632.119/10–447

Memorandum by the Assistant Secretary of State for Political Affairs ( Armour ) to the Under Secretary of State ( Lovett )

confidential

The Brazilian Ambassador, Mr. Carlos Martins, has asked for appointments with the Secretary and the President concerning the two matters of which I spoke to you on September 25, that of getting a wheat quota of 40,000 tons a month for Brazil and obtaining export [Page 477] licenses to cover a purchase of flour for the Brazilian Army. When told that the Secretary was in New York, Mr. Martins asked for an appointment with you for October 6, if possible.

Brazilian Army Flour

In August the Brazilian Army bought and paid for 500,000 bags of flour from the Overseas Trading Corporation which has had no historic basis as a flour exporter. Export licensing is based largely on this factor. The price paid was $7.15 a bag (cwt) as compared with a market price of around $5.00 a bag at the time. 300,000 bags reached New Orleans where they have been building up storage charges, deteriorating and using needed warehouse space.

The Brazilian Embassy and Dr. Vieira Machado, then exchange director of the Bank of Brazil, through which the purchase was made, approached the Department and the Departments of Agriculture and Commerce in an attempt to get export licenses (there was no available export quota against which the shipment could be charged). OIT absolutely refused to countenance this procedure, pointing out that it would be completely irregular and bring the whole export licensing program into disrepute. The Brazilians were told repeatedly that the only solution was a sale of the flour in the open market, with the Brazilian Army pocketing its losses.

There is no question but that the Brazilians were fully aware that the transaction was not in accord with regular procedure, of which they had thorough knowledge. They managed to cancel the purchase of the 200,000 bags which had not been delivered but continued to try to flout established procedure by attempting to purchase an additional 200,000 bags from at least two other sources. Apparently they were counting on the Department’s being able to get Commerce and Agriculture to back down from their opposition as a result of the Brazilian representations on political grounds.

Ambassador Martins has received several scorching telegrams from President Dutra demanding that he get favorable action, taking the matter to the “highest level”. According to Mr. Martins, President Dutra has stressed Brazilian cooperation with the United States during the Rio Conference, the lavish entertainment of President Truman and Brazilian support on a series of problems, including atomic energy, and has complained bitterly at the lack of United States cooperation in return in the flour question. Obviously, Ambassador Martins is worried that failure on his part will force his resignation.

The tremendous Brazilian interest and pressure in the matter is due to a number of factors. President Dutra’s political position has [Page 478] been deteriorating and he needs the continued support of the Brazilian Army, top officers of which were responsible for the deal (there is reason to suspect, from the price paid, that somebody got a sizable cut). The old Minister of Finance, Mr. Correa e Castro, who approved the flour purchase without reference to the Foreign Office, is being dropped, partly as a result of his part in the matter. However, Dr. Vieira Machado is the new Acting Minister of Finance and his personal prestige is manifestly tied up in the case.

Commerce and Agriculture’s opposition, which is shared by the economic divisions of the Department, is based not only on the factors outlined above but on the fact that a previous Brazilian attempt to get export licenses for flour from non-traditional exporters was refused. A reversal of policy now would not only be inconsistent but give ammunition to Thurman Arnold, attorney for the sellers in the previous transaction, who has threatened to sue Commerce. The Millers Association, which knows of the 300,000 bag affair, can be expected to protest vigorously if approval is given to it.

The only possible way to meet the Brazilian desires in this matter would be by a decision by you that this should be done for political reasons and pressure on Agriculture and Commerce. Agriculture would have to grant a special export allocation to cover the 300,000 bags of flour (roughly 19,000 tons in wheat equivalent) since the only allocation now available to Brazil is one of 15,000 tons for November which is needed for flour for civilian consumption. Commerce would in turn have to grant equivalent export licenses. Perhaps a path toward the latter might be found in having the Brazilian Government or one of its agencies figure as the shipper but this would, of course, be a subterfuge.

The Brazilian request leaves a distinctly bad taste but, in view of President Dutra’s marked interest in the matter and the possibility of increased instability in Brazil in case of a turn-down, I am inclined to feel that the Department should try to get affirmative action from Agriculture and Commerce. Failing this, I believe that arrangements should be made for Ambassador Martins himself to carry the case to Secretaries Harriman and Anderson, properly briefed by their subordinates, so that the onus of the unfavorable decision will be distributed among the three Departments and not borne solely by State.

Wheat Quotas for Brazil

The concentration on the flour situation has taken attention from the civilian wheat quota problem which is a most serious one with future consequences. Ambassador Martins will also take this up with you.

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Brazil, of course, withdrew from the IEFC some months ago in the belief that it would profit by withdrawing its rice from IEFC control and counting on Argentina for its wheat. These hopes have been blasted and Brazil has now rejoined the IEFC. It is asking for quotas of 40,000 tons of wheat a month from United States sources for the remainder of the current calendar year and will presumably want such allocations to be continued thereafter. The IEFC Cereal Committee is about to consider the Brazilian request.

At present, IEFC grain recommendations for Brazil are only on a basis of 15,000 tons a month (in flour) and our information is that a similar figure is now projected for December, January and February.

Mr. Highby of IR has calculated that Brazil has not yet reached the bottom of the wheat barrel and that, if consumption is held down to 65,000 tons a month and if Argentina ships an average of 10,000 tons a week to Brazil for the remainder of the year stocks of some 85,000 tons will remain on January 1, 1948. However, the Embassy at Rio de Janeiro calculates Brazilian minimum needs as considerably in excess of 65,000 tons a month and Ambassador Pawley has been informed by Ambassador Bruce65 that there will be no further Argentine shipments to Brazil this year. Ambassador Pawley estimates that Brazil will be out of wheat in November if relief is not forthcoming.

I recommend that our representatives on the IEFC Cereals Committee be asked to consider the Brazilian request most carefully and to support it if the Brazilians can present a prima facie case of need. One difficulty in this respect has been the dilatory nature of Brazilian representations and the lack of adequate statistical evidence.

  1. James Bruce, Ambassador in Argentina.