, or both. Agriculture publishes its Export Sales Reporting regulations in compliance with the rule-making procedures of the Administrative Precedures Act. Under this authority it also issues instructions and reporting forms to exporters for filing export reports. Specific types of export data supplied by exporters to Agriculture include: new sales, buy-backs or cancellations, purchases from foreign sellers, changes (marketihg year, destinations, etc.), export shipments against contracts, and net outstanding sales (unshipped balances) at the end of the reporting period, usually weekly. The Department also periodically requests exporters to furnish contract information to be used as a basis for double- checking summary export reports, for conductinr field reviews of exporter adherence to export reporting system regulations, and for developing important data to evaluate the effective- ness of the export reporting system. Approximately 22 professional and support staff operating within an annual budget of $520,000 1/ administer the Export Reporting ystnm. Use of Export Reporting System According to Agriculture's General Sales Manager's Office (GSMO), the Department uses export sales information compiled under section 812 of the Agricultural Act of 1970, as added by the Agriculture Act of 1973, in the following way. 1/The budget for the coming fiscal year is expected to remain unchanged. Prior to the current fiscal year the system operated under a budget of $511,000 in FY 76 and $463,000 in FY 75. Source: Mr. Thomas McDonald, Budget Officer of the General Sales Manager's office. 41 "Each week the Department published data re- ceived in compilation form along with analy- tical comment designed to highlight impor ant market activity and to relate the data to the worldwide supply and demand situation. Thus, export sales data has become integrated ,ith the worldwide market intelligence sys- tem operating through agricultural attaches and the Washingtcn staff of analysts and export program officials. ***" Shifts in Organizational Responsibilit Within the=AgricuturaI epartment At various periods during the export reporting system's 3-year existence within Agriculture, three different internal units have been given the responsibility for administering the system. The Statistical Reporting Service operated it from September 1973 through September 1974. The Foreign Agricultural Service took over from October 1974 until March 1976. Since March 1976, the newly created Office of General Sales Manager has nad responsibility for the system, along with various Government financed agricultural export programs. From the inception of the system, the Statistical Re- porting Service experienced difficulties. Weekly export reports continually varied, reflecting export volumes that exceeded departmental estimates. The statisticians who operated the system were unable to provide the necessary analysis of exporters' data, and were unable to manage the system in a a manner consistent with the Congress' legisla- tive intent. As the U.S. corn and wheat situation deteriorated in August and September 1974 amid rumors of impending Soviet purchases, the Foreign Agricultural Service--which was al- ready performing some analysis of export data--was assigned full responsibility for the export reporting system. The Secretary of Agriculture's October 1974 memorandum trans- ferring responsibility cited the unit's analytical experience as a key factor in the operational shift. It had become in- creasingly clear throughout late 1973 and 1974 that mere data 42 collection and publication were insufficient, given the complex and ever-changing character of export sales data. The Foreign Agricultural Service had already set up its own daily export reporting system in September, 1974 to: (a) supplement the mandatory weekly export reporting system; (b) provide more timely export data; (c) ensure closer monitoring of export sales; and (d) function as an "early-warning system" for Executive Branch decisionmakers. Although initially conceived as a temporary monitoring action, the daily export reporting system has remained in effect since inception. The quantity qualification for daily reporting of various agricultural commodities was revised up- ward from 50,000 tons to 100,000 tons as the U.S. supply situation improved over the past year and a half. Unlike the weekly export reporting system, where exporters submit only written export reports to Agriculture, the daily system re- quires exporters to telephone export information for sales in excess of certain prescribed quantities. They are then required to submit written verification of their oral report to the Department within 24 hours. The daily export reporting system's importance has varied since its establishment. When supplies appear tight and foreign demand is high, its signifi- cance, as a decision-making tool, mounts. Voluntary Prior Approval System September, 1974 - March, 1975 The Foreign Agricultural Service also directed the vol- untary prior approval system for export sales which was set up in September 1974, to monitor the Soviet purchases. Until terminated in March 1975, this system functioned as part of Agriculture's overall export sales monitoring activites. At its inception exporters were requested to seek Agriculture's approval for sales of 50,000 tons or more to a single destin- ation in any one day or 100,000 tons or more to a single destination in one week. Although the system did not require that exporters seek approval of export sales on a mandatory basis, it was clear to all observers that failure to parti- cipate would ultimately have resulted in mandatory export controls througn implementation of the Export Administration Act of 1969, as amended. In a 1975 letter to the Chairman of the Senate Agricul- ture and Forestry Committee, the Secretary of Agriculture presented executive branch rationale for establishing the prior approval system: 43 "* * (In view of the extremely tight wheat and corn market situation that existed in September 1974) We had three choices: (1) stand firmly on the principle of completely free access to export markets and risk the strong possibility of legisla- tively imposed mandatory (export controls); (2) make a short supply determination on the assumption that the Act would be extended in the same form; or (3) devise a less drastic way for resolving the dilemma. We chose the third alternative and the voluntary prior approval program was the instrument for implementing it. At the same time it seemed a logical and feasible solution, supported generally by farmers, the grain trade, the public and the Congress * * * * * * the voluntary approval program did not em- bargo or control export trade. During the period of its operation (Oct. 1974 - March 1975), we ap- proved over 14 million tons of exports sales of grain and oilseeds. The program applied only to large sales and did not affect cargo quantities. At most, the program constituted a loose form of restraint and its principal effect was to cause some overly eager foreign buyers to pace their purchases. Except for the U.S.S.R. purchases, the program did not interfere with contracts already made; it did not harm our diplomatic relations with foreign countries; it did not damage our reputation as a dependable supplier of agricul- tural commodities in world markets. These would have been the inevitable consequences of the other alternatives available to s." The prior approval system's operation generated con- troversy. It was criticized by farmers, farm organizations and congressional representatives from corn aid wheat-pro- ducing States on grounds that it represented unnecessry government involvement in the market and that its existence adversely affected market prices. Prices dropped approxi- mately 35 - 40 percent during the 5 months of its operation. Although it was not clear at the time, the sharp drop in prices probably resulted from a number of other factors. One Agriculture official wrote later: 44 "Looking back now, it is apparent that the easing in the supply/demand situation was the re- sult of a number of economic factors unrelated to the voluntary approval system. World-wide reces- sion, balance of payments problems in many import- ing countries, consumer cut-backs in response to hiigh market prices, reductions in grain and feed use in the U.S. and elsewhere all combined to bring about adjustments in supply and demand." Advocates of the voluntary prior approval system were principally executive branch officials, commodity exporters and congressional representatives concerned about sustaining and expanding agricultural export markets. According to Agriculture officials, the voluntary prior approval system accomplished its principal goal--the pre- cluding of mandatory export controls which would have either completely cut U.S. agricult. r.l exports or partially but significantly restricted such exports. The system enabled the Department to be notified of large transactions before being finalized. It also ermitted Agriculture the oppor- tunity to initiate discussions with foreign buyers to develop mutually acceptable alternative plans for satisfying their import requirements. This type of communi, abion resulted in deferrihg some sales and staggering rchers into the following marketing year. The system also had a psychological effect on the market and, according to some officials, tended to restrain speculative export transactions and sales entered into as a hedge against the potential imposition of mandatory export controls. 1975 "Prior Appoval" System In mid-1975, the Agriculture Department introduced a modified informal version of the 1974 prior approval system. On July 24, 1975, grain export firms were asked to notify the Department before negotiating major grain sales to the Soviet Union. This ad hoc system remained in effect until August 11, 1975, when the Secretary of Agriculture asked grain exporters to withhold further sales to the Soviets until U.S. crop production levels became concrete. This temporary system was voluntary and, again, was designed to avoid the imposition of mandatory export controls (although such controls on exports to the Soviet Union and Poland did follow). The system placed the responsibility for compliance 45 on grain exporting company officials. No formal compliance system was established by Agriculture to determine whether all exporters were adhering to the Secretary's request. This temporary system extended an even more informal notification system that had been in existence for several months. Since late 1974 exporters had been requested by Agriculture to Keep the Department informed of major con- tracting activity with the Soviet Union either through the U.S. Embassy in Moscow, the Department of -Agriculture in Washington, or other appropriate sources. ExportReporting System Weaknesses The Export Reporting System was inm led after being transferred to the Foreign Agricultural vice in 1974 through the establishment of the daily system and the temporary im- position of the prior approval system. But the system's ef- fectiveness and usefulness remain somewhat uncertain. This is partly due to the fact that export contracts are frequently modified before shipments actually take place. The actual quantities shipped may be less than originally contracted for, delivery of the commodity may be deferred to he next mar- Keting year, another commodity may be substituted for the commodity originally contracted for, the destination may be changed, or purchases from foreign sellers may be used to fulfill export sales contracts. We determined several causes for decreases in export contract quantities after contracts were reported to Agri- culture. These causes included: -- original quantities contracted for may be based on estimates of maximum needs rather than probable needs; -- original quantities contracted for may be based on anticipation of the imposition of U.S. Government export controls; -- there may be hedging to protect exporters cash or futures market position; -- with a drop in price of commodity, it is more advan- -ageous for a buyer to cancel or modify the original contract; -- a foreign buyer's inability to pay or take delivery or a seller's inability to deliver; and 46 --poor quality grain. The above demonstrates that the reporting system-- established to provide accurate, timely, and reliable export data--actually provides data that is continuously su ,,ct to change. For this reason it is not functioning as the e rly warning system originally envisioned by Congress. The Acting General Sales Manager addressed the issue in an August 1974 memorandum to the Foreign Agricultural Service Administrator: "It seems inevitable that any system of monitoring export sales will reflect inflated sales totals when there is fear of scarcity. Foreign buyers seek to protect their ultimate requirements and sellers are anxious to get as much business as possible recorded in case controls are imposed * * *. The problem is to interpret the motivation of the buyer--to decide whether he bought for direct consumption or for later re-sale--and there is no easy way to do this. Our short experience with the monitoring system sug- gests that we have created something of a monster-- a system which automatically inflates export sales in times of threatened scarcity and which doubt- lessly will have a reverse effect in times of sur- plus when low sale totals will encourage buyers to abstain in anticipation of still lower prices. Un- fortunately, I am afraid this is inherent in the human psychology that contributes to the making of markets. It is a problem that I hope will lessen as we become more familiar and experienced in the use of this new information factor. ntil then, I am afraid I have no better suggestion than to pro- ceed as we did last year--to use every opportunity to explain our interpretation of the reports and our evaluation of the supply situation." Because the issue of contract decreases has impacted significantly on the export market and on the credibility of the reporting system, Agriculture and other executive branch officials have considered the possibility of modifying reporting system regulations by requiring exporters to sub- mit written explanations for contract decreases and/or to penalize exporters who cancel for purely speculative or manipulative reasons. It is possible that such action could 47 minimize the amount of unnecessary or speculative contract changes and thus enhance the system's informational reli- ability and decisionmaking quality. After some consideration, Agriculture officials decided that the above action would result in giving the reporting system an unnecessary regulatory orientation which could ad- versely affect the flow of exports. Managers of the system have reiterated that their primary responsibility is to pro- vide export sales information without impeding the flow of exports. Therefore, they have no interest in requiring ex- porters to justify contract changes for fear that more re- liable information would result in restricted export flows. They also remain unwilling to temporarily modify the system on an experimental basis. The issue is particularly important during short-supply situations, when the Department's traditional orientation to- ward export promotion may color its assessment of export con- trols of a quasi-regulatory nature. The export promotion orientation may also interfere with the effective administra- tion of a short-supply monitoring function. In our interviews with Agriculture and other executive branch forecasting groups, we found that for forecasting pur- poses, the export data provided by Agriculture's export re- porting system had not been particularly useful. Responsible officials in these agencies said that because the export data provided b the system is constantly changing--either de- creasing or increasing--it does not provide a reliable repre- sentation of foreign demand by which forecasters can make accurate short-term forecasts for the relevant crop year. Internal Evaluations and Audits Each of the three groups responsible for administering the export data reporting system has been concerned with up- grading the data collection, and has found it difficult to accomplish. During its tenure, Commerce tried to improve the quality of its reports by auditing the firms which were providing the information and through a comprehensive management evaluation of the entire short-supply program. This evaluation, completed just before Agriculture assumed responsibility, revealed a var- iety of data base and management weaknesses. 48 Until 1976, Agriculture had initiated analyses of par- ticular problems, such as contract changes, but no formal eval- uation program. This may have been due to the system's limited budget, although some government officials attributed it to an inclination to avoid any modifications that might limit the flow of exports. The adminstrators have tried to operate the system effectively and efficiently, and attempts have been made to improve the quality of the data. Shortly after becoming responsible for the operation of the export reporting system, the Foreign Agricultural Ser- vice initiated field reviews in an effort to improve effective- ness. Teams of two to four staff members periodically visited reporting exporters to verify data furnished the Department and to instruct exporters in the proper procedures for submitting export sales data. Department officials particLpating in field reviews have also attempted to evaluate some o-ntract data as well as develop a better understanding of the exp, ':t market and export sales contracting in particular. Altk. ugh field reviews have been superficial and periodic they have provided the export reporting system's managers a means of improving operations short of a thorough program evaluati,.) and detailed internal audit. Recognizing that continuous contract changes are a nor- mal manifestation of traditional agricultural trade prac- tices, Government officials have attempted to improve their ability to interpret contract changes in an effort to eval- uate more effectively export data provided them. Their ef- forts have focused on contract modifications involving des- tination changes (known vs. unknown), pricing terms (flex- ible "basis" vs. fixed), relationship of seller to buyer, definition of an acceptable and reportable export sale, re- selling of export contracts, and comparison of export sales data to data received by the Bureau of Census and the Agricultural Marketing Service. In 1976 the Department for the first time established a program evaluation post to assess the system's operation. A study of contract cancellations due to pricing terms con- ducted by the system's program evaluation specialist con- cluded that for the period beginning April 13, 1975, and ending August 31, 1975: 1. More than 50 percent of corn basis-type contracts resulted in cancellations, while approximately 20 percent of corn fixed-price contracts were can- celled. 49 2, Approximately 75 percent of soybean cake and meal basis-type contracts were cancelled while about half this commodity's fixed-price sales were can- celled. 3. Overstatement of export sales reports is not lim- ited to basis-type contracts as originally believed. 4. During periods of declining prices there is a greater frequency of contract cancellations of both a basis- nd fixed-price nature with the rate of cancellation particularly higher among basis-price contracts. 5. Both basis-price and fixed-price contracts should be reported to the Department to provide a better picture of total export sales, even tnough there are times when the sales position is overstated. Although the above evaluation and its conclusions well as other analytical efforts have as contributed to under- standing the significance of export sales data, the ever- changing nature of export sales contract data continues to make the reporting system an unreliable early-warning system. Since October 1974, the following disclaimer has appeared on the cover of the Department's weekly U.S. Export Sales Report: "Outstanding export ales as reported by pri- vate exporters and compiled with other data in this release give a snapshot view of the current contracting scene. At any given tine in the course of a marKeting year outstanding sales do no: a consistent relationship to eventual export bear ship- ments. A meaningful export projection is not ob- tainable by the simple device of adding outstanding sales to exports to date. The latter data, alone, may provide a more reliable measure of current ex- port activity than may be derived from a year-to- year comparison of outstanding sales." In view of the continuing controversy associated the general unreliability of the export sales with data, Agri- culture's Office of Audit initiated an audit of the system in the Summer of 1975, The audit--on which a report was being developed in September 1976--had the following objectives: 50 -- to determine if the existing export sales reporting system is providing assurance that all export sales are being properly reported. --to ascertain the validity and accuracy of the individ- ual exporter's reports submitted, and determine what influence such transactions as cancellations, sales between affiliates, etc., have on these reports. --to determine how export sales data is being used (1) by Agriculture officials; (2) by individuals and com- panies rn the mailing list; and (3) by other Government agenci s. -- to evaluate the security for protecting the confiden- tiality of export sales data. -- to evaluate the Export Sales Division's field review system and procedures with a view towards determining whether the field reviews are a audit function that should be handled by the Office of Audit. In its January 1977 report the Office of Audit mad,? the following major conclusions concerning the export porting system's management and operation: 1. "Foreign buyers tend to view the export sales reporting system as a type of export control or at least a mechanism that will 'rigqg-' export controls; as a result there is ar centive to overcontract to assure adequate supplies in case contracts are cut as during the 1973 soybean em- bargo. Several European grain companies estab- lished subsidiaries in the U.S. primarily to report commitments through the export reporting system to protect against possible export controls. 2. There is a need to revise the Export Sales Re- porting Regulations to provide that a verbal trans- action supported by a trade or sales document (which according to trade practice will lead to a written agreement) be reported at the earliest possible opportunity. Basically, the Export Sales Reporting Regulations now define a reportable sales transaction as one that represents a ritten agree- ment between the buyer and the seller. However, the Office of Audit noted, according to trade practice, a sale occurs when verbal agreement is reached between the buyer and seller. The written agreement may sometimes follow the verbal sale by several weeks. In practice, verbal agreements were being reported. 51 3. The Department should change the designated weekly sporting period (currently Monday through Sunday) o reduce the elapsed time to the weekl- report Publication date (Thursday, 3 p.m.) This could en- hance the accuracy of the data reported ***. 4. Several exporters visited (by OA) were not main- taining complete records in accordance with the Export Sales Reporting Regulations. The exporters were unable to provide sales contracts because their U.S. offices only purchased and arranged shipment of commodities. As a result, (OA) was unable to trace the applicable sales contract to the reported transactions for verifying the accuracy of submitted reports. (The OA was rble to review shipping documents and verify sipments.) 5. Several Department officials, as well as other Government agencies, felt cancellation occurred most frequently between U.S. exporters and their affiliates. (OA's) review disclosed that can- cellations occurred almost as frequently with non- affiliates as with affiliates. 6. Current policies and procedures for evaluating and analyzing the export sales reporting data need to be broadened both in terms of improving the data base and evaluating the Irnner in which the export reporting information might be integrated into the.FAS and the ERS forecasting information system. Presently, export sales data is only beint utilized on as-needed basis by FAS Foreign Commodity Analysis. ERS only gains access to the data through a copy of the U.S. Export Sales Publication at the time of its official release. The Export Sales Division's ADP system does not have built in capability for cataloging, storing, retrieving and analyzing export data. 7. The Export Sales Division has not performed field reviews in a manner that best accomplishes the ob- jectives of such reviews. Although (OA) generally found the data accurate, (OA) noted field reviews were not always responsive in assuring that ex- porters thoroughly understood reporting regula- tions, nor have they provided a basis for up- dating the regulations. 8. The Department needs to change its procedures for releasing export sales reporting information. 52 Several exporters, on a regular basis, telephon- ically request and receive export sales infor- mation each Thursday at 3:00 p.m. EST, which is the time set for official release of the weekly publication. This could provide an advantage as against those not aware of the oppurtunity (who receive the written report sales 2 to 4 days later through the mail)." The Office of Aud't proposed the following recommen- dations to the Secretary of Agriculture to correct the above deficiencies in the export reporting system: 1. "Establishment of a task force co-chaired by the Director of Agricultural Economics and As- sistant Secretary for International Affairs and Commodity Program, with OGSM, FAS, ERS, ASCS, and other members as deemed necessary, or desigate a USDA coordinator, to evaluate data accumulated through the export sales re- porting system with the objective of utiliza- tion and integration into the FAS and ERS forecasting information system." The Office of Audit also suggested that the Task Force or coordinator should consider the following: "--Refine and further develop the ADP system for cataloging, storing, retrieving, and analyzing the data and provide capability of online hook- up for FAS and ERS forecasters to gain access to the raw aggregate data at the time of its official release. -- Reemphasize to reporting entities that the e- pressed policy of the Executive Branch of Govern- ment, including USDA, is to 'not' impose sanc- tions on exports and that if export controls are ever needed, reported export contracts will not be used as a basis for allocations. This would possibly deter foreign buyers from inflat- ing their import expectations to assure them- selves adequate supplies in the event of the introduction of export controls. --Require all reporting exporters to submit a written statement concerning: (1) their export operations; and (2) their affiliation with domestic and/or foreign corporations. Ex- porters should be classified or grouped accord- ing to their methods of operation, i.e., likeli- ness of performance or non-performance based 53 on current market conditions, or exporters who are only reporting for protection against possible export controls. -- Provide data users with interpretive analysis of what the export sales reporting system is, what it measures, and what represents in rela- tion to foreign demand for U.S. agricultural products. This could eliminate much of the fear over export controls when the reporting system indicates a short supply situation de- veloping. -- Take a poll of export sales data users, within and outside the Government, on suggestions for needed additional information that could be utilized in improving analyses and forecasting needs. Where practicable, expand the existing data base to require additional data, e.g., delivery period of shipment and the price and/or pricing mechanism of the contract. The data requirements should be constantly evaluated to minimize the collection of extraneous data." The Office of Audit suggested to the Office Sales Manager that it consider the following of General recommendations: 1. "Revise tne export sales reporting regulations to provire that a verbal transaction supported by a trader or sales document (which according to trade practice will lead to a written agree- ment) be reported at the earliest possible opportunity. 2. Study (in conjunction with the task force or co- ordinator) ways of changing the weekly report. Also develop ai ADP system with sufficient built- in edits, and improving the field data coliection system ***. 3. Require all reporting exporters to maintain tneir U.S. offices trader documents and/or in written sales contracts with support documenta- tion for every transaction reported to USDA, in accordance with established regulations. 4. Perform field reviews on an as-needed basis to assure that exp -ters thoroughly understand and 54 follow export reporting requirements, on those exporters that would have concentrating the impact on the composite weekly export greatest figures ***. 5. Designate an Export Sales Division with an alternate to handle policy staff member interpretation inquiries from the and regulation trade. This could eliminate some of the confusion porter level over policy and regulationat the ex- inter- pretations. 6. Strengthen the release of information procedures and channels by: -- Establishing, documenting, and following guide- lines which set forth the criteria which official information is to or basis on be released by ESD employees. -- Eliminating the practice of releasing sales information oer the telephone export on or after its official release immediately unless ESD is prepared and willing to provide the all (about 850) people on the mailingservice to list. 7. Release the reported daily sales public at the earliest possible information to the time after Depart- ment officials have been notified, e.g., a pess re- lease." Office of Audit officials discussed and recommendations with appropriate their conclusions atives and the Assistant Secretary Departmental represent- of Agriculture for Inter- national Affairs and Commodity Programs. retary generally agreed with the The Assistant Sec- study group to evaluate the export recommendation to appoint a and integration into forecasting sales data for utilization information systems. supported the recommendation to improve He Division's export reporting ADP the Export Sales system. general agreement with other recommendations He also expressed OA report. However, he did state appearing in the commendation on releasing daily that concerning the rec- had been released when possible sales data such information agreement. It was also noted in with individual exporter's had with the Assistant Secretary the discussion OA officials questions concerning the release "that there may be legal of daily sales information." Officials of the Foreign Agricultural General Sales Manager and Economic Service, Office of Research Service were in 55 general agreement with the majority of the Office of Audit's recommendations. OVERVIEW OF GAO'S EXPORTER SURVEY As part of our examination of the export reporting system, we surveyed agricultural commodity exporters to get their opinions on the export reporting system's management and administration and their attitudes on U.S. Government involvement in the agricultural export sector. A copy of our exporter questionnaire and a detailed analysis of exporter responses appear in Vol. II, Appendix G of this report. From information we requested on organization, sales, and contract procedures, we also hoped to develop a general description of the agricultural export industry as a whole. The 195 exporters who participated in the sur- vey were found to represent, in terms of sales and exports, almost all of the U.S. agricultural export industry. The firms surveyed encompass a wide range of enter- prises, from businesses doing a few thousand dollars in exports to multinational, billion-dollar corporations. Almost 30 of the firms claimed 1974 sales in excess of $100 million. Seven of the firms accounted for more than 60 percent of total 1974 sales. Exporters expressed a generally positive attituce toward the Export Sales Reporting System. For example, they acknowledged the Government's need to monitor export sales and did not find weekly sales reporting to be burdensome. They accorded the Reporting System a moderate degree of success in achieving its objective of providing accurate, timely, and reliable export statistics, and they rated Agriculture's weekly reports as generally useful. When asked to rank 10 forms by order of preference, that U.S. involvement in export markets might take, the exporters chose a reporting system similar to the present one over all other (and more extensive) forms of Goverrnment invoivement. The exporters' view of Government reporting, however, may well be more tolerant than enthusiastic, for they gen- erally opposed more stringent controls. For example, more firms opposed than supported the public disclosure of the terms of export sales contracts, even if information were agg- regated to protect individual exporter identities. They oppose having to submit written explanations for contract decreases and oppose even more the penalties f unjusti- fiable decreases. 56 Exporters were generally dissatisfied with past Gov- ernment actions which lead to contract cancellations or re- negotiations. They were generally satisfied with the vol- untary Prior Approval System--a mild, pre-contractual review of large volume export sales. If Prior Approval were re- established, however, exporters would prefer it to be temp- orary and voluntary, rather than permanent and mandatory. The exporters gave us detailed information about con- tract decreases, cancellations, modifications, and delivery deferrals. Approximately 20 percent of the quantities contracted for export in 1973-74 were eventually cancelled or deferred. Reasons cited for decreases included contract- ing for maximum rather than probable needs, overcontracting in anticipation of export controls, hedging to protect mar- ket positions, and disadvantageous price changes. More often than not, the decreases were attributed to actions of buyers rather than of sellers. Further analysis of 1973-74 contract information re- veald that basis contracts (those with no specifically stipulated price) were much more frequently decreased than were fixed-price contracts and that contracts with unknown destinations were more often decreased than those with known destinations. About half of the 1973-74 decreases were against contracts made by exporters with their own affil- iates. Exporters believed that contracts showing exact des- tinations had better chances of being fulfilled than did those showing pricing terms. GAO ANALYSIS OF EXPORT REPORTING SYSTEM'S PRICE IMPACT The influence of Agriculture's weekly export reporting system on agricultural commodity prices has been debated. Some frmers contend that it has depressed grain prices and cite the dropoff in prices since late 1974. Consumers, on the other hand, are increasingly con- cerned about the effect of grain prices on the general rise of food prices. Since the export reporting system was established in part to assure "consumers of plentiful supplies * * * at reasonable prices," the question of its possible price impact seems appropriate. Using regression analysis, we studied the relation- ship between weekly agricultural prices and weekly data 57 published in the export reports. The analysis identified a moderate relationship between changes in export commitment and weekly cash prices of the weekly corn and soy- beans but none for wheat and soybean meal. Because of these inconsistent results, inferences could not be drawn concerning the system's price impact. Next we analyzed the reporting system's possible impact on price variability. We developed indices of price variability for agricultural commodities based on month-to- month price changes in the 22-month period before reporting began and in the 21-month period since. After making adjustment for unusual market activity in 1973, we found no great change in price variability since the reporting system was established. The major determinants of agricultural commodity are worldwide and domestic supply and demand factors. prices After acknowledging this, we asked exporters if the weekly lication pub- ; export data in the U.S. Export Sales report has any addi nal influence on commodity prices. Sixty percent o the exporters responding felt the reports (60) influence commodity prices to some extent, while 25 percent believe they have little or no price influe ce at all. Exporters were also asked what effect system has had on their firm's export sales the reporting of agricul- tural commodities during the past year. An overwhelming majority (93 percent) claimed that ESRS had not affected their export sales volumes. Given this result, it may be that the advantage some exporters feel foreign buyerswell are getting is in the form of lower prices for commodities purchased from the United States. A detailed GAO analysis of the export reporting system's price impact is contained in vol. II, appendix C. PROPOSED GAO AMENDMENT TO 1973 AGRICULTURE ACT At the request of the Senate Agriculture and Forestry Committee, we repared legislative language to amend the Agriculture and Consumer Protection Act of 1973 for con- gressional consideration. This proposed amendment is intended to make more and better export information avail- able to the Secretary of Agriculture and to ovide mechanism to facilitate more timely decisionmnaking. a The proposed amendment accompanied with explanations appears in Vol. II, appendix F of this report. 58 The principal features of GAO's proposed language to amend the 1973 Agriculture Act follow: A. Exporters would be required to furnish Agriculture with weekly reports regarding any commitment, contract, or other agreement for export sales entered into, modified in any manner, or terminated during the weekly reporting period. In addition, exporters would be required to notify the Secretary of Agriculture, within 15 days of their commencement, of any contracts with foreign commercial or govern- mental importers which might result in exports of wheat and flour, feed grains, oilseeds, soybeans, soybean meal or other agricultural commcities so designated by the Secretary. B. The Secretary would determine at the start of each marketing year whether a short-supply situation exists or will exist for each commodity on which exporters' reports are filed. The Secretary, util- izing information from executive branch sources as well as exporters' reports, would periodically review these commodity situations and modify his determination as appropriate. Whenever a short- supply situation is determined, the Secretary would report such determination to the Congress. Unless either House, within 30 legislative days, provides a resolution to the contrary, exportation of the short-supply commodity would be subject to regulation by the Secretary of Commerce under the Export Administration Act of 1969. C. The Secretary--utilizing the full resources of the Department--would make a semiannual report to the President and the Congress on: -- The impact on the economy and world trade of of shortages or increased prices for commodities subject to these reporting requirements, -- The worldwide supply of such commodities, and -- Actions being taken by other nations in response to such shortages or increased prices. D. The Comptroller General would monitor and evaluate the activities under this amendment, including all reporting activities. Essentially, the GAO would: 59 -- Review and evaluate the procedures followed by the Secretary of Agriculture in gathering, analyzing, and interpreting statistics, data, and information related to the supply of agricultural commodities; -- Evaluate particular projects or programs; -- Gain access to any documents, data or records of persons or facilities engaged in any phase of exporting agriculturae. commodities; and -- Provide appropriate reports to the Congress. 60 CHAPTER 5 AGRICULTURE'S FORECASTING OF FOREIGN SUPPLY AND DEMAND EXPORT FORECASTS AND THE SOVIET UNION Chapter 4 described the development of an improved export data reporting system, to minimize disr[tptions caused by large, unexpected purchases of U.S. commodities by foreign buyers. For the same reasons, higher priority is being given to accurate forecasting of foreign production and demand. A 1975 report by the Office of Technology Assessment on agriculture, food, and nutrition information systems expressed concern over the increasing importance of the Soviet forecast problem. The report attributed most of the instability in world supplies in past decades to the Soviet Union's variation in crop yields and changes in national policy. An internal agriculture study (being finalized in 1976) on the problem of forecasting accuracy concluded that: "Examination of forecasts for U.S. wheat prices and utilization in 1972-73 suggests that most of the forecast errors were directly attributed to export market factors. More precise and timely knowledge about possible Russian purchases and estimated world grain supplies outside the U.S. would have improved forecasting accuracy for domestic usage and prices in the wheat economy." In recent Congressional testimony, the Soviet Union's importance in world grain markets was accentuated when an agricultural specialist made the following point: "The Soviet Union is the world's largest producer of wheat. It normally produces about one-quarter of the world's annual wheat crop, and about one-fifth of the world's nnual production of wheat and coarse grains. It has also accounted for about 80 percent of the annual fluctuations in world trade in wheat during the past decade* * *." The Office of Technology Assessment concluded that despite recent improvements in information systems relating to world agriculture, they have not kept pace with needs for 61 current information and short-term analysis caused by the short supply situation. According to the report, necessary improvements depend on the leading food exporting nations persuading the centrally planned countries, particularly the Soviet Union and the People's Republic of China, to prepare estimates of their exports and imports. SOVIET FORWARD ESTIMATES The exchange of this kind of data was one of the prin- ciples and aims of the 1973 agricultural cooperation agree- ment between the U.S. and the Soviet Union, but Soviet com- pliance has been disappointing. The difficulties in implementation and compliance that have caused problems for U.S. forecasting primarily concern article II, paragraph I, which requires: "Regular exchange of relevant information, including forward estimates, on production, consumption, demand and trade of major agricultural commodities." Without forward estimates, data provided under the agreement has primarily historical interest for researchers. It is not useful in Agriculture's preparation of worldwide production estimates and Soviet production-supply estimates. The United States has repeatedly asked the Soviet Union to fulfill the forward estimates provision of the June 19, 1973 agreement. The United States has maintained that forward estimates of crop production and foreign trade data are an integral part of the June 19 agreement. The Soviet delegates have responded that no "official" forward estimates are avail- able and that such data could not be released until published by the Central Statistical Administration on November 1 of each year--after the end of crop year when it is of little planning use to the U.S. Agriculture officials contend that providing of forward estimates alone will not resolve problems associated with forecasting of Soviet supply and demand. While variations in Soviet production are a major factor, the magnitude of such variations by no means serves to indicate the exact magnitude of grain imports. The volume of Soviet imports is also importantly influenced by physical restraints (e.g., port capacity, internal transport capacity), availability of reserve stocks, feed consumption requirements, availability of foreign exchange, etc., only if full details concerning these other factors were available would it be possible to make a fully accurate translation of Soviet crop forecasts into a forecast of Soviet imports. 62 As noted in the previous chapter, the Soviet Union's continued failure to provide forward estimates thwarted U.S. efforts in 1975 to make accurate estimates of Soviet grain import demand. A period of 7 months saw production fore- casts go down over 70 million tons, from a near-record high to a 10-year low. By the end of the crop year, the Soviet Union released data showing they had produced approximately one-third less than U.S. and Soviet agricultural economists had forecasted earlier that year. EFFECT OF LONG-TERM PURCHASING AGREEMENT Soviet and some executive branch officials have said that the 1975 long-term purchasing agreement obviates the need to furnish the U.S. with information other than that already being supplied under the 1973 agreement. U.S. officials, especially in the Agriculture Department, dis- agree. They say U.S. forecasters will continue to need for- ward estimates from the Soviet Union. AGRICULTURE'S FORECASTING SYSTEM The availability of more complete foreign data is only one side of the equation of U.S. forecasting. The other side is the effectiveness of the Agriculture Department's fore- casting system itself. Although it is generally acknowledged to be the best forecasting system in the world, increasing attention is being given to ways and means of improving it. GAO has previously reported on the causes and effects of the 1972 and 1973 poor forecast record.l/ We more recently reported on the history of the 1974 fecast record and ex- amined its causes and effects. 