Foreign Relations of the United States, 1964–1968, Volume IX, International Development and Economic Defense Policy; Commodities

220. Memorandum From the Under Secretary of Agriculture (Murphy) to the President’s Deputy Special Counsel (Feldman)¹

Washington, May 27, 1964.

SUBJECT

• Exports of Domestically Produced Extra Long Staple Cotton

This memo is submitted as you requested.

The Problem

We have a current “glut” in the U.S. supply of extra long staple cotton (ELS) created by increased U.S. production and decreased domestic consumption of such cotton. The United States consumption of this cotton had been trending sharply upward for several years. In the last year this upward trend has been sharply reversed. Stocks on hand are moving up from about 89,000 bales on August 1, 1963, to an estimated 183,000 bales on August 1, 1964. Despite the fact that the acreage allotment was cut from 150,000 acres for 1963 to 112,500 acres for this year’s crop, it is now expected that the 1964 crop will add some 50,000 bales to the U.S. carryover. As matters now stand under present legislation, it is indicated that an acreage allotment cut to less than 75,000 acres will have to be announced not later than October 15, 1964—a cut of more than 50% in two years. Yield is about one bale per acre.

Domestic production is supplemented by imports, for which there is an annual quota of 85,600 bales.

ELS producers in the U.S. are mostly in Arizona, New Mexico, California and West Texas. Strongly supported by Senator Hayden, they are urging the USDA to conduct an export program to move enough of the surplus to prevent further drastic cuts in acreage. (As explained later, these exports would not in fact prevent sharp acreage cuts.) CCC now has 37,000 bales in inventory and 115,000 bales under price support loans, making a total of about 150,000 bales that could be available for export.

USDA proposed an export sales program for these stocks on competitive bids at not less than the world market price² and in a manner designed to avoid disruption of world markets. We asked the State Department for its comments. It is estimated that prices received under such a program would be in the range of 40 to 45 cents a pound, compared with a support price of 49.25 cents for this year’s crop. The State Department objects strongly to the proposed export sales program because of the interest of other ELS producing countries—U.A.R., Sudan and Peru. State’s objections were stated at length in a letter to me, dated May 12, 1964 (Attachment A).³

State’s Objections

State’s objections have implications which extend beyond this specific problem. They appear to indicate that by a series of consultations with foreign governments we have unduly restricted the freedom of action of the U.S. to protect the interest of its own producers and to expand its exports. Even so, we believe State’s objections are considerably overstated.

1. U.S. obligations under the GATT. We strongly disagree with State’s view on this. We are satisfied that the proposed program would not violate U.S. obligations under the GATT. The basis for this conclusion is set forth in Attachment B.⁴ We are at a loss to understand why State should strain to construe this provision against our interest, and we would regard it as quite unfortunate if this should be accepted as the U.S. construction of this provision.

2. Relations with other exporters and assurances given them. Unfortunately, it appears to be true that the U.S. has made representations to ELS exporting countries that might be drawn in question by the proposed export sales program, and USDA is not without fault in this regard. However, to say that this program would be “contrary to solemn promises” appears to be another unwarranted construction against the U.S. own interest. Attached is a copy of the note given to Peru on April 9, 1964, and a copy of the note from Peru which gave rise to it (Attachments C and D).⁵ Several points should be made about these notes. The U.S. note to Peru does not give solemn promises to Peru concerning future program; rather it states the then current policy. In this connection, it should be noted that the letter from Mr. Sherman of USDA on March 11, 1964, which apparently is the basis for saying USDA concurred in the assurances given Peru on April 9, 1964, contains the following language:

“The comments contained in Mr. Duncan’s letter are still applicable. It might also be added that the Secretary of Agriculture has broad authority to take action concerning extra long staple cotton. Even though he has shown the kind of restraint referred to in Mr. Duncan’s letter, it is possible to review existing policies at any time that circumstances seem to indicate that a need exists.”

The note from Peru is inaccurate as to the facts in several material respects, most significantly perhaps in asserting that there is already a surplus of several hundred thousand bales of American extra long staple cotton in the hands of CCC. The most notable thing about Peru’s note, however, is that there is no showing that a U.S. export program would injure Peru in any way—just the unsupported assertion that it would be disastrous. Couple this with the fact that Peru has been claiming for several years to be badly hurt by U.S. policies with respect to ELS, while in actual fact, as pointed out in the U.S. note, both Peru’s total imports and exports to the U.S. of cotton have been climbing very sharply. This raises the question whether, in determining how far we should go in abstaining from measures to increase our own exports in order to protect markets of other exporting countries, we are to exercise some independent judgment or merely accept the unsupported assertions of the other exporters.

In the present situation, it is possible that other ELS exporting countries might be helped instead of hurt by a U.S. export program which could help them retain ELS markets now being lost to man-made fibers because of a current shortage in the supply of this kind of cotton in foreign countries. (See Attachment E.)⁶

3. USDA assurances that no export subsidy was contemplated. The statements in Mr. Ioanes’ letter of November 7, 1962,⁷ were accurate and the proposed export sales program would not be in conflict with them. The statement of Mr. Duncan in his letter of July 5, 1963,7 was not accurate, as the State Department undoubtedly knows, because USDA in 1960 actually announced that such a program was to be put into effect. This announcement was not implemented because of, as I understand it, the strong objections of the State Department. Nevertheless, I agree that USDA has gone too far in giving assurances that could be used to restrict U.S. freedom of action, and I will do what I can to prevent that in the future.

