399. Memorandum From the Chairman of the Council of Economic Advisers (McCracken) to President Nixon1
- Wheat, International and Domestic
It is becoming increasingly probable that the international wheat market is headed for a price war. Our price cuts of last week have been followed to some extent by Canada and the Soviet Union. The grain trade is at a standstill, since traders are waiting for further cuts. The exporters committee set up at the Washington meeting two weeks ago has not yet met. The EEC has withdrawn its offer to cooperate, which was based on the assumption we would not cut our prices; however, there are indications of disagreement within the Community over the next steps.2[Page 1000]
If a wheat price war breaks out, the world price of wheat will undoubtedly fall to the level of feedgrain prices, which means a decline of another 20¢ a bushel. Feedgrains, of which we are the major exporter, will probably also fall. The effect of all this on our balance of payments and on our budgetary costs will be considerable, probably on the order of $200 million per year.
It appears, therefore, that further efforts should be made to prevent a price war. The EEC has proposed another Ministerial meeting, but this would be of doubtful value. Our counterproposal is to activate the London Committee, which is strongly supported by Canada and Australia.
The reductions already made in wheat export prices are probably irreversible. They should therefore be reflected in our decisions concerning the domestic wheat program. If we cannot sell our wheat at remunerative prices, it is clear that the case for a substantial cut in the wheat allotment is made even more compelling. I, therefore, support the Budget Bureau’s preference for a 16% cut in the allotment, as opposed to the 10% cut favored by Agriculture.
Since the loan rate on wheat (not to be confused with the support price, which is fixed by law) is supposed to equal the world price, it would also be appropriate to reduce the loan rate by at least 10¢ a bushel. Although this will have only a minor effect on farm income and budget expenditures, it will serve to bring home the fact that a wheat price war will be partly at the expense of our own wheat growers. Unless the loan rate is changed the wheat growers and the Department may be led to expect that we are prepared to subsidize our wheat exports without limit.