2/ The review reported here addressed Agriculture's current short-term forecasting 1/ Russian Wheat Sales and Weaknesses in Agriculture's Man- agement of Wheat Export Subsidy Program (B-176943, 07/09/73) and U.S. Actions Needed to Cope with Commodity Shortages, (B-114824, 4/29/74). 2/ What the Department of Agriculture Has Done and Needs to do to Improve Agricultural Commodity Forecasting and Reports. (B-114824, 8/27/75) 63 operations, with particular emphasis on 1975 crop year forecasts, and includes our evaluation of those operations. Our review focused primarily on the two Agriculture agencies most directly involved in foreign crop intelligence and short-term forecasting areas: 1. Foreign Agricultural Service - foreign crop intel- ligence and the analysis with resultant current ex- port forecasts; and 2. Economic Research Service - foreign and domestic crop analysis with current forecasts of domestic demand, foreign supply and demand, and all long- term (one year or more) projections. Detailed discussion of the operations of these two services begins on p. 68. Statistical Repor'-in Service An integral part of U.S. forecasting activities is accurate estimating of the domestic supplies that will be available for export. The data on the domestic agricultural economy is collected by the Statistical Reporting Service, established in 1961. The service carries out its crop and livestock estimates through 44 tate offices serving the 50 States, operated through cooperative arrangements with various State agencies as doing Federal/State services. The Crop Reporting Board (chaired by the Deputy Ad- ministrator of the Service) meets monthly in Washington to compile and analyze reports submitted by the State offices. Because GAO's current study focused on foreign fore- casting, readers interested in a more detailed discussion of the Service's operations are referred to GAO's 1975 study, What the Department of Agriculture Has Done and Needs to Do to Improve Agricultural Forecasting and Reports (B-114I84, 8/27/75). In addition to the above agencies, Agriculture also has a number of interagency groups that combine specific elements of these agencies' forecasts to arrive at the Department's official comprehensive forecasts of the domestic agricultural sector. These include, for each crop, total supply by 64 source, total utilization (demand) both foreign and domestic, and end-of-year carryover. These groups, as applicable, were also included in our review. We also surveyed other groups, private and governmental, which maintain similar operations. This allowed us to compare the analytical capability of these groups with Agriculture's, and to explore possible avenues of additional cooperation be- tween them and the Department as a means of enhancing its forecast capability. System Flowcharts To assist the reader in comprehending the extensiveness and complexity of the Department's crop intelligence and short-term forecasting systemsr flowcharts of the systems, from data input to publications output, are presented throi.ghout this chapter. The first chart shows the system that results in information for public documentation. Interagency Groups in Agriculture Department Within the Department are several forecasting groups made up of persons having expertise in specific commodities and/or geographic areas from those Agriculture agencies directly involved in forecasting or farm programs. These forecasting groups are as follows: 1. The Outlook and Situation Board, chaired by the Economic Research Service. 2. Task Forces on U.S.S.R. and People's Republic of China (PRC) established at the request of the Sec- retary of Agriculture in his memos of February 21, 1973, and September 13, 1973. 3. The Interagency Commodity Estimates Committees, chaired by the Agricultural Stabilization and Con- servation Service. 65 43 3 I -- ~~~Ke~ a f m~~~~~~~~~~~~~~~!s a~ 8~~~~~~ 5 4 ~~~ ~~~~~ f-i-i~~~~~"· *~ ~ Zs! El'.' I ~ 6 Outlook and Situation Board The Outlook and Situation Board is responsible for the technical review and approval of all economic situation and outlook reports prepared within Agricultural Economics or by other agencies of the Department. The Board consists of specialists drawn from the Economic Research Service and other Agricultural agencies, and the membership varies for the different reports reviewed. Board approval of a situation and/or outlook report constitutes clearance by the Department as to its technical accuracy. USSR and P.R.C. TasK Forces The Task Forces' purpose is to make a collective judge- ment on USSR and P.R.C. crop statistics: production, carry- over, import demand, export trade, etc. They were formed because of the need to pull together aailable expertise on these two countries so as to derive the best possible st-- imates of crop statistics nd to resolve any differences in the estimates derived by the individual representative agen- cies that make up these groups. Representative. to the Task Force come from the Foreign Agricultural Service, the Office of the General Sales Man- ager, the Economic Research Service, Agricultural Sabiliza- tion and Conservation Service, and the Agricultural Marketing Service. The USSR Task Force is primarily irterested in grains, while the P.R.C. Task Force covers _ains, cotton, and rice, Both Task Forces arrive at their forecasts primarily through subjective evaluation of various types of information. These sources of information include press reports (the USSR group depends heavily on the Soviet press), information frcm the Air Force Air Weather Service, embassy reports, agri- cultural delegation reports, travelers' rports, CIA nfor- mation, Radio Liberty and sources within t ? Department of Commerce. Official Soviet publications art used whenever available. The People's Republic of China publishes ne ag- ricultural data except for total production. To date, s imports of U.S. g:ain have been modest, totaling only 8 million tons of wheat and corn between 1972 and 1975, al- though it should be recognized that imports from major con peting grain exporting countries can have a direct effect on U.S. markets.) 67 In'eragency Commodity Estimates Committees Interagency Commodity Estimates Committees exist for each price-supported agricultura. commodity (and others as needed) in response to a "continuLng need for estimates and projections of basic data reqge .lg supply, utilization, prices, and program effects to be used on a Department-wide basis for program planning and budgeting purposes and for evaluation and administering present or proposed programs." Committees for price-supported commodities are charged with the responsibility to appraise and review basic data and make estimates of projected supply, utilization, and prices for commodities. When new programs are under consideration, the Committees attempt to estimate a number of effects,in- cluding exports and availabilitie- for export. FCREIGN AGRICULTURAL SERVICE The primary source for Agriculture's information on foreign spply and demand is intelligence reported by the Foreign Agricultural Service's agricultural attaches. There are 63 attaches assigned to foreign offices who issue re- ports on 110 countries. The attaches function as an integral part of the in-country Embassy team headed by the Ambassador, but under the general direction of the Foreign Agricultural Service in Washington. The Washington group is headed by the Service's AdministLator under the Assistant Secretary for Ir ,iational Affairs and Commodity Programs. The Service is involved in efforts to improve its over- seas training and expand its staffing. It has increased its Mcscow staff, recently placed a representative at the U.S. mission in PeKing and an attache at the U.S. Embassy in Cairo. The Service plans, during fiscal year 1977, to es- tablish attache position3 in the Arabian Peninsula, East Ger- many, Kiev and at the U.S. Trade Center in Moscow. Attache Reporting In their host countries, attaches are involved in such activitic as: gathering crop production/consumption/demand information, administering Food for Peace programs under P.L. 480, developing export markets and identifying new trade opportunities. They also play a diplomatic role as members of the Embassies' mission to assist in maintaining contacts with government officials of the host country. 68 The individual attache s ability to gather data on agricultural commodities is dependent on the flexibility allowed him by the host country to carry out these duties. For example, travel restrictions imposed by the Soviet Gov- ernment hinder the attache in that country from making first- hand observations of Soviet crop production. The attache is officially restricted from traveling to some parts of the USSR, except with special permission, and reportedly has been often unofficially hindered through cancelled flights, closed roads, or similar difficulties characteristic of a closed system. Theoretically, Soviet attaches in this coun- try face the same kind of restrictions, but are actually less restricted due to our more open system. 'o negotiations to improve attache travel in the USSR are currently being held, but the U.S. makes a constant effort to improve the sit- uation. Because of the travel restrictions, the U.S.S.R. Attache must rely heavily on agricultural statistics that appear in the Soviet daily press or official figures published by the Soviet government for the information needed in his reports submitted to Washington. The oviets publish annual and 5- year goals, and have felt these were sufficient to fulfill their obligation to supply the T.S. with agricultural infor- mation. Hwever, thirty teams of agricultural experts were exchanged between the U.S. and the U.S.S.R. in 1976. These teams studied a wide range of subjects in the fields of ag- ricultural research, technology and economics. As a result of travel restrictions or other diffi- culties, and the limited available data, the attache in the U.S.S.R. has submitted the 19 minimum required number of re- ports each year, compared with an average of 74 reports a year each for France, West Germany, and the United Kingdom. In countries which fail to provide reliable current es- timates, the judgement of the individual attache can be a significant factor. A consultant's report, prepared for the Office of Technology Assessment in 1975, pointed out that attaches "in general are influenced by what they perceive to be their mission and the length of time they are posted in a country." According to the report, "Few Attaches per eive the collection of agricultural statistics and the dvelopment of supply-demand estimates to be their primary mission, * a·" 69 Other points made in the report: that seldom selected for their analytic ability, attaches are but usually for their ability to represent U.S. agriculture; and that rel- ative short tours of duty are a distinct disadvantage with re- spect to developing reliable estimates. The report indicated that attache reporting could be im- proved through more adequate coverage of several important agricultural countries, and through stationing data spec- ialists who had no other duties and who "were a organization whose sole mission was to operate part of an a world ag- ricultural information system." TYPES OF ATTACHE REPORTS Attaches submit two types of reports; (1) scheduled, required reports, and (2) "alert" reports, which are used to report fast-breaking items in the host country's tural situation that have an immediate effect agricul- on U.S. ag- ricultural commodities with respect to demand, world prices, and/or consumption. Required attache reports consist of numerical tered on a statistical format devised by data en- the Service's For- eign Commodity Analysis group. Attache analysis of the data is not considered essential because data analysis is primarily the responsiblity of the Service's commodity analysts in Washington. Forein Commodity Analysis The data supplied by the Attaches a),- oher sources is analyzed by the Foreign Commodity Anelysis roup of the Foreign Agricultural Service. This group is comprised of 7 divisions working on the analysis of foreign data for 7 specific commodities or groups supply/demand of commodities. Or review was limited to the Group's management, the Grain a,d Feed Division, and the Dairy, Poultry, and Livestock Division. The Group has responsibility for short-term yea--) forecasting of foreign supply/demand/exports(current ric- tural commodities. of ag- It completes projections of the rest crop season so as to provide input into policy decisions for that season. In addition, export forecasts, based on foreign crop and consumption projections, have been produced ulaly for rain for a 5-year period each since aroundreg- These forecasts are 1970. eviews. once or twice a year. 70 The Group uses various forms of models as one technique for forecasting global and regional levels of grain yields. It also relies on trend analysis to provide quantitative in- put into the analysis process. If necessary, qualitative factors such as the degree of mechanization, the amount of arable land, and weather are also subjectively included in the analysis. The 1975 OTA consultant's report concluded that better analytical capability was needed because: "As we have learned in current years, trend anal- yses fail to provide reliable results. More de- tailed analyses of the factors that determine pro- duction and consumption are required to improve the reliability of Agriculture's] world estimates." Officials told us that most of the Group's problems are in the grains area. Personnel are presently trying to in- tegrate feedgrains use into grains analysis and admit that they have been slow in defining the interrelationship be- tween the livestock and grain sectors. The Dairy, Poultry, and Livestock Division has insti- tuted new reporting instructions for quarterly dairy and poultry reports for 40 country automatic-data-processing data bases for the years 1964-74 by the end of fiscal year 1976. By the same time, they planned to expand the existing live- stock data base (1960-73) and make a major revision of live- stock reporting instructions to a standard quarterly report- ing schedule, for use in developing a short-term forecasting methodology of feed demand based on dairy cattle and poultry production. Division analysts have also increased the frequency of reports from annual/semi-annual to quarterly submissions by attaches, accompanied by a current f recast devised by the attacche. The data base for coarse grains and wheat for short- term forecasting purposes has been developed and operational for almost 2 years. This commodity area is the respon3i- bility of the Grain and Feed Division. It was the first div- ision to initiate quarterly reporting instructions for grains to be su mitted by attaches, and its analysis/forecasting capability is the model for the other divisions in the Group. This division is also filling the gap in the feedgrain demand 71 sector of analysis until such time as the Dairy, Poultry, and Livestock Division completes its livestock data base. Grain and Feed believes that it has tuned-in its oper- ations to meet its priorities. Major emphasis in its ana- lytical work is directed to monitoring current crop prospects ctnd changes in individual foreign countries, and keeping a- breast of the trade-flow impact of changes in foreign crop production. Tn response to a major upward shift in eedgrain demands 2 years ago, the Division set up a unit to specifically '.&dle the expanding work in this area. The Grain and Feed Division obtains its data base in- formation from Agricultural attache reports, published stat- istical sources, periodicals, cooperator reports, Reuters news service and personal contacts by Division personnel. In addition to its wheat and coarse grains data, Grain and Feed also collects and updates monthly trade-flow data by country of actual grain movements by origin to destination. The third part of the Division's data base is a record of grain transactions to data of forward contracts (what will move) for future grain shipments that ave been purchased by buyers. This data is then subjected to judgmental decision- making (by Division prsonnel and Attaches) to determine what portion of forward contracts is indicative of actual demand and what portion is "buying now" to avoid future price rises. Analysis/Forecasting Methodology Analysis and forecasting in the Grain and eed Division is essentially trend analysis subsequently adjusted by qual- itative (professional judgment) considerations as Attache- reported intelligence becomes available. These trends are needed to fL,-.st crop yields, production, and con.sumption; then any anticipated stocks changes are arrived at through subjective evaluation to finally determine import and export forecasts and appropriate revisions. Matrix analysis is used to arrive at these forecasts wherein total grain must equal tota' demand. Division analysts use sector analysis in making their forecasts--combining major roups of countries into aggregate trends as opposed to country by country analysis. While the Division performs the sector analysis for commodities, it 72 works closely with the Economic Research Service's Foreign Demand and Competition Division, which provides individual country analysis of commodity supply/demand factors, The quality of information of foreign supply, demand and buying intentions is often not high, being frequently based on subjective analysis of data gathered from various sources. This is especially true of the reports from closed societies such as the Soviet Union and the People's Republic of China. Of course, it would be unreasonable to expect statistically accurate estimates of foreign supply, demand and buying inten- tions, in such limited data ituations. Officials' Views of Forecasting Operations Grain and Feed Division officials informed us that the At- taches were their primary source of export information. They also told us that U.S. weekly export sales data is used mainly as a means of keeping informed of any unusual situation that might cause problems in the domestic market. More specifi- cally, export sales reports are used as a general indicator of country demand and activity on a weekly basis, based on that importing country's production, demand, nd stocks position (which analysts claim they know with a reasonable degree of accuracy for most countries). Export sales figures are not fully integrated into their forecasts, because the analysts maintain they are usually overstated, for both exports and outstanding sales contracts. One reason for this could be foreign buyers' overbuying to protec- themselves from possible future U.S. export controls. FAS officials informed us that export sales figures are taken into account as the marketing year progresses, in determining whether preseason estimates of U.S. exports to specific countries sould be adopted. In some instances such adjustments are triggered by new export sales data. This is especially true for such countries as the USSR, the PRC and certain other countries--especia. ly in Eastern Europe and North Africa--for which data on current crop developments are less readily available. Division personnel point out that the fundamental bar- rier to improving their forecasting is the lack of an adequate data base and the inabiliity to accurately forecast the impact of weather on grain production. Given this limitation, officials believe that they are doing the best job possible with the available information. These officials noted t the quality of foreign crop production information may depend more on national olicies (of foreign governments) than on any other factor. 73 Foreign Commodity Analysis officials stated that the big- gest unknown in their production forecasts is weather, al- though they are trying to account for it in some measure. Th2 principal source of weather data used by Agricul- ture's analysts of Soviet crop production is the Air Force Environmental Technical Applications Center. The Center com- puterizes and processes raw weather data and provides average information on 27 USSR regio,is on precipitation, tempera- ture, and calculated soil moistrue. Data are summarized and made available each 10 days, and cumulative monthly and sea- sonal averages are also provided. Agriculture's analysts evaluat- this and other weather data to estimate regional weather indexes of grain crops. Statistical models are used, but the indexes--which are largely judgmental--are multiplied by trend yields to obtain overall Soviet production. Fiscal year 1976 brought into full operation the Large Area Crop Inventory Experiment(LACIE), a joint project of the Agriculture Department, the National Aeronautics and Space Administration and the National Oceanic and Atmospheric Admin- istration. This experiment combines Agriculture's expertise in international economic and statistical disciplines with the use of satellites and meteorological and climatological data. Grain and Feed Division personnel stated that the Experiment will help by providing earlier warnings of crop failures due to adverse weather. Analysts will then be able to use this information to supplement and evaluate reports from Attaches. Initial tests of the Experiment were positive. Officials said that another problem affecting work quality is the Foreign Agricultural Service's rotation policy, which moves professional personnel throughout the various organizational units. This tends to disupt the continuity of commodity analysis operations as well as the development of more sophisticated forecast methodology and the degree of competence of commodity analysts. Officials cited various possible remedies to the problem, but pointed out that some form o.- rotation is needed in order to give analysts an appreciation of field reporting and attaches' problems. Dissemination of information The Fore gn Agricultural Service publishes some of its statistics, forecasts, and narrative analysis n publications for public dissemination, but more frequently its publications are for internal use only. 74 For external use, the Service publishes the World Grain Situtation in the Foreign Agriculture Circular on a bi-monthly basis. Recently, in recognition of the need for more complete and accurate reporting and analysis of foreign crops, the Ser- vice has taken steps to improve this report. According to the Administrator, it is unique in the world as a summary of pro- duction, trade, utilization, and stocks information from all major producing and importing countries. The World Grain Situation report, along with the U.S. Export Sales report published weekly by the Office of the General Sales Manager, adds a new dimension to available infoL- mation on current supply and marketing, and expands it to in- clude additional production and price information. The U.S. Export Sales report now includes a narrative interpretation de- signed to make the tabular material more useful to farmers, marketing people, and others. It also publishes a monthly orld Agricultural Production and Trade Statistical Report. A weekly news release service was instituted in June 1975 for reporting to the public cur- rent developments in the foreign agricultural situations that affect American agriculture. The Service hopes to expand it into a daily news release system. Internally, Service personnel make regular briefings on foreign agriculture for Department officials. The Service al- so prepares (in collaboration with the Economic Research Service) a monthly internal document, Digest of World Agri- culture, that includes a World Grain Situation and world weather and crop summary. A flowchart on the following page depicts the system for internal management information. 75 INTERNAL USDA DISSEMINATION FUNCTIONS INCLUDES ALL DATA CRB REPORTS FAS - FCA INCLUDES ALL ERS - NEAD, FAS & ERS FUNCTIONS FDC, CED (ANALYTICAL) ANALYSIS - NOTED FOR PUBLIC NARRATIVE & DISSEMINATION TABULAR FUNCTIONS WEEKLY &MONTHLY IN'TRNAL USDA BRIEFINGS DIGEST OF WORLD | INTERNAL AGRICULTURE USE (MONTHLY) ONLY USDA OFFICIALS. OTHER EXECUTIVE GOVERNMENTAL OFFICIALS ECONOMIC RESEARCH SERVICE Overview The Economic Research Service develops and provides economic information to a wide variety of decisionmakers in- terested in or responsible for improving agriculture. These include Agriculture Department officials, Members of Congress, officials of other government agencies, State and local admin- istrators, foreign government leaders, farmers and farm organ- izations, marketing firms and farm supply companies. 76 The research is carried out in a number of areas, including the characteristics and performance of the U.S. food and fiber sector, foreign trade, and foreign market development. The Service's monitoring and short-term foreign agri- cultural forecasting responsibilities are carried out by its Foreign Demand and Competition Division. This Division fo- cuses on worldwide supply and demand conditions and the impact of U.S. and foreign policies on world farm trade. Its publi- cations provide information needed by traders, government officials, and trade negotiators. The Foreign Agricultural Service has the major short-run forecasting responsibilities for the international area. The Foreign Demand and Competition Division functions in a con- sulting, review and advising rola and thus in the past did little regular forecasting work. An in-house review in 1974 stated that the Division then had only two regular forecasting projects: (1) U.S. agricul- tural trade forecasts and (2) world agricultural production indices. The review went on to point out that one of the Divi- s on's missions is an international agricultural intelligence gathering service-oriented mission. In this role, the review noted that the Division was often called on to make specific forecasts for various projects, but that this work fell in the one-time-only category. Recently, the Division began to develop its own short- term forecasting capability as shifts in export demands be- came more rapid and more important to U.S agriculture. Of- ficials stated that these forecasts would contribute to the Department's "Outlook and Situation" reports. Currently, the Division does some forecasting of exports of major commodities, contributing this information indirectly to the Department's official forecasts assembled through the Interagency Commodity Estimates Committees. However. the Foreign Agricultural Service has primary responsibility with- in the Department for export forecasts and has the major influence on the final export forecasts published by the com- mittees. Nor does the Foreign Demand and Competition Division share any responsibility for export forecasts with the Foreign Agricultural Service, even though these units are supposed to complement one another and utilize the same data base. 77 According to Division officials, the primary purpose in developing its enhanced short-term forecasting capability was to service internal Economic Research Service needs. They claimed that their forecast methodology was more analy- tic and hoped to improve the rigor of both their and the Fo:eign Agricultural Service's forecasting. We were informed that the Division has two essential lines of effort ongoing in short-term forecasting of for- eign supply/demand/exports: the first is regional analysis and the second is monthly one-month projections of exports. These efforts were closely coordinated with Foreign Commodity Analysis operations. Both are based on subjective evaluation of all of the available information. One source is the U.S. Export Sales reports. officials use the reports to obtain - an indication of export demand and to track their forecast estimates of exports. Generally, they found the reports inflated by care buying when a shortage situation existed or was antic ;ed, and deflated in situations of excess supply. For spec ic commodities, these officals stated that wheat and corn sales reported were reliable but that soybeans sales were very inflated. The Division has established a group to develop new and more sophisticated models for short-term forecasting of pro- duction/utilization/export demand by individual foreign na- tions and for U.S. agricultural exports. Their effort was geared to making the short-term forecasting process more efficient, as well as shifting to a more formal quantitative forecasting methodology to supplement subjective evaluation (qualitative analysis). Projections are now being developed of production and consumption levels for grain, feed and livestock products under alternative price and policy conditions for several developed nations. From this information, projected im- ports and exports of each country can be calculated. Despite the Division's interest in its xpanding role in the international forecasting effort, there is also cun- cern chat the Economic Research Service may be perceived as stepping directly into a role historically designated as FAS's. The ERS report was careful to poirt out that by developing a modeling approach to forecasting its work "* * * would be more complementary than competitive to what the Foreign Agricultural Service is currently doing." 78 LLU oi I -0 Z LLC. ci~ OW I 2W (0 C LUfi L ilw~ LU >U In U W IW lp Z~ ~~ ~ u~~~~aj C~~8 ac~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~d W L Wic 2 U LL. Eli Ca M u 0 W i (60~~~~~~~~~~ U)~~~~~~~~ L U. IC IL_ __ __ __ _ -rrr~~~~I ul xus L2 > m Y cu o~~~~~~~~~l iu- Z~~~~~~~~~~~~~~~~~~~ C 2 I. 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U I~~~~~~~~~~~~~~~~M -~~m 80 The Under Secretary recommended: "For example, we believe that data on production, supply and distribution of agricultural commodities can be most efficiently developed by Foreign Agricultural Service commodity specialists, while data o:n general economic indicators and factor inputs can b most effi- ciently de-eloped by Economic Research SeLvice country analysts. Common data bases can be developed for use by both agencies on all types of data, just as [these services] Lhave done with grain data." The 1975 Consultants' Report for the Office of Technology Assessment commented on the relationship between the two services: "The organizational structure used by the Agricultuze Department to operate the world agricultural informa- tion system impedes efficiency and effectiveness. It is extremely difficult to use analysts efficiently and effectively when the responsibility for the outputs cf a system is assigned to two completely separate agencies * * *It will be essentially impossible for USDA's wo£ld agricultural information system to reach potential under the present organzational setup." The report suggested several ways to achieve a meaning- ful reorganization, The alternative ccnsidered most efficient and effective would combine the Foreign Agricultural Service's commodity analysts with the Economic Research Service forming a group responsible "for assessing and disseminating informa- tion on world and U.S. agriculture'. The report claimed this would eliminate duplication and maximize coordination. PROBLEMS OF COORDINATION The barriers to smooth coordination of the sister agen- cies range from philosophical to practical. Foreign Agricul- tural Service officials believe that work is needed in the area of defining relationships that will enable them to develop short-term models so as to devise better forecasts. They -tress the current situation, which is always changing, and contend that because the Economic Research Service is too aca- demic in its approach and spreads the work over a number of years, the Foreign Agricultural Service has had to undertake its own basic economic research. 81 Others in the Foreign Agricultural Service cited poor relations with their counterparts in the Economic Research Service. They attributed it to a lack of understanding be- tween the two groLps brought about' by their respective orientations--the Foreign Agricultural Service personnel having direct agricultural knowledge, the Economic Research Service personnel having a more academic background with no appreciation of how the agr.cultural sector functions. They also said 'Chat the Economic Researci ervice as competing with the Foreign Agricultural Service in its efforts to develop its ow, short-term forecasting apabilities. Economic Research Service officials agreed in part with these statements and mentioned the need for their staff to have more contact with private trade. On the other hand, they felt that the Foreign Agricultural Service needed to develop ita analytical capabilities. They also cited another problem. The Foreign Agricul- tural Service retains primary responsibility for export fore- casts and is adamant that its final forecasts of foreign supply/demand fnr U.S. exports be retained as the Department's official forecasts published for public dissemination. Given this position, the Economic Research Service is relegated to the position of attempting only to influence the forecast figures. IMPROVEMENTS, CO1 INUED WEAKNESSES The Office of Technology Assessment published another re- port in August 1976: Food Information Systems: Summary and Analysis. It noted improvements made in griculture's informa- tion and forecasting system since 1972-73: modification of the agricultural attache system; improving staff analytical compe- tence; upgrading publications and eliminating duplication; attempting to get better information on the Soviet food situ- ation; releasing more timely crop forecasts; collecting dat- from new areas; ane using modeling and remote sensing techno- logies. The report concluded that four groups of deficiencies continue to exist in the food information system: 1. poor national (foreign) systems, upon which the Agriculture Department must depend; 2. collection of inadequate and/or obsolete data; 82 3. inadequate analysis, especially by the overseas network of agricultural attaches; 4. Agriculture's fragmented organizational structure, which hinders effectiveness and promotes institu- tional conflicts of interests. The Office of Technology Assessment proposed the fol- lowing possible solution to the above weaknesses. The tionai Commission on Supplies and Shortages supported a- possible soluticns in its December 1976 final report these to Congress. These solutions which are designed to protect the integrity of U.S. foreign agricultural data include: 1. Transfer the Foreign Commodity Analysis Unit out of the Foreign Agricultural Service and make it a Division of the Economic Research Service. 2. Combine the Foreign Commodity Analysis Unit with the Foreign Demand and Competition Division of the Economic Research Service into a new agency, one with the sole mission of providing economic intelli- gence on world agriculture. 3. Combine the Foreign Commodity Analysis Unit with tha Economic Research Service's Foreign Demand and Competition Di-ison and with domestic commodity analysts into a single economic intelligence agency responsible for assessing and disseminating informa- tion on world and U.S. agriculture. Both organizations (OTA and NCSS) agree that overall ficiency and effectiveness would be highest under the ef- first proposal." The National Comn:ission was highly supportive the third option because it represents an effort to of end redundancy of both operations and attempts to establish the integrated view. The Office of Technology Assessment an National Commission also concur in the belief that the and the best long-run solution to developing a better iternational infor- .nation system is the employment of agricultural information specialists who would reside in major food export and port countries on a permanent basis. The Commission im- that be er data analysis is essential if stresses the U.S. food in- formation system is to improve. The Commission also proposed the following pertinent guidelines regarding Agriculture and other materials agencies in its summary report: 83 1. Data collection and data analysis should be organizationally separate from policy and program activities. 2. Data collection and data aralyses should be placed in a separate, high level (preferably Bureau level) organization of comparable status. 3. The credibility of data and analyses should be main- tained through open access,advisory committees, and other institutional safeguards. 4. Data collection and analysis should be responsive to the needs of users. 5. Statistical standards should be upgraded, and the limitations of the data--including sampling error, uncertainty, and assumptions--should be published with the data. OTHER FORECASTING ORGANIZATION Central Intelligence Agen!c Central Intelligence Agency orecasts include periodic assessments of harvest prospects ,rmpared to domestic sumption levels of Communist-Bloc .ations. This is con- part of its continuing research on agricultural and consumption trends in these countries. The CIA also projects interna- tional trade in grain and other agricultural products, into account its incomplete knowledge of domestic taking stocks the intentions of Bloc leaders with regard to consumption and levels. CIA findings go to everal government agencies Agriculture) and to relevant interagency agricultural(including groups. The CIA estimates demand for U.S. grain by policy sidering total worldwide supply and demand utilizing con- matrix approach based on importer/exporter activity. a total It all other available sources of data, including Agricultureuses and grain companies, in devising its trade estimates. It has developed a crop forecasting model to predict crop yields in 27 major producing areas of the Soviet Union. The predicted yields--based on time trends and a composite index of several weather variables--are combined with reported data on sown rea to produce crop estimates. 84 Prior to the 1972 grain sales, the CIA had not placed a significant priority on the forecasting of Soviet grain pro- duction and import demand. During the past 4 years the CIA h1ae continuously endeavored to expand arid improve its fore- casting capability. Concern has emerged among Government officials in recent years over differences in Agriculture and CIA estimates of the Soviet grain situation. The differences were generally attributed to the different data bases and forecastiLg methodologies used by both agencies, as well as difficulties in achieving effective interagency communica- tion. Howevcr, since 1975 both Agriculture and the CIA have improved their coordination and communication on the fore- castilig of Soviet supply and demand. Although both agencies utilize different forecasting methodologies based on many different varieties of data, they recently have worked to- gether in attempting to provide the executive branch with one consensual estimate of Soviet production and demand. Food and Agriculture Organization o_ the United Nations The Food and AgricultLre Organization (FAO) of the United Nations fosters international cooperation in the fields of nutrition, food, and agriculture. The United States maintains a permanent mission--under State Department supervision--to the Organization's Rome headquarters. The Organization is_a source of international economic and statistical data. It obtains information from a number of sources, including member governments, the Organization's technical personnel assigned overseas, and from Foreign Agri- cultural Service publications. In turn, Agriculture uses the Organization's publica- tions as a supplemental source of sttistical information; however, Agriculture makes little attempt to follow the Organization's information-gathering activities on a current basis. GAO recommended in a previous report that closer cooperation between the two groups might be desirable. Agriculture responded that althoigh they would welcome closer cooperation with the Orgaaization, it was not always the best source of information or the most timely source. 85 The Office of Technology Assessment in 1975 compared the forecasting of the two groups and concluded: "All in all, USDA's system clearly has been superior with respect to timely assessments of the current situation and ear-term outlook, but unless steps are taken oon to improve USDA's system, the most reliable system will be the one operated by FAO." The Food and Agricultural Organization began an early warning system in 1965 which assembled o develop mates of major food crops from over 7; developingmonthly esti- order "to obtain advance indications o possible countries ia emergency food aid needs." It is also experimenting with graphy to gather agricultural information from aerial photo- tries lacking adequate information-gathering those coun- systems. Major Grain Exorting Companies GAO interviewed officials of several porters including the six who handled the major grain ex- majority 1972 Russian grain sales (Cargill, Inc.; Cook of the Inc.; Bunge Corporation; Dreyfus Corporation; Industries, Grain Co.; and Garnac Grain Co., Inc.). Continental The exporters' forecasts are for the dent of Agriculture's data. Coordindtion most part indepen- between the ex- porters and Agriculture is superficial and the exporters are careful not to compromise their respective positions. competitive Although forecasting ability varies by company, cials of the large exporting companies feel the offi- that their term forecasts are more accurate than Agriculture's, short- ally on a commodity basis, because the Department especi- all agricultural commodities and does overs not focus exclusively on selected commodities as is the case with many exporters. Private grain exporters and some government added that the Department's forecasts, as well officials as the De- nartment itself, are subject to numerous bureaucratic and poli- tical constraints influencing ultimate supply/demand/export forecasts. While instances of bureaucratic or political constraints may have influenced ultimate forecasts instances, the view of forecasters in the Foreign in some Analysis Division is that, for grain, it would Commodity be difficult 86 to imagine a situation where objectivi'y would be any less prevalent than is the case now with Agriculture's forecasts of foreign supply/demand/trade prospects. Agriculture maintains that its forecasts are not poli- tically ifluenced for the following reasons: "First, the procedural system for grains ensures collective judgment by a staff of analysts rather than allowing forecast judgments to be compartmentalized or specialized. Under the existing systemr all forecast judgments made by Foreign Agricultural Service personnel are open to scrutiny by specialists in the Economic Research Service and other concerned USDA agen- cies. The second reason (for Agriculture's rejection of the claim of outside influence)is the fact that all significant components of the foreign supply/demand and U.S. export fore- casts are regularly disseminated through public information channels and therefore open to the scrutiny of the foreign countries concerned, as well as the domestic producer groups and exporter firms who themselves can judge the accuracy, currentness, and objectivity of Department forecast judgments. Under these conditions Agriculture insists analysts respon- sible for the grain forecasts are acutely aware and continu- ally reminded of the need for objectivity at all times in the preparation of forecasts." 87 CHAPTER 6 U.S. AGRICULTURAL EXPORT POLICY The most important consequence of Soviet grain purchases over the past 4 years has been that these transactions have highlighted the need to assess the Government's agricultural export policy. The results of this review conducted by GAO have raised a number of questions about the effectiveness of recent policy. FLEXIBILTY Export picy clearly should be sufficiently flexible to adjust to extreme shifts in foreign demand for U.S. commodi- ties. The difficulties encountered by the Government ill re- sponding to the Soviet Union's 1972 and subsequent purchases were only in part due to weaknesses in export reporting and forecasting. They also arose from fuaAdamental policy assump- tions. In 1972, the Government had completed a recent transition in agricultural policy. The former policy--which had been in effect for roughly 4 decades--had been focused almost exclusively on limiting farm production in order to bolster prices. The policy involved large-scale government inter- vention involving billions of dollars for price supports, export subsidies, Government held stocks, food aid programs, and similar measures, In 1969, this policy was abandoned and supplanted by one designed to remove the Government from agriculture altogether. The policy change was articulated in legislative changes in the 1970 and 1973 Agricultural Act. An article in a recent issue of Foreign Affairs described the Goverment's new approach: "* * *the federal government according to this policy, should no longer own reserves of commodities and regulate prices, as it has for more than 30 years. Price changes should regulate the movement of resources into and within agriculture." This ne* policy was based on expectations of full pro- dudtion. Exports were encouraged, but without subsidization. It was assumed that the free market could handle international transactions in U.S. commodities. 88 Then several forces came together in the early 1970's to push foreign demand up sharply. From the perspective of 1976, it is clear that the Soviet purchases, though pivotal, were only one part of this larger picture of growing world demand. The phenomena contributing to growing demand in the early 1970s included: -.