393. Memorandum From the Agricultural Trade Task Force to President Nixon 1

SUBJECT

  • International Grains Arrangement (re Ministerial Meeting on Wheat)

At the invitation of the United States there will be a Ministerial meeting to discuss the Wheat Trade Convention, which is a part of the International Grains Arrangement. This meeting will be held in Washington and is tentatively scheduled for July 10-11. The Task Force on Agricultural Trade, which includes the agencies listed at the end of this memorandum, has considered the options available to the United States. If you approve the recommendations at the end of this memorandum a position paper for the U.S. delegation will be drafted accordingly.

Background

The International Grains Arrangement, which also includes a Food Aid Convention, was negotiated in 1967 as part of the Kennedy Round and went into force on July 1, 1968. The Wheat Trade Convention is essentially a minimum price agreement encompassing a number of different grades of wheat exported by the principal Free World producers (the U.S., Canada, Australia, the European Economic Community, and a few others). Because of the worldwide oversupply of wheat the Convention has led to problems almost from the start. Some of the principal exporters have gone below the minimum prices, and others have been compelled to follow suit in order to safeguard their traditional [Page 986]markets. Because the minimum price schedule is based on a grade of U.S. wheat we have been in an especially difficult position and forward sales of our wheat are abnormally low.

At a meeting in London last week the U.S. proposed suspension of the minimum price schedule but the other exporters were unwilling to support us. The Prime Minister of Australia sent you an aide-memoire urging us to keep the agreement alive and declaring a willingness to consider necessary changes.2 Although our wheat experts are agreed that the long-run outlook for the Convention is poor we should not take the blame for letting it die without a further attempt to improve its provisions.

Canada and Australia are believed to be very anxious to uphold the agreement and would be prepared to take specific measures, including possible revision in its provisions. The attitude of the EEC, whose sales policy has been especially disruptive, is not clear, however. We believe therefore that our proposals to the Ministerial meeting, while constructive in themselves, should also be designed to place the onus of a future breakdown on any exporter who resumes price cutting (most likely the EEC).

The outcome of the IGA discussion also has important domestic implications. Unless we can ensure reasonable prospects for our exports the wheat allotment (soon to be announced) will have to be cut more sharply than will be necessary in any case.

The available options fall into two categories: the short-run options that could be agreed upon immediately to keep the agreement alive and the long-run options that would change the agreement more drastically and therefore would take more time to negotiate. From our point of view the short-run options should furthermore reinforce the competitive position of our wheat, while the long-run options should help us in maximizing our export revenues and fulfilling our international obligations.

Short-run Options

Option 1: Maintain the status quo, i.e., freeze prices at prevailing export levels irrespective of the minimum price schedule).

Advantages:

(a)
It would reduce uncertainty in the wheat market, thus buyers would resume a more normal level of purchases.
(b)
It would stop the trend toward further erosion of the IGA.
(c)
It would provide a stable situation under which to work for a more basic solution to wheat trade problems by negotiating changes in the IGA.
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Disadvantages:

(a)
It would provide no relief from the present decline in U.S. wheat sales.
(b)
It would provoke a strong negative reaction from U.S. wheat interests, aggravating the political problem connected with the impending announcement of an acreage allotment cut.
(c)
It would make it easier for non-IGA members to undercut IGA member sales and thus to gain an increased share of the world wheat market.

Option 2: Unilateral price cuts by the U.S.

Advantages:

(a)
It would enable us to maintain our share of the market, and in fact might lead to an improvement of our trade balance by as much as $75 million, provided other countries leave their prices unchanged.
(b)
It would make an acreage allotment cut (which will be unavoidable even with favorable export prospects) more palatable politically.

Disadvantages:

(a)
It would mean a continuation of present market uncertainty, which would depress near-term sales volume.
(b)
It would further weaken the IGA.
(c)
It might lead to a round of price cuts by wheat exporters, for which the blame would be clearly placed on us.
(d)
It might involve somewhat higher budget costs.

Option 3: Increases in landed prices by other exporters (Australia and the EC).

Advantages:

(a)
It would provide an immediate amelioration of the situation.
(b)
It could provide a basis for later renegotiation of IGA price provisions (see Option 5).
(c)
It would also help Canada.
(d)
Any infraction could be easily detected, so that it could be used as a justification for our abandoning the minimum price schedule if this were in our interest.

