STATEMENT OF FRED V. HEINKEL, PRESIDENT, MIDCONTINENT FARMERS ASSOCIATION AND MISSOURI FARMERS ASSOCIATION, INC. Mr. Chairman and Members of the Committee, my name is Fred V. Heinkel, and I am president of the Midcontinent Farmers Association and Missouri Farmers Association, Inc., both of which are headquartered at Columbia, Missouri. Membership of the Midcontinent Farmers Association is over 157,000 with membership in the state of Missouri and a sizeable number of members in Illinois, Iowa, Nebraska, Kansas, Arkansas, and surrounding states. I am appearing before this Committee to urge Senate ratification of the new International Grains Arrangement. I am making this recommendation in favor of ratification based on the following factors that influence my judgment: (1) I have been privileged to serve on the National Public Advisory Committee for Trade Negotiations under the able leadership of the Honorable Christian Herter prior to his death and, since that time, under the capable leadership of Mr. William M. Roth. (2) Recently some 350 farm leaders from all over the United States, including one from Canada, and representatives from farm organizations as well as commodity groups met in Kansas City, Missouri, at my invitation to discuss many timely subjects involving agriculture of the future. I quote below resolution number 6 which was passed unanimously at this meeting. "We urge the ratification by the United States Senate of the Trade Expansion Act including particularly the International Grains Arrangement." (3) The members of Midcontinent Farmers Association whom I represent here today realize the importance of foreign trade and by resolution of the delegate body urged the ratification of the International Grains Arrangement. It is not hard to understand why some such arrangement is needed. With the tremendous supply of wheat available in the world market, the price of wheatin the absence of some international agreement-would undoubtedly fall to very low levels. For example, for this marketing year, beginning July 1, 1967, the member importing nations of the world reported to the Wheat Council that their total commercial requirements for grain would be about 19 million tons of wheat. On the other hand, the member exporting nations of the Wheat Council reported that about 50 million tons were available for commercial export. We have had international cooperation in the trading of wheat for about 17 years. The first international agreement and the Wheat Council first went into effect in 1950, and up until this year we have been selling wheat in world trade under some sort of agreement ever since. The last International Wheat Agreement expired this marketing year, and we have been operating outside of any formal agreement since August 1, 1967. We have, therefore, had a taste of what unrestrained competition can mean during this current marketing year. United States farmers have been forced to meet cut-throat competition in world wheat markets, and prices have been much below where we would like to see them. We are anxious that appropriate steps be taken to remedy the situation. It is our hope that this grains Arrangement will bolster prices and get them back up to where they are reasonable. This new International Grains Arrangement, now being considered by the Senate, calls for world trade in wheat to be carried on at levels somewhat above those provided by the old International Wheat Agreement. And, over a period of time, this should increase the net price and income to farmers. In general, as you know, the minimum and maximum prices in the new Arrangement will be approximately 23 cents per bushel higher than the minimum and maximum prices in the expired agreement. The second part of the new Arrangement represents an important new tool to relieve hunger in needy nations throughout the world. It calls for a cooperative effort among a number of nations to help developing nations of the world to meet their food needs while they work to expand their own food production. Wheat exporting countries will contribute grains under the food aid program, and some of the net importing countries will provide some of the aid in cash contributions, so there will be a sharing of the burden on a more ordely basis. Our contribution will still be substantial under the Food Aid Convention, but by relieving our country of part of the tremendous burden we have been carry ing, it offers a degree of relief to the American taxpayer and improvement in our balance-of-payments situation. We, at M.F.A. are vitally interested since the business sector of our organization is directly engaged in buying wheat from farmers and selling same for both domestic use and export. We are, therefore, particularly concerned that this International Grains Arrangement not put United States wheat at any disadvan tage in world markets. Wheat and wheat products are among the most important earners of export dollars that we have among agricultural products. The dollars we receive from wheat exports help us with our balance of payments. Any efforts that can be made to increase these earnings through higher prices or through greater volume would indeed be beneficial. As I said in the beginning, I urge Senate ratification of this new International Grains Arrangement. I am convinced the whole country would benefit. STATEMENT BY WILLIAM R. PEARCE, FOR THE GRAIN AND FEED DEALERS My name is William R. Pearce. I am a vice president of Cargill, Incorporated, Minneapolis. Also, I