-world-wide (except in U.S.) shortfalls in crop pro- duction; -- Soviet decision to increase per capita protein con- sumption. and import grain; -- dollar devaluations of 1971 and 1973 made American agricultural commodities less expensive and, ther.fore, more competitive on the world market; -- world population continued to increase, particularly in the less developed countries, many of which tend to experience chronic focd shortages; -- Peruvian fishmeal supplies were temporarily exhausted; -- relative affluence and prosperity in the more developed nations stimulated demand for more, and better quality, food which entails greater consumption, directly or indirectly, of grain; and -- the effects of the so-called energy crisis, particu- larly with respect to fuel and fertilizer, impacted on most nations. These forces also came into play just at the time that the U.S. and other major grain exporting nationF had embarked on a stocks reduction policy. The result was an unprecedented demand for U.S. grain, a situation the U.F. Government's agricultural export policy was not geared to meet. As a consequence, between 1972 and 75 it was forced to modify its commitmen' to non-interr on and to take the steps described earlier in this re 1973 - Established a mandatory export reporting system and placed temporary export controls on soybeans and related products. 83 1974 - Requested voluntary export restraints on grain sales to the Soviet Union, established a volun- tary prior approval system on grain exports, and initiated a mandatory daily export reporting system; imposed a temporary embargo on Soviet grain sales; and held up and renegotiated existing Soviet grain sales. 1975 Requested voluntary export restraints on grain sales to the Soviet Union and Poland, negotiated a formal long-term grain sales agreement with the Soviet Union, and i nforally committed itself to supply Japan with grain for the next 3 years. These steps were required by the sudden transformation to a tight-supply situation. The question arises whether Government policy may be similarly unprepared to meet a period of agricultural surpluses. A close look at the phenomena which led to the sudden increase in demand in the early 1970s shows that most of these factors were subject to change. They could fairly suddenly shift in ways that would present a dramatically different world market for U.S. grains from the one of the early 1970s. Sharp drops in foreign demand, for example, could be precipitated by a period of good weather and successful for- eign harvest, by a prolonged recession in the developed countries, or by an economic situation in wnich U.S. grains were priced beyond foreign budgets. Changes in foreign demand could also come about as a result of changes in national policies, sucn as the Soviet Union's 1971 decision to abandon its practice of diverting grain from livestock i periods of shortage, and to import grain instead. The fact is that the demand picture is already changin-. It appears that U.S. agricultural surpluses may again reach and/or exceed pre-1972 levels as a consequence of stagnati: 9 or decreasing foreign demand. when faced with periods of extreme markets, either sur- plus or shortage, Government officials implementing present policy have to deal with the following questions: 90 -- What is the range within which price variations for domestic producers and consumers will be tolerated? -- Should there be some overnmental mechanism over and above the market by which the domestic supply of grain is to be allocated among domestic and oreign consumers? --To what, if any, extent should Government respcnd to differences between foreign consumers with respect to: 1. their willingness and ability to pay for U.S. grain, 2. the regularity of consuming nations' purchases, ana 3. allowable quantities of grain to be purcnased. A degree of rigidity of official position in the face of changing conditions may be expected, according to the March 1976 GAO report on export subsidies: .in the summer of 1972, Agriculture was ex- tremely reluctant to modify its surplus policy, in- cluding the payment of export subsidies which (had) existed foc many years, ad to shift to a policy oriented to a low surplus and high export demand. Although Agri- culture did finally adopt a market-oriented policy and suspend payment of subsidies, it finds itself in 1975/ 76 committed to that policy with the same degree of rigidity that it ad in support of subsidies in the summer of 1972 when signs of changing market conditions arose." GAO's current review of the 1974-75 transactions, export reporting and forecasting, and export policy found weaknesses in Government policy when hallenged by unantici- pated market shifts. Besides the deficiencies in export reporting and forecast data no contingency plans or impact analyses had becn carried out. A more fundamental criticism, we believe, requires con- sideration: that the absence of guidelines and standby mechanisms for government intervention contributed to the dis- sension, confusion and uncertainty marking the Soviet pur- chases. 91 FOREIGN POLICY ASPECTS OF FOOD EXPORS Food export policy clearly warrants cause of its newly recognized importance consideration be- as a pt nation's overall foreign policy. The Commission of the on Inter- national Trade and Investment Policy, in 1971, assigned agricultural exports in its final report a major role in helping to overcome the Nation's trade deficit, and these hopes have been fulfilled. Approximately U.S export earnings are deL;ved from one-quarter of gricultural As agricultural exports have ha a positive exports. impact on the U.S. balance of trade, they have strengthened position. the U.S. world The Secretary of Agriculture in 1976 pointed "Agriculture has now become our numbe, out: exchange and it's a powerful factor in one source of foreign maintaining the econo- mic health of this country." The Secretaray also pointed to the role exports in U.S. foreign relations: of grain "We are using food to win friends." The special role of food exports in our economic relations with Communist countries political/ by the Administrator of Agriculture's was underscored Foreign Agricultural Service in 1976: "The plain fact is that agricultural trade been crucial to economic relations, and has therefore political relations, with Communist countries. In the last three years, U.S. exports to Soviet Union have been more than two-thirdsthe cultural; the same ratio has held for exportsagri- to Eastern Europe, and U.S. (agricultural) ports to Mainland China have been 80 percentex- the total exports from this country." of It has also been advocated that the U.S. use its food ex- port potential more aggressively, to counteract embargoes, for example, or as a mechanism oil or other age. Although ruled out, one suggestion for political lever- was the of "food power" to discourage Soviet involvement employment in Angola. In Chapter 3 we noted the AL-CIO's proposal negotiations that: during 1975 "The U.S. policy to deal with commodity should establish an offensive cartels such as the OPEC nations 92 and determine to what extent American corporations are participating in and supporting them." A 1974 CIA document addressed to coming decades described the potential economic and political dominance flowing from the U.S.'s near monopoly Frosition as food exporter. The report cited the "virtual life and death power" which could result. This is a profoundly moral issue, and not the only one bound up in grain export policy-making, both from a domestic and a foreign relations veiwpoint. A former high-level Agri- culture official has stated that: "The great difficulty with respect to food supplies during the next 25 years will not be one of too little grain and other food in the aggregate, but of distributing the grain equitably between people and animals, and nations." 1975 LONG-TERM GRAIN PURCHASING AGREEMENT Another problematical area of food export/foreign policy is the long-term agreement negotiated with the Soviet Union in 1975. To recapitulate briefly, the Government's position is tnat the agreement represents an attempt to shield pro- ducers and consumers from wide fluctuations in foreign demand by stipulating minimum annual grain purchased by the Soviet Union for a 5-year period. Not only does the agreement pro- vide certainty for farmers, but it assures the Soviet Union a minimum of U.S. grain annually. In contrast to this official view, consumers complain that they fear paying higher prices for farm products as a consequence, farmers feel that the agreement both contra- dicts Government's commitment to free markets and depresses prices, and the grain trade believes that the Government's arbitrary intervention impairs the credibility of both pro- ducers and traders. There were also fears that the agreement might be the first of more government-to-government contracts, but this does not ap,ear to be the case. The official position is that it was a unique agreeuaiint to deal with a unique situ- ation" and tnat the Govern~lent does iot seek and would not approve similar proposals from other Importing countries. "Understandings" with Japan, Poland, and other countries, 93 according to officials, are not specific in their obligations and provide only general assurances on both sides. CONSTRAINTS ON FREE MARKET AGRICULTURAL TANSACIONS Government Controls in Other Countries The world context in which the U.S. agricultural economy operates is one marked by government controls. Of all nations involved in grain trade, the U.S. now stands alone in not exercising considerable control over either agricultural production or marketing. The rise of centrally-planned economies with state tra- ding systems represents concentrated power disruptive to a mar- ket model. Currently the most significant of these is the Soviet Union, whose ability to disrupt a free market system was demonstrated in the 1972 grain sales. The 1975 long-term agreement has drawn criticism be- cause it is a contract between this kind of controlled econo- my and the U.S. free market. The Farm Bureau Federation testified before Congress on this point in January 1976: "The interest of the United States in international trade cannot be advanced by participation in politi- cally determined international commodity agreement . . .(therefore, the) Farm Bureau strongly opposes the recent Soviet grain agreement and others be- cause these government-to-government contracts establish a dangerous precedent for future political international commodity agreements and constitute further interference with the world market system." In other grain exporting countries a recently completed review by GAO found a range of marketing controls. The market- ing differences evolved mostly from the political orientation of the respective governments. In Canada, Australia, and Argentina, only government wheat or grain boards are authorized to buy wheat and certain feed grains. Canadian and Australian wheat boards are pro- ducer-oriented, while Argen-ine Acricultural policy until re- cently has been geared primarily to benefit the urban popula- tion. The European Community, in contrast to other markets we 94 studied, produces primarily for domestic consumpt 'n and uses exports to dispose of surpluses. Brazil's agricultural policy is directed toward expanding its developing soybean industry and increasing eports, and Brazil gives credit, tax breaks, and other incentives to producers. These marketing systems contained guaranteed producer and domestic support price schemes. -- The European Community support price benefited pro- ducers but consumers generally paid higher-than- world-market prices. -- The Australian Wheat Board uses a wheat stabilization fund to smooth fluctuations in grower income and ties the domestic wheat price to growers' production costs. -- Argentine producers until recently paid a fixed price, which was about one-third of world-market prices, and Argentine consumers benefit from on-again, off-again subsidies to Argentine millers and other processors. (This system is now in a state of transition and it is unclear whether past policies will continue.) -- The Br..zilian Government has set attractive minimum soybean prices, but high world market prices have made price support unnecessary. -- The Canadian Wheat Board has established a minimum price for producers and sells wheat - domestic users at prices considerably below world m Ket prices. Concentration in U.S. Grain Exportin Although U.S. grain is produced by a large number of farms, grain marketing is characterized by a high degree of concentration. The GAO's survey found that 11 multinational firms control almost three-quarters of U.S. agricultural ex- port sales. Since less than 10 percent of the firms account for nearly 75 percent of all export sales, the grain trade can thus be characterized as oligopolistic competition. This raises the question whether current policy adequately ad- dresses the subject of competition in the exportation of grain. 95 GOVERNMENT DECISIONMAKING The ew status of food exports (as no longer a matter solely of domestic concern, but a potent factor in U.S. balance of trade and foreign policy) has meant considerable shifting in decisionmaking, particularly during the Soviet grain trarsactions. In January 1976 the Senate Subcommittee on Foreign Agricultural Policy conducted hearings on decisionmaking and food policy in order to learn more about executive branch actions. The chairman's opening statement addressed the inherent complications of 26 agencies participating in the policy process: "When one looks at all of the aencies. . .in- volved in food and agricultural policy, it is understandable that decisions are made which are seemingly at cross purposes. If the Secretaries of State, Treasury, Agricul- ture, and Labor say conflicting things, one can only wonder who is in charge. And, obviously, this will have an important impact on decisions by our foreign buyers." As noted earlier. agricultural policy was consolidated in arch 1976 under the Agricultural Policy Committee, chaired by the Secretary of Agriculture. Agriculture in theory was to be the "lead" agency in what had become an inter-organizational policy process. However, the Pesident's Economic Policy Board in reality remained the Nation's pri- mary agricultural decision-making entity throughout 1976. Uncertainty continues to exist regarding how and when major policy options should be implemented. GAO believes a new mechanism to effectuate policy action is worth con- sideration. VIEWS OF RECENT POLICY The chairman quoted above also expressed concern about weaknesses of current food policy: "If the complex interrelationships of food and agricultural system are to be balanced. . .we have got to start thinking in terms of a compre- hensive policy which relates all the basic ele- ments. 96 We can no longer afford to have a separate policy for grain producers and another for livestock, dairy and poultry producers. We can not ever afford to have just an agricultural policy, or a consumer policy, or trade policy. We must have a policy which interrelates and balances all of these elements." Whether the Government has a food policy has ben a matter of dispute. For example, the Director of th4e Com- munity Nutrition Institute contends that there is nne: .the Administration (in existence in 1976) seems intent on emphasizing that we do not have a national food policy, and that we are not about to develop one. There is no mechanism within the Executive branch to develop a food policy, n c is there an agency to administer one if it s uld be developed. This does not relate to the economic consequences to farmers and consumers of farm exports, it also touches on such issues as food availability, food quality, and food safety." The National Farmers Union in 1976 also criticized the lack of an overall food policy: 'To service our domestic and export customers-- and alleviate fears of shortages--adequat, reserves of storable food products should be maintained as a public policy. All of this, however, must be done as part of an overall food policy--and this is something which we do not have at this time. . .We regard it as important to have, as part of a definitive, comprehensive national food policy, an export licensing system which would en- able the government to insure that food supplies needed by American consumers and industries would be assured and maintained, and to allocate remaining supplies in times of real shortages among our var- ious export customers on the basis of their histori- cal record of purchases, and to provide food needs for humanitarian purposes and natural disasters. In 1973, in 1974 and again in 1975, the government has intervened and is now interfering to prevent farmers from selling their crops freely. 97 Because this was done without any guidelines, without any line to a policy of food abundance, this has been the worst possible form of export control. It has exposed farmers, American con- sumers and our export customers alike to the capri- cious, irresponsible and incompetent whim of politicians in the Executive branch, actin un- predictably and arbitrarily under the pressures, the hysteria and the political motives of the moment." Similarly, the National Farmers Organization has said that if Governrent can ask farmers to undertake full production, farmers deserve to know more about Government's role in the market place. The Secretary of Agriculture in 1976, however, had taken exception to the charge that no food policy exists: "The plain truth is that this PAministration has a definite, and a very positive, food policy. Our food policy can be summed up in a single word-- abundance. Its synonym is full production. Or differently, it is freedom from government re- straints for farmers. Or still another way, it is encouragement by the government of conditions that lead to full production of farm goods." Eut the policy may be inadequate to deal with the com- plexities and equity of food distribution, as the Secretary acknowledged n his response to the chairman o the Senate Subcommittee on oreign Agricultural Policy i.,Jtnuary 1976. SENATOR: "Let us say there is going to be a short- age of supply. . .Do we (Government1 have ground rules that say if there is a short- age, our regular customers are going to be taken care of first? Do we have ground rules that say if you are intermittent that you can only expect to get a certain per- centage over whet you got a year ago or less than that? Are there any ground rules such as this? SECRETARY: No. It (Government olicy) makes it dif- ficult to do that kind of thing." 98 IMPACTS OF RECENT POLICIES With respect to consumers, the table below reflects the consumer price index of food in comparison with all other items during the last 15 years. As world demand increased and as U.S. grain stocks were depleted, domestic food prices rapidly inflated, particularly in relation to non-food items. With respect to producers, average net farm income more than tripled between 1960-1974, and the farm sector's aver- age per capita income more than quadrupled. While the land utilized remained roughly constant during this period, the intensity of farming increased somewhat in terms of mechanical power and enormously in terms of fertilizer. The predictable result is that crop production increased. Although farmers' equity doubled over the last 15 years, total farm debt more U.S. FOOD SURPLUSES AND CONSUMER PRICES, 1960 TO 114 INDEX 185.0 ., . INDEX OF PRICES RECEIVED 1 160 BY FARMERS (1967 100) - CONSUMER PRICE INDEX 1 7 140 -FOOD (1967-100) ALL OTHER ITEMS (1967 100) 6. 12_ 100 ark s0 38.4 40 35.& 36.0 32. . 30 22.2 22.223.5 20 90x 1.6 1960 1961 1962 1963 1964 1965 1966 1967 1966 1969 1970 1971 1972 1973 1974 NOTE: All figures for 974 are estimated SOURCES: Indexes for food prices and prices received by formers: Economic Report of the President (Washington, D.C. U.S. Government Printing Office, Feb. 1974). Stocks of wheat: Wheat Situation (Washington, D.C.. U.S. Department of Agriculture, February 1974). 99 than tripled. It should also be noted that farmers' operating costs have also risen steeply, particularly the price of fertilizer and of energy to run farm machinery. These and other rising costs mean that the farmers are in a vulnerable position should falling demand depress farm prices subscanti- ally. POSSIBLE MODIFICATIONS OF FRESENT POLICY National Grain Reserve As noted previously, a key part of the post-1969 agricul- tural policy was the decision to give up government reserves of commodities. The Secretary of Agriculture observed: "At one time storage costs on government-held stores of grain exceeded $1 million a day." Under the new policy the Commodity Credit Corporation disposed of all of its grain holdings, except for oats, and the Nation's grain stocks in the summer of 1973 were at their lowest levels in years. Despite the bumper ctops of 1973, stocks were not replenished. The U.S. was joined by other major grain exporting countries in a general move to reduce surplus stocks. A study prepared by the Congressional Budget Office described the evolution of this policy: "As a. result of the continuing accumulation of surplus stocks, their depressing effects o mar- ket price and their high budget costs, the U.S. and other large grain producing nations embarked on a stocks reduction policy in 1970 to join with the produciton curbs launched a couple of years earlier. Between 1970 and 1971, the four major exporters reduced their combined stocks by more than one-quarter. They accomplished this through export sales promotion and changes in farm price support policy. By 1974, the stocks of these countries were only about 40 percent of the level four years earlier. In the U.S., almost all stocks of grain are now held by the private sector." The above summary points out that one of the major con- sequences of Government's accumulation of surplus stocks in prior years was to stabilize or dampen upward price movements, even though this was not the primary purpose of holding 100 stocks. For this reason, U.S. farmers are understandably concerned that a resumption of formal Government policy of holding reserves would have a smilar effect on prices in the future. The advocates of reserves believe their function is to smooth out the "peaks" and "valleys" of production and prices not to eliminate them. In this view reserve stocks can serve as buffers in the production and distribution of agricultural products. A 1975 GAO report, "Grain Reserves: A Potential U.S. Food Policy Tool," tressed this point. Observing that crop shortfalls are as probable as surpluses, we concluded that attention should be given to developing a food reserve mechanism to facilitate decision- making and management. Lacking some form of physical re- serve, the Nation has no insurance in cse of crop failure. And this commits U.S. consumers and deperdent foreign cus- tomers to a hand-to-mouth strategy. Food reserves could improve the predictability of mar- ket prices for farmers and consumer nd assure a physical supply of food, whereas other allocation mechanisms (such as export controls or long-term agreements) only provide the rules for allocating available supplies. Should the United States adopt a national grain reserve policy, several types of management control systems are available: -- voluntary private reserve, -- mandatory Government-financed reserve stored either by the private sector or by the Government, -- private sector-financed reserve stored by the private sector, and -- joint venture reserve mutually financed and stored by the Government and the private sector. Other Optional Modifications A number of options for dealing with exports under short bupply conditions could be considered, including -- allocating export quotas by country or region, 101 --selling export permits of fixed fees with no quota on the number of permits to e sold, -- selling export quota licenses to exporters at auction, -- distributing expert licenses to domestic producersl on the basis of production histories, and -- distributing export licenses t exporters on the basis of their historical market shares, or on a first-come, first-served asi,- Any of these options could be trigge. by a variety of early warning systems, ranging from a voluntary to a man- datory prior approval system on U.S. export sales. Another proposal advanced by a rgmber of Congress would make the Commodity Credit Corporation (CCC) the seller or marketing agent for grain exports. A flexible approach, it would--at one extreme--enable the corporation to replace private industry in all grain export transactions. At the other extreme, the corporation would allow private industry to continue to make sales but under certain guidelines and regulations. It would be possible for the corporation to manage sales with centrally-planned economies (a government- to-government approach) and to allow the multinationals to transact all other sales. EXPORTERS' VIEWS OF OPTIONAL MODIFICATIONS In chapter 4 we reported the response of grain ex- porters to various proposa:s involving export data reporting. We noted their general preference for a voluntary prior ap- proval system over a mandatory one, a temporary system rather than a permanent one, and the current system over one requiring written explanations for contract decreases. To the question whether Government might need to monitor food exports routinely in order to permit market intervention in the national interest, 64 percent of those responding did perceive such a need. When presented various options for allocating exports, roughly one-third of the companies responding preferred allo- cation by export quotas by country or region. 102 On the question of various forms of grain reserves, the responses were mixed. (See Vol. II, Appendix G, for details.) SUMMARY At this juncture, U.S. agricultural export policy must not only eet domestic needs but is also expected to fulfill important foreign policy and foreign economic policy objec- tives. In this context, the full-production/nonintervention policy appears inadequate to deal with periods of either shortage or surplus. Seeking full production by farmers, Government has a need for a range of alternatives as agricul- tural surpluses accumulate and depress farm prices. On the other hand, when shortages materialize, the policy hampers Government's ability to intervene promptly and with a minimum of disruption to the economy. Government interventions in marketing decisions during the 4 years prior to 1976 appear to have both compromised expressed policy and limited the opportunities for farmers to realize greater financial returns from their efforts. On the other hand, consumers can be said to have subsidized the foreign grain sales through higher domestic prices. Government intervention also appears to have increased rather than reduced market uncertainty. The experience with the 1973 soybean embargo and with Soviet grain transactions between 1972 and 1975 shows clearly that the central issue of agricultural export policy is not whether the Government can or should intervene. The Govern- ment did intervene, several times dnd in various ways, during this period. The basic issue is whether a more effective policy would result from guidelines or ground rules establishing conditions under which intervention (through either export controls or export subsidies) would take place. This kind of more for- malized intervention policy would allow a more flexible response to extreme changes in market conditcns and minimize the disruptions caused by these sit.t ions. The agricultural sector would benefit from a poiLcy offering some stability while simultaneously insuring fair prices for consumers and acceptable returns for producers (conditions essential to assuring an adequate supply). Such a policy would also benefit foreign buyers of U.S. grain, in that it would provide more equitable access to available supplies, and make the U.S. a more reliable supplier internationally. 103 The GAO believes that these potential benefits warrant consideration in the Congress's assessment of agricultural export policy. Our 1976 study of grain reserves as a U.S. food policy tool has already set forth our conclusion that attention should also be given to developing a food reserve imechanism to facilitate decisionmaking and management. Any attempt to develop a balanced agricultural export policy should also include an assessment of the role of multinational grain exporters in marketing and distributing U.S. grain, their relationship to Government, and their im- pact on the market in terms of supply and price. Attentior might also be paid to the potential role of U.S. grain cooperatives which have shown considerable interest in developing their export capabilities. 1/ There are strong indications that this trend will continue, and such cooper- atives might well provide a viable supplement to traditional grain-exporting channels. In the GAO's view, a national agricultural policymaking system which can deal effectively with current and future challenges should include the following elements: -- An early warning system of changes in export sales. -- A flexible policy framework that satisfies specific objectives. -- A structure and procedure for implementing policy action. -- Contingency planning to meet domestic and foreign economic policy objectives and national security needs. A complete summary of GAO's conclusions and recommenda- tions is provided in the following chapter. l/The Farmer Cooperative Service of the U.S. Department of Agriculture issued FCS Research Report 34 in 1976: "Improving the Export Capability of Grain Cooperatives'. 104 CHAPTER 7 CONCLUSIONS, AGENCY COMMENTS AND OUR EVALUATION, RECOMMENDATIONS, MATTERS FOR CONSIDERATION BY THE CONGRESS GENERAL CONCLUSIONS The Executive Branch has taken numerous actions over the past 3 years to improve its information gathering, analysis, and decisionmaking processes. But weaknesses cited in GAO's 1973 Russian Wheat Report and its 1974 Soybean and Commodity Shortages Reports persist. we believe tat tnese weaknesses are potentially destabilizing to the domestic economy and may impact on the international economy as well. The domestic and international disruptions associated with the 1973 soybean embargo and Russia's 1974 and 1975 grain purchases demonstrated a continuing agricultural export policy problem--particularly on the issue of large-volume grain purchases by Russia. While the 175 long-term grain purchasing agreement added some stability to the purchasing relationship between_ the two Nations, its effectiveness remains uncertain until tested un- der a variety of circumstances. Various Government interventions in the grain exporting market, prior to successful negotiation of the 1975 agreement with the Soviets, occurred without warning and in the wake of strong official statements that sch action would be un- necessary. Government's reemergence in the market on an ad hoc basis remains a distinct possibility despite the existence of the grain agreement. The GAO believes a more balanced export policy, based on established guidelines for government intervention, wculd minimize disruptions and impacts of extrem. shifts in foreign demand. SPECIFIC CONCLUSIONS As a result of our review of Executive Branch management of Russian grain sales, export reporting, and related export policy issues, we arrived at the following specific conclusions. 105 1974 Russian Grain Sales In our opinion, cancellation and renegotiation of the Russian grain purchases and the adoption of the voluntary export approval system are evidence of a need for greater flexibility in export policy. Although an interagency committee was established to monitor the U.S. crop situation and its policy implications, the committee was not able to implement its decisions effectively. More importantly, it saw no need to modify export policy in light of a tight supply situation and to assess the benefits of agricultural exports in a broader national context. Instead, it avoided intervention in the marketplace until a major disruption had occurred. Instead of recommending Presidential adoption and announcement of a formal mandatory export approval system, the committee established a voluntary system as a stop-gap measure. Firm rules and procedures for large disruptive trans- actions involving purchases by centrally-planned economies were not adopted until after such transactions occurred. Weaknesses in the data base for decisionmaking were recog- nized, and some steps were taken to eliminate the weak- nesses. However, decisions of working groups were not prop- erly considered and acted upon by senior officials. Consultations with U.S. trading partners did not result in their sharing the adjustment burden of smaller supplies caused by the U.S. crop shortfall nor in the provision of accurate estimates of demand for U.S. grains. Nor did con- sultations with U.S. exporters result in improvements in data supplied by the export reporting system. There was an absence of agreement concerning decisions on such policy issues as the need for a compliance program to assure that grain exports were allocated as approved, and the need for a prior approval system for large export sales. There was also uncertainty resulting from conflicting statements of U.S. policy. Policymakers were hampered by inadequacies of the data base for decisionmaking and the delay caused by debate over whether and how the data base should be improved. Finally, there was interagency conflict over policy and a resulting inability to reach consensus and adopt plans for effective and coordinated implementation. 106 1975 Russian Grain Purchases Despite the existence of the Export Reporting System, the Executive Branch was surprised by and ill-prepared to handle the events surrounding the 1975 Soviet sales--althougn not to the same extent as in 1972. Once the first sales were made, the Government reacted to pressure from various groups and suspended sales indefinitely. Further pressure was instrumental in the Government's decison to seek a long- term purchasing agreement. As in 1974, certain events in 1975 caused the Government to take actions that were contrary to its policy of full pro- duction and open markets. It is presently difficult to assess the extent to which the long-term grain agreement is a viable and effective alter- native to the traditional Soviet approach of substantial buying without prior notification. It has clearly raised additional uncertainties that may only be resolved as its application is tested under a variety of circumstances. For example, concern continues over the extent of Soviet respon- siveness to the agreement's terms and conditions. And doubt continues as to how the U.S. Government will manage possible extreme circumstances that may confront both signatories. Such circumstances include unexpected changes in the market environment and possible difficulties in the foreign policy area hat might necessitate reconsideration of the entire issue. Even with the agreement in force, the 1975 Soviet grain experience clearly reflects a need for the U.S. Government to improve grain export policy decisionmaking and monitoring. Agricultural Export Reporting System Our review of the system indicated that it falls short of providing timely, accurate, reliable, and complete agri- cultural export data. It does not provide prospective sales information and therefore is not as effective an early warning system as needed. Data currently reported b exporters is not suitable for evaluating foreign demand on which to base timely agricultural policy decisions. The data has limita- tions because export contracts are frequently canceled or extensively modified. Our survey of exporting firms showed that about 20 percent of commodities contracted foL export in 1973-74 were canceled or deferred. 107 Although Agriculture officials administer the system an efficient manner, the uncertain nature of export in sales con- tract data virtually makes it impossible for the system provide the type of concrete information needed for to early warning system. a timely The quality of information provided by exporters could be materially improved if Agriculture modified reporting quirements to include additional information on export re- such as: sales -- Classification of foreign buyer (Government agency, affiliate, private reseller, processor, distributor or other end user). -- Contract pricing terms or formula (including identifi- cation of flexible (basis) vs. fixed-contract types). -- Exact destinations. -- Contract provisions such as loading tolerances, ship- ping dates, storage details, etc. Because contract decreases have affected the export re- porting system's credibility, requiring written for export contract decreases might reduce the explanations unnecessary and speculative contract changes. extent Fewer of would, most likely, improve the quality, consistency, changes and credibility of data generated by the system. Data quality could be further improved and the system's reliability hanced by penalizing exporters who modify contracts en- acceptable justification. Such actions would expand without tem's regulatory role, however, and undoubtedly the sys- would strongly opposed by grain exporters, as was indicated be survey. in our During the export reporting system's 3 years of existence, three different Agriculture organizations have been responsible for its administration. It is currently administered by the Office of the General Sales Manager, which has primary responsibility for managing Government- funded agricultural export programs. We believe that ex- port monitoring by an agency whose main purpose is to export programs raises a question as to its objectivitymanage carrying out its monitoring and quasi-regulatory in functions. 108 Agricultural Forecasting To improve its aility to forecast Soviet grain pro- duction, develop an appropriate early warning system, and manage Soviet grain sales effectively, the United States must endeavor to gather more and better data. This ob- jective can be partially realized by taking a stronger stand that the Sc-iet Union provide the forward estimates called for under the 1973 US/USSR Agricultural Cooperation Agreement. In recent years, it has become clear that trend analyses do not provide reliable forecasts because of the difficulty of interpreting the impact of severe weather variations and a variety of market and nonmarket variables. Forecasters in various agencies are now attempting to make more detailed analyses of the numerous factors that determine production and consumption, both domestically and internationally. In the past forecasting was employed primarily for export promotion and market development objectives, not to provide high-quality data analysis for Government decision- makers. Execu:ltive branch officials are interested in strength- ening the application of forecasting to the management of foreign agricultural policy. The Government still needs to improve its market in~- telligence capability and forecasting system. Estimates of foreign agricultural conditions are sometimes inadequate for proper US. policy making due to the many demands placed on the agricultural attaches' time and the difficulties in collecting agricultural information in some countries. Com- pounding the problem is a less-than-adequate methodology and disagreements between the Foreign Agricultural Service and the Economic Research Service--the two agencies within Agriculture that make foreign agricultural forecasts. Since major multinational exporters develop forecasts of foreign demand for the commodities they export, we believe that the executive branch could benefit by considering some of the methodologies used by these companies. Other organiza- tions, such as the Central Intelligence Agency, the United Nations Food and Agriculture Organization and various pri- vate organizations also collect information on foreign agricultural conditions and, in some respects, with better success than the Agriculture agencies. Agrirulture should improve its relationship with the foregoing organizations and should persist in its attempts 109 to improve the in-house relationship between the Economic Research Service and the Foreign Agricultural Service. it should also evaluate the importance of foreign data gathering by attaches in relation to their other duties. Finally, the Department should continue pressing naticns such as the Soviet Union for information about their domestic agricultural situation. Agricultural Export Policy Executive Bra ch commitment to a full-production/non- intervention export policy has adversely affected its ability to intervene effectively in the market and with a minimun of disruption when a shortage situation materializes. This is likely to be equally the case in periods of grain surpluses. Although a variety of forms of limited Government interven- tion are available, the Executive Branch has generally op- posed considering such alternatives on the grounds that ad hoc, voluntary export control systems are more effective. Moreover, t claims that if ad hoc voluntary restraints fail to achieve eir objectives, the Export Administration Act authorizes ormal Government intervention on a temporary basis. In GAO's view, what is clearly needed is an agricultural policy frameworK that contains a series of criteria designed to satisfy specific objectives, but with the flexibility to ,hange when conditions change. Who should get what, when .nd why are the critical questions such a framework should address. This would allow consideration of a number of dif- ferent policy actions which would be appropriate under varying conditions. We believe that a more balanced agricultural export pol- icy, responsive to consumer, producer, exporter, and foreign needs, could insure against recurrence of serious supply pro- blems and satisfy basic domestic and international supply commitments. AGENCY COMMENTS AND OUR EVALUATION Agency Comments The Assistant Secretary of Agriculture for International Affairs and Commodity Programs, in his January 19,1977, re- sponse to our report, acknowledged the accuracy of the factual material presented in it. He wrote: "In general the draft report appears to be a reasonably balanced presentation of facts surrounding the 1974 and 1975 Soviet grain sales and the Executive actions taken in response to these sales." 