177. Memorandum From Charles Cooper of the National Security Council Staff to Secretary of the Treasury Shultz 1

SUBJECT

  • Phase 4 and Food Exports

The Problem

The market’s appraisal of current conditions in wheat, corn, and soybean markets was indicated by the sharp price rises following the USDA July crop report.2 Even if USDA’s estimates of world demand for these crops turns out in the end to be accurate, removal of the threat of export controls in today’s bullish market could lead to sharp increases in market prices of these crops, particularly in the short run. At the same time, low stock levels in most other countries and uncertainties about availabilities are likely to feed speculative demand and "hoarding" demand, which, in turn, could lead to total export demand substantially higher than USDA estimates. Concern about the possibility of a surge of export demand late in the crop year could also lead to high grain prices next spring and summer in order to assure an adequate carry over of stocks. Finally, USDA estimates of export demand and corn production may turn out to be too low and too high respectively: projecting commodity availabilities is far from an exact science.

Under these conditions, a policy of unrestricted exports could lead to grain and soybean prices that push up meat and poultry prices beyond the point that is politically sustainable, and consequently to a reversal under unfavorable political and economic circumstances of the original liberal policy decision. This process could take some months to develop, or it could happen very quickly in a matter of weeks as bullish market conditions exert themselves in an atmosphere of great uncertainty.

The Solution: A Liberal Quota System

Announcement of upper limits on U.S. exports of wheat, corn, soybeans, and related products would help avert some of the above dangers even if those limits are set at or near the levels of export demand projected by the USDA. If world demand turns out to be near projected [Page 659]levels, reducing uncertainty could dampen bullish forces which might otherwise be very strong. If USDA projections are too low, such quotas would "bite" and serve actually to restrict exports to levels more compatible with domestic price objectives. Finally, an announcement of liberal global quotas, while it would cause some concern in other countries, could be very useful in seeking cooperative measures by others to limit speculative and postponable demand. Any such announcement should be followed immediately by intensive international consultations and announcement of a specific restrictive mechanism as soon as possible.

Implementing the Basic Solution

There is no simple way to set an effective upper limit on U.S. food exports. However, the problem is a difficult one, not an insoluble one. The broad outlines of a policy that would be economically effective and diplomatically acceptable can be sketched in. Many details will require further staff work and analysis, but based on the work that has already been done the following appears to offer a feasible resolution of the basic problems involved.

Outline of the Proposed "Liberal Quota" Program

1.
Announce the following global ceilings for exports of wheat, corn, and soybeans in the 1973–4 crop year:
Wheat 1025 million bushels
Corn 1200 " "
Soybeans 600 " "
2.
Require licenses for all shipments of the above commodities, specifying country destinations certified by the importing country.
3.
Announce that all shipments resulting from contracts concluded prior to June 13, and all shipments to countries whose total imports in 1973–4 had not yet reached 100 (110?) % of their average imports of the same commodities in 1971–2 and 1972–3, will be freely licensed.
4.
Specify commodities and quantities to be reserved for first quarter shipment under the PL–480 program.
5.
Indicate that license requests for first quarter shipments that do not fall in either of the categories in Point 3 will be received, but not yet acted upon.
6.
Enter immediately into international consultations at the OECD and bilaterally to seek cooperation in limiting non-essential imports of the above commodities, agreement to an auction system for allocating shipments exceeding the 1971–2–1972–3 base quota base, and agreement on quantities and methods for reserving adequate supplies of the commodities affected for poor countries.
7.
Continue to press for Congressional authorization for flexible export control authority.3

Further Issues

1.
If ceilings are placed on wheat, corn, and soybean exports, will ceilings on rice exports be required?
2.
If an effective annual ceiling is enforced, will quarterly ceilings be required as well?
3.
What, if anything, needs to be done about old crop corn exports?
4.
Can wheat exports since July 1 all be attributed to particular countries?
5.
Should the 1973–4 corn export ceiling be set temporarily (until the next crop report) at 1000–1200 million bushels?
6.
Can ceilings be established in wheat, corn and soybean equivalents to handle the problem of related products? How many products are involved?
7.
Is a requirement for national certification by the importing country realistic?
8.
Can a public statement be made about likely Chinese and Soviet imports in 1973–4?
  1. Source: National Archives, RG 56, Records of Secretary of the Treasury George P. Shultz, 1971–1974, Entry 166, Box 4, Export Controls 1973 GPS. Secret.
  2. The report was issued on July 10. (The New York Times, July 11, 1973, p. 1)
  3. Under cover of another memorandum that same day, Cooper sent Shultz suggested language on the quota proposal for a Presidential speech, commenting: "As I mentioned last night, Dr. Kissinger agreed orally that we should at least consider a policy option along the lines I have proposed, but he has not seen any of this material yet." Cooper also forwarded to Shultz a similar proposal produced in the CIEP. He concluded: "Needless to say, there has been no interagency coordination of any of this. Can we get a day’s grace? This subject is as important as it is complicated, and I can’t help but feel we need one more go-round, unattractive as that prospect is." (National Archives, RG 56, Records of Secretary of the Treasury George P. Shultz, 1971–1974, Entry 166, Box 4, Export Controls 1973 GPS)