Disadvantages:

(a)
It would only represent a partial and temporary solution to our wheat trade problem and would not attack more fundamental inequities inherent in the IGA.
(b)
It is doubtful the EC would agree, thus leaving one of the major sources of our market difficulties unaffected.

Long-run Options

Option 4: Market sharing, which could take the form either of formal export quotas or of a concerted management of prices through a committee of exporters.

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Advantages:

(a)
It would provide the best means of ensuring that exporting countries maintain their historical shares in a limited market.
(b)
It would avoid more complex problems involved in altering pricing and/or freight provisions of the IGA.

Disadvantages:

(a)
It would be difficult to obtain agreement on division of the market (such a proposal was raised and rejected in IGA negotiations).
(b)
There would be serious, if not insurmountable, technical problems relating to monitoring and enforcing the system.
(c)
In the case of formal quotas the U.S. would be forced to institute a visible and quantitative export control system which would be politically difficult and legally questionable.
(d)
It would stifle competitive market forces.

Option 5: Changes in the IGA price schedule (in the prices and/or wheats listed).

Advantages:

(a) It strikes at the real problem, i.e., altering the price provisions of the IGA so as more accurately to reflect actual competitive price relationships than in the present price schedule, which was established in 1967.

Disadvantages:

(a)
It may involve long and difficult negotiations.
(b)
Other exporting countries may refuse on the grounds that it involves a basic renegotiation of the IGA, which still has two years to run.

Option 6: Move from a basing point system to another basis of setting prices (e.g., to some form of destination pricing, under which landed prices would be the same regardless of origin, or of origin pricing, under which f.o.b. prices would be set for all exporters rather than only for the U.S.).

Advantages:

(a)
Either form of this option would rectify certain f.o.b. price and freight disadvantages to the U.S. built into the IGA.
(b)
Origin pricing would in theory correspond to an economically optimal pattern of production and transportation.

Disadvantages:

(a)
This approach might lead to protracted negotiations.
(b)
Since destination pricing would lead to equal CIF prices, there would be no real basis for competition among the exporters to a given importer. Importers might therefore consider themselves exposed to exploitation.
(c)
Origin pricing might make it impossible for some exporters to supply remote areas, and thus also lead to some reduction in competitive forces.
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Option 7: Obtain agreement by Australia and EC to hold stocks.

Advantages:

(a)
It would relieve some of the immediate pressure on the world market from oversupply.
(b)
It would provide for more equitable sharing of the burden of supply management, which at present is being done only by the U.S. and Canada to any significant extent.

Disadvantages:

(a)
We have no means of bringing pressure on the other exporters to do this. For this reason it is unlikely that the EC would agree.
(b)
Since the excess supply of wheat may be even greater in the future than it is now there is no economic rationale for storage.

Recommendations

For the short run we believe that option 3 (price increases by other exporters) holds the most promise of serving our interests. It fits in with the relatively tough line we think is needed, yet it represents a serious attempt on our part to rescue the agreement. If this option is accepted but does not work out we would have a clear case for going it alone. Option 2 (a unilateral cut by the U.S.) would be the second best; it carries a greater risk that the blame for scuttling the IGA would fall on us. Since option 1 (a price freeze) is unpromising, we would have to withdraw from the minimum price schedule if neither option 2 nor option 3 are accepted.

For the long run option 5 (revision of the minimum price schedule), which is the logical sequel to option 3, is preferred, with option 6 (a change in the basing point system) as the next best alternative. Both of them offer some promise of keeping the agreement in being, though world supplies may grow too much to make this feasible in the long run. In any case, our negotiators should present both these options as bases for discussion, without necessarily ruling out the less attractive options 4 (market sharing) and 7 (stock holding).

  • Paul McCracken
    Chairman of the Council of Econmic Advisers
  • Nathaniel Samuels
    Deputy Under Secretary of State for Economic Affairs
  • J. Phil Campbell
    Acting Secretary of Agriculture
  • John W. Evans
    Acting Special Representative for Trade Negotiations
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 333, International Grains Agreement. No classification marking. The memorandum is Tab A to Document 395.
  2. See footnote 2, Document 398.