110 However, the Assistant Secretary's letter disagrees with many of our conclusions and recommendations. Specifically, the Assistant Secretary contended that there is no evidence in the report justifying additional government intervention in the agricultural economy. In fact, he asserted that "recent experience indicates that Government intervention in the marketing system should rarely be used." He added that many of the forms of govern- ment intervention proposed by our report "may affect foreign purchasing of U.S. grains by encouraging importing countries to become less dependent on the U.S. as a source of their grain supplies." The Assistant Secretary of recent agricultural policy contended that our criticisms are unsubstantiated by fact. He states that the market mechanism better serves all sec- tors of the economy and the country than would formal govern- ment mechanisms. He also reiterates that such an orienta- tion represents a conscious and deliberate agricultural pol- icy. Other disagreement reflected in the Assistant Secretary's formal response concerns the 1973 Agricultural Agreement with the Soviet Union, the export reporting system, and our recom- mendations to improve the management and operation of the export reporting system. The Assistant Secretary maintained that tne export re- porting system was never intended to function as an early warning system and that it is not organizationally misplaced by being assigned to the Office of the General Sales Manager. He stated that the export reporting system is intended to operate in an informational capacity and not in a egulatory role and that many of our recommendations would make the system more regulatory and consequently have the impact of reducing the flow of U.S. grain exports abroad. He questioned the need for an annual report to the Congressalso on the management and operation of the export reporting system because the system is included in the Office of General Sales Manager's quarterly report on its operations. The Assistant Secretary also contended that we overstated the significance of Soviet non-compliance with the forward estimates provision of the 1973 U.S./USSR Cooperative Agree- ment. He staled that other factors are also important. His letter also questioned our suggestion concerning Agriculture's 111 need to become more familiar with forecasting methodologies used by other government agencies and the private sector on the basis that we provided no evidence supporting the "sugges- tion that export forecasts by these other organizations have generally been more accurate that those made by USDA." A complete text of the Assistant Secretary's formal re- sponse appears in Volume I, Appendix III, pp. 124-127. We also met with and eceived informal comments from officials of the Federal Maritime Administration, the Presi- dent's Economic Policy Board and the Council on International Economic Policy. Officials of the Maritime Administration acknowledged the accuracy o the report on matters pertaining to the U.S. and Soviet Maritime Agreement. Officials of the Economic Policy Board and the Council on International Economic Policy generally agreed with the facts of the report but did have some concern about the general thrust of several recommendations. Although they agreed that a need exists to establish a flexible and more responsive agricultural policy, they were uncertain concerning whether increased government involvement through a more sys- tematic approach would produce a stable and growth oriented agricultural market. They expressed concern that our recom- mendations could adversely impact on the market, however, they also agreed that the past crisis-oriented approach had also adversely impacted on the market and the entire economy. Our Evaluation We believe that our conclusions and recommendations are appropriate and constructive. They emerge from the general factual accuracy of the report which the Assistant Secretary acknowledges. We are not advocating increased government involvement in the agricultural economy but we are recom- mending a qualitative change ill government involvement de- signed to preserve and enhance the existing agricultural economy. Despite its commitment to a market-oriented system the Executive Branch has intervened in the market repeatedly during the past five years in a crisis manner precipitating serious market disruptions. Had the Government developed a flexible export policy designed to respond to a variety of contingencies (including large lump sum Soviet purchases as well as shortages and surpluses), fewer disruptions would have materialized and the integrity of the market would have been in better condition. We believe that some systematic involvement of the Government in the exporting of U.S. grain 112 is both necessary and desirable. Continued crisis-oriented intervention in the absence of a flexiole policy could cause unnecessary government intervention and the undermining of our market oriented agricultural economy. Our recommendations are designed to preserve the integrity of a market oriented agricultural economy while at the same time recognizing government's responsibility to protect producer, processor, consumer, exporter and importer interests by insuring adequate supplies at reasonable prices. Our recommendations directed at strengthening the export reporting system are based on the premise that better export data will enhance the potential for informed, less crisis- oriented and more market-oriented government decisions. Agriculture's Office of Audit's recent evaluation of the export reporting system (pp. 51-56! supports many of our con- clusions and recommendations. It is highly unlikely that an improved export reporting system will reduce the flow o U.S. grain exports. Such a posiLion was argued by USDA against establishing the system initially; however, the performance of the system thus far shows no relationship between its exis- tence and a decline in exports. Indeed, many exporters be- lieve that the system has provided information that has facilitated more effective operation of our market oriented system. we believe an annual report to Congress on the operation and management of the export reporting system would be use- ful. The current uarterly report on the operations of the Office of the General Sales Manager only contains a brief description of the export reporting system. It does not represent the detailed analytical report that we envision to be necessary. The growth in the size and importance of U.S. agricul- tu,'l exports to tne U.S. economy and national interest over the past five years cannot be denied. All our recom- mendations emerge out of an awareness of this new stature. They are designed to support an updated and more realistic agricultural policy. Our recommendations concerning the 1973 and 1975 U.S. agreements with the Soviet Union are intended to help estab- lish the proper framework for evaluating such agreements in the context of a comprehensive U.S. export policy. Efforts at improving Agriculture's forecasts through more knowledge of forecasting methodologies used by the private 113 sector and other government agencies are intrinsic to better agricultural policy decisionmaking. RECOMMENDATIONS In view of our conclusions, we recommend to the Secre- tary of Agriculture that the following actions be taken, either administratively, if possible, or by seeKing appro- priate legislation: 1. The Export Reporting System be modified to improve its accuracy and reliability by requiring all exporters to explain contract changes, and to penalize exporzers who modify export contracts for speculative or manipulative purposes. (This could be done on an experimental basis so that if export flows are impeded a a result, these procedures could be modified.) 2. All exporters who currently report export sales contracts to Agriculture also be required to report all verbal agreements concerning the sale of U.S. grain, including information on negotiations f sales exceeding 50,000 metric tons. 3. A permanent "early-warning system" be established that supplements the daily and weekly export reporting system, taKing into consideration a variety of other market and decisionmaking factors that would result in a process that minimizes disruption and facilitates informed, orderly, and balanced decisionmaking. 4. A permanent "prior approval system" be established as part of any early warning system to insure that the Government reserves the right to defer, modify, or other- wise intervene in the market to insure adequacy of supply and fairness of price. Unlike past, ad hoc prior-approval systems, this system would be established as a formal entity with guidelines and subject to the rulemaking pro- cedures of the Federal Register and the Admi,&istrative Procedures Act. 5. All exporters who currently report exports sales contract data to Agriculture be required to submit additional data involving more specific destination information. This would require importers to declare the final destination Fnd/or ultimate end-user location when known or deter- ained. Exporters would also be required to identify the name of the buyer and submit information to Agriculture concerning the buyer's relationship to the seller. 114 6. An annual report on the management and operations of the eport reporting system be submitted to Congress. Such a report would stress efforts ade to improve the systemi' reliability and effectiveness, and would be submitted to Congress prior to the convening of appro- priation hearings each year. 7. Responsibility for managing and operating he Export Reporting System be transferred from any agency having operational export responsibilities, such as the Foreign Agricultural Service and the Office of the General Sales hanager, to an analytical and/or 'egulatory agency. iAgencies with a more objective, analytical and/or regu- latory orientation that appear to be appropriate reposi- tories of such a reporting function include Agriculture's Economic Research Service, Commerce's Office of Export Administration, and tne Commodity Futures Tra. ng Commis- sion. Another alternative would be to establish within Agriculture a separate and independent organizational entity which would report concurrently to the Secretary and to the Congress. 8. A thorough evaluation of Soviet compliance with the 1973 Agricultural Cooperation Agreement be made to determine now the agreement has benefitted the U.S. and the Soviet Union. This effort should also determine whether Soviet non-compliance with the agreement's forward estimates provision has rendered the agreement ineffective in U.S. terms. An attempt should also be made to determine a means for insuring Soviet compliance with the forward estimates provision. 9. U.S. forecasting of foreign supply and demand--particularly for the Soviet Union and other non-market economies-- should be upgraded and improved. Better market intelli- gence and analysis coupled with greater intraagency and inter-agency communications and coordination is necessary and desirable. The recommendations of recent studies (by the Economic Research Service on short-term forecasting and by the ffice of Technology Assessment on food infor- mation systems) should be considered in the response to this recommendation. 10. An agricultural export policy be established that clearly defines the Nation's policy goals and objectives as well as the role of the Government and private sector i imple- menting that policy. Such a policy should take irto con- sideration periods of surplus and shortage and provide 115 policy variations responsive to each condition. policy should, to the extent possible, The differentiate approach to non-market economies to minimize an resulting from large-scale, unanticipated instability purchases. In view of foreign economic policy considerations, for reasons of national security, the policy and provide for contingency planning. should 11. Evaluate the effectiveness of the 1975 long-term pur- chasing agreement with the Soviet Union, determining costs and benefits to producers, processors, porters, and the Soviet Union. Submit consumers, ex- an annual report to Congress on the agreement's effectiveness to provide for appropriate Congressional in order action. 12. All future long-term grain purchasing as the 1975 Russian Agreement) be fullyagreements (such relevant Executive Branch agencies and reviewed by all subjected to ap- propriate Congressional consultation before signed by all parties. being formally 13. All future short-supply export control decisions should be subjected to some form of CongLessional before final decisions are made. consultation MATTERS FOR CONSIDERATION BY THE CONGRESS In its consideration of and deliberations cultural Act of 1977, GAO recommends that over the Agri- Congress legislation providing for an improved export enact that will function as an effective early reporting system warning system. GAO has submitted to Congress proposed providing for needed improvements to thelegislative language export reporting system. (See vol. II, app. F.) The principal features of GAO's proposed legislation include: -- Exporters would be required to provide Agriculture with weekly reports on any commitment, other agreement for export sales. contract, or -- Exporters would be required to inform within 15 days of commencement of any Agriculture contracts with foreign commercial or governmental importers. -- The Secretary would determine at the marketing year whether a short-supply start of each situation exists or will exist. He will also periodically 116 assess commodity situations and modify his determi- nation as appropriate. -- Whenever a short-supply situation is determined, the Secretary would report such a determination to Congress. Unless either House, within 30 legisla- tive days, provides a resolution to the contrary, exportation of the short-supply commodity would be subject to regulation by the Secretary of Com- merce under the Export Administration Act of 1969. --The Secretary, utilizing the full resources of the Depar'a2nt, would make a semiannual report to the Presiuent and the Congress on: (1) the impact on the economy and world trade of shortages or increased prices for commodities subject to these reporting requirements; (2) the worldwide supply of such com- modities; and (3) actions being taken by other na- tions in response to such shortages or increased prices. --The Comptroller General would monitor ard evaluate the activities under section 812, including all re- porting activities. Essentially, we would: (1) review and evaluate the procedures followed by the Secretary of Agriculture in gathering, analyz- ing, and interpreting statistics, data, and infor- mation related to the supply of agricultural com- modities; (2) evaluate particular projects or pro- grams; (3) gain access to any documents, data or records of persons or facilities engaged in any phase of exporting agricultural commodities; and (4) provide appropriate reports to the Congress. In its development of the 1977 'Agricultural Act we recommend that the Congress establish an agricultural ex- port policy that protects the interests of both producers and consumers, while simultaneously providing an effective policy mechanism for surplus and shortage market conditions. The policy should also clarify the Government's position on grain sales to non-market economies, including the propriety of such mechanisms as long-term agreements and government- to-government negotiations. Other issues which the Congress should consider include: the question of a national grain reserve; the role of multi- national grain exportcrs and the degree of concentration in t.is field; and the role 'that might be taken in grain export- ing by U.S. grain cooperatives. 117 APPENDIX I APPENDIX I BIBLIOGRAPHY 1) Food, Agriculture and Nutrition Information Assessment d Recmmendations, Report of theSystems: Food Ad- visory Committee, Congress of the United States; Office of Technology Assessment, June, 1975; 79 pp. 2) Working Papers On Agriculture, Food, and Nutrition Infor- mation Sstems, Appendix A, An Analysis of National and International Agricultural, Food and Nutrition mation Systems; Congress of The United States, Infor- of Technology Assessment; June, 1975; 311 Office pp. 3) A Preliminary Report On The Agriculture Information Sys- tems, Appendix C, An Analysis of National and Interna- tional Agricultural, Food and Nutrition Information tems; Congress of The United States, Office Sys- of Technology Assessment; Jane, 1975; 307 pp. 4) Preliminary Assessment Of The U.S. Food Consumption Nutrition tatus Information Systems, Appendix And B, An Analysis of National and International Agricultural, Food and Nutrition Information systems; Congress of The United States, Office of Technology Assessment; 1975; 219 pp. June, 5) Food Information Systems; Hearings Before Asessent Board Of The Office of TechnologyThe Technology Songress Of The United States; Ninety-Fourth Assessment, Congress; t.rst and Second Sessions; September 24, 25 10, 1975, February 4, 1976; 414 pp. and December 6) Food Information Systems: Summary and Analysis: United States Congress; Office of Tec no ogy Assessment; 1976; 85 pp. August, 7) GAO Testimon on 1972 Russian Grain Sales (Interim Report) March , 1973, pp. 38-41; Hearings Before On Agriculture And Forrestry, United States The Committee Ninety-Third Congress, First Session On S. Senate, Of Farm And Related Programs (Part 1) U.S. 517, Extension Printing Office; Washington, D.C.; 1973. Government 118 APPENCIX I APPENDIX I 8) GAO Testimony on 1972 Russian Grain Sales (Final Report); Ty 23, 197, pp. 149-16 ; Hearings Before The Permanent Subcommittee On Investigations Of The Committee On Govern- ment Operations, United States Senate, Ninety-Third Con- ress, First Session; Russian Grain Transactions; Pursuant To Section 4, Senate Resolution 46, 93rd Congress; U.S. Government Printing Office; Washington, D.C., 1973. 9) GAO Testimony a,Coping With Con-nodity Shortages, April 4l T-JToint -- -Hearingsn The Domestic Supply Informa- tion Act; committee On Commerce and Committee On Govern- ment Operations, U.S. Senate; Ninety-Third Congress, Se- cond Session; U.S. Government Printing Office, Washington, D.C., 1974. 10) Russian Grair Transactions, July 31, 1974, Report Of The Committee On Government Operations, United States Senate, Permanent Subcommittee On Investigations; U.S. Government Printing Office; Washington, D.C., 1974 67 pp. 11) Sales Of Grain To The Soviet Union; October 3, 1974, Hearings Before The Permanent Subcommittee On Investi- gations of The Committee on Government Operations, U.S. Senate; Ninety-Third Congress, Second Session; Pursuant to Section 4, Senate Resolution 269, 93rd Congress; U.S. Government Printing Office; Washington, D.C., 1974; 71 PP. 12) GAO Testimony on Russian Grain Sales; July 31 and August 1, 1975, pp. 76-104; Hearings Before The Permanent Subcom- mittee on Investigations of the Committee on Government Operations, United States Senate; Ninety-Fourth Congress; First Session; Pursuant to Section 4, Senate Resolution 49, 94th Congress; U.S. Government Printing Office; Washington, D.C., 1975. 13) Russian Grain Sale; Hearing Before the Committee on Agri- culture and Forestry; United States Senate; Ninety-Fourth Congress; First Session; September 4, 1975; U.S. Govern- ment Printing Office; Washington, D.C., 1975. 14) United States Grain And Oil Agreements with the Soviet Union; Hearing Before the Committee on International Relations; House of Representatives; Ninety-Fourth Con- gress; First Session; October 28, 1975; U.S. Government Printing Office; Washington, D.C., 1975. 119 APPENDIX I APPENDIX I 15) Who's Makin Foreign Agricultural Policy? the ubcommittee on orelgn AgricuturaI Hearings Before Conimmittee on Agriculture and Policy of the Forestry; United States Senate; Ninety-Fourth Congress; 22 and 23, 1976; U.S. Government Second Session; January Printing Office; Washingtoc D.C., 1976. 16) U.S.S.R. and Grain: A Staff Report Prepared for the Ue Of the ucSu ommittee on Multinational Corporations the Cmmittee on Foreign Relations; of United States Senate; April, 1976; U.S. Government D.C., 1976. Printing Office; Washington, 17) The United States, FAO and World Food Politics: U.S. elations With IternationaTFoOg Staff Report Prepare zatio: Nutrition and Human Needs; or te Seect ommitteeon United Staes Senate; U.S. Government Printing Office; Washington, D.C., 1976. 18) Government and the Nation's Resources: Report of the Na- tional Commission on Su ies Printing Office, Washington, a ortaes; . Government ; Dece r 1976, 211 pp. 19) Multiuational Corporations and United States Foreign Policy: nternationa ra n ompanies; earing on itinational Corporations ore te ubcmmI tee Relations, United States Senate; of the Committee on Foreign Session; June 18, 23, and 24, Ninety-Fourth Congress; Secon Printing Office; Washington, D.C. 1976 (Part 16); U.S. Government 1977; 382 pp. 20) GAO Testimon on Grain Export Before the ucommittee on Foreign Policy Management; Hearings and the Subcommittee on AgriculturalAgricu ural Policy and Stabilization of Prices of Production, Marketing the Committee on Agricul- ture and Forestry, United Staes Congress; Second Session; une Senate; Ninety-Fourth Printing Office; Washington, D.C., 24, 1976; U.S. Government 1976, 96 pp. 21) rovin he E rtCapabit of Grain Coo C esearc peratives; eportarmer Cooperative ervice; Department of Agriculture; 1976, .S. 90 pp. 22) A Review andAppraisal of Forecasting in the Economic Researc rvice; ra. C. Haiacher; Commodity Economics Matthews an ichard Research Service; 1975 & 1976; Division; Economic U.S. Department of Agriculture, 2 volumes. Note: See also list of GAO reports, Appendix A, Volume II. 120 APPENDIX II APPENDIX II DEPARTMENT OF AGRICULTURE orrFICC orC SECRECTARY WASHINGTON. D. C. 20250 January 19, 1977 Mr. Henry Eschwege, Director Community & Economic Development Division U. S. General Accounting Office Washington, D. C. 20548 Dear Mr. Eschwege: This is in response to your letter of December 14, 1976, asking for comments on your proposed report to the Congress entitled, "Executive of Russian Grain Sales, Agricultural Export Branch Management Policy Issues." Reporting, and Related Export Ingeneral the draft report apoears to be a reasonably of facts surrounding the 1974 and 1975 balanced presentation Soviet grain sales and the Executive actions taken in response to these sales. From these conclusions which differ considerably from most of the facts, however, we draw draft report. We also, therefore, disagree with many conclusions in the recommendations. of the report's As presently drafted, the report appears to reflect an underlying assumption that the current market system for U. S. grain is incapable allocating yearly supplies of U. S. produced of satisfactorily foreign buyers without considerel, governmentgrains between domestic and intervention. The report, however, contains no evidence to upport this underlying absence of the export subsidy mechanism which existed assumption. !n the and until the autumn of 1972 whereby throughout the 1960's foreign buyers received a price advantage over domestic buyers, we believe recent experience indicates that Government intervention in the marketing system should rarely be your report is unbalanced if it fails to recognize thatused. We believe that government intervention proposed in the report may affectthe forms of of U. S. grains by encouraging importing countries to foreign purchasing on the U. S. as a source of their grain supplies. become less dependent The draft report asserts that this Administration's export implementation of these policies "lack cohesion", "fail to policies and the are 'oftn ill-timed, and generally provide fexibility...", decisionmaking...". These are strongsuffer from an absence of rational charges that appear unsubstantiated by fact. These charges appear to reflect the presumption government in the export of U. S. grain is in the nationalthat intervention by absence of form! mechanisms for government interventions interest. The exports reflects an explicit policy (ot, as the report ingrain and focd policy) -- based on the belief that the market mechanism implies, a lack of the producing and consuming sector in the United States, better serves not only interest of the country. but also the general 121 APPENDIX II APPENDIX II Throughout the report there are references to inaccuracies in the USDA's export forecasts due to weaknesses and deficiencies in the overall system of export reporting and the forecasting of foreign demand. The draft report fails to recognize that the principal reasons for "inaccuracies" of forecasts and other export inlicators is not a failure of systems, procedures or techniques, but simply the occurence of unpredictable deviations in the weather. In regard to export forecasts, the draft report suggests that forecasting methodology used by the multi-national exporters, the CIA, and the United Nations Food and Agricultural Organization might be an improvement over that used by the Department of Agriculture. However, the report offers no evidence to support the suggestion that export forecasts by these other organizations have generally been more accurate than those made by USDA. The report makes repeated references to the need for obtaining forward estimates of grain production from the Soviet Union under the 1973 Agricultural Agreement. While such information would be of value, and in fact we have made repeated efforts to obtain forward estimates, we believe the importance of this point is overstated. Even if earlier crop estimates were given, there would remain a wide range of uncertainty as to the size of Soviet import needs since factors other than the level of production (e.g., availability of grain reserves, government policy decisions, availability of foreign exchange, etc.) may be more important n determining the level of imports. Opportunity for receiving general indications of Soviet import needs for grain will perhaps be best within the context of the biannual consultations with the Soviets under the 5-year Grain Supply Agreement. The Ministry of Foreign Trade, the agency responsible for imports, is the lead Soviet agency In these consultations. Ifexperience with the bilateral agreement is satisfactory on both sides, this channel of forward information may develop further, but it will be through patient development of good working relationships rather than by simply making new demands for information. Our remaining observations relate to the report's conclusions and recommendations concerning the export sales reporting system. GAO concludes that, although the export sales reporting system is administered in an efficient manner, it fails to provide timely, accurate and complete data on foreign demand for U. S. agricultural commodities. This conclusion is based primarily on the determina- tion that (1)reported export sales are often concelled or modified, and (2)the system fails to provide information on prospect:ve export sales. We do not believe that either of these determinations affect the accuracy or timeliness of data generated under the reporting system. Cancellations and modifications of contracts are normal trading practices inour free market system. As long as such transactions are reported accurately and promptly to the Department, and there isno suggestion in the report that they are not, published summary data would accurately reflect the outstanding balance of export sales. To penalize exporters for cancelling or modifying their contracts, as recommended in the report, would amount to government control of sales, a concept which we doubt the Congress intended and certainly one which this Admin' tration opposes. 122 APPENDIX II APPENDIX II Likewise, we find nothing inthe law, nor in the legislative history, which suggests that Congress intended prospective export sales to be included in the reporting system. Moreover, we believe it impractical to implement such a reporting system, as recommended in the report, without significantly impeding export sales of agricultural commodities -- sales which are vital to the American economy. We generally agree with the recommendations concerning the reporting of verbal transactions and ultimate destinations. In fact, verbal transactions, supported by written documentation, which as a matter of trade practice represent or lead to written contracts, are reportable under present regulations. The reporting of ultimate destinations, ifknown, is also required under present regulations. Information concerning the name of the foreign buyer and other contract details is being obtained on a periodic basis. However, we do not agree with GAO's conclusion that the relationship between the buyer and seller determines whether a given contract will be performed. Exporters maintain that all export sales are bona fide contracts and will be fulfilled. Logically, it is the importer's motivation, e.g. whether purchasing for consumption or for re-sale, which most affects the incidence of cancellation, and this factor is exceedingly difficult to determine. Contrary to the report's conclusion that the reporting system is organizationally misplaced in Agriculture, wt think a persuasive case can be made for its relevance to the other activities of the General Sales Manager. Itis inthis office that responsibility for agricultural export policy is centered. Most decisions affecting commodity priorities or export stimulus flow through the General Sales Manager. It therefore seems logical to make this office responsible for the reporting of the consequences of USDA's export policies. We would observe that the concept of the reporting system under the present law is informational, not regulatory. We disagree with the recommendation to establish a formalized early warning system, encompassing a reporting procedure for prospective export sales and a prior approval system. As indicated inthe draft report and in the proposed amendment to Section 812 of the Agriculture and Consumer Protection Act of 1973, this system would be effective only in those situations such as purchases by the Soviet Union, where traditional intelligence and forecasting methods do nct work. However, we believe the long term U. S./USSR Grain Supply Agreement has now stabilized trading between our countries thus eliminating the threat of large unexpected grain sales and the need for a formal early warning system. An additional concern we have with the proposed amendment to Section 812 involves the formalized procedures for Secretarial determinations of short supply. As proposed, this concept could impede our ability to respond promptly and effectively in critica' supply situations. Of special concern is the proposed 30 day period for Congressional override. We know from past experience that time isof the essence when making determinations and policies affecting commodity availability during these critical periods. 123 APPENDIX II APPENDIX II Finally, we question the eed for the recommended annual report to the Congress on the management and operation of the export reporting system since the General Sales Manager is already submitting quarterly re rts on the operations of the Office of the General Sales Manager, includ>i g this system. USDA's detailed comments on specific portions of the draft report are attached. Sincerely, Richard E. Bell, Assistant Secretary International Affairs and Commodity Programs 124 APPENDIX III APPENDIX III PRINCIPAL OFFICIALS RESPONSIBLE FOR ADMINISTRATION OF ACTIVITIES DISCUSSED IN THIS REPORT Tenure of office From To DEPARTMENT OF STATE SECRETARY OF STATE: Cyrus Vance Jan. 1977 Present Henry A. Kissinger Sept. 1973 Jan. 1977 William P. Rogers Jan. 1969 Sept. 1973 DEPARTMENT OF THE TREASURY SECRETARY OF THE TREASURY: W. Michael Blumenthal Jan. 1977 Present William E. Simon May 1974 Jan. 1977 George P. Shultz June 1972 May 1974 John B. Connally Feb. 1971 June 1972 David M. Kennedy Jan. 1969 Feb. 1971 DEPARTMENT OF JUSTICE ATTORNEY GENERAL: Griffin Bell Jan. 1977 Present Edward H. Levi Feb. 1975 Jan. 1977 William B. Saxbe Jan. 1974 Feb. 1975 Elliot L. Richardson May 1973 Oct. 1973 Richard G. Kleindienst June 1972 May 1973 John N. Mitchell Jan. 1969 Mar. 1972 DEPARTMENT OF AGRICULTURE SECRETARY OF AGRICULTURE: Robert Bergland Jan. 1977 Present John A. Knebel (Acting) Oct. 1976 Jan. 1977 Earl L. Butz Dec. 1971 Oct. 1976 Clifford M. Hardin Jan. 1969 Nov. 1971 125 APPENDIX III APPENDIX III Tenure of office From To DEPARTMENT OF COMMERCE SECRETARY OF COMMERCE: Juanita M. Kreps Jan. 1977 Present Elliot L. Richardson Feb. 1976 Jan. 1977 Rogers C.B. Morton May 1975 Feb. 1976 Frederick B. Dent Feb. 1973 Mar. 1975 Peter G. PeteLson Feb. 1972 Jan. 1973 Maurice H. Stans Jan. 1969 Feb. 1972 OFFICE OF MANAGEMENT AND BUDGET DIRECTOR: Bert Lance Jan. 1977 Present James T. Lynn Feb. 1975 Jan. 1977 Roy L. Ash Feb. 1973 Feb. 1975 Caspar W. Weinberger June 1972 Feb. 1973 George P. Shultz July 1970 June 1972 Robert P. Mayo Jan. 1969 June 1970 NATIONAL SECURITY COUNCIL ASSISTANT TO THE PRESIDENT FOR NATIONAL SECURITY AFFAIRS: Zbigniew Brzezinski Jan. 1977 Present Brent Scowcroft Nov. 1975 Jan. 1977 Henry A. Kissinger Jan. 1969 Nov. 1975 COUNCIL ON INTERNATIONAL E"ONOMIC POLICY a/ EXECUTIVE DIRECTOR: John M. Dunn (Acting) Feb. 1975 Jan. 1977 William D. Eberle July 1974 Jan. 1975 Peter M. Flanigan Feb. 1972 July 1974 Peter G. Peterson Jan. 1971 Feb. 1972 a/Organization no longer in existence. 126 APPENDIX III APPENDIX III Tenure of office From To CENTRAL INTELLIGENCE AGENCY DIRECTOR: Vice Admiral Stansfield Turner Feb. 1977 Present George Bush Jan. 1976 Jan. 1977 william E. Colby Sept. 1973 Jan. 1976 James R. Schlesinger Feo. 1973 July 1973 Richard Helms Jan. 1969 Feb. 1973 COUNCIL OF ECONOMIC ADVISORS CHAIRMAN: Charles Shultze Jan. 1977 Present Alan Greenspan Sept. 1974 Jan. 1977 Herbert Stein Jan. 1972 Aug. 1974 Paul w. McCracKen Feb. 1969 Dec. 1971 OFFICE OF THE SPECIAL REPRESENTATIVE FOR TRADE NETIATIONS SPECIAL REPRESENTATIVE FOR TRADE NEGOTIATIONS: Rober Strauss Mar. 1977 Present Vacant Feb. 1977 Mar. 1977 Frederick B. Dent Mar. 1975 Jan. 1977 william D. Eberle Nov. 1971 Jan. 1975 Carl J. Gilbert Aug. 1969 Nov. 1971 EXECUTIVE OFFICE OF THE PRESIDENT COUNSELOR TO THE PRESIDENT a/ FOR ECONOMIC POLICY: Kenneth Rusn May 1974 Oct. 1974 ASSISTANT TO THE PRESIDENT a/ FOR ECONOMIC AFFAIRS: L. William Seidman Sept. 1974 Jan. 1977 a/Position no longer in existence. 127 REPORT TO THE CONGRESS BY THE COMPTROLLER GENERAL OF THE UNITED STA TES Issues Surrounding The Management Of Agricultural Exports Volume II (Related Appendixes) ID-76-87 MAY 2, 1977 VOLUME II: RELEVANT APPENDICES Contents APPENDIX A GAO Reports on Agricultural Exports and Related Matters 1 B Executive Office Organization for Food Issues (Diagram) in 1975 3 C Impact of Export Sales Reporting System on Agricultural Commodity Prices 4 D Chronology of Events in Sales of Wheat to Russia - 1975 14 E Section 812 of the Agriculture and Consumer Protection Act of 1973 26 F GAO Amendment of Section 812 of the Agricultural Act of 1970, as Added by the Agriculture Act of 1973, and Explanation of Proposed Revi- sion of Section 812 27 G Questionnaire Survey of Exporters' Attitudes Toward USDA'S Export Reporting System 37 Chapter 1. Introduction 38 2. Description of the Exporters 39 3. Exporter Attitudes and Opinions on the Export Sales Reporting System 45 4. Contract Decreases 54 5. Exporter Opinions on Past and Possible U.S. Involvemint in Export Markets 65 6. Questionnaire Forms 76 Page APPENDIX H 1973 Agreement Between the U.S.A. and the U.S.S.R. on Cooperation in the Field of Agriculture 89 I 1975 Agreement Between the U.S.A. and the U.S.S.R. on the Supply of Grain 94 J Letter to Congressman Findley Concern- ing Legal Information on the Agree- ment Between the U.S.A. and the U.S.S.R. on the Supply of Grain 96 K Description of U.S.-U.S.S.R. Maritime Agreement 112 L Provisions of General Agreement on Tariffs and Trade (GATT) Relevant to Polish Sales Suspension 114 APPENDIX A APPENDIX A GAO REPORTS ON AGRICULTURAL EXPORTS AND RELATED MATTERS 1. July 9, 1973, Russian Wheat Sales and Weaknesses in Agriculture's Management of Wheat Export Subsidy Program," B-176943 2. February 12, 1974, "Exporters' Profits on Sales of U.S. Wheat to Russia," B-176943 3. March 22, 1974, Impact of Soybean Exports on Domestic Supplies and Prices," B-178753 4. April 29, 1974, U.S. Actions Needed to Cope with Commodity Shortages," B-114824 5. July 30, 1974, "Information Concerning Reports of a Possible Wheat Shortage," B-176943 6. September 6, 1974, Increasing World Food Supplies-- Crisis and Challenge," B-159652 7. December 30, 1974, Alleged Discriminations and Con- cessions In The Allocation of Railcars to Grain Shippers," B-114824 8. April 11, 1975, The Agricultural Attache Role Over- seas: What He Does and How Ho Can Be More Effective for the United States," i-133160 9. April 21, 1975, The Overseas Food Donation Program-- Its Constraints and Problems," B-159652 10. June 24, 1975, "Improvements Needed in Regulation of Commodity Futures Trading," B-146770 11. July 10, 1975, Review of U.S. Import Restrictions--Need to Define National Sugar Goals," ID-75-80 12. August 27, 1975, What The Department of Agriculture Has Done and Needs To Do To Improve Agricultural Commodity Forecasting and Reports," RED-76-6 13. November 26, 1975, 'Disincentives to Agricultural Produc- tion in Developing Countries," ID-76-2 1 APPENDIX A APPENDIX A 14. February 12, 1976, Assessment of the National Inspection System," RED-76-71 Grain 15. March 3, 1976, "Agriculture's Implementation GAO's Wheat Export Subsidy Recommendations andof lated Matters," ID-76-39 Re- 16. March 26, 1976, "Grain Reserves: A Potential U.S. Food Policy Tool," OSP-76-16 17. April 23, 1976, "Marketing Order Program--An Assessment of its Effects on Selected Commodities,' ID-76-26 18. May 28, 1976, "Grain Marketing Systems in Argentina, Australia, Canada, and the European Community; bean Marketing System in Brazil," ID-76-61 Soy- 19. August 6, 1976, "U.S. Participation in International Food Organizations: Problems and Issues," ID-76-66 20. December 8, 1976, "U.S. Import Restrictions: to Present Dairy Programs," ID-76-44 Alternatives 21. March 3, 1977, "Summary of GAO Reports Issued Pertaining to Farm Bill Legislation," CED-77-39Since 1973 2 APPENDIX B APPENDIX B ~~~~~~~~I Ii.~~~~~~~~~~~~~~~~~~~~~ I _ ~ oil _ _ _~ a a Qr[ sB abaI8f( Ie w w a e 3e :aS~~~~~~~~~~~ 5~ ~ dii 3 s Uf 15g P g ef~ ~~Ea~~ APPENDIX C APPENDIX C IMPACT OF EXPORT SALES REPORTING SYSTEM ON AGRJ.ULTURAL COMMODITY PRICES Since the inception of USDA's weekly export reporting system in October 1973, comments have been made about the sys- tem's influence on the price of agricultural commodities. Farmers, for example, contend that the monitoring system has been depressing grain prices. As evidence for their conten- tion, they cite the dropoff in prices since late 1974. Consumers, on the other hand, are increasingly oncerned about the role that grain prices play in the continuing rise of food prices in general. Since the export reporting system was established in part to assure "consumers of plentiful supplies * * *. at reasonable prices", the question of the possible price impact of the reporting system seems an appro- priate one. We.began by looking at the determinants of agri- cultural prices and price trends over the last few years. Price Determinants Long-run agricultural price movements are commonly ex- plained in terms of the fundamentals of supply and demand-- production, consumption, and reserves (stocks). In general, when production exceeds consumption, prices fall and when consumption exceeds production, prices rise. Because.of the nature of the demand for agricultural pro- ducts, large price changes result when imbalances between pro- duction and consumption coincide with low reserves. The price increases of recent years, we found, have generally been attri- buted to the dropoff in world grain production in 1972 and in U.S. production in 1974, rising imports by both developing and state-controlled economies, and depleted stocks. Short-run price movements are more complex. They are influenced to a large extent by the same forces that affect supply and demand. Among these are transportation and stor- age costs; fertilizer and substitute grain prizes; inflation and government policy; and weather, plant disease and pests. But they reflect, additionally, people's perceptions and expectations of future market conditions. The size of a harvest is not a certainty until the crop comes in and the estimates of future export activity undergo frequent revi- sion throughout the marketing year. Day t day and week to week fluctuations in agricultural prices are a result of the 4 APPENDIX C APPENDIX C constant interplay of economic factors and forecasts and human emotions. A significant element affecting short-run price movements is the periodic, detailed information on future supply and demand coming from the Department of Agriculture and private organizations. This information, in the form of forecasts of production, farmers' planting intentions, and foreign demand estimates (among others) allows speculation in commodity futures markets to adjust for future supply-demand imbalances. Given foreseeable imbalances, speculators tend to smooth out the release of grain to the market over time and to stabilize prices. Conversely, when speculators guess incorrectly about future market events, they tend to aggravate price variability. Price Trends The 1960's and early 1970's were relatively tranquil times for U.S. agriculture. Grain surpluses and low prices were the rule, with only an occasional exception. After 1972, however, the grain situation underwent a rapid reversal when world crop shortfalls and rising exports led to diminished stocks, high prices, and general uncertainty. The deterioration in the grain situation was precipitated by a drop in world production in 1972--off 35 million tons against an average annual increase of 36 million tons the pre- vious 10 years. At the same time, there was a sharp rise in total world exports and a significant shift in their pattern. World grain trade increased 31 million tons from 1972 to 1973. Concurrently, state-controlled economies, and especially Russia, chose to import on a massive scale rather than reduce their consumption in the face of tight domestic supplies. The U.S.S.R., traditionally a net grain exporter, led the world in imports, buying 30 million tons in 1972 and 1973, compared with net exports of 8.6 ilion tons the previous 2 years. These two large-scale occurrences--declining world pro- duction and rising exports--combined to create demand that put strong pressure on U.S. grain stocks and prices. From 1973 to 1974, U.S. wheat stocks dropped 71 percent and feedgrain stocks were down to 54 percent. With the U.S. the world's leading grain exporter, these short supplies sent prices sky- rocketing (see figure 1). The rebound of world grain pro- duction in 1973 was not sufficient to replenish already low carryover stocks and the downturn in the 1974 U.S. crop re- duced exportable supplies even further. Grain prices in general remained high through late 1974, when smaller export APPENDIX C APPENDIX C demand and prospects of record 1975 crops combined to prompt a slow but steady price slide. (See figure 2.) Export Reporting System The export reporting system was established in October 1973 to act as an early warning system for short-supply situations in heavily exported agricultural commodities. The summer of 1973 had seen just such a situation develop in soy- bean markets, when strong export demand and depleted stocks combined to drive soybean prices to all-time highs. An em- bargo on soybean exports, followed by an export licensing system, led to a temporary easing of prices. But the action taken was not well received y domestic producers or foreign buyers. The reliability of the U.S. as grain supplier had been called into question nd overbuying by foreign importers as a hedge against further contract cuts may have occurred. The reporting system began, as a result, amid extensive market uncertainty, both about the supply and demand of wheat, corn, and soybeans, and about a reimposition of export con- trols. In view of these unusual market and non-market events, we felt that the system's price impact would be difficult to identify or measure. Nonetheless, we considered various eco- nomic and mathematical approaches to the problem. Econometric modeling is a method frequently used to study price behavior and the economic forces that influence it. Occasionally, the impact of a single force can be inferred from a change in price behavior at the time the force first took effect. We discussed modeling with agricultural econo- mists to see if it could be used to detect the export re- porting system's price impact. Because price models are usu- ally based on yearly--and sometimes quarterly--data, a formid- able statistical problem developed. The export reporting system had been in effect for less than 2 years, making tests of a model for the system's impact unreliable. This problem, combined with the difficulty of handling unusual market evAnt, like recent dollar devaluations, export con- trols, and large grain purchases by state-controlled eco- nomies, led us to forego a modeling attempt. In its place, we tried two simpler, although less pro- mising, methods. The first of these was to examine how much prices seemed to be affected by the information published in the weeKly export sales reports. If we found a strong rela- tionship between prices and the export data, the price impact 6 APPENDIX C APPENDIX C of the system might be inferred. Conversely, no relations' P at all might suggest that the system had had minimal impace The second method was to study agricultural price vari- ability or instability over recent years. We hoped to deter- mine whether a change in variability occurred with the estab- lishment of the export reporting system. Reasonable economic arguments suggest that the system's impact on prices may well be of this nature. Regression Analysis To determine the relationship between prices and data in the export reports, we performed a simple regression analysis. Regression analysis is a statistical technique used to exam- ine data and draw meaningful conclusions about the relation- ship between elements. We selected four commodities the U.S. exports heavily--wheat, corn, soybeans, and soybean meal-- and computed their average weekly cash prices from November 1973 through March 1975. The weekly averages were developed from daily quctations at Chicagov Kansas City, and Decatur markets. Two other major agricultural prices--futures and prices received by farmers--were not used because they were unavailable on a uniform weekly basis. To compare with cash prices, we chose for each of the same commodities two items published in the export reports--change in "ap- parent export commitment" and weekly export shipments. Cash prices of agricultural commodities are commonly classified by market, grade, and class. With no composite cash price available, we chose those prices we felt were rea- sonably representative of the commodities in question: corn- No. 2 yellow, Chicago; soybeans - No. 1 yellow, Chicago; soybean meal - 44% protein, Decatur; and wheat, No. 1 hard winter ordinary, Kansas City. These items are both measures of the export activity of an individual grain. Weekly export shipments represent sim- ply the amount of the grain exported that week. "Apparent export commitment," on the other hand, is obtained by adding cumulative shipments (i. e., exports to date in the marketing year) to outstanding sales. As such, this latter item re- flects longer-run export activity and, in particular, future demand for a commodity. We performed separate regression analyses for each of the commodities, first with weekly prices against weekly ship- ments and then with prices against changes in apparent export 7 APPENDIX C APPENDIX C commitment. All of these analyses presumed that the variables were related on a simultaneous (same week) basis. Since prices in some cases may have been responiding to export activ- ity of a week or two earlier, e also performed regression analyses that accounted for the possibility of delayed responsec. Results of Regression Analysis When cash prices were tested against weekly shipments, no significant mathematical relationship was found for any of the four commodities. This lack of relationship does not seem unreasonable given the apparent random character of the weekly shipment levels. The second group of tests measured the mathematical re- lationship between prices and changes in export commitment. For wheat and soybean meal, we found no significant mathe- matical relatic 'hip between weekly prices and changes in export commitment. In the cases of corn and soybeans, how- ever, relationships of moderate strength were obtained. The coefficients of determination (R squared) / for soybeans and corn were .59 and .51, respectively. In effect, there was a general tendency for large swings in the apparent export com- mitment for these two commodities to be accompanied by price movements in the same direction. We believe that, during periods of market stability, one should expect to find a relationship between agricultural prices and data on agricultural exports. For major export- able crops like corn, wheat, and soybeans, however, such stability was not the case from 1973 through 1974. As a result, the inconsistency of the regression results among the four commodities is not surprising. Unfortunately, however, this inconsistency prevents us from making inferences about the reporting system's price impact. Price Variability The measure of variability we chose was based on month- to-month percentage changes in the cash price of six agri- cultural commodities. For each commodity, we computed the I/The value of the R squared is a measure of the strength of the relationship. A perfect relationship yields an R squared of 1.0 and none at all gives n R squared of 0.0. 