supply scenarios. The very fact that Congress established an Export Administration Act contemplates export controls under certain

scenarios.

Senator BELLMON. Go on. What is the scenario which would lead to that development? That is what Senator Dole and I are trying to learn. We do not want this business of encouraging our grain farmers to plant everything from fence to fence in grain and then when the price gets higher, some coward in the administration says the price is going too high and we will sock them with an export control and break the market on wheat. That is what they did October 4. If there is some other way to do it, we would like to know about it. If the administration still takes the position that when conditions get right again we are going to have more export controls, then the Congress has to figure out some way to put some backbone into the administration.

Mr. JOHNSON. I think, sir, the concept, as we interpret it, that is embodied in Senator Doles's bill would bring stability to the market and very possibly avoid situations that would bring about the kind of pressures that led to the events of last fall.

Senator DOLE. We want to bring about some stability to the administration, too.

Senator BELLMON. Mr. Johnson, in your statement you say, "since the summer of 1973, when it was found necessary to impose export controls on soybeans".

I have never found what that necessity was.

Mr. JOHNSON. I cannot answer your question, sir, because I do not know what the necessity was at that time.

Senator DOLE. You probably could have used a better word there. Expedient, maybe.

Senator BELLMON. Yes, that is a possibility-you say the United States committed itself last November at the World Food Conference to a policy of actively seeking the establishment of an international system of nationally held grain reserves.

Now, then, the U.S. Congress did not commit itself and we are part of this system.

Mr. JOHNSON. Certainly.

Senator BELLMON. This country is not to my knowledge committed to any international grain reserve.

Mr. JOHNSON. It is the policy, of course, of the administrationSenator DOLE. It is the policy of Henry Kissinger. That is the only one I have

Mr. JOHNSON (continuing). To have national reserves, and there were at least some members of this committee who were in attendance. Senator BELLMON. You are talking about some members but there are some other members of this committee

Senator DOLE. Those fellows are not here this morning.

Senator BELLMON. We are not committed to any such policy. Congress is going to have to approve it and provide the funds and you don't have 35 cents to set up a Government-held grain reserve, and I do not think you are going to get it.

Mr. JOHNSON. No, but it is the position of the Department of Commerce that what is intended in this bill would move us well along that road to, in effect, provide a reserve. The ability of the foreign buyer to store in this country would in effect create a reserve.

Mr. MILLIGAN. Designed to help certain foreign countries shoulder more of the burden than they have in the past.

Senator BELLMON. The gain will be here. They are not going to produce one additional bushel through having an international grain reserve. The only question is who owns it?

Mr. MILLIGAN. Foreign importing entities will be purchasing grain and will place it into storage in this country. This may raise one of the issues that has to be resolved. When will title pass during this transaction? As we understand it, the foreign purchaser will own the reserve, take title, and assume storage costs from the time the grain he has purchased is physically delivered to the storage facility desig-nated for this use.

Senator BELLMON. I am not talking about this bill. This bill is a very fine thing but this business of establishing an international system of nationally held grain reserves which according to your testimony is now our policy is something that I was not aware of. If we have ever adopted such a policy, I was asleep at the switch.

Mr. MILLIGAN. The policy is to have the foreign countries shoulder more of the burden. A burden that the United States has been shoulder-ing in the past as pointed out in Deputy-Assistant Secretary Bell's statement, the situation of the sixties and early seventies.

Senator BELLMON. You mean to say that rather than having our own Commodity Credit Corporation own these supplies?

Mr. MILLIGAN. That is correct. Have the foreign purchaser own the supply or reserve.

Senator BELLMON. That sort of approach and the approach that Senator Dole is trying to accomplish is very desirable, but your phrase here, "an international system of grain reserves," in the view of many grain producers means the same sort of a politically controlled reserve that we had previously which Secretary Freeman used so effectively to continually break the grain markets in the past. Until we look very carefully at how any such reserves could also be manipu-lated to the disadvantage of the producer, I do not believe it is our national policy to have such reserves. That is the point I am trying to make. It is a mistake to say we have a national policy like this. Mr. JOHNSON. Perhaps we did not state it with a full explanation, sir, the executive branch did make a commitment to seek solutions to the problems of the international reserves and again I point out to you that we believe that this bill would accomplish or at least comple-ment that commitment and would bring about the very advantageous position of having the foreign countries carry the load.

Senator BELLMON. I have no further questions, Mr. Chairman. Senator DOLE. Senator Bellmon is exactly correct, that if there has been any national policy it has not been by act of Congress. There has been administration policy and it was expressed at the World Food Conference by Secretary Kissinger. There is some difference of opinion within the administration, however, if you get into the USDA position, and the State Department position. This legislation would be a complementary program and it might hopefully change the administration's view insofar as nationally held grain reserves are concerned.

Unless you have some further comment, I again want to emphasize that we are in the early consideration of this legislation. There are going to be some difficult questions because there are some very strong.

views in this committee and in the Congress about "domestic grain reserves" and the impact on producer prices. We are also concerned about consumers. We are also concerned, as you indicated, Mr. Milligan, about someone else bearing part of the burden of any international grain reserve. We have done it along with Canada pretty much on our own. Over the past decade or so we have held reserves at our expense for foreign countries and millers and others in this country, and I think it is time that the burden is shared by others.

It there are any other comments, we would be happy to have them. Otherwise there will be additional hearings hopefully sometime later next month.

Mr. JOHNSON. Thank you, Senator. It was a pleasure to appear before you.