am chairman of the International Trade Committee of the Grain and Feed Dealers National Association, for whom I appear today. This Association includes more than 1800 members, ranging from the smallest country elevators to the largest grain marketing and processing firms. The Grain and Feed Dealers National Association opposes U.S. participation in the grains arrangement. The basis for this position is set forth in an Appraisal of the International Grains Arrangement, published in January. This paper (a) analyzes the negotiations in the light of problems confronting the United States, (b) traces progressive weakening of the United States position on such key issues as trade liberalization, access to markets, cooperation among exporters, minimum price limits and food aid, and (c) concludes that the United States has more to lose than it has to gain from participation in the end result. A second paper setting forth Association responses to Administration arguments in support of the arrangement was published last week. We request that both be made a part of the hearing record. [See Appraisal only on page 123.] PRICE RANGE Our Association has not opposed earlier versions of the International Wheat Agreement because we recognize the importance of reasonable price stability in the world wheat market. But, it is one thing to stabilize prices and quite another to support them as the proposed arrangement would, well above longterm equilibrium. The importance of this distinction has been recognized by the President's Council of Economic Advisers. Its Annual Report, transmitted to the Congress in February, 1968, says at page 193: **** United States favors commodity agreements designed to stabilize prices and stands ready to support efforts by less developed countries to move resources out of the production of commodities in chronic surplus. "Primary producers sometimes attempt through commodity agreements to raise prices above the long-term equilibrium level. They rarely succeed. Maintenance of a price above long-run cost requires restrictions on supply; the necessary export quotas are extremely hard to negotiate and to enforce ***." Proponents of the agreement have argued that proposed prices are unlikely to stimulate new competition, (a) because the new minimum is not much higher than average world trading prices for the past five years and (b) because costs of producing wheat are rising. We disagree. In the past five years, wheat prices have varied within the range in response to changing supply and demand conditions. When supplies were short, wheat sold at prices well above the average for the whole period. On the other hand, when supplies were excessive prices fell well below the average. The effect of the new minimum in the proposed arrangement would be to assure marginal producers that prices will not be permitted to decline below the level of average prices under the old agreement even in periods of large surplus. This would indeed serve as an incentive to larger production. There is abundant evidence that price levels influence acreage planted to wheat. In two of the past five years, prices rose above the proposed minimum. Each was followed by a year in which world wheat acreage rose substantially. Also, we challenge the assertion that higher minimum prices are possible because costs of production are increasing. Surely for some wheat producers in some countries (including our own) production costs are rising. But it is also true that for many other wheat producers in many countries productions costs are declining significantly. Throughout the world new technology in seeds, in chemistry, and in the management of land and water is being applied with increasing success on an expanding acreage basis. Lester Brown, USDA's resident authority on the subject, has described recent gains, especially with short stem varieties of wheat developed by the Rockefeller Foundation in Mexico, as "revolutionary". As small, fragmented farms are grouped together in larger units and begin applying this technology in scale, new production will pose an increasing challenge to U.S. exports. This trend is likely to continue in any event. But the rate at which it proceeds and the extent to which it excludes United States wheat from commercial markets would be stepped up by guaranteed prices at the levels proposed. The proposed increase would not, in itself, increase producer prices in this country. Prices received by U.S. wheat producers are insulated from world prices in most cases by export subsidies and taxes. The Administration has conceded that if domestic prices are below the new minimum (as they recently have been in some cases) when the new agreement becomes effective, an export tax would be necessary. If higher domestic prices are sought they could be achieved by higher levels of domestic price support, reduced acreage, or other similar action. They cannot be achieved, however, simply by agreement not to compete in the world market below a new, higher minimum price. DIFFERENTIALS In the absence of effective competition at all price levels, some alternative system must be provided for allocating markets among various exporting countries. The proposed arrangement relies upon price differentials-specified minimum prices for 14 different types of wheat-and upon a system for adjusting them if they prove not to be equitable. We believe that the system will be unworkable in practice. Conceptual problems-Proponents have said that specified price