8 APPENDIX C APPENDIX C average absolute month-to-month price change for the periods January 1960-December 1965, January 1966-December 1971, January 1972-October 1973, and November 1973-July 1975. (The last two periods are the 22 months before and 21 months after the export reporting system's establishment.) The resulting averages, or variability indices, are a measure of the ten- dency for prices to change, either up or down, from one month to the next. 1/ The results are presented in table I. TABLE I Average Absolute Percentage Change rtom Previous Month I II III IV Jan '60- Jan '66- Jan '72- Nov '73- Dec '65 Dec '71 -t '73 Aug '75 Corn price 2.7 3.1 6.2 5.6 Cotton price (note a) .7 8.7 5.9 Rice price (note b) .6 .4 5.8 3.4 Soybean 2.9 2.6 10.1 6.6 Soybean meal price 4.5 4.2 13.3 10.9 Wheat price 2.2 2.2 8.2 79 a/SLM (41), Staple 34 b/Southwest Louisiana (long) 1/As such, the indices are driven up during periods of us- tained price movements in a single direction (trends), as well as during periods of frequent up and down price swings. Since only the latter situation is what we mean by price variability, our indices are imprecise to the extent that they are not adjusted to account for the effect of under- lying trends. 9 APPENDIX C APPENDIX C The pattern of the indices over time is similar for the commodities. Price variability seemed all to rise markedly from Periods I and II to Period III. This rise, consistent with market events since 1972. moreover, is The suggested decline in variability after 1973, is not as easy to confirm. All of the commodities however, unusually large price increases in the summer of experienced increases that weighed heavily in the Period II 1973-- felt, however, that these increases were part of indices. We trends in 1973 and, as such, did not reflect true major price variablity. Consequently, w adjusted the Period price to account for the increases. The adjusted Period III indices and the Period IV indices are as follows. IT indices TABLE 2 9 III III III Jan 172-Oct 1973 Adjuisted yNov973-Au 125 Corn price 6.2 4,1 5.1 Cotton price (note a) 8.7 7.1 5.9 Rice price (ndte b) 5.8 3.6 3.4 Soybean price 10.1 6.8 6.6 Soybean meal price 13.3 9.1 10.3 Wheat price 8.2 5.6 7.9 a/SLM (41), Staple 34 b/Southwest Louisiana (long) 10 APPENDIX C APPENDIX C A comparison of t adjusted Period III indices with Period IV finds a modest increase for corn, soybean meal, and wheat; a similar decline for cotton; and little change for rice and soybeans. Given the acknowledged imprecision of the indices and the relative shortness of Periods III and IV, we believe that agricultural price variability has not greatly changed since the establishment of export monitoring. Summary We studied the possible price impact of USDA's export reporting system. We could not develop an agricultural price model because of recent nusual market instability and the comparatively short lifespan of the reporting system. A com- prehensive and well-defined model should have identified any significant changes in price behavior since the start of export monitoring. In lieu of developing a model, we selected two other approaches to identifying the system's impact on prices. Using regression analysis, we studied the relationship be- tween weekly agricultural prices and weekly data published in the export reports. The analysis identified a moderate relationship between changes in the weekly export commitment and weekly cash prices for corn and soybeans, but none for wheat and soybean meal. Because of the inconsistency of the results, we do not believe that inferences about the system's price impact can be made. Our second analysis was of the export reporting system's possible impact on price variability. We developed indices of price variability for six agricultural commodities based on month-to-month price changes in the 22-month period before reporting began and the 21-month period since. After suitable adjustments to account for unusual market activity in 1973, we find no great change in price variability since the reporting system's establishment. 11 APPENDIX C APPENDIX C Iil I Y. X ..- · ! -I I ' 12 ~ i// gL 12 a -Ic~~~~~~~~~~~~~~~~ · fr~~~~~~~c Z Cou LU 0 IC' 0I *B 1 I C ur $ L M~~~ o /Pe~~~~1 APPENDIX D APPENDIX D CHRONOLOGY OF EVENTS IN SALES OF WHEAT TO RUSSIA 1975 Prepared for the Subcommittee on Foreign Agricultural of the Committee on Agriculture and Forestry Policy by the Congressional Research Service in January 1976. Modifica- tions and updating of chronology provided by GAO. 14 APPENDIX D APPENDIX D CHRONOLOGY OF 1975 Soviet Grain Purchases January 23 A wheat expert from the International Wheat Council reported that unusually mild weather in Europe was threatening the Soviets' winter wheat crop. About 40 percent (100 million tons) was in danger. March 6 Secretary nf Agriculture Earl Butz announced the termi,-.ion of the voluntary prior-approval system fo2 export sales for grains, soybeans, and soybean meal. The expo:t reporting system remained in effect. May 20 A bumper grain crop was predicted for the Soviet Union by Western agricultural experts in Moscow. Poor weather conditions were not considered serious. June 9 The Department of Agriculture revised downward its projection of Soviet grain production, from 210 to 200 million tons. Soviet grain import requirements were estimated between 10 and 15 million tons. July 1 Agriculture's Crop Reporting Board predicted a bumper U.S. soybean and corn crop for ] Corn crop estimates ranged from 5.7 to a.. billion bushels. July 7 A Department of Agriculture team returned from a 3-week inspection tour of Soviet w eat-pro- ducing areas and predicted a lower yield than in 1974. July 8 Richard Bell, Assistant Secretary of Agricul- ture, denied any knowledge of a grain pact with Russia or that Russian negotiators were in this country seeking purchases. He acknowledged, however, tat the Russians ere chartering ves- sels to ship grain from North America to the Baltic and Black Seas. First estimates of Russian grain needs indicated a 10-million-ton a year purchase from the U.S. over 3 years, and 2 million tons a year from Canada, also over 3 years. APPENDIX D APPENDIX D July 9 Agriculture predicted Russia would harvest 195 milli .etric tons of grain, 10 percent below the S, t goal of 215.7 million metric tons and under the 200 million metric tons that Agriculture forecasted last month. July 10 Agriculture's July U.S. crop report predicted a 153.6-million-ton corn harvest (30 percent over 1974) and a 59.5-million-ton wheat harvest (22 percent over 1974). Bell estimated that the U.S. could sell 12 to 14 million tons to Russia "without endangering domestic supplies." July 15 Government intelligence reports suggested Soviet import needs of 15 million tons for 1975. July 16 USDA announced the sale of 2 million metric tons of hard red winter wheat to Russia (first 1975 sale to USSR), confirmed by Cook Industries of Memphis. July 17 USDA announced the sale of 1.2 million metric tons of hard red winter wheat to Russia. Cargill, Inc. of Minneapolis confirmed the sale through its subsidiary Tradax of Geneva. The Canadian Wheat Board announced that the Soviets had purchased 2.0 million metric tons of high-grade wheat. The Department of Agri- culture announced additional sales of 1.2 mil- lion metric tons of U.S. grains to the Soviets. July 21 Agriculture announced the sale of corn and bar- ley by ContinGc.al Grain Co. to Russia. This sale included 4.5 million metric tons of corn and 1.1 million metric tons of barley. July 22 The Department of Agriculture announced addi- tional sales of 1.0 million metric tons of wheat to the Soviets. July 23 Major U.S. newspapers carried the story that the Soviets had declined t issue a formal in- vitation to members of the House Committee on Agriculture to tour Soviet farmlands in August. 16 APPENDIX D APPENDIX n International Longshor.men's Association (ILA) in Miami voted to refuse to load American and Canadian grain on ships destined for Russia. However, they indicated the ban would be lifted if "the interests of the Aierican public are adequately protected." West Coast longshoremen opposed the move. To date, Russia has purchased approximately 12,550,000 tons of foreign grain (within the last 3 weeks)--2 million tons fromn Canada, 750,900 tons from Australia and 9.8 million tons from private grain companies, primarily using U.S. supplies. Bell stated that the Russians will wait for the August 11 Agriculture crop report and further evaluation of their own crop before making ad- ditional purchases. He indicated the Russians will buy more. He lso projected Soviet import requirements at 16.!, million tons, with 12.1 million tons from the U.S. July 24 The Department of Agriculture asked export firms to notify the Department before making major grain sales to the Soviet Union. The Department revised its estimates of So;iet grain production, from 195 to 185 million ;mttric tons. Soviet import requirements were estimated at 20 million metric tons. Agriculture revised downward its estimate of the Russian grain crop to 185 million tons and increased their import requirements to about 20 million tons of grain. ILA promised that they will load U.S. grain aboard Soviet-bound ships. July 29 Lack of rainfall over much of Iowa and other parts of the Midwest corn belt with forecasts for continued hot and dry weather threatened the bumper crop prospects for corn and soybeans. At a hearing before the Joint Economic Committee, the Chairman of the Federal Reserve Board, 17 APPENDIX D APPENDIX D Arthur Burns, testified that grain sales to the Soviets could lead to a sharp rise in food prices in the U.S. July 31 The AFL-CIO pledged to support the International Longshoremen's Association if the longshoremen refused to load grain on ships bound for the Soviet Union. July 31 and August 1 At hearings before the Permanent Subcommittee on Investigations of the Senate Committee on Government Operations, Assistant Secretary Bell stated that U.S. grain sales to the Soviet Union included 10.3 million tons of wheat, corn, and barley. John Schnittker testified that grain sales to the Soviets shou3d be stopped until mid-October. Bell, before the Senate Committee on Government Operations' Permanent Subcommittee on Investi- gations, stated that the grain sales will have minimal effects on consumer prices. He further said that the Government has no upper limit as to Russian purchases. General Mills (Minneapolis) and Multifood raised wholesale flour prices 1.6 cents a pound af- fecting grocery prices. Among reasons cited were the Russian grain developments. August 1 J. Kenneth Fas.ck, Director, International Di- vision, GAO, testified that the Soviets have refused to comply fully with a 1973 agreement (Article II of the July 1973 Soviet-American Agriculture Agreement) to exchange estimates of farm production, consumption, demand, and trade information. August 6 Mcritime union leaders (ILA) decided to meet in Washinrton on August 18 to consider an embargo against loadincg American grain for sLipment to the Soviet Union. Two other maritime unions, the Seafarer's Association and the Maritime En- gineers Benevolent Association, have already voted to refuse to load grain unless assured the sales will not substantially raise food 18 APPENDIX D APPENDIX D prices. The meeting will also attempt to re- solve disagreements over ocean shipping rates. August 8 Two-thirds of Iowa's 100 counties indicated their corn crop prospects for the October har- vest were fair to poor because of lack of rain. Iowa produces 16 percent of the U.S. corn crop. August 9 The CIA received information indicating the Soviet grain harvest could be as low as 165 million metric tons (20 million metric tons Delow current USDA figures). Information also obtained by CIA indicated that Soviet grain import requirements could reach 40 million metric tons. Government officials stated that Soviet port capacity may limit future grain purchases. Estimates indicated that their ports can handle a maximum of 25 million tons of grain annually, only 10 m.illion tons more than is already on order. August 11 The USDA Crop Reporting Board forecasted U.S. corn production at 5,850 million bushels, 3 per- cent (196 million bushels) below July 1 but 26 percent above 1974, and wheat production at 2,141 million bushels, 19 percent more than 1974 but 2 percent (47 million bushels) below the July figures. Bell released a new estimate of Soviet grain production--180 million metric tons, a de- crease of 5 million metric tons from earlier estimates. Russian import needs were increased to 25 million metric tons. The Secretary of Agriculture called on grain companies to withhold further sales to the Soviet Union until U.S. crop production figures were known. The Department of Agriculture es- timated Soviet grain production at 180 million metric tons. 19 APPENDIX D APPENDIX D August 13 Canada sold the Soviets 750,000 long tons (28 million bushels) low-grade wheat and 3.3 million bushels of feed oats. August 14 Pillsbury Co. raised flour prices by 8.5 percent or 1.4 cents a pound. August 18 President Ford told Iowa grain farmers that he expects additional grain sales to the Soviet Union pending more complete crop figures. The maritime unions reaffirmed their intention to boycott ships loading grain for the Soviet Union in ports along the Atlantic Coast, Gulf of Mexico, and Great Lakes. Longshoremen in Port Houston stopped loading grain. August 19 A temporary Federal Court injunction on behalf of shippers, ordered longshoremen in Houston to return to their jobs loading grain on vessels bound for Russia. August 20 Associations of wheat producers began to talk of a retaliatory boycott against union-made farm implements. President Ford called for restraint and cooperation. August 21 The Secretary of Agriculture predicted a rise of 1.5 percent in U.S. food prices as a result of grain sales to the Soviet Union, and an annual food-price inflation rate of 9 percent. However, a senior official cautioned that the impact would be greater if further sales are consummated. August 29 Agriculture again revised downward their es- timate of the Soviet grain crop to 175 million metric tons, 5 million metric tons below their previous estimate. Import requirements were set at 25 million metric tons. Soviet-American negotiations on a freight rate for American ships carrying grain to Russia were suspended after the Soviets refused to make an acceptable offer. rJ.S. sources were optimaistic that a settlement could be reached when talks resume in KMscow on September 9. 20 APPENDIX D APPENDIX D September 4 Secretary Butz and Chairman Burns testified before the Senate Committee on Agriculture and Forestry. Secretary Butz stated that no additional sales would be made to the Soviet Union until the dispute with the maritime un- ions was settled. Federal Reserve Board Chairman Arthur F. Burns said that Soviet grain purchases have had a "quite sizable" impact on food prices, but much less than the effect of rising production and marketing costs. September 9 As a result of negotiations between George Meany and President Ford, the President announced his intention to explore the possi- bility of a long-term grain agreement with the Soviet Union. He extended the moratorium on grain sales to the Soviets until mid-October. The maritime unions agreed to load grain des- tined for the Soviet Union. In response, the AFL-CIO agreed to end their boycott of ships loaded with grain bound for the Soviet Union. To date, the Soviets have purchased 10.2 million metric tons of grain in the U.S. this year. September 10 Without a public announcement, the State De- partment requested through the Polish Embassy that Poland halt grain buying in the United States. Poland had purchased 1.9 million metric tons of wheat and corn before that date. On the same day, Under Secretary of State Charles W. Robinson left for Moscow to begin negotiations for a long-term grain trade agreement. President Ford announced that he would create a special board to consider re- lated questions of agricultural exports and domestic food prices. September 11 USDA said that the 1975 U.S. grain crop will be large enough to permit additional corn and wheat sales to the U.S.S.R. without causing substantial food price increases in the U.S. 21 APPENDIX D APPENDIX D The statement was based on the latest (as of Sept. 1) estimates of 5.69 billion bushels of corn and 2.14 billion bushels of wheat. September 11 or 12 Jozef Danilczuk of the New Ycrk Office of Rolinpex, the Polish grain-buying agency, was ordered by his government to stop buying grain on the American market. September 12 Danilczuk informed grain exporting firms that Rolinpex was no longer buying grain in the United States. He later reported that he did not mention the embargo to the firms. September 15 President Ford rejected a request by the American Farm Bureau Federation to lift immediately the administration's suspension of grain sales to Soviet Uniorn. September 16 Und,.. Secretary Robinson announced in Moscow that the Soviets had agreed in principle to a long-term trade agreement. September 19 The text of the U.S.-Soviet agreement on ship- ping rates of $16 per ton was released. The rate would go into effect on September 22 and extend at least through 1975. September 21 The Polish Minister of Agriculture Kazimierz BarciKowski arrived in Washington to begin dis- cussion of a long-term grain trade agreement. September 22. News agencies began publishing reports of a secret government ban on grain sales to Poland. These news stories caused sharp fluctuations in grain prices on U.S. commodity exchanges. September 23 An Associated Press article in the Washiiton Post stated that "informed sources" had con- firmed that further U.S. sales to Poland had been suspended until a long-term agreement could be negotiated with the Soviet Union. De- partment of Agriculture officials confirmed the suspension but added that it originatAe in the 22 APPENDIX D APPENDIX D State Department and not in Agriculture. State Department officials declined to comment or said that they were unaware of the suspension. September 29 Secretary of Agriculture Earl Butz and the Polish Minister of Agriculture completed dis- cussions on a long-term trade agreement between the United States and Poland. The agreement was scheduled to be signed in November. October 1 The Senate Committee on Agriculture and For- estry agreed that the United States should negotiate separate agreements for the sale of U.S. grains to the Soviets and for the sale of Soviet oil to the United States. October 6 American newspapers reported a speech by a Soviet Communist Party leader, stating that Soviet grain production could reach only 170 million metric tons, or 45 million tons short of the projected goal. October 9 The Department of Agriculture reduced its estimate of Soviet grain production to 170 million metric tons, including 82 million metric tons of wheat. October 10 The Department of Agriculture released its October 1 crop estimates, showing record har- vests for wheat (2.137 billion bushels) and corn (5.737 billion bushels). President Ford announced that he was lifting the embargo on grain sales to Poland because the Department of Agriculture was estimating record corn and wheat harvests. October 20 President Ford announced the signing of a five-year grain trade agreement with the Soviet Union and ended the embargo on grain sales to the Soviets. Shipments are to be in accord with the U.S.-Soviet Maritime Agreement. An oil trade agreement was still under negotiation. 23 APPENDIX D APPENDIX D October 24 The Department of Agriculture reduced its estimate of Soviet grain production to 160 million metric tons. Import needs were estimated at 30 million tons. October 24 Grain sales to the Soviet Union re- sumed. The U.S.S.R. has purchased 1.2 million tons of co-ts, raising their imports to 25 million tons--11.5 tons from the United States USDA revised its estimate of Soviet grain produc- tion down to 160 million metric tons. October 29 The U.S.S.R. has purchased an ad- ditional 400,000 tons of corn, raising their U.S. imports to 11.9 million tons. November 27 Secretary Butz and Minister Barcikowski exchanged letters relating to a five- year grain trade agreement. Poland agreed to purchase 2.55 million tons of U.S. wheat and corn each year. This amount would be allowed to fluctuate from year to year by 20 percent, depending on the size of the U.S. crop and Polish import re- quirements. December 4 A Soviet planner disclosed that 1975 Soviet grain production may total only 137 million metric tons. December 5 Assistant Secretary of Commerce Robert Blackwood announced that the Soviets were unwilling to pay above- market rates for American shipping after December 31, 1975. American longshoremen threatened another boy- cott of Russian-bound ships if the Soviets refused to pay the higher rates agreed to in September ($16 per ton). 24 APPENDIX D APPENDIX D December 5 A spokesman for the Washington Associ- ation of Wheat Growers, Jerry Rees, states that wheat growers might sue the Federal Government over the five- year grain export agreement with the Soviets. Rees accused the government of yielding to unjustified pressure from consumer groups and the maritime unions, and interfering unnecessarily in the grain market. December 9, William Kuhfuss, President of the American Farm Bureau, stated that there was no lecal basis for suing the Federal Government over the grain trade agreement, though the Bureau op- poses the agreement. The Department of Agriculture reduced its estimate of Soviet grain produc- tion to 137 million metric tons, about 80 million tons below the origi- nal Soviet target for 1975. December 18 Under Secretary Blackwood initialed the U.S.-Soviet shipping agreement which will take effect on January 1, 1976, and will remain in force for 6 years. The agreement allows American ships to receive $16 a ton for grain shipped to the Soviet Union. December 29 Secretary of Commerce Rogers Morton and Minister of the Merchant Marine Timosey Guzhenko signed the shipping agreement in Washington and Moscow. January 22, 1976 The National Association of Wheat Growers authorized initial steps to- ward making a legal challenge of the U.S.-Soviet grain agreements. 25 APPENDIX E APPENDIX E. SECTION 812 OF THE AGRICULTURE AND CONSUMER PROTECTION ACT OF 1973 (P.L. 93-86) "EXPORT SALES REPORTING" "Sec. 812. All exporters of wheat and wheat flour, feed grains, oil seeds, cotton and products thereof, and other commodities the Secretary may designate produced in the United States shall report to the Secretary of Agriculture, on a weekly basis, the following information regarding any contract for export sales entered into or subsequently modified in any manner during the reporting period: (a) type, class, and quantity of the commodity sought to be ex- ported, (b) the marketing year of shipment, (c) destination, if nown. Individual reports shall remain confidential but shall be compiled by the Secretary and published in complia- tion form each week following the week of reporting. All exporters of agricultural commodities produced in the United States shall upon request of the Secretary of Agriculture immediately report to the Secretary any information with respec: to export sales of agricultural commodities and at such t mes as he may request. Any person (or corporation) who knwingly fails to report export sales pursuant to the requir ments of this section sha.ll be fined not more than $25,00) or imprisoned not more than one year, or both. The Secretary may, with respect to any commodity or type of class thereof during any period in which he determines that there is a domestic supply of such commodity substan- tially in excess of the quantity needed to meet domestic requirements, and that total supplies of such commodity in the exporting countries are estimated to be in surplus, and that anticipated exports will not result in excessive drain on domestic supplies, and that to require the reports to be made will unduly hamper export sales, provide for such reports by exporters and publishing of such data to be on a monthly basis rather than on a weekly basis." 26 APPENDIX F APPENDIX F GAO PROPOSED AMENDMENT TO SECTION 812 OF THE AGRICULTURAL ACT OF 1970, AS ADDED BY THE AGRICULTURE ACT OF 1973 (P.L. 93-86) The Congress hereby finds that accurate, reliable, complete, and timely information on exports of agricultural commodities and control of such exports in situations of potential or actual short-supply are necessary to protect the domestic economy from: (1) excessive drain of certain commodities; (2) the disruptive effect of major price fluctuations; and (3) the serious inflationary impac of excessive foreign demand. Section 812 of the Agricultural Act of 1970, as added by P.L. 93-86, is amended to read as follows: "EXPORT SALES REPORTING" "Sec. 812. (a) All exporters of agricultural commodit- ies produced in the United States shall, pursuant to regu- lations to be promulgated by the Secretary, report to the Secretary on a weekly basis the following information, including any changes in information previously reported, regarding any commitment, contract, or other agreement for export sales entered into, modified in any manner, or ter- minated during the reporting period: (1) type, class, quantity, and price of the commodity sought to be exported; (2) the marketing year of shipment; (3) ultimate destination and any intermediate destinations; and (4) identity of the buyer and the relationship, if any, of the buyer to the seller. The Secretary may, upon request by one or more exporters of a particular commodity, waive the reporting requirements of this section with respect to such commodity for good cause shown; provided, however, that such waivers may not be granted for exports of wheat and wheat flour, feed grains, oilseeds, soybeans, soybean meal, and cotton and products thereof, and that waivers may be withdrawn by the Secretary if in his opinion it becomes necessary to begin or resume reporting on a particular commodity. (b) In addition to the other reporting requirements established herein, and subject to the penalties set forth in subsection (f) for knowing failure to report, exporters of agricultural commodities shall notify the Secretary, within 15 days of their commencement, of any contacts with Foreign commercial or governmental importers which may 27 APPENDIX F APPENDIX F result in export sales of wheat and wheat flour, feed grains, oilseeds, soybeans, soybean meal, cotton, and products thereof, or of other agricultural commodities as may be designated by the Secretary. For purposes of this subsection, the Secretary may establish threshold notification quantities by regulations. For each commodity for which the Secretary establishes a threshold notification quantity, notification is only required when a contract with a foreign importer may result in an export of at least that quantity. Notifi- cation shall consist only of identification of commodity, the quantity expected to be exported, and the expected marketing year of shipment. (c) The Secretary shall, with respect to each commodity concerning which reports are required to be filed hereunder, determine at the start of each marketing year whether a short-supply situation exists or will exist. A commodity shall be determined to be in a short-supply situation when the total of reserves on hand, estimated total domestic production, and an amount determir d by the Secretary to be an adequate reserve is exceeded y the total of estimated exports (both commercial and under Government programs) and estimated domestic consumption. The Secretary shall, as additional information beccmes available to him during the marketing year by means of the required reports, consultation with other agencies, and otherwise, review his determinations whether or not agri- cultural commodities are in a short-supply situation, and, as appropriate, modify those determinations. In developing the necessary information and in making determinations here- under, the Secretary shall seek information and advice from the Department of State, the Council of Economic Advisers, the Council on Wage and Price Stability, and the Commodity Futures Trading Commission; from the several departments and agencies concerned with aspects of our domestic and foreign policies and operations hav 1.. an important bearing on exports of agricultural commodities; and, ith respect to foreign demand, from foreign sources including governments, importers, grain boards, and other such sources. All departments and agencies of the United States shall fully cooperate in rendering such advice and information. The Secretary shall cause to be published in the Federal Register any determination that a commodity is or will be in a short-supply situation, with a summar of the basis for such determination. 28 APPENDIX F APPENDIX F (d) The Secretary shall, when he determines that a short-supply situation exists with respect to a particular agricultural commodity, report this determination to the Congress. Unless either House, within 30 legislative days, by resolution provides otherwise, export of the commodity shall, notwithstanding 50 U.S.C. App. 2403(f), be subject to regulation by the Secretary of Commerce under the Export Admini.stration Act of 1969, as amended, 50 U.S.C. App. 2401-2413. (e) The Secretary shall publish in the Federal Register notice of proposed regulations to implement the reporting requirements of this section, and of subsequent modifications of uch regulations, at least 45 days before their effective date, and shall consider and evaluate all comments received thereon. (f) All exporters of agricultural commodities pro- duced in the United States shall, upon request of the Secretary, immediately report to the Secretary any information with respect to export sales of agricultural commodities and at such times as he may request. Any person (or corpor- ation) who Knowingly fails to report export sales pursuant to the requirements of this section shall be fined not more than $25,000 or imprisoned not more than 1 year, or both. (g) Individual reports submitted hereunder shall remain confidential. Reports submitted under subsection (a) shall e compiled by the Secretary and published .n compil- ation form each week following the week of reporting; Provided, however, that published compilations shall not include information concerning identity of buyers or buyer- seller relationships. Nothing contained herein shall be construed to limit the authority of the General Accounting Office to have access to all records of the Department of Agriculture, including the reports filed hereunder, to the extent necessary to carry out its duties. (h) The Secretary, utilizing the Economic Research Service ani the Office of Planning and Evaluation, Department of Agriculture, shall make a semi-annual report to the Pesident and the Congress of his operations heLe- under. Each such report shall contain an analysis by the Secretary of: (1) the impact on the economy and world trade of shortages or increased prices for commodities subject to the resorting requirements of this section; (2) the worldwide supply of such commodities; and (3) actions being taken by other nations in response to such 29 APPENDIX F APPENDIX F shortages or increased prices. Each report shall include also summaries of the information contained in the reports required by subsection (a). For each commodity reported on under subsection (a), the report shall include the Secretary's mst recent estimates of exports, domestic consumption, domestic production, reserves on hand, and w.at he considers to be an adequate carryoveL, along with dn account of the bases for reaching these conclusions. The second semiannual report required hereunder and every second report thereafter shall set forth the internal audit guidelines relied upon by the Secretary to evaluate the effectiveness of the reporting system, and his recommenda- tions with respect to any changes or additional legislative action deemed necessary or desirable in carrying out the program. (iJ Upon his determination that an agricultural commodity is potentially in a hort-s:?ply situation, the Secretary may pomulgate temporary eincrgency re% lations requiring that all proposed agreements to export such commodity-in excess of a quantity to be d rmined by the Secretary shall be reported to him in adv..ce by the exporter, and shall not be executed without his approval. Approval of an export contract shall be granted unless the Secretary, based on written findings, makes a determination that the proposed export would unduly contribute to the creation of a short-supply situation. Notice of the emergenicy regula- tions shall be given directly to all persons who have pre- viously reported exports of the affected commodity under subsection (a) and shall simultaneously be published in tne Federal Register, and reported to the Congress pursuant to subsection (d). ?he emergency regulations may remain in effect only for '' legislative days after the report to the Congress. Unless either House disapproves, exports of the commodity shall become subject to regulation under the Export Administration Act, as provided in subsection (d). (j) (1) The Comptroller General of the United States shall monitor and evaluate the operations hereunder including reporting activities. The Comptroller General shall (A) re- view and evaluate the procedures followed b the Secretar' in gathering, analyzing, and interpreting semiz-ics, datd. and information related to he supply of agricultural commodities, and (B) evaluate particular projects or pro- grams. The Comptroller General shall have access to such data within the possesJion or control of the Secretary .rom any public or private source whatever, notwithstanding 30 APPENDIX F APPENDIX F the provisions of any other law, as are necessary to carry out his responsibilities under this section and shall report to the Congress at such times as ha deems appropriate with respect to the operations hereunder including his recommen- dations for modifications in existing laws, regulations, procedures, and practices. (2) The Comptroller General or any of his authorized representatives, in carrying out his responsibilities under this section shall have access to any books, documents, papers, statistics, data, records, and information of any person owing or operating facilities or business premises who is engaged in any phase of export of agricultural commodities as he may determine relates to the purposes of this section. (3) To assist in carrying out his responsibilities under this section, the Comptroller General may sign and issue subpoenas requiring the production of books, documents, papers, statistics, data, records, and information referred to in subsection (j) (2). (4) In case of disobedience to a subpoena issued under subsection (j) (3) of this section, the Comptroller General may, through his own attorneys or attorneys he may choose, invoke the aid of any district court of the United States in requiring the production of the books, documents, papers, statistics, data, records, and information referred to in subsection (j) (2). Any district court of the inited States within the jurisdiction ,.here such perscn is found or ransacts business may, in case of contumacy or refusal to obey a subpoena issued L the Comptroller eneral, issue an order requiring such person to produce the books, docu- ments, papers, statistics, data, records, or information; and any failure to obey such order of the court shall ue punished by the court as a contempt thereof. (5) eports submitted by the Comptroller Genera to the Congress pursuant to this section shall be available to te public at reasonable cost and upon identifiable request. The Comptroller General may not disclose to the public any information which concerns or relates to a trade secret or other matter referred to in section 1905 of title 18, United States Code, except that such information shall be disclosed by the Comptroller General or the Secretary, in manner cesigned to preserve its confidentiality-- 31 APPENDIX F APPENDIX P (A) to oth.r Federal Government departments, agencies, and officials for official use upon request; (B) to committees or Congress upon request; and (C) to a court in any judicial proceeding urAer court order. (r) To the extent necessary or appropriate to the enforce- ment of this section the Secretary (and officers or em- ployees of the Department specifically designated by him) may make investigation and obtain information from, require reports or the keeping of records by, make inspection of the books, records, and other writings, premises, or property of, and take the sworn testimony of, any person. In addition, such officers or employees may administer oaths or affirmations, and may by subpoena require any person to appear and testify or to appear and produce books, records, and other writings, or both, and, in the case of contumacy by, or refusal to obey a subpoena issued to, any such person, the district court of the United States for any district in which such person is found or resides r transacts business, upon application, and after notice to any such person and hearing, shall have jurisdiction to issue an order requiring such person to appear and give testimony or to appear and produce books, records, and other writings, or both, and any failure to obey such order of that court may be unished by such court as a contempt thereof. No person snall be exciused from com-lying with any requirements under this section because his privilege against self-incrimination, but the imunity provisions of the Compulsory Testimony Act, Part V of itle 18, United States Code, shall apply with respect to any individual who specifically claims such privilege. (1) The Secretary of Ag-iculture and the Secretary of Commerce shall fully cooperate in the administration of this section. (m) In the administration of this section, reporting requirements shall e so designed as to reduce the cost of reporting, recordkeeping, and export documentation to the extent feasible consit ent with effective enforcement and compilation of usefui statistics. Reporting, recordkeeping, and export documentation requirements shall be periodically reviewed ad revised in the light of developments in the field of information technology. 32 APPENDIX F APPENDIX F Explanation of Proposed Revision of Section 812 The Export Administration Act of 1969, as amended, recognizes that control of exports may be necessary in certain circuz.tances. Agricultural commodities are specifi- cally exempted from export controls unless the Secretary of Agriculture approves the imposition of controls in a partic- ular instance (50 U.S.C. App. s2403(f), Supp. IV, 1974). Except where the President determines that control of an agricultural commodity is required to further U.S. foreign policy and fulfill its international responsibilities, or where control over the export is significant to te national security of the United States, the Secretary may ot give his approval to controls over exports of agricultural commodities during any period for which he determines the supply of such commodity to be in excess of the requirements of the domestic economy. One grave difficulty with the operation of this system has emerged: the Secretary's determination whether supply exceeds domestic demand can only be as good as the informa- tion available to him, and that information, with respect to the export by private persons or corporations of agricul- turai commodities, is often incomplete or inaccurate, and hence misleading. Currently, the source of information on exports of agricultural commodities is section 812 of the Agricultural Act of 1970, as added by the Agriculture and Consumer Protection Act of 1973 (7 U.S.C. §612c-3, Supp. IV, 1974). The accompanying amendment to section 812 is intended to make more and better information available to the Secretary, and to provide a mechanism whereby the crisis atmosphere and the decisions without sufficient information which have characterized previous short-supply situations can be avoided. Of crucial importance is improvement of the data base. The amendment would require all exporters of agricultural commodities to report to the-Secretary, rather than just those of wheat, feed grains, cotton, oil seeds, soybeans, and soybean meal, as in section 812. While the Secretary may, under existing law, designate other commodities to be reported on, the problem remains that by the time a short-supply situation with respect to a particular cormodity has develcped to the point that the Secretary finds it necessary to require reports on exports, much of the harm may have been done. 33 APPENDIX F APPENDIX F Second, the kind of information to be reported will be significantly broadened. The amendment makes it clear that not just formal cntracts for export but any kind of cormmit- ment or agreemen;, written or otherwise, which may result in an export, shou.d be reported. Price is to be reported along with the other information. Price trends may give a valuable clue for forecasters, Where an export is not at a fixed or pre-determined price, reports should reveal the basis or formula on which price will ultimately be set. Existing law requires that destination be reported. The amendment makes it explicit that the purpose of the reports is not served by reporting intermediate destinations or transfer points only. Where the nal destination is Known to the exporter, it should be reported. A requirement is adci that the identity of the buyer be reported, and that if the buyer is in some way affiliated with the beller, this relationship should be revealed. The bill recognizes that the information sought is proprietary in nature. The confidentiality requirement of existing section 812 is retained, with a direction added that information concerning identity of uyers, and buyer- seller relationships is rot to be publisaed or disseminated. Nothing in he bill, however, is intended to limit the access of the General Accounting Office to records of the Department, including reports filed thereunder, to the extent necessary to carry out its duties. GAO would be expected to respect the confidentiality of private data. In addition to reports of contracts, exporters would be required to submit reports of negotiations with foreign buyers which may lead to contracts. This requirement is intended to allow the Secretary to predict accurately the potential for a hort-supply situation, particularly with respect to certain critical commodities. Once the Secretary determines that an gricultural commodity is potentially in a short-supply situetion, he can, on a temporary emergency basis, promulgate regulations which prevent consummation of any further agreements for export of that commodity without prior approval by him. (At the same time, he would be required to report hs determination to the Congress, so as to activate the i._:hanism in the bill which brings export of commodities in short-sLpply within the Export AJministra- tion Act, unless the Congress disapproves.) But a short-suplly situation may be created by the execution of contracts which are not known . the Secretary until after they are executed and reported to him. At that 34 APPENDIX F APPENDIX F time, exercise of his power to prevent execution of proposed contracts might come too late to avoid market disruption and the other consequences of an unforeseen short-supply situation. The bill therefore provides for reports of negotiations by exporters which, if they result in execution of a con- tract, are likely to have a significant impact on supply. The reports are to b made when the negotiations are entered into, and are intended to provide an additional and crucial source of data for the Secretary to make forecasts. Recog- nizing he sensitivity and the competitive nature of negoti- ations at an early stage, however, the bill not only protects the confidentiality'of individual reports of negotiations, but does not require that these reports include the identity of the prospective buyer, and further provides that the re- ports of negotiations are not be to published by the Secre- tary, even in compilation for.,. A requirement that the Secre t ary publish regulations and consider comments thereon has been added. Its purpose is to give the exporters who will be affected, as well as interested Government agencies, a chance to review the procedures proposed by the Secretary before they go into effect. The Secretary is to report semi-annually on the export reporting system. The purpose of this requirement is to provide continuing assurance that the system is accomplish- ing its intended purpose and, particularly, that there is adequate capability within the Department to ensure that the requlations are being complied with. That capability does not now exist, and one result has been the failure of the current reporting system to be responsive. The evaluation of the system by the Secretary should be useful to the Congress as well as to the General Accounting Office which, it is expected, will also carefully review and comment on the manner in which the Secretary carries out the mandate of sc.ioan 812. Finally, the bill is addressed to the problem tat there is now no adequate system to ensure adequate supplies of a variety of agricultural commodities at stable prices, that there is no effective early warning system to protect the domestic economy against the disruptions of unan.ici- pated export sales, ad that the short-supply "trigger" for agricultural commodit. s--that is, the mechanism for bring- ing agricultural commodities under the export controls of the Export Administration Act of 1969--does not now operate 35 APPENDIX F APPENDIX F effectively. The trigger in 50 U.S.C. App. S2403(f) requires approval by the Secretary, but he cannot give approval during any period for which supply is determined by him to exceed the needs of the domestic economy. limits are set on his authority to withhold approval. No What s needed is a rigger which is a matter of public knowledge, and which gives ,ore weight to forecasting, than to the upply-demand relationship at the present rather The bill enjoins tne Secretary to determine when a moment. supply situation existz c- will exi3t. Its intent short- in this respect is that he make a careful and systematic assessment of develop ng shortages and tne long-term supply and situation. His analysis should show the impact on demand the economy and world trade c shortages or increased their probable duration, the worldwide supply, and prices, taken by other nations in response to such shortages actions increased p)rices. or The analysis is intended to allow develop- ment of appropriate policies before a crisis materializes, and before options short of a complete embargo are fore- closed. Such a provision was controversial in the proposed 1973 amendments to the Export dministration Act of i969 and, ultimately, was rejected. This provision is intended to answer some of the objections which led to rejection that earlier provision. of Under this bill, the Secretary's determination of a short-supply situation does not auto- matically impose controls, but only brings the commodity potentially under controls, subject to congressional veto. The bill incorporates the penalty provision contaiilld in present section 812. While the nature and amounL penalties are matters for the Congress, we are not of any convinced that the present provisions are effective. The Congress wish to consider providing for civil penalties, as may is done in the Export Adminiptra_,on Act of 1969, as amended, sibly to include suspension of the right to export. pos- 36 APPENDIX G APPENDIX G QUESTIONNAIRE SURVEY OF EXPORTERS' ATTITUDES TOWARD USDA'S EXPORT REPORTING SYSTEM CONTENTS CHAPTER Page 1 INTRODUCTION 38 DESCRIPTION OF THE EXPORTERS 39 2 3 EXPORTER ATTITUDES AND OPINIONS ON THE EXPORT SALES REPORTING SYSTEM 45 4 CONTRACT DECREASES 54 5 EXPORTER OPINIONS ON PAST AND POSSIBLE U.S. INVOLVEMENT IN EXPORT MARKETS 6 EXPORTER QUESTIONNAIRE 76 37 CHAPTER 1 INTRODUCTION Under the Agriculture and Consumer Protection Act of 1973, the Dpartment of Agriculture was required to assume the responsibility for monitoring the export sales of agri- cultural commodities. U.S. agricultural supplies had been severely strained that year, in part by the &cceleratinq rate of exports. The Export Sales Reporting Syasem, as the monitoring has come to be known, provides information on future export demand, so that in the event of shortages thoughtful Government planning car replace precipitate market intervention. All firms exporting U.S.