4. Two-price system for ELS. The U.S., after most extended consideration of the difficulties of a two-price system for upland cotton, did not decide to end the two-price system by making impossible the exportation of such cotton. On the contrary, it established more firmly than ever the policy of an export subsidy on upland cotton to maintain our fair share of world markets. There is no reason here to suppose the U.S. would refuse to export ELS cotton at world prices to meet the current problem.

5. The social benefits to U.S. citizens. By my standards, any U.S. citizen is an important number. The number of producers sharing in the 1963 U.S. crop of ELS cotton as landlords or tenants was 5,884. The size of the average farm allotment is about 30 acres. Over 55% of the allotments were less than 15 acres. Fifteen acres of ELS cotton represents a gross income of perhaps $3,500 to $4,000—and a net income of only a fraction of that. Perhaps the ELS price support program should and can be modified along the lines of the new law for upland cotton to make larger producers more competitive in world markets, while retaining added protection for smaller producers. In the meantime, we cannot agree that this group of ELS cotton producers is unimportant.

Effect on 1965 Acreage Allotments

Having said all this, the actual fact is that an export program ending prior to August 1, 1965, to remove current excess stocks would not have a substantial effect on the 1965 acreage allotment. The formula for fixing the allotment is based on anticipated domestic consumption and exports, and the allotment is not reduced because of large supplies on hand. These supplies might shade the judgments used in making estimates of consumption and might impair future general prospects for the program. Such stocks will not in and of themselves result in sharp cutbacks in the acreage allotment that must be announced before October 15, 1964. Indeed, it seems most probable that a sharp cut will be necessary even if present supplies are exported. The growers and Senator Hayden have not asked for a permanent export program.

Treasury Receipts and Balance of Payments

Apart from effects on U.S. producers, the export sales program would reduce Government expenditures and have a favorable effect on the balance of payments. It would probably yield about $30 million in Government receipts and gold inflow. The commercial demand for ELS cotton appears to be strong enough and distinctive enough, so that export sales for dollars would largely represent additional dollar exports not otherwise available to us.

Failure to Implement an Export Sales Program

It is pointed out that the practical alternative to going ahead with the proposed program is for the Government to incur about $15.00 per bale in carrying charges on some 125,000 to 150,000 bales of ELS cotton on a recurring annual basis. The cost which would be incurred in disposing of the excess ELS cotton stocks in the world markets under the present world supply situation will, in a matter of two or three years, be offset by carrying expenses and the excess U.S. supply problem will doubtless still exist at the end of such period.

Recommendations

In view of the fact that exports of U.S. grown ELS cotton at this time, with the current shortage of ELS cotton in foreign countries, would not seriously interfere with marketings by other exporting countries—and in fact might well help them preserve future markets they would otherwise lose to synthetic fibers—I strongly recommend that we move ahead immediately with an export sales program at prevailing world prices. This would have important benefits for the U.S. Government and the U.S. economy, even though it would not prevent sharp cuts in the 1965 acreage allotment. The program would not be announced until after consultations with U.A.R., Sudan, and Peru.

Whether or not the decision is made to go ahead with an export sales program in this instance, we would regard it as important:

(1) Not to adopt a construction of Article XVI (3) of the GATT which is adverse to the interest of the U.S.;

(2) To refrain from future assurances to other countries that unnecessarily restrict the freedom of the U.S. to expand exports; and

(3) For the U.S. to exercise some independent judgment about the effects of our exports on world markets and, within the limits of our international obligations, to make its own decisions on export policy with due regard for the legitimate interests of both itself and other exporting countries.

State Department representatives have indicated they would like to take this matter up personally with the Secretary of State. I am sending a copy of this memo and attachments to Assistant Secretary Griff Johnson. I am also sending copies to Walter Jenkins, Ralph Dungan, Bill Roth, and Francis Bator, who have requested them, and to Assistant Secretary of the Treasury John Bullitt, because of that Department’s interest in the balance of payments.

1. Source: Johnson Library, National Security File, Subject File, Trade—General, Vol. I [1 of 2], Box 47. No classification marking.
2. In the margin is the handwritten word “meaning?” with a line drawn to this point in the text. Other handwritten marginalia are illegible.
3. Letter from Acting Assistant Secretary of State for Economic Affairs Trezise to Under Secretary Murphy, May 12, not printed.
4. An undated and untitled paper, not printed.
5. Note from Peruvian Ambassador Pastor to Secretary Rusk, March 3, and note from Deputy Assistant Secretary Trezise to Ambassador Pastor, April 9. The notes are not attached but are in Department of State, Central Files, INCO–COTTON PERU.
6. An undated and untitled paper on Egyptian extra-long staple cotton, not printed.
7. Not found.