relationships represent "approximate trading spreads or value differentials which occur in the market when there are adequate supplies of wheat". This implies that in most circumstances the proposed differentials would be adequate to assure each type of what a fair market share. This is not the case. Supply and demand for different kinds of wheat vary considerably from year to year. The mechanism which tends to maintain a balance among them is the price premium, or discount, which the market places on each relative to the others. Since the price spread required to assure that any type of wheat is competitive with all others varies with market conditions, fixed differentials are certain to be wrong more often than they are right. They can fit only one set of competitive conditions precisely. For all the rest, they would tend to favor some classes or qualities at the expense of others. U.S. wheat exports could suffer first and most from this arrangement as they have from similar arrangements in the past. Should wheat prices decline, the lower quality wheat would tend to be the first to reach the minimum. Unless differentials were quickly adjusted, these wheats, which comprise much of our exportable surplus, would not be competitive. Unduly restrictive-The proposed system is unduly restrictive for the United States. For the first time, price comparisons would be based on a United States rather than a Canadian shipment point. (Canadians sought this change for 15 years for good reason.) Minimum prices for United States classes of wheat would be firmly fixed, while all others would be calculated by reference to changing shipping costs. The advantage this can offer competitors already is evident. Prices for Australian wheat specified in the proposed schedule have been calculated by reference to costs of transportation in ordinary freighters. But, because Austra lian wheat now moves extensively in larger, lower cost bulk carriers, its competitive position would be strengthened. The proposed arrangement is also more restrictive for U.S. wheat in another respect. Of the 14 classes of wheat for which minimum prices are specified, four are U.S. wheats, while only two are Canadian wheats. The latter do not include Manitoba Nos. 2, 4 and 5, which compete with U.S. wheats for which limits are specified. Minimum price limits have not been specified for French wheat of substandard quality, which is exported in quantity, nor for Russian and other Eastern European wheats. Also, there is less flexibility for U.S. wheat than for many others because our grading system is based on objective classifications which do not vary from year to year. Other countries which judge wheat on the basis of average quality of the crop, could avoid the effect of minimum price limits simply by improving the quality in each numerical grade. Adjustment procedure-Proponents have acknowledged that problems can arise with differentials, but they have argued that a system has been provided for adjusting them and that if this fails, the United States is free to ignore them if necessary to remain competitive. The adjustment procedure is unlikely to be very effective. Adjustments would require the approval of either the Prices Review Committee or the International Wheat Council. Approval by the Committee could be blocked by a single member "having a direct interest in the matter". Council approval would require a twothirds majority of the votes cast both by exporting and importing countries, counted separately. While votes have not yet been apportioned, it seems clear that exporting countries benefiting from existing prices could block any adjustment favoring the United States. The assertion that the United States could, without breaching the agreement, ignore minimum prices if necessary to remain competitive is not convincing. Proponents argue that the obligation to observe the minimum, clearly expressed in Article 4, is somehow altered by "negotiating history". In support of this view, they offer a paper summarizing discussions both in the Geneva and Rome negotiations. The paper reveals, however, only an equivocal statement to this effect by the United States, acknowledged but certainly not accepted by any other country whose views are summarized. In the absence of other evidence, the United States' statement stands as a unilateral expression of interpretation which could not alter the clear language of the arrangement to the contrary. The following reference to the purpose and effect of unilateral statements. from the Restatement of the Law of International Agreements, offers insight here: "In practice, unilateral statements of understanding are sometimes used as a convenient way of reserving issues of interpretation on certain aspects of the agreement. . . as to which there might be domestic difficulties as to ratification or implementation. In such circumstances, a unilateral statement of understanding is actually of mutual interest to the parties, and is tolerated for that reason. but without enlarging its strictly interpretive character." If the parties to this agreement intended that any member unsatisfied with its market share and unable to secure an adjustment, may simply ignore the specified minimum, then why did they not say so in so many words? Why, instead, was the authority for this fundamental proposition buried in ambiguous negotiating history? And, why has there been no unequivocal public statement from other parties to the agreement affirming the United