-origin wheat, feed grains, cotton, and oil seeds are required to submit weekly reports to USDA on their export activity, including among other things information on actual exports and outstanding (forward) sales. The Office of the General Sales Manager at USDA is responsible for the administration of the Export Sales Reporting System and each week compiles the information submitted by the exporters and publishes it in the U.S. Export Sales" report. we surveyed agricultural exporters to determine their attitudes and opinions on the Export Sales Reporting System and on other past, present, and potential short-supply management systems. The survey was conducted through the use of a questionnaire that was mailed in the summer of 1975 to 316 businesses that had filed export sales reports with USDA. Fort,-six o these businesses, however, were sub- sidiaries whose parent corporations answeLed for them, or were no longer active in the agricultural export business. Of the remaining 270 exporters, 195 (or 72 percent) returned completed questionnaires acceptable for analysis. These 195 respondents were found to represent, in terms of sales and exports, almost all of the agricultural export industry. 38 CHAPTER 2 DESCRIPTION OF THE EXPORTERS This chapter describes the 195 exporters that participated in our survey. In so doing, it also describes to a large extent the entire agricultural export industry, since the firms surveyed account for almost all of the agri- cultural commodities exported by the U.S. in 1973 and 1974. The agricultural export industry is a concentrated one, we found, with relatively few firms doing most of the business. The firms range in size from a small exporter with export sales of only $35,000 to a large multinational firm with export sales of $3.7 billion. Organization of xporters Although some of the firms in our sur'ey have been in the export business since the late 1800's and early 1900's, about two-thirds of the firms appear to have entered the agricultural exporting industry during te past 25 years. The following table shows how 175 exporters responded to a question on this matter. Period entered Exporters export industry u Percent 1880 to 1925 19 10.9 1926 to 1950 39 22.3 1951 to 1960 42 24.0 1961 to 1970 38 21.7 1971 to 1975 37 21.1 175 100.0 Aithough we have no Knowledge of the frequency with which firms go in or out of the export business, about a third of those responding have entered since 1965--possibly drawn to exporting by the increased demand for U.S. agri- cultural commodities over the past decade. The exporters in our survey were found to range from small firms exporting less than 100 metric tons of a single agricultural commodity (or with no exports at all) to 39 multi-national companies dealing heavily in a variety of commodities. In answer to a question concerning their organization, most of the 193 respondents identify themselves as private corporations (123 firms), a small group as public corporations (31 firms) and the remainder either as partner- ships (8 frms), sole proprietorships (7 firms), or some other form of business (24 firms). Although we did not determine how many of the firms are U.S.-owned, 37 of the exporters say they are subsidiaries or affiliates of foreign-based companies. Pursuing the parent-subsidiary relationship, we found that one-third (70) of the surveyed exporters are a subsidi- ary or affiliate of another company. Sixty-six of the firms, furthermore, indicate that they export U.S.-origin agricultural commodities to parent, subsidiary, or affiliate organizations. The latter were identified mostly as mer- chants, processors, or traders located in the European Community, Japan, or Canada. Export Sales 1/ The exporters were asked to approximate the dollar alue of all the U.S.-origin agricultural commodities they ex- ported (i.e., export sles) during calendar years 1973 and 1974. Although a number of firms gave no sales information (34 for 1973 and 36 for 1974), the rest estimate sales totaling $18.6 billion in 1973 and 974, respectively. We compared these figures to published ones 2/ on the total 1973 and 1974 dollar value of all U.S. agricultural exports, so that we could measure the sales volume of the firms on which we did not obtain data. The published figures are $17.7 billion and $22 billion for 1973 and 1974, respec- tively, suggesting that most major exporters are included in our survey. 3/ 1/The term "sales" refers here and in later sections to the dollar value of agricultural commodities actually exported. 2/"Foreign Agricultural Trade of the United States," September 1975, USDA. 3 VWe are unable to explain why the surveyed firms claim ex- port sales in excess of the total U.S. export value beyond ascribing the discrepancy to exporter overestimates, USDA underestimates, or a combination of the two. 40 The 1974 sales figures indicate further that the agricultural export industry is a concentrated one, with relatively few firms accounting for a substantial share of the business. In addition to the 36 firms who did not identify their 1974 export sales, 11 firms reported zero sales. Of the remaining 148, however, just 7 firms (only 5 percent) account for 62 percent of the total sales for the group as a whole. The 75 smallest, or 51 percent of the 148 firms, on the other hand, have less than 1 percent of the total sales. The following table shows 1974 export sales by sales categories and the number of firms, total sales, and averaqe sales in each category. In the analysis of the questionnaire, we frequently make use of the terms "large," "medium," and "small" ex- porter. These designations evolved from the above table and refer to firms with 1974 sales of $500 million and more, between $10 and $S00million, and of $10 million and less, respectively. The 11 large exporters captured about 74 percent of the total sales for all surveyed firms and are, for the most part, multinational corporations dealing in a wide variety of agricultural commodities. 1974 EXORT SALES Total Exporters Export Sales Average 1974 Sales Number Percent Amount Percent Sales (millions) (millions) $0-$10 75 50.7 $ 173 0.7 $ 2.3 $10-$100 45 30.4 1,759 7.6 39.1 $100-$500 18 11.5 3,974 17.2 233.8 $500-$999 4 2.7 2,949 12.7 737.2 $1,000 & up 7 4.7 14,323 61.8 2,046.2 148 100.0 $23,178 100.0 $ 156.6 Commodities Exported We asked the exporting firms for their 1973/74 export totals in wheat, corn, rice, soybeans, cottonseed, soybean oil, cake and meal, and cottonseed oil, caKe and meal. We found that, as with sales, the exports were frequently concentrated in the hands of a few large companies. The seven commcdities are presented in the following table with 41 the number of firms that dealt in them, the total exports claimed, and corresponding USDA figures for the industry as a whole. Commodities Exported (1973/74) Number Total exports Total U.S. Commodity of firms claimed exports 1/ (etric tonsT (Metric tons) theat and products 42 35,068,000 31,067,000 Corn 43 35,263,000 31,574,C00 Soybeans 36 18,435,000 14,700,000 Soybean oil, cake, and meal 42 4,312,000 5,600,000 Rice 37 1,565,000 1,589,000 Cottonseed 5 31,000 44,000 Cottonseed oil, cake,and meal 18 239,000 62,600 As with 1974 export value (sales), some survey export figures exceed comparable USDA figures for the industry as a whole. A Department of Agriculture official has indicated that USDA 1973/74 data on agricultural exports came in part from the newly established Export Sales Reporting System, in whose early months accuracy was questionable. The sizes of the discrepancies, however, lead us to believe that the surveyed exporters may have overestimated their 1973/74 exports to some extent also. Jsing the 1973/74 export information provided by the exporters, we assigned each of the 195 firms to a primary export commnodity group. For these purposes, cottonseed and cottonseed oil, cake and meal were combined, as were soybeans and soybean oil, cake and meal. We wanted to see whether exporters in different commodities would respond to 1/"Foreign Agricultural Trade of the United States," Septem- ber 1975, USDA. 42 questions in different ways. Where 1973/74 export information was lacking, we turned to 1974/75 data obtained from USDA for the classification. A primary commodity was assigned to a firm if better than two-thirds of its exports in one of the years were of a single commodity. Otherwise the firm was designated "multi-commodity." (Nine of the very large exporters are in this category.) Some of te exporters in our survey proved to be inactive i all five commodity groups and were classified as such. The following table shows the primary commodity exported for the firms in our survey and the total 1974 export sales for each commodity group. Primary Export Commodity Total Number Percent 1974 sales (millions) Multi-Commodity 27 13.9 $17,402 Soybeans and Products 34 17.4 687 Wheat and Products 22 11.3 1,212 Corn 17 8.7 2,304 Cotton and Products 54 27.7 839 Rice 26 13.3 706 Inactive 15 7.7 29 195 100.0 $23,179 Sh iment Terms The exporters were also asked to provide a percentage )reakdown of the mode of shipment for their export sales. £he following table shows the volumes of seven major commodities exported in the 1973/74 marketing year and the percent exported by mode of shipment for the firms who completed this question. 43 Airunt in Commodity metric tons F.O.8 / C.I.. 2/ P.A.S. 3/ C&t 4 '000 omitted) wheat (in- - -. ercent cluding wheat products) 35,068 79.2 5.2 0.4 15.3 Corn 35,263 64.5 11.3 0.0 24.2 Rice 1,565 16.1 16.5 47.8 19.5 Soybeans 18,145 45.6 24.3 0.0 29.1 Soybean oil, cake, and meal 4,267 67.6 17.7 0.1 14.6 Cottonseed 31 99.6 0.0 0.4 0.0 Cottonseed oil, cilKe, and meal 239 54.0 3.1 4.8 37.9 94,543 65.8 11.9 1.0 21.3 More than half of the 1973/74 exports of wheat, corn, cotton- seed, soybean oil, cake and meal, and.cottonseed oil, cake and meal were F.G.B. Almost half of the soybeans also went F.O.B., while rice was most frequently sold F.A.S. On the whole, about two-thirds of the exports for all seven commodi- ties went F.O.B. I/F.O.B. - free on board I/C.I.F. - cost, insurance, and freight I/F.A.S. - free alongside 4/C&F - cost and freight 44 CHPft ' 3 EXPOURTE ATTITUDES AD OPINIONS ON THE EXPORT SALES REPRTING SYSTEM A majority of the eporti. firms believe that the U.S. Government needs an export sales reporting system. Most of the exporters feel that the present Export Sales Reporting System has met the provisions of the Act that established it and has, to at least a moderate degree, achieved its objective of providing accurate, timely, and reliable export statistics. The firms have had few problems in complying with the report- ing regulations and requirements, and most of them receive and use the weekly U,S. Export Sales reports. Despite their belief that the Export Sales Reporting System has not affected their own sales, the exporters generally feel that tne publication of the export reports has to some extent influenced agricultural commodity prices and has given at least a minor advantage to foreign buyers in export contract negotiations. Most exporters believe the U.S. Export Sales reports would be more useful if additional information on contract destinations, decreases, and shipment dates were included. General Comments on Export Sales Reporing yste Tne Export Sales Reporting System (ESRS) is intended to monitor the amount of agricultural commodities being exported so that, i.n the event of shortages, the U.S. Government will have on a timely basis the intJrmation required to formulate necessary decisions. The exporting firms were asked how they feel about the U.S. Government's need for an export sales reporting system. Almost 70 percent of the firms believe a reporting system is needed, while 15 percent say it is not. None of the large exporters (those with 1974 export sales above a half billion dollars) is among the 15 percent. The firms' responses follow. 45 Need for an ExDort Sal eotiIIISystem? Exporters Number Percent Needed 1,6 69.8 Undecided 26 13.3 Not needed 30 15.4 Did not answer 3 1.5 195 100.0 USDA's Export Sales Reporting System was established under section 812 of Agricultural Act of 1970, as added by the Agricultural Act of 1973 (P.L. 93-86). The exporters claim a good understanding of the Act's provisions generally feel that ESRS has met those provisions. and The exporters' responses to a related question are in the following table. presented Has ESRS Met The Pr7i ov s-ions-oj-'i7 -Ac t? Exporters Number Percent Yes 145 74.4 Undecided 39 20.0 No 8 4.1 Did not answer 3 1.5 195 100.0 The exporters were asked to what the Export Sales Reporting System has degree they believe achieved its stated objective of providing accurate, timely, and reliable export statistics. Most of the exporters wno answered believe the System has acnieved that objective (74 percent) at least to a 46 moderate degree. The other 26 percent claim tne achievement has been minimal at best. Because the Export Sales Reporting System represents, an entry of the Federal Government into the private sector, the exporting firms were also aske4 for their primary per- ception of the system a it is presently operated. About 41 percent of the firms responding view the system primarily as a means to provide the U.S. more information on foreign demand and export commitments, In a imilar vein, 17 per- cent perceive it mainly as an improvement of the Government's system for forecasting exports. Twenty-two percent see ESRS as a first step toward a comprehensive Government short-supply management system, while 14 percent term it a Government activity of marginal utility. These percep- tions were found to be unrelated to the firms' sizes or commodities exported. AdmJiistration of tie Export Sales Reportng Sysem A certain amount of work is required of exporting firms ir providing information to USDA on their weekly export sales activity. In addition to the basic "Report of xport Sales and Exports" form, which they must submit each week that they have some activity in exports, there are three other report forms that are filled out at varying times. To guide the e.-,rters in completing the report forms, USDA issued regulations and instructions for the reporting system. We asked the exporting firms to evaluate these regulations and instructions in terms of clarity, format, indexing, and comprehensiveness. The majority of the exporters indicate that they have little or no problem in any area. Similarly, we asked the exporters to rate the export report forms themselves, in terms of the language, format, response space, measurement conversions, the burden asso- ciated with completing the forms, and the meeting of report deadlines. Again, the majority of the exporters say they have little or no problem with the forms in the areas mentioned. xv determine whether the exporters are burdened by export reporting requirements, we asked them to estimate no.! many staff hours per week are spent in completing the following four forms used in administering ESRS: 47 1, Report of Optional Origin Sales (Form 97). 2. Report of Etport Sales and Exports (Form 98). 3. Contrac Terms Supporting Export Sales and Foreign Purchases (Form 99), 4. Report of Exports for Exporters Own Account (Form 100). Forms 97 and 100 are used to report relatively uncommon transactions, and we found that almost all of the exporters responding had spent an hour or less each week completing each of them. Forms 98 and 99, on the other hand, are submitted more frequently--when reporting export sales, changes in he status of sales, or specific sales trms. The following table shows how many staff hours the 180 exporters who responded say they spend each week in com- pleting these two forms. Average Staff Hours Spent Each Week by Exporters To Complete Forms an Form 98 Form 99 Numier of- NuFmberFo - Hours er wee expoters Percent eporters Percent Less than 1 29 16.1 95 52.8 1 98 54.5 52 28.9 2 22 12.2 11 6.1 3 10 5.6 2 1.1 4 6 3.3 2 1.1 5 2 ! .1 5 2.8 6 to 10 8 4.4 6 3.3 Over 10 5 2.8 7 3.9 151 100.0 85 100.0 48 As might be expected, we found tnit large exporters spend appreciably more time completing the forms. On the whole, however, we believe the results indicate that thr completion of the USDA report foris is not a burden for the exporters. USEFULNESS OF THE US. EXPORT SALES REPORT Almost 90 percent (172) of the 195 exporters in our survey say they receive the weekly U.S. Export Sales reports. We asked these 172 firms to rate the overall usefulness of the data published in the reports. Of the 168 firms who re- sponded, 103 (or 61 percent) term the data generally or ver useful. Only 23 firms, in contrast, find the data of little or no use. The larger firm:s consider the export data more useful than do the smaller firms. The responses follow. Exporters Rate "U.S. Export Sales Data Exporters Number PFrcent Very useful 26 15.1 Generally useful 77 44.8 As useful AS not 12 7.0 Of some use 30 17.4 Of very little or no use 23 13.4 Did not answer 4 2.3 172 100.0 In a similar manner, we inquired about the and manner of use the exporters make of the U.S. frequency Export Sales reports. As can be seen from the table below, slightly more than two-thirds use the report at least occasionally. The big exporting firms were found to be the more frequent users. 4' Exporters Frequency of Use Numer Perce Very frequently - about 2 or 3 times a day 3 1.8 Frequently - about 2 or 3 times a week 40 23.8 Occasionally - about 2 or 3 times a month 79 47.0 Rarely - about 1 or 5 times a year 31 18.5 Don't use it at all 15 8.7 Did not answer 4 2.3 172 100.0 The exporters were also asked to identify the different ways they use the weekly U.S. Export Sales reports. I gen- eral, the reports appear to be used for market dcvlopment and intelligence, with the most common use bein.g as a ence for export sales to foreign countries by cmmodity. refer- following table summarizes the results. The Number of Description of Useexorters Compare company's export sales with total U.S. export sales 54 Forecast foreign countries' needs for specific agricultural commodities 55 Use as a reference for exrort sales to foreign countries by commodity 107 Develop planning strategy for buying U.S. agricultural commodities 37 Develop planning strategy for company's trading decisions with foreign buyers 34 Use to make transportation and/or storage decisions 19 Other 16 50 The major determinants of agricultural commodity prices are worldwide and domestic supply and demand factors. After acknowledging thts, we asked the exporters if the weekly pub- lication of export data in the U.S. Export Sales report has any additional influence on commodity prices. Sixty (60) percent of the exporters responding feel the reports influence commodity prices to some extent, while 25 peL-ant believe they have little or no price influence at all. The table below illustrates the exporters' responses. Influence of Export Reporte on rAqricultura Commoi ies Exporters Number Percet Little or no influence 46 25.4 Small influence 44 24.3 Noderate influence 54 29.8 Substantial influence 9 5.0 Very great influence 1 0.6 No basis to judge 27 14.9 Total 181 100.0 The eekly publication of export sales data is believed by about half of the firms to be of some benefit to foreign governments or trading companies. Of the 169 firms answering a question on this matter, 61 feel the reports give foreign buyers at least a moderate advantage in contract negotiations. The exporter responses folloi. 51 Advana ge of Export Reeorts to Foreign Governments or Trading CoTmpanies Exporters Number Percent Major advantage 10 5.9 Somewhat of a major advantage 19 11.2 Moderate advantage 32 18.9 Minor advantage 23 13.6 Little or no advantage 48 28.4 No basis to judge 37 21.9 lb9 100.0 The expocters were also asked what effect the Reporting System has had on their firms' export sales f agricultural commodities during the past year. An overwhelming majority (93 percent) of the exporters able to judge claim ESRS has not affected their export sales volumes. Given this result, TE-may well be that the advantage some exporters feel for- eign buyers are getting is in the orm of lower prices for the commodities they buy. Exporters Commients on Changes The inclusion in the export reports of some information not now provided would apparently increase their usefulness substantially. Of great interest to exporters are destina- tions, decreases (cancellations, buy-backs, etc.), and ship- menc periods (dates). Each of these items is regarded as very or generally important by a majority of the firms re- sponding. Only 1 out of 5 exporters, in contrast, considers these items of little or no importance. Contract type, i.e., fixed or basis, is rated at least moderately important by about half the firms, while little importance is attached to quantity tolerances and transportation details. About 92 percent of the 172 firms receiving the export reports re- sponded to this uestion, and their responses are summarized in the following table. 52 Information that ight Improve the Reports' Usefulness (By Percent of firis Responding) Very or generaily Moderately or Little or no Type of i rtat somewhat .mportant iu tance lnformation Percent Percen Percent Destinations 63.3 22.2 14.5 Decreases 57.3 21.7 21.0 Shipment Daies 57.0 23.4 19.6 Contract Type 35.5 23.4 41.1 Transporlation Details 21.7 28.0 50,3 Tolerances 10.8 25.9 63.3 53 CHAPTER 4 CONTRACT DECREASES For a number of reasons, agricultural export contracts do not always result in actual exports. At the opt.on of the buyer or the seller, contracts can be cancelled or modified, and deliveries can ba deferred to another marketing year -- actions which are called, in general, "contract decreases". Because of their potential for decrease, outstanding export contracts tnd to overestimate the actual U.S. export commit- ment. Through or survey of exporters we attempted to measure the extent c contract decreases for five selected commod- ities, the reasons for the decreases, and the characteristics of export contracts that are likely to be decreased. We found that about a fZth of the total quantities of wheat, corn, rice,.soybeans, and soybean oil, cake and meal origi- nally contracted for. export in 1973/74 by 48 firms in our survey were not shipped. Large exporters as a group had a rate of decrease below that of the rest of the exporters, while two firms cancelled all 2.2 million metric tons of corn, soybeans, and soybean oil, cake and meal they had con- tracted for export. The most commonly cited reasons for the decreases were commodity price changes, contracting for maximum rather than probable needs; overcontracting in anticipation of controls, and hedging to protect a market position. Our survey also revealed that basis contracts (those with no specifically stipulated price) were much more frequently-decreased than fixed price contracts, and unknown destination contracts more often than known destination. About half of the 1973/74 de- creases were made by exporters against contracts with their own affiliates. The surveyed exporters oppose being required to submit written explanations to USDA for their contract decreases and are even stronger in their opposition to the addition of penalties for unjustifiable decreases. In addition, more firmas are against than are for the public disclosure, even on an aggregated basis, of information they presently provioe USDA in Form 99 (Contract Terms Supporting Export Sales and Foreign Purchases). 54 Contract Decreases As defined in USDA's Export Salcs Reporting instructions, "decreases" means cancellations or modifications, including those times when (a) smaller quantities are shipped than or- iginally contracted for, (b) delivery is deferred to te next marketing year, (c) nother commodity is substituted for the original one, and (d) purchases from foreign sellers are used by the seller to fulfill the original contract. We asked the exporting firms to estimate the quantities of five commodities (wheat, corn, soybeans, rice, nd soybean oil, cake and eal) they contracted to export in the 1973/74 marketing year. "'~ang with thaL, we requested the total quantity decreases for each of the commodities in the same year, so we coild sea the percentage of the quantities orig- inally contracted for that were decreased. The following table summarizes the results for the 48 firms who responded. Contract Decreases* - 1973/74 Soybean Soy- oil, cake wheat Corn beans and meal Rice Total Total quantities originally contracted for 41,486 45,855 23,086 6,308 1,564 118,298 Total quantity decreases 6,407 9,547 4,671 3,704 39 24,369 Percent of decreases 15.4 2".8 20.2 58.7 2.5 20.6 *In thousands of metric tons. 55 AF, can be seen, about a fifth of commodities originally contracted for the agricultural export in 1973/74 were not shipped that year. Better than half cake and meal contracted for export was of the soybean oil, cancelled or deferred. The rates of decrease for wheat, corn, ranged from 15 to 21 percent, while rice and soybeans, meanwhile, ligible. decreases were neg- Of the 48 firms who described their decreases, subgroups are of particular interest, two The among the 48 had a combined rate of decrease 9 big exporters substantially below that of the other firms. With original ing 88,073,300 metric tons and decreases contracts total- at 15,841,291 metric tons, the larger exporters' decrease rate compared to 28 percent for the others. was only 18 percent, latter group, moreover, cancelled 100 Two exporters in the percent of their 1973/74 export contracts--representing over 2.2 of corn, soybeans, and soybean oil, cake million metric tons firms are subsidiaries of foreign-based and meal. These companies and, not surprisingly, registered for but did not either. export in 1974/75 In order to determine the causes of decreases, the exporters to break out on a percentage we asked for their 1973/74 contract decreases. basis the reasons Although only 35 of the 48 exporters answered, these 35 account for almost 99 percent of the decreases made by the surveyed following table shows the reasons t firms. The exporters their 1973/74 contract decreases and the gave for percentage and amounts of the decreases attributed to each reason. 56 Reasons Given by Exporters For 1973/74 Contract Decreases Volume tmetric tons) Percent Contracting for maximum ratherthan probable needs 6,957,479 28.9 Overcontracting in anticipation of controls 4,-783,602 19.9 Price changes 7,350,076 30.5 Hedging to protect a market siti o n 3,185,303 13.2 Other 1,806,760 7.5 Total 2483,220 100.0 Decreases, then, play a significant role in the agricul- tural export market. With 21 percent-Of the 1973/74 agricul- tural contracts ultimately not fulfilled in that year, the U.S. Export Sales reports consistently overstated the extent to which U.S. grain supplies were committed. Recognizing this, bSDA cautions readers of its weekly reports that a meaningful export projection is not obtainable by simply adding outstanding sales commitments to exports to date be- cause sales commitments outstanding are subject to modifica- tion, deferral or cancellation. Fixed vs. Basis Contracts The terms fixed" and basis' refer to the pricing ar- rangements of agricultural export contracts. Fixed contracts have a price set at the time they are written, while in contracts the price is set at a later date. As one mightbasis expect, we found that decreases were made much more fre- quenty against basis contracts than against fixed. Almost 50 million metric tons of the five commodities we surveyed were originally contracted for export in 1973/74 with a basis pricing arrangement. Of these, about 16 million metric tons did not get shipped--a 32 percent rate of de- crease. Of the 69 million metric tons in fixed contracts, 57 however, only 8.4 million metric tons, or 12 percent, were ultimately not exported. Fixed contracts, then, appear to represent a substantially more solid commitment of U.S. grain for export than do basis contracts. The following table contains the results for all five commodities. 1973/74 Contract Decreases/Fixed vs. Basis Contracts Decreases as a percentage Originally Contract of original contracted for decreases contract volumes (metric tons) (metric tos (percent) Wheat Fixed 33,082,988 3,530,621 10.7 Basis 8,402,638 2,876,737 34.2 Corn Fixed 21,947,937 3,303,653 15.1 Basis 23,907,266 6,243,414 26.1 Soybeans Fixed 9,959,973 1,272,935 12.6 Basis 13,125,967 3,398,216 25.9 Soybean oil, Fixed 2,547,592 273,405 10.7 CF cake & meal Basis 3,759,950 3,430,113 91.2 Rice Fixed 1,562,930 39,443 2.5 Basis 1,150 0 0.0 Fixed 69,101,420 8,420,057 12.2 Total Basis 49,196,971 15,948,480 32.4 Known vs. Unknown Destination Contracts When an exporter reports a grain sale on the weekly reporting form, he is required to enter a country of destina- tion if it is known at the time. Otherwise, the sale is considered of unknown destination unless and until the ulti- mate destination becomes known and the exporter files an amending report. Occasionally, however, grain is shipped without a country of destination ever being identified. This frequently happens with free on board (FOB) sales, where the seller's responsibility ends as soon as the grain is loaded on the transport vessel. When the Office of the General Sales Manager compiles and publishes the weekly sales report, it keeps the quantity of outstanding sales with un- known destination separate from those with known destination. 58 We asked the exporting firms in our survey to indicate the amount of thei: 1973/74 contract decreases that were known destination. Again, only the commodities wheat, corn, soybeans, rice, and soybean oil, cake and meal were included. About 56 percent of the 24,368,391 metric tons of decreases were identified as known destination, leaving 44 percent of the decreases as unknown destination. The results for the individual coanmooties and for all five as a whole are shown below. 1973/74 Contract Decreases by Destination Decreases Amounrt - Commodity Destination (metric tons) Percent wheat Known 3,~24,995 47.2 Unknown 3,382,363 52.8 Corn Known 5,643,815 59.1 Unknown 3,g03, 52 40.9 Soybeans Known 3,082,213 66.0 Unknown 1,588,938 34.0 Soybean oil, Known 2,014,824 54.4 cake & meal Unknown 1,688,694 45.6 Rice Known 11,518 29.2 Unknown 27,925 70.8 Total Known 13,777,365 56.5 Unknown 10,591,172 43.5 59 How these results compare with the breakout of and unknown destination sales originally contracted known for can- not be determined directly, since the latter information not obtained. An indirect comparison can be made, was however, using 1974/75 contract data. An analysis wheat and corn contracts revealed that 89.9ofpercent data on 974/75 original sales were known destination. Assuming of the that same percentage to have held for 1973/74 wheat and corn sales yields decrease rates fog Lnown and unknown destination tracts of 11.0 percent and 82.6 percent, respectively. con- Because the 1974/75 data does not represent a complete marketing year, however, we conclude from the comparison only that known destination sales appear more solid those with unknown destination. than Affiliate vs. Non-Affiliate Contracts As with known and unknown destination contracts, we asked the exporters to identify those 1973/74 decreases that were again:st contracts with non-affiliate contract decreases. affiliates, as opposed to No information about the quantities originally contracted for with affiliates non-affiliates was obtained, however, so the solidity and two kinds of salestremains unknown. Nonetheless, of the with affiliates constituted almost half of all decreases the 1973/74 contract decreases in our survey. The results for the five commodities follow. 60 Decreases: Affiliate vs, Non-Affiliate Contracts, 1973/74 Decreases Percent Wheat Affiliate 2,997,223 46.3 Non-Affiliate 3,410,135 53.2 Corn Affiliate 3,728,477 40.0 Non-Affiliate 5,818,590 60.0 Soybeans Affiliate 2,534,509 54.3 Non-Affiliate 2,136,642 45.7 Soybean oil, Affiliate 2,772,352 74.9 cake & meal Non-Affiliate 931,166 25.1 Rice Affiliate 7,056 17.9 Non-Affiliate 32,387 82.1 Total Affiliate 12,039,617 49.4 Non-Affiliate 12,328,774 50.6 Possible Modifications to the xport ales kepti stem The Export Sales epcrting System was intended to act as an early warning system in agricultural export markets. The level of agricultural xports could be constantly mea- sured against existing and forecasted supplies so as to avoid overcommitment of U.S. agricultural commodities. A problem with the reporting system is that many of the ex-- ports originally contracted for are not shipped because of contract cancellations or modifications. It has been suggested that if USDA had certain additional information, not currently available in all cases, it would be able to estimate more accurately the percentage of exports originally contracted for that would result in actual shipments. Such information could be obtained from the exporters through a modification of the export reporting forms. 61 In line with this, we asked indicate the extent to which they the exporting firms to feel certain items of information mignt help USDA identify contracts potential of being fulfilled. For each item with a high about 30 percent of the firms marked "don't of information, know" or did not respond. The est of the firms rank information foreign buyers' capability to honor contracts on in importance, with over half calling it helpful as highest stantial extent or ore. About 40 percent to a sub- of the rate exact estinations, foreign buyers' advanced firms and the ecent of buyers' activities and position needs, U.S. cash and futures market as substantially in the Less importance is ascribed, however, to foreign helpful also. storage capacities, the exact classification buyers' of the foreign buyer, contract pricing terms (fixed vs. basis), and contract provisions. In general, large exporters attribute less imprtdnce to all of the information. Another way of modifying the existing Export Reporting System would be to require exporters Sales writtei explanations for contract decreases. to provide It from our survey, however, that such a requirement appears meet considerable resistance might from the exporters themselves. Firms in opposition to written explanations outnumber those in support by a wide margin, and the opposition strong than oderate in its tone. Turthermore, is more large exporters oppose the requirement and eight of the The exporteis' responses follow. only one supports. Exporter Attitudes Toward Written Explanations for Contract Decreases Oppose Strongly 63% Moderately 377 102 Neither oppose nor support 44 Firms Support Strongly odertel Firms40 45% Firms We then a3sked the 84 firms not opposed to planations how they would feel abot the additionwritten ex- assessments for unjustifiable decreases. of penalty Of the firms 52 responding, 21 oppose this stronger action, 30 support it, and 30 are neutral (neither oppose nor support). One large exporter is in support and tne other two are neutral. The results for the 84 can be combined with the imputed opposi- tion of the 102 firms against written explanations to obtain a composite exporter opinion on the addition of penalties for unjustifiable decreases. About two-thirds oppose the action, a sixth support it, and the rest neither oppose nor support. These same 84 exporters feel that written explanations and/or the assessment of penalties for unjustifiable contract decreases could possibly have some effect in various areas. The largest impact would be in the form of a decrease in contract cancellations and in the number of contracts, with commodity prices and total export volumes not a greatly affected. As might be expected, the assessment of penalties is seen as having the greater impact. At the present time, exporters are notified on an idi- vidual basis when to file the form, "Contract Terms Suppoiting Export Sales and Foreign Purchases." We asked the exporters for their position on the public disclosure of the informa- tion on these forms if it were aggregated to protect indi- vidual firms' identities. Exporters in opposition to public disclosure exceed those in support 76 to 58 (with 7 expressing indifference). Moreover, the firms opposed to disclosure called their position a strong one. We found that large exporters are against disclosure more so than medium and small exporters. The responses follow. Exporters' Position on Public Disclosure of Export Contract Terms Oppose Strongly 67% Moderately 33% 76 Firms Neither oppose 57 nor support Firms Strongly Moderately Firma 55% 43% 63 A potential sho;:tcoming of the Export System is duplicate reporting. For example,Sales Reporting exporters might each report the same shipment differ'nt vidual exporter might report a single shipment or an indi- once. We asked the exporting firms to estimate more than centage of the total export volumes reported what per- they would attribute to such duplication. Of the 133 us estimates, almost one-third feel that firms who gave accounts for more than 10 percent of total duplicate reporting volumes. Another third put the duplication rate in the 3 to 10 percent range, while the rest believe it is less than 3 exporters tend to minimize the extent of percent. Large the duplication. The responses are shown below. Exporter Estimates of Percent of Total Export Volumes Attributable to Duplicate Reorting Percent of Firms 20 10- 47 44 20 12 10 Percent attributable to Finns Firms Fm Firms Fl ._. duplicate reporting 0-2% 3-10% 11-20% 21-307. Over 30X 64 CHAPTER 5 EXPORTER OPINIONS ON PAST AND POSSIBLE U.S IVV NT IN EXPORT MARKETS Part of the survey dealt with the roles tne U.S. Government has played in the past and might consider for the future in agricultural export markets. Our survey diselosed that the exporters were generally dissatisfied with the Government's role in the soybean embargo in 1973 and the renegotiations of Soviet wheat and corn sales in 1974. On the other hand, the exporters were generally satisfied with the prior approval system implemented for a short time by the Government in 1974 and 1975. As t future U.S. involve- ment in the export market, a majority of the exporters pre- fer tne present reporting system to other forms of Government export monitoring and/or controls. 1973 Soybe a n E bargo Because of a domestic short-supply situation in the soybean market and an increase in foreign demand, the Department of Commerce imposed an embargo on the export of soybeans on June 27, 1973. On July 2 the embargo was replaced by export controls that remained in effect until October 1, 1973. A decidedly large number of exporters in our survey were dissatisfied with this Government action. Of the 131 firms responding, only 15 (12 percent) express satisfaction with the controls, while 89 (68 percent) claim dissatisfaction. Two out of three exporters in this latter group, moreover, call their dissatisfaction strong rather than moderate. The following graph illustrates the over- all responses. 65 Exporters' Attitudes Toward 1973 Soybean Controls Percent i 40 6 30 20 221.4 m1 7.67. 1 27 28 61 5 Firmi 10 Firm Firms Films Firms Strongly Moderately Undecided'Moderately Strongly Satisfied Satisfied Dicsatisfied Dissatisfied Not surprisingly, a greater proportion of exporters directly affected by the c,,trols express dissatisfaction with them. We found, for xample, that 77 percent of the firms who exported soybeans or their products in 1973/74 were dissatisfied, compared to 61 percent for the rest of the firms. Similarly, of the 39 firms who were forced to make contract decreases because of the embargo, almost 85 percent (33) were dissatisfied, as against 61 percent for the others. These two results converge in the case of the 11 large ex- porters, 10 of whom exported soybeans and 9 of whom had to cancel contracts. We fund that 10 of these 11 claim strong dissatisfaction *.th the Government's action. Just under half of those dissatisfied say that the Government controls were implemented at the wrong time or were simply not necessary. Smaller percentages feel the controls were the wrong type to apply or were excessive in nature. 66 The 1974 Soviet Union Wheat and Corn Sales In mid-September 1974, the Soviet Union entered the U.S. market to purchase wheat and corn. Because of a tight- supply situation in this country, the U.S. Government in- tervened in the following month, causing the original sales to be renegotiated for small quantities. As with the soy- bean embargo, we sought to determine the exporters' attitudes toward this U.S. action. Their responses are shown in the following table. Exporter Attitudes Toward the U.S. Ro'e in the 1974 Soviet Grain Purchases Percent 32.1%7 30 20.47.% 19.0 1S.07% 20 10 1 9.5% 13 28 44 26 26 Firms Firms Firms Firms Firms Strongly Moderately Undecided Moderately Strongly Satisfied Satisfied Dissatisfied Dissatisfied Although more firms were dissatisfied than not, the strength ot the dissatisfaction is noticeably less than it was with the embargo. The difference, we feel, is that the 1974 U.S. intervention was considerably less severe than the em- bargo. Only 6 firms, in fact, had to make contract cancel- lations or deferrals as a result of the U.S. action. The dissatisfaction of the 52 exporters was centered on the feeling that the intervention was simply not necessary, and the exporters' responses appear unrelated to how much and to what they export. 67 The Prior Approval System From October 7, 1974, to March 6, 1975, USDA operated a voluntary Prior Approval System for large volume export transactions. Under this system, exporters were requested to receive Drior approval from USDA before entering into contracts for selected agricultural commodities in excess of 50,000 tons. In the later months of the system's operation, the limit was raised to 100,000 tons. As with the 1973 soybean embargo and the 1974 Soviet wheat and corn sales, we asked the exporting firms whether or not they were satisfied with the implementation of the Prior Approval System. In contrast to he two earlier U.S. actions, exporters expressing satisfaction (as opposed to dissatisfac- tion) are in the majority this time, as shown in the following table. Exporter Attitudes Toward Prior Approval Percent 40 30 20 10 12 55 70 13 5.7 iFrmFa i FirmsFirm s Strongly Moderately Undecided Moder- Strongly Satisfied Satisfied ately Dissatisfied Dissatisfied 68 Exporters who were satisfied with Prior Approval outnumber those dissatisfied by about three to one, with the response about the same through all sizes of firms. The exporting firms repeated this favorable view of Prior Ap--rval in their response to another question. When asked how eft - tive, in terms of the national interest, Prior Approval was, the firms answered as follows. Exporters Rate The Effectiveness of Prior Aproval Exporters hum-eer Percenit Positive effect 69 35.4 Little or no effect 64 32.8 Negative effect 20 10.3 Did not answer 42 21.5 195 100.0 A final question posed to the exporters concerns the impact of Prior Approval in four specific areas. Alth..ugh the responses are generally mixed, the most common answer in each case is that Prior Approval had no effect. The results are shown in the following. Expo:ters' Opinions on the Impact of Prior Aproval Increase No effect Decrease No answer Total Volume of Exports 6 79 56 54 Commodity Prices 29 57 36 53 Number of Contracts 27 66 44 58 Contract Cancellations 26 92 20 57 69 Government Role in Export Markets Besides simple modifications to the Export Sales Reporting System, we asked the exporters about various levels of involvement in the agricultural export market that the U.S. Government might wish to consider. Among these are different kinds of Prior Approval Systems, export allocation schemes, and national grain reserve policies. Many of the programs represent a more active market role for the Government than the monitoring now being done, while others are similar to action that has been taken by the U.S. in the past. When asked to rank, in order of preference, ten forms Government involvement in the export market might take, the exporters responded as follows; Exporters' Preferences For Government Involvement Average Rank 1. An Export Sales Reporting System similar to 2.1 the one currently in operation. 2. A voluntary temporary Prior Approval System. 3.8 3. An Export Sales Reporting System with the 4.9 requirement to submit written explanations foL contract decreases. 4. A voluntary permanent Prior Approval System. 4.9 5. A mandatory temporary Prior Approval System. 5.0 6. An agricultural commodity reserve system. 5.9 7. An Export Sales Reporting System with the 6.3 requirement for penalties to be assessed against exporters unable to reasonably justify contract decrea3es in writing. 8. A mandatory permanent Prior Approval System. 6.4 9. An export licensing system. 7.5 10. A producers' licensing system. 8.2 70 We have included the average rankings to demonstrate the relative strength of the exporters' preferences. The Export Sales Reporting System as presently operated is strongly pre- ferred over all the others, with 86 of the 143 firms who responded placing it first. Similarly, a voluntary temporary Prior Approval System is a solid second choice. The rankings reflect, in adition, a preference in most cases for the minimal necessary Government involvement. For example, the firms favor a voluntary Prior Approval System over a mandatory one and a temporary rather than a permanent one. They prefer the Export Sales Reporting System as it is to one with written explanations for contract decreases and would like the addition of penalties for unjustifiable decreases even less. The exporters' preference for the present Export Sales Reporting System is, furthermore, not simply a choice among evils. Earlier we mentioned the firms' strong belief in the U.S. Government's need for an export sales reporting system. A second question we asked concerns the Covernment's need to monitor agricultural exports routinely as to permit inter- vention when it is felt to be in the national interest. About 64 percent of the exporters who expressed an opinion believe there is such a need, while only 23 percent say no. Large exporters overwhelming say yes. No significant dif- ference of opinion on this issue appears among the various commodity groupings. The results follow. Need for Monitoring Agricultural Exports Exporters Number Percent Yes 111 64.2 Maybe 19 11.0 No 43 24.8 No basis to judge or did not answer 22 -- 195 100.0 71 Two final questions on alternative programs involve different export allocation schemes and national grain re- serve policies. Were the U.S. Government to implement an allocation program in the face of a sort-supply situation like the 1973 soybean shortage, exporters would prefer to see the allocation based on quotas by country r region than to have export licenses sold or distributed on any basis. The exporters' preferences are shown in the following table. Exporter Preferences Among Short-Supply Export Allocation Programs Exporters Number Percent Allocate export quotas by country 63 32.3 or region Distribute export licenses on the 19 9.7 basis of exporters' historical market shares Distribute export licenses on a first- 13 6.7 come, first-served basis Distribute export licenses to domestic 11 5.6 producers on the basis of production histories Sell export quota licenses to exporters 7 3.6 at auction Sell unlimited export permits at fixed 5 2.6 fees Other or did not answer 77 39.5 195 100.0 In the event that the U.S. adopts a national grain re- serve policy, however, exporters disagree widely on the types of management control systems they would favor. The differ- ent systems and the numbers of firms favoring each are shown below. 72 Exporters' Preferences Among Grain Reserve Systems Exporters Number Percent Voluntary private 34 17.4 Mandatory Gov't-financed, stored by 35 18.0 private sector Mandatory Gov't-financed, stored by 32 16.4 Gov't Joint venture--mutually financed and 32 16.4 stored by Gov't and private sector Private sector-financed and stored 11 5.6 Other or did not answer 51 26.3 195 100.0 73 SUMMARY The surveyed exporters are generally satisfied with USDA's Export Sales Reporting System as it is presently operated. For example, most of the eporters: * believe the U.S. Government needs a monitoring system to prepare for commodity shortages, * feel ESRS has met the provisions of the act that established it, think ESRS has at least moderately achieved its objective of providing accurate, timely, and reliable export statistics, find the Weekly Export Sales Reports useful for market de, opment and intelligence purposes, have little problem with the actual reporting require- ments, claim that ESRS has not affected their export sales volumes, and prefer ESRS over other forms of U.S. Government involvement in agricultural export markets. In a somewhat different vein, many of the exporters feel that the publication of the export reports has to some extent influenced agricultural commodity prices and has given at least a minor advantage to foreign buyers in export contract negotiations. Also, most exporters think that the reports would be more useful if additional information on contract destinations, decreases, and shipment dates were included. We pursued the subject of contract decreases (i.e., cancellations, modifications, or delivery dferrals) in an attempt to measure the overall extent of decreases and the characteristics of contracts that are likely to be decreased. Using data obtained from 48 firms in the survey, we calcu- lated a 21 percent rate of decrease in the total volumes of contracts to export wheat, corn, rice, soybeans, and soy- bean oil, cake and meal in the 1973/74 marketing year. Given the unusual market events and Government actions that took place in that period, we view this rate as not at all surprising. The exporting firms attributed over 90 percent of their decreases to one of the following four reasons: 74 · Disadvantageous price changes, · Contracting for maximum rather than probable needs, * Overcontracting in anticipation of the imposition of controls, and . Hedging to protect a market position. Further analysis revealed that basis contracts (those with no specifically stipulated price) were much more frequently decreased than fixed price contracts and that unknown destination contracts were less solid than those with known destinations. About half of the decreases, moreover, were made by firms against contracts with their own affiliates. Part of the survey dealt with the roles that he U.S. Government has played in the past and might consider for the future in agricultural export markets. The exporters were asked first about three recent Government actions--the soybean embargo in 1973, the renegotiations of Soviet wheat and corn sales in 1974, and the Prior Approval System in 1974 and 1975. Both the embargo and the renegotiations resulted in the forced cancellation of some outstanding export contracts, while Prior Approval was mainly a voluntary, pre-contractual review of large volume sales. Exporters expressing an opinion were generally dissatisfied with the first two actions, but satisfied with the third. As for future forms of U.S. involvement, the exporters also appear to prefer a minimal Government role. Were Prior Approval reestablished, for example, the firms would want it to be temporary instead of permanent and voluntary rather than mandatory. Although they accept the funda- mental need for monitoring itself, the exporters oppose modifications to the existing Export Sales Reporting System that would step up the Government's involvement. Specifi- cally, more firms are against than are for the public disclosure of export sales contract terms, even on an aggregated basis. They are in opposition, furthermore, to being required to submit written explanations for their contract decreases and even more opposed to the assessment of penalties for unjustifiable contract decreases. Although only 72 percent of identifiable exporters participated in the survey, the participants were found to represent, in terms of sales and exports, almost all of the agricultural export industry. As such, the survey results extend, we believe, to tht industry as a whole. 75 *CHAPTER 6 U.S. O A AUCOUIWUdO CL OpFICE SUIVLmY1 IOltZIG Iruml INSTRUCTIONS All exporters who have filed export males repo-te Jith the oreign Agricultural Service of the U.S. Depart- ent of Agriculture are being surveyed to determine their att'udese ad opinions on the Exprt Sales Reportinp System and other past, present, and potential short-supply m,.lgement ystems. Please read the followins questions and ansr each one as frankly ond completely as poss.ble. If question doe not apply to your firm, simply cross it out and go on to the next question. In responding to specific items tointhis questionnaire, pleasel 1. Consider only U.S. origin agricultural cmitie, specifically those identified in Appendix I of the Export Sleo Reporting Regulations. 2. Respond as if all alternative actions mentioed could be .tplemeted under existing legislation. 3. Iespond to quetilrs o the Ebport Sales Reporting System as it currently operates. Please dort be Influenced by the initial "tartup" problems or early reviicms d modificatiomes unless the questions are specifically about the original or early system. 4. Assue norml market cond:tiona umles the queston directs you to consider certain specific abnormalities. S. Conider n export to be defined a hipment of commodity from the United States to (a) a destina- tion outside the United States or (b) ay territory or possession of the United States. The comodity hall be demed to have been ported on the date of the applicable export carrier on- board bill of lading or the date the cadity is received for ahip t, as specified n the bill of lading; in the case of a commodity received for shipment in a lash berge or containerised van if a through on-board bill of lading is isuod for himnt to (a) destination outside the United L.atcs or (b) any territory or possession of the United States. Please feel free to add any dditional commute you ay have at the end of the questionamir. GINAL I1 fATIOU I. Please identify your fim. 4. Is your fir o subsidiary or affiliate of another corporation? (N'eme) - - tZ7 Yes If j,. please provide the mme and address of the irm No. (the same no. used to report export -sles) parent corporation or compny. (Address) Address (Zip Code) Zip Code 2. Company official completing quetioraire. (title) (Telephone) 3. How is your firm orpsnised? (Check ne.) L Sole pr6prietorship . Private corporetion . Partnership D Public corporation 0 Other (please pecify/ 76 5. Does your firm expert U.S. origin agricultural codities to any orglaniation* that re either Ca) your parent organisation or partially or wh ly owned affiliates or subsidiaries thereof or (b) partially or wholly owned affiliaaes or ubsadiaries of your firm .(Check one.) o Yes ° No If ys, please liat the ani of each orgafsiaton, the country or territory n vhich it is located, and the nature of Its ooeration, e.gl. shipper, ,aent,storage facility, cmmodity trader, end user, processor, merchant, etc. If your firm deals with mere than five such organisstions, please list the five with which you ordinarily conduct the reuest volums of export activity. ftilitoe/SubsidLary Country or Type of or barat Territory Oeanpit ~tion 6. In what year did your fire bgin exporting gricultural commodities? Year 7.. What was the approximate value of all your U.S. origin agricultural ccemoditios exported during calendar years (1 January through 31 December) 1973 and 1974? 1973 $ 1974 S 8. Please enter the amount (in metric ton) of each agricultural comodity listed below that your firm exported during the 1973-74 marketing year. Also indicate whet percent of exort sales of each commodity was . 0. . (free on board), C. I. . (cash, insurance, and freight), F. A. S. (free alongside), C & F (cost and freight), or other. plcase approximate the amounts and prcentagts requested if you don't have this nfnrmatton readily available. Comodi ty/ Amount n mrktin vyar metric tons .. C.OI.l. A.S. Other Wheat (ncudin.n wheat products) '/1/ I /30/74 Corn l0/1/' - 9/30/74 Rice 8/1/73 - 7/31/74 Soybeers 9/1/73 - 8/31/74 Soybean oil, coke and eal 10/1/73 - 9/30/74 Cottonseed 8/1/73- 7/31/74 Cottonseed oil, cake, and meal 10/1/73 - 9/30/74 77 ADMINISTRATIO N O T EX( T 8AWL ISITIG SYSTU Regardiess of whether you agree or disagree vith 12. Each of the items below deals with USDA's "Export the need for an Export Sales Rporting System, Sales Reporting Regulations" nd "Export Sales do you understand the provisions of Section 812 ReportinU Inatruction' (both revised effective of the Agriculture nd Consumer Protection Act June 1, 1974). Rate each item as c. whether you of 1973t (For exact wording refer to page 1 of consider It to be a problem or not. %Check only the Export Sales RporJing Regulations.) (heck one.) one box for each item.) D.J Very good understanding j Generally good understanding /o L.J/Moderate understanding D Generally poor understanding a. Language--can you L_/ Very poor understanding tnd it b. ?ormt--order of 10. Do you believe th- Export Sales Reporting System, reentia infor n __ as formulated and implemented by the Department c. Indexing--your ability of Agriculture, hs met the stated provisions of to find what ou need the Act? (Check one.) d. Comprehensiveness-- does it cover every- D Definitely yes thp . Other (pleseespecify):i_ _ _ I / Probably yes D/_Undecided JJ Probably no Di Definitely no 13. Each of the items below deels with certain features of the export report forms that your 11. The Export Sales Reporting System is intended to rirm is required to submit. Rate each item as monitor the amount of agriculturel coimdities to whether vou onsider 't to be problem or being exported so that, in the event of shortages, not. (Check only one box for each item.) the U.S. Government will have on timely basis / the information required to formulate necessary / decisions. Which statement best describes hov /9 Jou feel about the U.S. Government's need for an . 0 export sales reporting system? (Check one.) e 0 D Definitely needed r-7 p0f . Language--can you ..J Probably neededcen you bb. Undecided t--order in which L Undecided inforntion is requested Di Probably not --'~Probably needed needed not c. Adequacy of space for - Defnitely not needed d. eaesurement conversions e. Cost or burden associated f. Meeting deadlines for .. __1fou g. Other (please specify) _ _ _ _ ,::ii 78 14. List in the box belov the verage tiA in toaff 17. Now does your firm feel bout tho adequacy of hours per week that your firm spend on filling the tie llowed to ubit c ent on prop out the follwing rpor. odthe Export Soles Reporting System? (Check one.) Staff hours ~ Completely tindequate form .g. 0-o2 (prt of Ot10~l Ortain olo) C7 Slightly less then dequate *ormCt 06°008 (Report o rt la N u j2D tbout right fore CB .00 '(Gr T t TT" Sup _ parting Exprt /7 Sl:ghtly more then adequate soloee d Foreign form c.I. 06-00 h.r.. F*) ooprt o tiqort _ D7 Luch more than needed ffor bpoters 18. What was the extent of your participation in 0 oiunt)- the modification process? (Choek all that apply.) =_ Did not participate (Skip to question 20.) 15. At the present tim, reporting exporters are notified by USDA on an individual basis wheo to Dm Submitt.ad telephone caeunts file form CE 06-00S9 (ontract Teors Supporting report Seatl end foreiga Purchases). This form L/ Submitted written c ents contain export soles information related to reporting exportor, um of foritn buyer. I Participated in meetings that were closed contract terms, actual contract quantity not to the general public exported, destinotionsl etc. LJ Participated in meetings that veats open to Would your firm support or oppose the public the generol public disclosure of such data in a periodic report if it were combined or aggregated with similar L1 Other (please specify) data from other firm so that it could not be identified with your firm or any other firmat (Check one.) L== Strongly suppOrt 19. What is your firm's impression about the exten N Moderately support h to which USIA has considered your views prior to finslirlng modifications to the System? _ Neither support nor oppose Very little consideration if any U Moderately oppose Some consideration, ly oppose but not enough 0- Strongly oppose LJ An appropriate mount of eonsideration 16. Several changes huve been made to the REport Sales Reporting System since its inception. Now did 7 Too much consideration your firm first learn that changes were being considered? (Check one.) L_ No basis to judge L/ From the Federal Register 20. In addition to exporters, which (if any) of the following interest groups do you believe should L Goverrment officials requested your coents be represented if future motings concerning changes to the Export Sales Reporting System =L sly found out after changes were implemented are required? (Check all that apply.) (If you checked this box, please skip to question 20.) L.J Farm groups t_ Other (please specify) 0 Consumer groups / Trade associations 0 Transpottation companies 0 Storage copoanies 0 Foreign importers L7 Foreign governnents LU Retail food companies 0 Other (please specify) 79 usmus Ot rt u.s. te S. AES No 21. Do you receive the U.S. upeort aele Ipert that 75. D, you believe that the weekly pblicetion of is ublihed each week by the Foreip Aricultural export data n the U.S. Lsport Sale& report Service, USDAt ives foreign govrusto or trading comtpanes any advntate in elotietiu contracts wich 7 Yese 7 b U.S. eporting comaiet (Check on.) If II, please skip to questioa 28. 7 majorodvat ta 22. Which of the following stotments describe how your 7 Somewet of a ajor advantage fir generally uses the weekly U.S. eport Salee report? (Check all tohat aply.) D -&to advatage *lee with total D.r Zedvktag Cqpre toepay's export U.S. export sales ° Little or o advatage .7 For ecastforeig ceutries' ed lta for specific b t je agricultural comodities 26. At time, the xoert Sal Reprting Syste has Use as a reference for export ales to foreign bee critid for cetoaii duplicate reports countrie by c dity of the somshipment i.e., iffermat exporters reportlot the export of the sm quantity of Develop plaing · tratq for buying U.S. sive eemdity (e shipment) or a give agricultural cmodities eporter reporting the exprt of te ses ship- nt two or more tie. the syrte is Develop plaaing stretegy for company's trading currntly operated, what percent of the total decisions with foreign buyers export vims reported do you believe is attributable to such duplicate reporting Use to uake transportation or storage (Ceck e.) decisions 0.2 21-30 7 Other (pls specify) 3-101 31-401 D re then 5S 0--D 11-201 D *1-5o 23. Ihich statement best describes how frequently your firm uses the data from the eekly U.S. Ixportr Saler report? (Check one.) Donut use it t all I ra Iy - about I to 5 times a year t Occslonally-&bout 2 or 3 time a m th Frequently - about 2 or 3 ties a week 0 Very frequently-about 2 or 3 time a day 24. I would your fir rate the overll usful · tof the data published i tohe eekly U.S. mport Shle report? (Check se.) 7 Very ueful 7 Generally useful 0 ao useful asu ot 0 Of oe use Of very little or O use 80 27. blew are listed se it of itfomtion that 28. Nay people believe chat expert coamitments could be included i the U.S. Ruport Sale report (outetiag export oles plus export hip- if UfD had dot on than. Mo importat do you munts to dote) frequently overstate probable believe each of then i, or ould be, to the actual export hipmfts for gliven arketing usefulness of the U.S. aoport salei rportt year. This hapras because export contracts ( Cheek one box for each ite.) are (1) cenolle with no shipments being ade, or (2) modified so that () actual quantties shipped ere less than originally contracted for, (b) delivery of cmodities is deferred to the next markting yar, (c) nother comdity is substituted for the comnodity originally contracted for, d) delivery of coamodities is changed to snother - -' - - ___________________ - _ destination, or (a) purchases from foreign . Quantity tolerses (percent sellers are used to fulfill export sales of allowble under/over contracts. Please estimate what poroantse hgimfta_) _ of your firm's total decreases that occurred b. raportation d ls - - in the 1973-74 marketing year was attributable (such as P.O.., C.I.P., to each of the following reasons? Please t.-)_ _ __ _ respond in terms of the percent of volume, e.i., . Dinaons tons or running bales, etc., of commodities that wre decreased. If your firm did not " _eids(dates) xperience contract decreases during the d. nSbipot priodns(dota specified _ period, please check this box e. Contract type (fixued', and skip to question 29. d . *tc.l- 'b42is _) _ __Percent becrease f. Ibcrease}s(including rLr A in Volume cancllations, buy- b u Oth*rtcplase specifyI) - a) Original quantities based on c Othkr (please specify) : atites of maximum rather than iebable ned ;..'__ _:_i'_ b) Original quantities based on anticipation of the i._.:_:.____ _ imposition of U. S. Govern- ..... _ __m t controls _t :_ _ __ -c Hedging to protect their cash or futures market I fixed contracts are defined as contracts or oition transactions in which s definite cash price is d) rice dropped--more established at the time te contract is written, advantageous for buyer sometimes referred to as fsia contract&. to cancel or modify _ontracts _ b sis contracts are defined as contracts or e) oretign buyers' inability transactions in which a definite cash price is to nav not originally set --someties referred to os f) Foreign buyers' inabillty open, discount, or premium contracts. to take delivery Seller Activities: / Decemases are defined as domwWard djustments of g) Oriine quentities beed quantities actuelly exportdincludig cacelltio- riginal quantitiesxi baedof buy-backs", loading tolerances, changes in market on ofble t estimha x ne Ir.gyears, or chnges in cd _tie. h) Original quantities based on nticipation of the imeositlon of U. S. Govern- i) Hedging to protect their cash or futures market sosition j) Price dropped--more advantageous for seller to cancel or modify contracts k) Seller' inability to deliver 1) Other (please specify) 81 PO ssxLf ALSmIVES TO T ! 011T LU RN .ha~in tionh~"*"'""""""i f nst cma Sverai alternatives to the xport Sales Ieporting 30. Would your firm support or oppose U.S. overn. System hve been proposed t various times. Thee hve ment policy that required xporters to provide ranged from a slightly modified export rporting system writton explanations for contract decreasesl to drastically different kinds of comodity supply (Chock one.) onag_ nt yte system. Strongly support Some of these lternative rogrmu h been tried in the past. In this seoction we would like obtain M Irbd tely support your views both as to your past experiece with sm of these alternttive proposals, as well as to the desire- D Neither support nor oppose bility of implementing them in the future. IModerately oppose 29. It has been suggestod that if USDA had certain additional information not currently available LZ Strongly oppose in all cases, it would be able to more accurately estimate what prentage of the exports origL- If you choked either "Ibderetely oppose" or nally contracted for would result in actual ship- "Strongly oppose, skip to question 3. mnts. Please indicate the extent to which you believeeach of the folloing item of information 31. ould your firm upprt or oppose a U.S. Govern- would permit USDA to more accurately make such ment policy that required penalties to be assesed estimates. (Check one box for each item.) againt exporters wbo were uable to reasonably justify, in writing, contract dcreases? (Check one.) 07 Strongly support N7 bderatly upport Neither support nor oppose aNoderately oppose 0 Itronly owppo _ _-_ _ _ 32. If the gowrremt did require either, k)rittsr CMWUACTS aepleutt.os for contract decreases or, () both aClassification of foreignp ritten explnations nd the asseomemat of buyer Gover nt agency, pealtfre for unjustified contract docruass, affiliate, private rel- whot do you think the ffet weould be o the items lor, processor distribu- litoil below? (Cbheck oe box for eath item in or, ar oh. -A u _ _r") _ _ sectirm a md one box for each item in section b.) b)Contrset pricing term or formul (including identi- fiction of ixed vs. b-_~is centract om) _ _ _ _ _ I e et tinutio (t.e.. not prmittin destine- &ion 00.o matries - d)Contrect provisions such as leodin tolaraneos, &) bitt- Totl strage shipplig dtes, _. s of rt details, etc. e)Other (pl'ee specify) | ' C-ditL mries_ r ,____________________ 3. Bb er of cotracto ._trt cma/atim AJDD A BTU _ S._ Other ( a specify) f)oreigp buyers' dvsmeod oreip o| I s _ _ b) Vritte meplmtiemn ad h loreip b.yr' cap i)Dbtet of et buy. l vel of rt activities and position L. - iv oric-- tn the U.S. cash udr of otrct. j)Other (pleaoose specify) 4. Contract canellti 5. Other (please specify) _ 82 i1 lb hPior ~ra X k et from October 7, 174, to Maorch 6, 1975, UIA operated 37. In terms of the national interest, rw effective a voluntary rior Approval System for large volute we the most recent voluntary Prior Approval export treJoeatioln. UOder this system, xporter System? (Check one.) were u o resolve prior approval from USDA before eneri late export contreate for relected L major positive offect gtriculturel cemmditiet tis emeoe of 0,000 tone origieally, sod fttinally the ltor oaths fot CGeerally positive effect qutitte, t esoos of 100,0 tes. e Little or no effect 33. Mat Ld you think weo the primary rease ibhy USDA Implemeted the Prior Apprval ytro (Coeek onei. OGenerlly unegtive efIect Dsme for the U.S. cn .r j Moajor egative effect Coselrs for the U.S. tar come ity 38. It ie osible that, during the period the meoot reocent Prior Approval Sysetm m in effect, Concern for U.S. exporters om instancec of mltiple con'ract between U.S. exporters ad foreign buyler were rrgeod U.S. overment como for the adequacy of ti order to circuvent or aoid obtaiing prioer foreign eupplis approvall for exaple, contracting for tenages slightly uoder that requiring approval oe day D USAs desire to avoid mr4e tringent eontrll and contracting for rore shortly after. Of the total contracts entered into during the D Other (please specify) period that the Priot 4proval System es it ffect, what percentage do you believe repre- · snted attempts to cir-cuvent or avoid obtaining approval? (Check one.) 34. Dung the period the Prior Approvel System was t effect, ws it clear to your fire what criteria None 11-25 than 5.# Mbrore USDA was using to approve or disapprove export contractsa (Check one.) L O-lO 0 26-50% Very clear A firlyclear oat clear 39. hst effect do you believe the met receut all Approval System hbd on the fecors It,'- Prior at Syst rior 3. Th Syte etbi roval ewas ed d aml belowt (Chck one box for each factor,) 35. The Pior Approval establiobod operated by US as a volntary yotem. Dd your firm perceive it ao a volu tery system? (Check one.) L tes A NO Do't know 36. In retrospect, w your firm satified or nt vith thes ixlmtation of the Prior Approval System? (check ome.) Strongly satisfied S.7 -7 adseretely aisatisfied A) Total volum of expot d lbderately satisfied J_ Strongly dissatified 0 Udecidd 3) Commdity prices Yf you ecked "Noderately dissaotisfied" or"Strogly dissatisfied", please ottt to identify your C) Iuber of contracts ream(s) by hecking ose or mare of the followings_ D) Contract cancellations A U.S. Goveret cantrols weot naoeoeary i Wreg tpe of coatrols ere pplio d 1) Other (please specify) Centrolo ere implemented at the wrong time t Controls were terminated at the wro tim xc aiVe ___ Control were too o Control were not strong enough Other (please specify) 83 40. It the U.8. Govcrunut were considering tablihil l Z M 1974 Soviet Union and .at Corn SLe either () a temporary Prior Approval lyete, oly when it perceives such acti tbe in the In Ld-Sleptmber 1974, the Soviet Union national interest or (b) permonent Pritr Approval entered the U.S. umrket to purchase wheat dnd System, which of the following cystems muld your eorn. Because bf tt supply situation in 2ir prefer? (Chock one.) this ountry, n October 1974, the U.S. overn- sont intervened, causing the origti l soles to A voluntary parnmeent system be renegotiated for smaller q. titi. A voluntary porary syseem 43. Did your firn cncel contract o defer delivery under any contracts s a result o.' the U.S. / A mandatory permanent system Oovermet.control applied to the Actober 1974 dturchase of corn end wheat by the Soviet Union? _ A andatory temporary yera (Chek oe.) L. Doi t know Neither cancelled contracts nor deferred delivery under aay contracts III. 1'73 Sovbasm ubArmo Cancelled scoe contracts but did not defer Dus to domestic abort-supply situatLo in delivery under any contracts the soybean market end n increseo in foreign demand, the Deprtent of Coinrce imped exprt controls on July 5, 1973 that reuined in effect D Deferred delivery under ome contracts but did not cnel any contracts until October 1, 1973. L Cancelled mine contracts d deferred delivery undoer other cotracts 41 Did our firm cncel contrects or defer delivery under any of your ontracts s a result of the 44. Fro. your understanding of the October 1974 U.S. Goernment imposed soybe embargo of 1973? control applied to the sales of corn end wheat (Check one.) to the Soviet Union. were you satisfied or not Neithh~r cancelled contracts nor Jorrewith 0 Neither zancelled contracts nor deferred the Goveruent s ction? (Check one.) de ivery under any contracts 0 Strongly satisfied 7 Cancelled sme contracts but did not defer 0 Moderately satisfied delivery under ny contracts 0. Deferred delivery under ams contracts but did not cancel any contracts Moderately disutisfied / / Cncelled om contracts end deferred 0 Strongly dissatisfied delivery under other contracts If you checked "oderately discatisfied" or 42. From your understeding of the oybean embrgo of "Strongly dissetisfioed", please ttet to 1973, ere you satisfied or not with the Govern- identify your reason(s) by checking one or ment's action? (Check one.) more of the followings Stronguy satisfied 0 U.S. overnnt controls were not necessary ... Noderately satisfied Wruong type of controls were applied D Undecided D Controlc were Impl em ted at the wrong tine L Noderately ditsstisfied D Controls were terminated at the wrong timein D= Strongly dissatisfied D Controls were too excessive If you checked "Noderately dissatisfied" or /C'Gmtrols wre not strong enough "Strongly dissatisfied", please attempt to identify your reason(s) by checking one or man of the followings D Other (please specify) 0 U.S. overnisnt controls were not necessary 0. Wrong type f ontrols were applied _J Controls were implemented t the wrong time D/ Controls were terminated t the wrong tinm L/ Controls were too excessive / / Controls wcre not strong erough L/ /Other (please specify) _9_ 84 45. In thr event of short supply export control zEXpITn ATTITUD u AND OPImIOvS situation materislising, similar t he soybean shortage of 1973, which c' the following Govern- 47. What ffect do you believe the Export Sales ment export allocation programs would you prefer IReporting System has had n your firm's export (Check one.) sales of agricultural commodities during the paet year? (Chck one.) /7 Allocating export quotaes by cour try or region Selling S export permits t fixed fees with no D oddratu increse in sale volume quota on the number of pemsi.L to be old I.Z Slight increase in el*es olume / Selling export quota license auction to exporters at D No effe- . Sligsht decres in sales volun 7 Distributing export lfcesee to domestic producers on the basis of production histories Noderete drease in sleF uolum m 0 Distributing xpnrt liceaes to esporters on the besis of their historical market bshars 0 No bsis to judge 48. The major determinants of comadity prices are Distributing export license to exporters on worldwide aud domestic supply and dcrad factors. a first-come, first-served basis Recognising this, do you telieve that the vekly publication of export data in the U.S. Export 0_Other (pleas specify) Sales report hs any addittonal influence on coodity prices? (C.ek one.) v..!s·eri 0 Little or no influence In anticipation of future short-supply situs- Small influence tions the U.S. Government could establish reserves in which specified quantity of specific con 0 Moderate influence moditles would be set side for future national needs. / Substantial influence 46. in the event tb- .S. adopts national grain Very great influence reserve policy, please indicate which of the following types of management control systems 0 No basis to judge you would prefer. (Check one.) 49. Whet is your firm's drirv pereption of he 0 Voluntary private reserve Export Sales Reporting System as it is presently employedt (Check one.) 0 Mandatory Government finaced reserve stored by the private sector 0 A means to provide morr iformation on foreign demand and export comitments D Mandatory overrnent finsnce* by the ovurment reserve stored Improvement of the Government'3 system for forecasting exports 0 Private sector financed reserve stored by the private sector The first step toweard a comprehensive Govern- ment short supply manegeent system 0 Joint vnture reserve--mutually financed nd mutually stored by the Government and the 0 A Goverment activity of marginal utility private sector / / Other (please specify) D Other (plese specify) 50. To what degree do you believe the Export Sales IReporting System hs achieved its stated objective of providing accurate, timely, nd reliable export statistics? ~Check on..) LJ Little or no achievement L Minimally achieved 0 Modeately achieved _ Major achievement = Almost completely achieved 85 DS you believe that there I a need for the U,I. Cvrernmat to -sL mte rU.S. agrtculture eaport r eu se as to permit intervention w it prcreives uch action to be i t e atieal interest (Che4k ee.) 7 ft0lftIy tyeL= PrWobbly yes A A muh ye n Probably Defiit ly so to b a ui Judge 52. egardle·· of whether or not you believe that there it a need for Overano t ivolvt in the tstivities of agrieulturl ceomdity exporters, in th, event that ovraemrt nvolvement is to contioue, we would like your viove as to det form this involvm. nt should to. Selow ore listed teoo different types of control for the export of agricultural coemoditieo. Fnloas reek order the lternativee presented from the mot to the least preferred by your firm. Select the lternative most preferred ad indicate it by circling lt to the right of it. Do the me for all remeoning alternatives, rking them 2d, 3rd 4th, 5th, th, 7th, 8th, 9th and lOch. MlOt Bach rnk, lot threou 10th should be circled only oce. 1. An Dport Sles porting System mittlar to the lot 2nd 3rd 4th 5th 6th 7th 8th 9th 10th one urrently in operation 2. A Ibport Sale Reportig System with the lst 2ad 3rd 4th Sti 6th 7th 8th 9th 10th require t to euboit written expleetion for contract decreases 3. An Lport Sales Reporting System with the !- 2nd 3rd 4th 5th Gth 7th 8th 9th 10th requirerment for penalties to be assessed against exportr r ble to reasonably justify, in writing, cotreact &dAreeas 4. A voluntary etporary Prior Approval rystem lot 2nd 3rd 4th Sth 6th 7th 8th 9th 10th S. A voluontry permanent Prior Approval ytem lot 2nd 3rd 4th 5th 8th 7th Sth 9th 10th 6. A mndatory toerry Prior Approvel System lot 2ed 3rd 4th 5th Gth 7th Sth 9th 10th 7. A mendatory perm ent Prior Approval Syrtem lot 2ad 3rd 4th Stbh th 7th 8th 9th 10th 8. A eaporter licensing system lt 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 9. A producers licenosing system lot 2nlad 3rd 4th th th 7th 8th 9th 10th 10. As agricultural comodity reservCsystm let 2ed 3rd 4th 5th 8th 7th 8th 9th 10th 86 Yr~Q- - - - *, Ci14 1 41 4 1U S9 OB st ottt k 1 I o8> C1 _o.___ _ _ _ *04@ a'r~~~~~~0 *~~'Z ~ 'U .4 E'~ ~~ a 44I ,.,,+' Ai a i -- -' 01~~~~~i. 44, e -- -_ _ _ _ _ __ _ _ _ _ _ _ _ 44.444s41c_ 4. 1 `1 * c!S o^ 1S-- - -i - - e u u 0. *~~~~~~~14-444~ ~~~ ~ ~ ~ ~ ~ ~ ~ ~ 41 d 4 44 W Uc··~ D~ ~ UYO~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~' ~ ~~~~~~~~~~-44 Du ~ s 04 kI .4 41 IiI !1 gg~~~~~~~4 B~~~4 " o ""a "aM .bo 14.U1 _c - :l *.4U II 44 1464041 41441 a 04 0go gk'Ua- 4 k;*4641 440 i- 1 1 rO O~~~~~~~8 14 - ai -l 4 I n a * u ¢" Z Z f C6 _i .j _j - _ I *34L AJW _ "v W b ^ _ b4 _4oXwSo aoo o1 a. - u _u u u u Nk 4 J. 48 CENEUAL COSE4CSI Please use this space for meking any comments you may have on the Export Sales R rting Svstem or any of the other items mentioned in the questionnaire. Your vieve are greatly pprnoiateu. Thnk you. 8 APPENDIX H APPENDIX H AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITIED STATES OF AMERICA AND THE GOVERNMENT OF THE UNION OF SOVIET SOCIALIST REPUBLICS ON COOPERATION IN THE FIELD OF AGRICULTURE The Government of the United States of America and the Government of the Union of Soviet Socialist Republics; Taking into'account the importance which the production of food has for the peoples of both countries and for all of mankind; Desiring to expand existing cooperation between the two countries in the field of agricultural research and develop- ment'; Wishing to apply new knowledge and technology in agri- cultural production and processing; Recognizing the desirability of expanding relationships in agricultural trade and the exchange of information neces- sary for uch trade; Convinced that cooperation in the field of agriculture will contribute to overall improvement of relations between the two countries; In pursuance and further development of the Agreement between the Government of the United States of America and the Government of the Union of Soviet Socialist Republics on Cooperation in the Fields of Science and Technology of May 24, 1972, and in accordance with the Agreement on Ex- change and Cooperation in Scientific, Technical, Educational, Cultural and Other Fields of April 11, 1972, and in accord- ance with the Agreement on Cooperation in the Field of En- vironmental Protection of May 23, 1972. Have agreed as follows: ARTICLE I The Parties will develop and carry out cooperation in the field of agriculture on the basis of mutual benefit, equality and reciprocity. 89 APPENDIX H APPENDIX H ARTICLE II The Parties will promote the development of mutually beneficial cooperation in the following main areas: 1. Regular exchange of relevant information, including forward estimates, on production, consumption, de- mand and trade of major agricultural commodities. 2. Methods of forecasting the production, demand and consumption of major agricultural products, in- cluding econometric methods. 3. Plant science, including genetics, breeding, plant protection and crop production, including produc- tion under semi-arid conditions. 4. Livestock and poultry science, including genetics, breeding, physiology, nutrition, disease protec- tion and large-scale operations. 5. Soil science, including the theory of movement of water, gases, salts, and heat in soils. 6. Mechanization of agriculture, including develop- ment and testing of new machinery, equipment and technology, as well as repair and technical serv- ice. 7. Application, storage ar transportation of mineral fertilizers and other i;ricultural chemicals. 8. Processing, storage and preservation of agricul- tural commodities, including formula feed tech- nology. 9. Land reclamation and reclamation engineering in- cluding development of new equipment, designs and materials. 10. Use of mathematical methods and electronic com- puters in agriculture, including mathematical modeling of large-scale agricultural enterprises. Other areas of cooperation may be added by mutual agreement. 90 APPENDIX H APPENDIX H ARTICLE III Cooperation between the Parties may take the following forms: 1. Exchange of scientists, specialists and trainees. 2. Organization of bilateral symposia and conferences. 3. Exchange of scientific, technical and relevant economic information, and methods of research. 4. planning,'development and implementation of jcint projects and programs. 5. Exchange of plant germ plasm, seeds and living material. 6. Exchange of animals, biological materials, agricul- tural chemicals, and models of new machines, equip- ment and scientific instruments. 7. Direct contacts and exchanges between botanical gardens. 8. Exchange of agricultural exhibitions. Other forms of cooperation may be added by mutual agreement. ARTICLE IV 1. In furtherance of the aims of this Agreement, the Parties will, as appropriate, encourage, promote and monitor the development of cooperation and di- rect contacts between governmental and non- governmental institutions, research and other orga- nizations, trade associations, and firms of the two countries, including the conclusion, as appro- propriate, of implementing agreements for carrying out specific projects and programs under this Agree- ment. 2. To assure fruitful development of cooperation, the Parties will render every assistance for the travel of scientists and specialists to areas of the two countries appropriate for the conduct of activities under this Agreement. 91 APPENDIX H APPENDIX H 3. Projects and exchanges under this Agreement will be carried out in accordance with the laws and regu- lations of the two countries. ARTICLE V 1L For implementation of this Agreement, there shall be established a US-USSR Joint Committee on Agricul- tural Cooperation which shall meet, as a rule, once a year, alternately in the United States and the Soviet Union, unless otherwise mutually agreed. 2. The Joint Committee will review and approve specific projects and programs of cooperation; establish the procedures for their implementation designate, as appropriate, institutions and organizations respon- sible for carrying out cooperative activities; and make recommendations, as appropriate, to the Parties. 3. Within the framework of the Joint Committee there shall be established a Joint Working Group on Agri- cultural Economic Research and Information and a Joint Working Group on Agricultural Research and Technological Development. Unless otherwise mu- tually agreed, each Joint. Working Group will meet alternately in the United States and the Soviet Union at least two times a year. The Joint Com- mittee may establish other working groups as it deems necessary. 4. The Executive Agents for coordinating and carrying out this Agreement shall be, for the Government of the United States of America, the United States Department of Agriculture, and for the Government of the Union of Soviet Socialist Republics, the Ministry of Agriculture of the USSR. The Execu- tive Agents will, as appropriate, assure the co- operation in their respective countries of other institutions and organizations as required for carrying out joint activities under this Agreement. During the period between meetings of the Joint Committee, the Executive Agents will maintain contact with each other and coordinate and super- vise the development and implementation of coopera- tive activities conducted under this Agreement. 92 APPENDIX H APPENDIX H ARTICLE VI Unless an implementing agreement contains other provi- sions, each Party or participating institution, organization or firm, shall bear the costs of its participation and that of its personnel in cooperative activities engaged in under this Agreement. ARTICLE VII 1. Nothing in this Agreement shall be interpreted to prejudice or modify any existing Agreements between the Parties. 2. Projects developed by the US-USSR Joint Working Group on Agricultural Research which were approved at the first session of the US-USSR Joint Commis- sion on Scientific and Technical Cooperation on March 21, 1973, will continue without interruption and will become the responsibility of the US-USSR Joint Committee on Agricultural Cooperation upon its formal establishment. ARTICLE VIII 1. This Agreement shall enter into force upon signature and remain in fce for five years. It will be automatically extended for successive five-year periods unless either Party notifies the other of its intent to terminate this Agreement not later than six months prior to the expiration of this Agreement. 