States' view? Even if the "escape clause" could be said to exist, a question remains. Who shall decide when we will exercise it? The Secretary of Agriculture has stated he would exercise the right if necessary to keep us competitive, and we do not doubt his sincerity in this. However, the State Department, often the senior partner in such decisions, has remained silent on the subject. Its statement. tendered to the Subcommittee last week, makes no mention of it. Past experience suggests that where the State Department is involved, collateral considerations tend to override trade interest. COOPERATION Apparently, others share our concern about the effectiveness of price differentials in allocating markets fairly among exporters. Irwin Hedges, Ambassador Roth's deputy during the negotiations, said recently: "If prices do press on the minimum for any period of time, however, it is questionable whether price adjustments alone can be relied upon to allocate market shares among exporters. Under such circumstances it is likely that price adjustments would have to be supplemented by other measures. This would mean finding a solution to the problem of supply/management and market sharing which eluded exporters during the negotiations. "It was perhaps the better part of wisdom to have left the solution of these problems to be worked out in practice, rather than spell them out in the agreement. Certainly the agreement is politically more acceptable in the United States in its present form. The required approval by the Senate will be facilitated as a result *** Whatever their affect may have been on Senate acceptance of the grains arrangement, prospect of agreement on supply/management and market sharing seems slim. In the past only the United States and Canada have made any serious effort to withhold stocks to support world prices. Other exporters—Australia, Argentina and France-have priced wheat to clear their shelves on a year-toyear basis. The failure of a determined effort by the United States in the negotiations to achieve agreement on broader sharing of the burdens of supply management offers little basis for hope that cooperation will develop in practice. Even if the cooperation of these countries were assured, other problems remain. No one expects restraint from minor exporting countries or from importing countries, although their growing production will affect our sales abroad. Nor is there any prospect of cooperation from nonmembers, who would benefit from higher prices for their exports without undertaking any obligation to observe minimum prices or to participate in multilateral food aid programs. The most important of these is the Soviet Union, the world's largest wheat producer. While no one knows whether the Soviet Union will accede to the grains arrangement, the following view was expressed recently by Dale E. Hathaway, Michigan State University economist, who has traveled extensively in Russia and Eastern Europe: "The Russians are unlikely to become a signer of the new International Grains Agreement that is now being considered. The very nature of central planning virtually prohibits them from participating in such international agreements in a meaningful fashion. If, in the future, Russia again should become a major exporter, at least in certain years, we can depend upon them doing it in a fashion that is likely to be disruptive to the kind of international price agreements other countries might form. Moreover, if the Russians should be major importers in any particular year, it is equally unlikely that they are going to abide by the rules set up by such an international organization. Thus it seems to me that if the Communist world becomes a major factor in the world grain market that it will not fit within the institutional framework of well organized grain agreements which lack enforcement procedures and rest primarily upon gentlemen's agreements.' Administration witnesses have suggested that the cooperation of such nonmembers is assured by provisions which would require member importing countries to observe minimum prices when purchasing from non-members. This is a little hard to visualize, for example, in a sale by the Soviet Union, a non-member, to the United Arab Republic, a member. In any event, no prices have been established for non-members. FOOD AID CONVENTION We do not have the same reservations about the Food Aid Convention. The prospect that others would share the burden of meeting food deficits of less developed countries is encouraging and in our view weighs more heavily in favor of the proposed arrangement than any other aspect. However the advantages to less developed countries have been greatly overstated. 1 1 No new contributions would be required either of the United States or Canada, which together account for more than 56% of the amount actually committed. Only a small increase would be required from Australia. To some extent, obligations of others could be met by altering the form, but not the amount of present aid arrangements. At the same time, the value of commitments to less developed countries would be substantially offset by provisions of the Wheat Trade Convention, which would tend to increase the price of wheat they must purchase in commercial markets. This is not inconsequential. In 1966-67 undeveloped countries purchased approximately 9.4 million metric tons in commercial markets-more than twice the amount committed under the Food Aid Convention. An increase of 20 cents 1 See appendix A. |