2. This Agreement may be modified at any time by mutual agreement of the Parties. 3. The termination of this Agreement will not affect the validity of implementing agreements concluded under this Agreement between institutions, organi- zations and firms of the two countries. DONE at Washington, this 19th day of June, 1973, in duplicate, in the English and Russian languages: both texts being equally authentic. FOR THE GO¥ERNMENT OF THE FOR THE GOVERNMENT OF THE UNION UNITED STATES OF AMERICA OF SOVIET SOCIALIST REPUBLICS /S/ Earl L. Butz /S/ A. Gromyko 93 APPENDIX I APPENDIX I Agreement Between the Govunmen of the United tatee of Amricsa and The ovrnmet of the Union of ioviet Soolaet Rpublice on the Supply of Gain The Government of the United States of ARTICLE 11 America ("USA") and the Government of the During the term of this Agreement, etcept as Union of Soviet Socialist Republics ('USSR"); otherwise agreed by the Parties, the Government of Recalling the "Baic Prindciples of Relations the USA shall not exercise any discretionary Between the United States of America and the authority available to it under United States law to Union of Soviet Socialist Republic of May 29, control exports of wheat and corn purchased for 1972; supply to the USSR in accordance with Article I. Desiring to strengthen long-term cooperation between the two countries on the basis of mutual benefit and equality, M'-idful of the importance which the production In carrying out their obligations under this of food, particularly grain, has for the peoples of Agreement, the foreign trade organizations of the both countries; USSR shall endeavor to space their purchases in Recognizing the need to stabilize trade in grain the USA and shipments to the USSR as evenly as between the two countries; possible over each 12-month period. Affirming their coor;, that cooperation in the field of trade will contribute to overall ARTICLE IV improvement of relations between the two count- ries. The Government of the USSR shall asure that, Have agreed as follows except as the Parties may otherwise agree, all wheat and corn grown in the USA and purchased by foreign trade organizations of the USSR shall ARTICLE 1 be supplied for consumption in the USSR. The Government of the USA and the Govern- ment of the USSR hereby enter into an Agreement for the purchase and sale, of wheat and corn for ARTICLE V supply to the USSR To this end, during the period In any year this Agreement is in force when the that this Agreement is in force except as otherwise thagreedt ths Agreement in force, except a otherie total grain supply in the USA, defined as the offi- reed Patie,by he(i)the forein trade cial United States Department of Agriculture eti- organizations of the USSR shall purchase from pni- mates of the carry-in stocks of grain plus the offi- vate commercial sources, for shipment in each cial United State Department of Agriculture twelve month period beginning October 1, 1976, six forward crop estimates for the coming crop year, nillion metric tons of wheat and corn, in approxi- falls below 225 million metric tons of all grains, mately equal proportions, grown in the USA; and the Government of the US may reduce the quan- (ii) the Government of the USA shall employ its tity of wheat and corn available for purcha by good offices to facilitate and encourage such sales foreign trade organizations of the USSR under by private commercial sources The foreign trade organizations of the USSR may increase this quantity without consultations by up to two million metric tons in any twelve ARTICLE VI month period, beginning October 1, 1976 unless the Whenever the Government of the USSR wishes Government of the USA determines that the USA the foreign trade organizations of the USSR to be has a grain supply of less than 225 million metric able to purchase more wheat or corn grown in the tons as defined in Article V. USA than the amounts specified in Article I it Purchases/sales of wheat and corn under this shall immediately notify the Government of the Agreement will be made at the market price pre- USA. vailing for these products at the time of purchase/ Whenever the Government of the USA wishes sale and in accordance with normal commercial private commercial soures to be able to asell m'e termns. wheat or corn grown in the USA than the amounts 94 APPENDIX I APPENDIX I spedfied in Artidel, it shall immediately notify ARTICLE VIll the Government of the USSR. i conltTh Paties shall hold consultations concerning oernment of the PartUR. will Inthe consult as In both instance, the PartiS ent o tho impementation of this Agreement and related Po to rach eonin ord possible quantities of grain to be suppliedo tho matters at intervals of ix months beginning six UR pior to purchase/ale or codualon of con~ months after the date of entry into force of this truas for the purchase/sale of grain in amounts Agreement, and at any other time at the request of above those ipfied in Artidcle 1. ither Party. ARTICLE VII It is understood that the shipment of wheat and ARTICLE IX corn from the USA to the USSR under this Agree ment shall be in accord with the proviions of the This Agreement shall enter into force on exe- AmericanzSovit Agreement dn Maritime Matters cution and shall remain in force until Sp- which is in force during the period of shipments tember 30, 1981 unless extended for a mutually hereunder. agreed period. 95 APPENDIX J APPENDIX J OMPTROLLER oHENRAL Op THE UNITED STATE WAmGOtO, D.C. gied June 24, 1976 B-176943 The Honorable Paul Findley House of Representatives Dear Mr. Findleys This is in response to your request for the views of concerning the legal basis of certain administrative our Office actions that were taken by the Departments of State and Agriculture to grain sales to Poland and the Soviet Union. You with respect several specific questions concerning the "Agreement also submitted Government of the United States of America and the Between the Government of the Union of Soviet Socialist Republicson the Supply of Grain," October 20, 1975. dated In accordance with the policy of our Office, we requested Departments of State and Agriculture to povide us with the complete reports containing their views and comments concerning you raised. We have enclosed copies of the responses the questions we received from these Departments, together with copies of other and reports we have been able to obtain. Based on the relevant documents information thus obtained, as well as our own analysis, w offer the following responses to your questions, which have been consolidated as necessary for ease in presentation. Concerning the reported request b the Department of State to Poland to delay grain purchases from the United States, you ask: "Did the official of th? U.S. State Department on or about September 10, act lawfully in tele- phoning a request to the Embassy of Poland that Poland delay purchases of grain from the U.S.? This question has special significance, because the request was transmitted several days before anyone else, including the other branches of government, the Agriculture Department, the putlic, the grain trade and the farmer, became aware of it. The circumstances of the 1972 grain sale to the Soviet Union made the Agriculture Department very sensitive to the need o avoid private selective notification of grain sale developments in order to minimise the perversion of such information to windfall personal 96 APPENDIX JJ 5-176943 profit. An employee of the State Department notified my office that the request was made to Poland in order to 'hold down prices.' I question the State Department's legal authority for such action. nDid the official telephoning the request comply full.y with laws and regulations con- teraing the handling of market-sensitive in- formationt. At *whosedirection did he act? To whom did he give notice of his telephoned request and on what dates? Why did he or his superiors fail to notify, immediately, the Agriculture Secretary in view of the historic and statutory responsibilities of the Agriculture Department in handling and monitoring such in- formation? "What was the legal basis for a request of this nature?" According to the State Department, the official who asked the Polish Government to refrain temporarily from making further purchases of U.S. grain was implementing an Executive decision made at a White House meeting between the President and various other officials. The State Department official reporteO his action to the Secretary of State on the same day, September 10, 197%5 The State Department has further stated that this Executive decision, was only made "* * * after con- sultations with all appropriate advisers, including the Department of Agriculture.** * *" With respect to the legal basis for a request of this nature, the StOte Department's position is as follows: "A request of this nature is within the authority of the President under the constitution. This request did not purport to be legally binding or enforceable under United States law. It has never beer. doubted that one aspect of the President's constitutional authority is the authority to make requests of foreign governments in the national interest; indeed, the President could hardly fulfill his constitutional responsibilities without such authority. For example, the request to foreign steel producers to restrain 97 APPENDIX APPENDIX J B-176943 steel exports to the United States authorized under the Constitutional was held to be Executive power of the in Consumers Union of the Kissinger, 5 06 F2d 136 (D.C. 1974) U.S., Inc. v. producers' undertakings to even when the comply were set forth in a written arrangement." See also the discussion in Part III of the State Department on the Legal Status and Effect Memorandu United States and the Soviet of the Grain Agreement between Union (copy enclosed). the Concerning the President's authority to negotiate and conclude agreements with foreign governments, actions taken in this instance we agree with State that the constitutional authority to fall within the scope of conduct foreign relations. the President's part III of the State Department As stated in President's authority under Memorandum, the existence of the Constitution to negotiate the foreign governments aid to conclude with has been upheld by the appropriate agreements with aourts. For them Curtiss-Wriht Corp., 299 U.S. example in United States v. 304, 319-20 (1936), the Supreme 'aid8 Court "* * * In this vast external ternational relations7, with realm /of in- plicated, delicate, and its important, come President alone has the manifold problems, the power to speak or listen as a representative of the treaties with the advice andnation. He makes conseht of the Senate; but he alone negotiates, of negotiation the Senate cannot Into the field Congress itself is powerless to intrude; and Marshall said n his great invade it. As argument of Harch 7, 1800 in the House of Representatives, President is the sole organ 'The of the nation in its external relations, and its sole rerepresentative with foreign nations.' * * * * * "It is important to bear in here dealing not alone with mind that we are the President by an exertion n uthority vested in of legislative power, but with such an authority plus the very delicate, nlenary and exclusive power of the President as the 98 APPENDIX J APPENDIX J B-176943 sole organ of the federal government in the field of international relations--a power which des not require as a basis for its exercise an act of / Congress ** *o" (Emphasis in original.) In other words, the President's authority in the field of international relations is not dependent upon an act of Congress. It has also been held that the President has some authority under the Constitution to negotiate agreements that affect foreign commerce, notwithstanding the constitutional responsibility of the Congress "To, regulate Commerce with foreign Nations* * *." Const., Art. I, sec. 8, el. 3. In the case of Consumers Union of U.S. v. Kissinger, 506 F.2d 136 (D.C. Cir. 1974), cited in the State Department s response to this question, the State Department, at the direction of the President, had negotiated with foreign steel producers concerning the quantity of steel imports. As a result, the producers sent letters to the Sec- retary of State, stating their intention to limit steel shipments to the United States to specified maximum tonnages. The Court affirmed the ruling of the District Court (in Consumers Union v. Rogers, 352 F. Supp. 1319 (D.D.C. 1973)) that the Executive had the constitutional power to carry out the negotiations, and to request foreign steel producers to restrain voluntarily their steel exports to the United States. In this regard Judge Mc Gowan, speaking for the majority of a three judge panel of the Court of Appeals, said the following: "* * * There is no potential for conflict * * * between exclusive congressional regulation of foreign commerce * * * and assurances of voluntary restraint given to the Executive. Nor is there any warrant for creating such a con- flict by straining to endow the voluntary under- takings with legally binding effect, contrary to the manifest understanding of all concerned* * *" We conclude that the President does have the authority to make an informal request to a foreign government to refrain from making purchases of grain from this country. You ask next, in connectioitt with the request to the Polish Govern- sent, whethdr the requirements of the Export Administration Act were met fully. The Export Administration'Act of 1969, 50 U.S.C. App. 2401 99 APPENDIX J APPENDIX J B-176943 et sea, (1970) as amended (St:pp. IV, 1974), authorizes the President, or his delegate, to prohibit or curtail commodities from the United States exports of agricultural during periods when, as determined by the Secretary of Agriculture, supply in order to further the foreign policy exceeds domestic requirements, protect national security. When supply of the United States, or to requirements, controls may be imposed does not exceed domestic on for the additional purposes of protecting agricultural conmodity exports the-economy from excessive drain of scarae materials and reducing the inflationary impact of foreign demand. However, as stated to this question, the request to the in the State Department's response Polish Government "'** made pursuant to the Export Administration was not purport to make Polish compliance with Act, nor did the President the request enforceable under that Act." There was no attempt to "prohibit" pointed out above, only to solicit voluntary exports but, as the procedural requirements of that cooperation. Accordingly, Act were not applicable. You ask further whether the request in conformity and compliance with United to the Polish Government was the General Agreement on Tariffs and States obligations under Trade. After reviewing the General Agreement on Tariffs and Trade, ment's response to this we agree with the State Depart- question which reads as follows: "* * * The General Agreement on Tariffs and Trade in no way forbids the U.S. from requesting party to limit or suspend purchases another of a U.S. product. The GATT has a general requirement Article XIII that export restrictions in on a most-favored-nation basis, as be applied but there are many exceptions in thebetween members, GATT to this provision, and in any event the GATT clearly does not prevent members from agreeing, formally or informally, rLo different terms which do not prej- udice the rights of other parties to the GATT." In addition to your questions Polish Government, you refer to the concerning the request made to the earlier incident when, on July 2, 1975, the United States Department to advire the Department of further of Agriculture asked grain exporters sales to the Soviet Union. This evolved, you state, into a suspension press conferences with the Secretary of sales through a series of legal basis was for a request of this of Agriculture. iou ask what the nature, and whether the requirements of the Expnrt Administration Act were met fully. 100 APPENDIXX APPENDIX J J B-176943 The response to these questions is the same s the response to the prior questions concerning the basis for the request to t Polish Government to limit grain purchases from this country. As t; State Depirtment points out, the "suspension of sales" to the Sovi t Union was not legally binding under United States law and Terr er,tcd a lawful exercise of executive branch authority to conduct foreign relations and "make requests of foreign governments in .the national interest." The report of the Department of Agriculture said the following with respect to this matter: "In late July, based on information received under the export monitoring program coupled with nfor- mation on the Soviet crop situation,. we concluded there was the likelihood of further large sales of grain to the Soviet Union. The Department con- sequently asked exporters to advise the Department prior to negotiating any large sales for export to the USS2. * * *0 "Thereafter, it was announced at the Secretary's press conference, following release of the crop estimates on Augvst 11, 1975, that U.S. exporters were being asked to refrain from contracting for. additional quantities of U,S. grain to the USSR until more precise information was available con- cerning the size of the 1975 U.S. grain crops. The Secretary further stated at that time that he expected additional grai ses irom the 1975 U.S. grain crops to be made to the Soviet Union at a later date. * * * (These statements were reported in a publication on U.S. export sales issued by the Foreign Agricultural Service, United States Depart- ment of Agriculture on August 14, 1975 * ' *.) "The Department of Agriculture's actions were limited merely to making informal requests to grain exporters to defer temporarily export sales to the Soviet Union. Compliance with these requests was purely voluntary on the part of exporters. No action was taken pursuant to the authority of the Export Administration Act." 101 'PENDIX J APPENDIX J P-176943 Although the foregoin& explanation from the Department of Agricilture suggests that only the American grain exporters were requested to refrain from contracting for additional quantities of grain to the Soviet Union, the cited publication on Export Sales, dated August 14, 1975 (copy enclosed) states that the Soviet Union was also requested to refrain temporarily from making additional purchases until more precise information became available concerning the size of the 1975 United States grain crop. The request to the Soviet Union, as in the case of the request to the Polish Government, represented a lawful exercise of Executive authority, ince the request was not legally binding and compliance was not mandatory. We are aware of no legal basis to object to the request to the grain exporters to refrain voluntarily from sales to the Soviet Union. You have also requested that we determine what is the legal basis for the Agreement Between the Government of the United States of America and the Government of the Union of Soviet Socialist Republics on the Supply of Grain dated October 20, 1975 (referred to hereafter as the Agreement). You ask specifically what is the legal authority for entering into or negotiating this Agreement. The Agreement is an executive agreement which became effective upon signing by representatives of our Government and of the Government of the Soviet Union on October 20, 1975. The purpose of the Agreement has been explained by the State Department as followst "* * * The impetus of this Agreement was a legitimate public concern that sudden and secre- tive purchases of huge quantities of United States grain by the Soviet Union might, as in the - past, disrupt grain markets in the United States and contribute strong inflationary pressures to the economy; The objective of the Agreement was to assure a substantial and steady market for American grain to the Soviet Union, to proteCt consumers from sharp price increases, and to strengthen cooperation between the two countries by stabilizing the important grain trade between them." Es:.ztially, the Soviet Union has agreed to purchase, at the prevailing markct price, at least 6 million metric tons of United States 102 APPENDIX J APPENDIX J B-176943 wheat and corn in approximately equal proportions for each of 5 years beginning October 1, 1976. Purchases of up to 2 million additional metric tons in each of the 5 years can be made without prior con- sultption unless the total United States grain supply is less than 225 million metric tons. Purchases of more than 8 million metric tons of grain in these years cannot be made without the prior consent f the United States, In return, the United States has agreed to facilitate and encourage sales by private comnercial sources and not to exercise its discretionary authority under United States law to curtail exports unless the domestic grain supply, as determined by the Department of Agriculture, should fall below 225 million metric tons. The Agreement provides for consultations in the event that sales of more than the amounts of grain specified therein are desired by either Government., In its response, the State Department explains the President's legal authority to negotiate the Agreement as follows: "The President has the authority under Article II of the Constitution to negotiate and conclude appro- priate agreements with foreign governments. This Agreement was concluded on the basis of the President's Constitutional authority. It is consistent with the statutes of the United States and carries out Congressional policies expressed in such legislation as the Agricultural Marketing Act of 1946." Also see Part III of the State Department's legal memorandum, cited above, which deals at considerable length with this issue. The President's authority to negotiate and enter into executive agreements with foreign governments (other than treaties, which are subject to the advice and consent of the Senate) is firmly established and well settled, In this regard, see the discussion in the State Department memorandum and the cases cited therein, including United States v. Curtiss-Wright Corp., supra; United States v. Belmont, 301 U.S. 324 (1937); and United States v. Pink, 315 U.S. 203 (1942). However, the President's legal authority to enter into the particular Executive Agreement involved here may be subject to attack in light of the provision in Article , Section 8, Clause 3 of the Constitution, authorizing the Congress rather than the President to regulate forei;n cocierce, and the specific terms of the Export Admin- istration Act which set forth certain procedures to be followed by the 103 APPENDIX J APPENDIX J B-176943 Executive branch in implementing export controls under the Act, especially when agricultural commodities are involved. Admittedly, the Export Administration Act procedures were not adhered to in this' case because, as stated by the State Department, the authority con- ferred upon the President by the Export Administration exports did not form the basis for negotiation Act to control of the Grain Agreement. The basic legal issue is whether the President Constitutional authority to enter into this has independent type of Executive Agreement affecting foreign commerce or whether his legal regard is solely derived from and dependent authority in this upon the provisions of the Export Administration Act, in which case it would have tc be exercised in compliance with the Act. In Consu. s Union of U.S., Inc. v. Kissinger, supra, the Court of-Appeals for the District of Columbia was question with respect to the authority of the confronted with a similar bring about a reduction in steel imports by Executive Branch to requesting foreign producers to limit their steel exports to this country. without adhering to the procedural requirements The request was made restrictions set forth in the Trade Expansion concerning import Act of 1962, 19 U.S.C. M8 1801 et seq. (1970). The Court said the following: "What is clear from the cussion of th:_ Trade Expansionforegoing /Lds- Act/ is a purpose on the part of Congress to delegate legislative power to the President for use by him in certain defined circumstances and in furtherance of cer- tain stated purposes. Without such a delegation, the President could not increase or decrease tariffs, issue commands to the customs service to refuse or delay entry of goods into the country, or impose mandatory import quotas. To make of such delegated power, the President would use of course be required to proceed strictly in accordance with the procedures specified in the statutes conferring the delegation. Where, here, he does not pretend to the possession as of such power, no such conformity is required. "The steel import restraints do not purport to be enforceable, either as contracts or as governmental actions with the force of law; and the Executive has no sanctions to invoke in order 104 APPENDIX J APPENDIX J B-176943 to compel observance by the foreign producers of their self-denying representations. They. are a statement of intent on the part of the foreign producer associations. The signatories' · expectations, not unreasonably in light of the reception given their undertakings by the Executive, are that the Executive will consult with them over mutual concerns about the steel import situation, and that it will not sudden recourse to the unilateral steps have avail- able to it under the Trade Expansion Act to impose legal restrictions on importation. The President is not bound in any way to refrain from taking such steps if he later deems them to be in the national interest, or if consultation proves unavailing to meet unfc-~en difficulties; and certainly the Congress is nuL inhibited from enactingsany legislation it desires to regulate by law the importation of stel. "The formality and specificity with which the undertakings are evuressed does not alter their essentially precakoxy nature insofar as the Executive Branch is cona:ned. In effect the President has said tt he will not initiate steps to limit steel imports by law if the volume of such imports remains within tolerable bounds. Communicating, through the Secretary of State, what levels he considers tlerable merely enables the foreign producers to conform their actions accordingly, and to avoid the risk of guessing what is at acceptable * * *. "The question of congressional preemption is simply not pertinent to executive action of sort. Congress acts by making laws binding, this valid, on their objects and the President, if whose duty it is faithfully to execute the laws. From the comprehensive pattern of its legislation regulating trade and governing the circumstances under and procedures by which the President is authorized to act to limit imports, it appears quite likely that Congress has by statute oc- cupied the field of cnforccahble import restrictions, 105 APPENDIX J APPENDIX J B-176943 if it did not, indeed, have exclusive possession thereof by the terms of Article I of the Con- stitution. There is no potential for conflict, however, between exclusive congressional regu- .lation of foreign commerce--regulation enforced ultimately by halting violative importations at the border--and assurances of voluntary restraint given to the Executive. Nor is there any warrant for creating such a conflict by straining to endow the voluntary undertakings with legally binding effect, contrary to the manifest under- standing of all concerned and, indeed, to the manner in which departures from them have been treated." 506 F.2d at 142-44 (emphasis in original). Although there are differences between the situation in the Consumers Union case and this situation, we agree with State's position on the applicability of the decision to he instant situation. State contends (on page 5 of its legal memorandum): "While the grain Agreement differs from the arrangement in question in the Consumers Union case in that this arrangement is an inter-governmental agreement that gives rise to obligations of states under international law, it is similar in that it does not create any restraints on commerce enforce- able under domestic law. Moreover, the Agreement does not go as far as the arrangements in the Con- sumers Union case which established specific ceilings on steel imports. This Agreement does not establish a ceiling on grain exports. * * * "In the case of the grain Agreement, the action of the Executive Branch is consistent with the statutes relating to exports and carries out important Congressional policies expressed in legislation. There is no evidence of any Congressional intent to pre-empt the President's constitutional authority to conclude such an agreement." The statutory provisions referred to by the State Department are sections 202 and 203 of the Agricultural Marketing Act of 1946, 7 Us.C. 1i 1621 and 1622 (19701 which encourage the development of wider markets, both foreign and domestic, for American agricultural products. Section 202 of the Act provides that it is the policy of the Congress that uch 106 APPENDIX J APPENDIX J B-176943 markets be developed to help make it possible "* * or the full production of American farms to be disposed of usefully, economically, profitably, and in an orderly manner. * * *" The grain agreement with the Soviet Union would appear to further these policies. In accordance with the foregoing, we believe that enactment of the'Export Administration Act did not preempt the authority of the President to negotiate and enter into the Agreement. You ask further "What is the legal authority for limiting the amount of sales of agricultural goods as defined in the agreement?" As stated in the State Department's response to this question, the Agreement does not limit or set a ceiling on the quantity of American wheat and corn that can be purchased by the Soviet Union. To the contrary, the agreement establishes a minimum annual amount of 6 million metric tons of grain that the Soviet Union is "obligated" to purchase and what is in effect an option for an additional 2 million metric tons, which the Soviet Union can exercise without consultations -unless U.S. supply is less than 225 million metric tons. In the event the Soviet Union wishes to purchase grain in excess of the specified amount, the Agreement provides for rior consultation with the United States Government. Of course, our Government would retain its statutory authority under the Export Administration Act to impose export controls should the Soviet Union desire to make such additional purchases. This further demolstrates that the Agreement is in no way inconsistent with the provisions of the Export Administration Act of 1969, which authorizes the.President to "prohibit or curtail" exports. In addition, you ask that we identify the legal obligations of 'the American government imposed by the Agreement. We agree with the following State Department response to this questions "The Agreement is legally binding upon te two governments under international law. Under the Agreement the United States is obligated not to exercise discretionary authority to control exports of wheat and corn purchased in accordance with the Agreement. The United States is also obligated to use its good offices to facilitate and encourage sales under the Agreement and to consult on various matters under the Agreement. However, the Agreement does not establish any obligation enforceable against any erson under United States domestic law." Your next question is stated as follows: 107 APPENDIX J APPENDIX J B-176943 "In Article II of the Agreement, the term 'shall not exercise any discretionary authority avail- able to it under United States law' appears. What is the discretionary authority to which .Agreement refers?" the The President, or such other official as he designates, has discretionary authority under section 4(b)(l) of the Export Administration Act of 1969, 50 U.S.C. App. 2403 (1970), as amended (Supp. IV, 1974), to control exports as follows: "To effectuate the policies set forth section 3 of this Act * * * the President ir ay prohibit or curtail the exportation from the United States, its territory and possessions, of any articles, materials or supplies, in- cluding technical data or any other information, except under such rules and regulations shall as he prescribe * * *" (Emphasis added.) You ask next: "On July 2, 1975, the United States Department of Agriculture asked exporters to advise Department of further sales to the Soviet the Union. This evolved into a suspension of sales through a series of press conferences withthe of Agriculture. This embargo was removedSecretary by the President October 20, 1975. Yet, I have read that the Soviets can only purchase 7 million tons of wheat and grain for shipment between and October 1, 1976. If this is true, is now limitation lawful? What law authorizes this it?" The State Department justified this Executive following grounds: action on the "In concluding the grains agreement. which effective with the next crop year /beginningbecomes October 1, 1976/, we had to reach an understanding with the Soviets regarding further purchases this year. The Soviets assured us that they would not make additional purchases of grain in the current 108 APPENDIX J APPENDIX J B176943 crop year in a volume which could disrupt the U.S. market and that they would consult with us before purchaan&s more than an additional seven million retric tons of grain.* * The seven million ton limitation does not purport to be binding as a matter of domestic law, nor does it constitute a formal international legal otli- gation of either the United States or the U.S.SR." In light of the nonbinding nature of this limitation, we believe that the same rationale, discussed above, justifying the President's request to the Polish Government to suspend grain purchases, is applicable hre: You ask that we outline the procedures and requirements the Administration would have been required to follow under'the Export A4- ministration Act, had that statute been relied upon. Section 4(b)(1) of the Export Administration Act of 1969, 50 U.S.C. App. 2403(b)(1)(1970), as amended (Supp. IV, 1974), auth.o,.ise the President to prohibit or curtail exports from the United States of "* * * any articles, materials, or supplies, including technical data or any other infirmation, except under such rules and regulations as he shall prescribe * * *" The purposes for which such controls may be implemented have been set forth above, and include foreign policy, national security, and prevention of short supply. 50 U.S.C. App. 2402(2)(1970), as amended (Supp. IV, 1974). Pursuant to section 4(e) of the Act, 50 U.S.C. App. 24 03(e)(1970), as amended (Supp. IV, 1974), authorizing the President to delegate the authority conferred upon him under the Act, the President has delegated the authority to regulate exports to the Secretary of Commerce. Exec. Order No. 11,533, June 4, 1970. The Office of Export Administration within the Commerce Department implements export control. With several exceptions, the Office of- Export Administration authorizes exports either by issuing specific "validated licenses" or by issuing broad "general licenses." A validated license is a formal document issued to an exporter by the Office of Export Administration, based on his signed application. It authorizes the export of commodities or technical data within the specific limitations of the license. See 15 C.F.R. Part 372 (1976). A general license, on the other hand, is a broad authorization established by the Department of Commerce to permit exports under specified conditions. Neither the filing of an application by the exporter nor the issuance of a license document by the Department is required. See 1 C,FR. Part 371 (1976). 109 APPENDIX J APPENDIX J Ercept for most exports to Canada for internal consumption; exports for the official use of the United States Armed Forces; ex- ports of commodities and technical data controlled by another Govern- ment agency; and exports to an American territory, the export frcn ; the United States of all commodities and technical data is prohibited unlqss a general license authorizing the export shall have been established or a validated license or other authorization for the export shall have been granted by the Office of Export Administration. 15 C.F.R. HS 370.3, 370.4 (1976). The Commodity Control List which is published in the Department of Commerce Export Administration Regulations contains the complete list of all commodities under the export control jurisdiction of the Office of Export Administration. For additional specific information in this regard including the different types of general and validated licenses and their usage, see 15 C.F.R. Parts 368-399 (1976). Any agricultural commodity is specifically exempted from export control under the Act during any period for which the Secretary of Agriculture determines the supply of the commodity to exceed domestic requirements. 50 U.S.C. App. 2 4 03(f)(Supp. IV, 1974). Controls may ba imposed with respect to any agricultural commodity, however, regardless of the supply, when control of the commodity is required to further significantly foreign policy and fulfull international responsibilities, or when control is significant to national security. Id. Accordingly, to invoke the Export Administration Act with respect to grain exports, during a period when omestic supply exceeded demand, the President or his delegate would have to deLurmine that controls were necessary to further foreign policy or for national security reasons. Thereafter exports of grains could only be made if licensed, pursuant to the procedures discussed above. Finally you ask whether it is possible for the Export Administration Act to be implemented ex post facto. It would in our view be improper to attempt to invoke the sanctions provided under the Act with respect to an export which at the time was licensed or was exempted from the controlo imposed by the Act. As discussed above, the President's authority to institute legally binding and enforceable controls on exports is derived from and dependent upon the authority delegated to him by Congress in the Export Administration Act. As stated in the Consumers Union case con- cerning a similar situati-on "* * * To make use of such delegated power the President would of course be required to proceed strictly in accordance with the procedures specified in the statutes conferring the delegation.* * i 506 F,2d at 143. 110 APPENDIX J APPENDIX J B-176143 the use of "ex post Nothing in the statute itself would support facto" controls. However, 15 C.F.R. 370.3(b)(i976) provides that to export "* * are all export licenses and other authorizations notice.* * *" subject to revision, suspension or revocation withoutfacto implementation post Although this provision would not authorize ex the Executive Branch of the Export Administration Act, it would allow to subsequent exports, to institute export controls, w th respectwhere export authority for without advance notice or in -ituation a particular commodity had p- .iousl.y been granted. responses to We trust that the foregoing information and o.r your questions will be helpful to you. Sincerely yours, DEPUTY Comptroller General of the United States Enclosures 111 APPENDIX K APPENDIX K D IPTION OF U.S.-U.S.S.R. MARITIME AGREEMENT U.S.-U.S.S.R, MARITIME AGREEMENT The 1972 Maritime Agreement between the United States and the Soviet Union, which extends through December 31, 1981, contributes to the establishment mercial relationship. of an expanding com- By providing a broad framework clear set of ground rules for and a maritime activities between the two countries, the agreement represents an important step toward normalizing and expanding commercial relationships between the U.S. and the Soviet Union. Due to the positions adopted by American maritime unions through the 1960s, the trade relationships between the two countries stalemated. The unions insisted that 50 grain an' other cargoes to percent of the Soviet Union be reserved U.S. ships, but the Soviets for were reluctant to pay the addi- tional shipping costs that use of U.S. flag vessels would entail. However, the Merchant Marine for the payment of operating At of 1970, providing made it possible for American subsidy to bulk carriers, has snips to engage in carrying wheat to the Soviet Union at reasonable rates. In view of this radical change, the unions withdrew their long-standing objections and the United States was able to conclude various trade agreements with the U.S.S.R. dasically, the Maritime Agreement first, to open the channels has two objectives: of maritime commerce between two nations by opening major the U.S. and Soviet commercial ports to calls by U.J. and Soviet flag vessels and second, to afford to U.S. and Soviet flag vessels the opportunity to participate substantially in the carriage of all cargoes moving by sea between the two nations. The Agreement pro- vides that U.S. flag vessels and Soviet flag vessels will each have the opportunity to third of all cargoes moving carry not less than one- by sea between the two nations. With the aid ot operating subsidies, are able to offer a reasonable U.S. flag vessels freight rate and thus partic- ipate in this program. Initially, the Agreement provided for the Soviets to pay a negotiated a premium over and above these fixed freight rate plus fixed rates through June 30, 1973. 112 APPENDIX K APPENDIX K For the period July 1, 1973, to March 31, 1975, this negotiated rate system was replaced with a more favorable index system which adjusted, on a monthly basis, the rates paid to U.S. vessels to reflect current market conditions. The index system used the U.S. Gulf/Holland-Belgium grain trade as the base trade used to calculate the U.S./Soviet Black Sea freight rate. This index system was terminated on March 31, 1975, due to the U.S. Gulf/Holland-Belgium trade being abnormally distorted by large vessels. Subsequently, a fixed freight rate of $9.50 was agreed to through June 30, 1975. Negotiations for a new rate agreement were concluded in mid-September on the establishment of a freight rate for U.S. flag ships participating in the cartriage of Soviet grain. Terms of the agreement included: -- A minimum U.S. Gulf/Soviet Black Sea grain freight rate of $16.00 through December 31, 1975. In January, the rate was extended through December 31, 1976. This minimum rate is significantly in excess of the current market price. -- A revised index system for determining monthly freight rates offered to U.S. flag vessels. The index base now uses a Gulf/Black Sea rate that is twice as high as the old rate. --A credit/debit system which is a low market provides for Soviet payment of a freight rate which is higher than the market rate and sufficient to allow a significant number of U.S.-flag vessels to partici- pate in the trade and, in a strong market, provides for an offset. When the credit is eliminated, the rates received by U.S.-flag carriers will be deter- mined under the new index system. -- A higher minimum demurrage rate (the penalty paid by Soviets to shipowners for delays). 113 APPENDIX L APPENDIX L PROVISIONS O GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)t RLEVANT TO POLISH SALES SUSPENSION The Gneral Agreement on Tariffs and Trade (GATT) is multilateral and, therefore, he U.S. must abide by set criteria covering embargoes stemming from short supply situations, as explained in Articles 11, 20, and 13. Article 11 contains an absolute prohibition on export controls but is followed by an important exception which allows: 'export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party." Article 20 permits the adoption of measures: "(i) involving restrictions on exports of domestic materials necessary to assure essential quantities of such materials to a domestic processing industry during periods when the domestic price of such materials is held below the world price as part of a governmental stabilization plant Provided that such restrictions shall not operate to increase the exports of or the protection afforded to such domestic industry, and shall not depart from the provisions of this Agreement relating to nondiscrimination; "(j) essential to the acquisition or distribution of products in general local short supply; Provided that any such measures shall be consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any ich measures, which are inconsistent with the other provisions of this Agreement shall be discontinued as soon as the conditions giving rise to them have ceased to exist." Article 13 provides that: "1. No prohibition or restriction shall be applied by any ontracting party * * * on the exportation of any product destined for the territory of any other contrcting party, unless * * * the exportation of the like product to all third ountries is similarly pl:ohiLited or restricted." 114 APPENDIX L APPENDIX L Article 13 also provides guidance for allocating import and export restrictions and makes the principles, insofar as applicable, apply also to export restrictions. It suggests that a global quota for import restrictions be established or, if there is to be allocation among countries that quota shares be negotiated or allocated as in the past. Article 20 states that there must not be "arbitrary or unjustifiable discrimination between countries when the same conditions prevail," and the general rule that "all con- tracting parties are entitled to an equitable share of the international supply of * * * products." 115
Issues Surrounding the Management of Agricultural Exports
Published by the Government Accountability Office on 1977-05-02.
Below is a raw (and likely hideous) rendition of the original report. (PDF)