[The prepared statement of Mr. Johnson follows:]

OF

STATEMENT OF DONALD E. JOHNSON, DEPUTY ASSISTANT SECRETARY COMMERCE FOR DOMESTIC AND INTERNATIONAL BUSINESS, U.S. Department OF COMMERCE

Mr. Chairman, Members of the Committee:

I appreciate the opportunity to appear before this Committee today to testify in connection with S.1354, a Bill "To assure foreign countries that reserve stocks of agricultural commodities stored in the United States under certain conditions shall not be subject to export controls."

The Department of Commerce, as the principal agency of the U.S. Government concerned with the expansion of exports and the improvement of our balance of payments, is well aware of the major role which agricultural exports play in this effort, and we share with this Committee and the Department of Agriculture, the desire to maximize U.S. agricultural exports. Since the summer of 1973, when it was found necessary to impose export controls on soybeans and certain other derivatives or substitutable commodities, there has been an understandable reluctance on the part of some foreign buyers to make forward purchases of agricultural commodities in the United States when the same commodities can be purchased elsewhere. Any uncertainty as to the reliability of the United States as a source of supply is hardly consonant with our position as one of the world's major exporters of agricultural commodities. We believe we share with this Committee and the Department of Agriculture the desire to mitigate that concern and to restore our reputation as a reliable supplier of foodstuffs and other agricultural products to the world.

While we appreciate that S. 1354 may relieve concern over the reliability of the U.S. as a supplier, and we endorse that overall objective, there are a number of issues which we wish to present for the consideration of your Committee.

As you know, the U.S. committed itself last November at the World Food Conference to a policy of actively seeking the establishment of an international system of nationally held grain reserves, as at least a partial answer to periodic production shortfalls and the worldwide tight supply situation which has existed during the last few years. We believe that a cooperative and coordinated international system, with the burden of establishing and maintaining reserves widely shared among producing and consuming countries, is in the best interest of the world as a whole, as well as the American farmer and the American consumer.

We also believe that any reserve system which the United States adopts should be established in concert with those which hopefully, will be established by other nations. Consequently, and to avoid pre-empting our negotiating stance, we think the Committee should consider awaiting the results of the discussions we expect to begin shortly.

At the same time, however, we have a number of concerns with the bill. We believe that there are a number of areas, not now covered in the bill, where clarification is needed. We believe it will be necessary to spell out in considerable detail, either by law or by regulation, the limitations on the reserve proposal and the manner in which it will operate, so as to assure that both the rights of the foreign buyer and those of the American consumer are adequately protected. We must also prevent the storage system from being misused to circumvent any export controls which, at some future date, may become necessary. I would like to speak on the major areas which are of concern to the Commerce Department.

We think it desirable to be as specific as possible as to just what "agricultural commodities or products" would be eligible for particiation in this reserve plan. Should the concept apply only to basic raw agricultural commodities, or should it also apply, as presently contemplated in S. 1354, to products derived from such commodities? We believe this issue should be carefully studied.

We think it would be essential to promulgate very explicit regulations as to just how the reserve would operate in order to prevent any circumvention of such controls as may become necessary. It may be useful, in this connection, to enumerate the areas which would have to be addressed-either in the legislation or the implementing regulations-to avoid circumvention of controls. In our view, it is preferable that the law be sufficiently broad so as to permit the necessary flexibility in the face of changing conditions, so our concerns can best be adressed in the implementing regulations. For instance, the regulations should make clear just which entities would be entitled to participate in such a plan. If the eligible foreign companies are to include trading affiliates, subsidiaries or parent companies of U.S. firms, some means will have to be provided of distingushing between a bona fide purchase and storage arrangement and a fictitious transaction, speculative in nature, entered into solely for the purpose of evading any future export controls over the commodities placed in storage.

As the committee is aware, most of the large international grain companies responsible for the bulk of world trade in agricultural commodities have trading affiliates or subsidiaries in several foreign countries with whom they routinely engage in selling and purchasing grain in "string transactions". This frequently involves as many as twenty or more purchases and sales of the same commodities before any deliveries are made. Moreover, many of the sales agreements involved in these "string transactions" provide for the supply of optional original commodities and, at the time the contract is entered into, the selling firm does not really know, for example, whether it will supply U.S. wheat, Canadian wheat, Australian wheat, Argentine wheat or French wheat. This is a decision which is often deferred until shortly before the contractual delivery date when the origin of the wheat will be determined by the relative level of spot prices in various markets and charter rates from the applicable ports. It would be necessary for us to be sufficiently restrictive, so as to prevent these companies from maintaining substantial reserves in the United States, which would be exempt from export controls, which were not genuinely earmarked for delivery to foreign countries. Any proposal would also have to specify clearly the terms and conditions under which commodities would have to be stored to be eligible for exemption from any subsequently-adopted export controls. Would they be stored in bonded elevators, or could they be stored in a commercial elevator or warehouse not subject to federal inspection? If the latter, how would we assure that the commodities remained physically in storage during the twelve month period necessary to qualify for participation in the plan, and thereafter until they are exported? With fungible commodities such as raw agricultural products, special care would have to be taken to assure that the commodities placed in reserve actually remained there, and that the reserve did not merely become a fiction not representing commodities in any physical sense, but rather designed to assure the exportability of commodities which might be purchased for export after short supply controls had been announced.

Mr. Chairman, we foresee other questions which will also have to be addressed before such a plan is workable, for instance: Would payment for commodities placed in the reserve have to be in cash, or would credit purchases be permitted? Would the final foreign destination of the commodity have to be specified at the time the commodity was placed in the reserve, and would subsequent changes in the destination be authorized?

We think that strict controls on the country of destination would have to be imposed if the procedure is to operate as a bona fide reserve, rather than as an avenue to speculative transaction exempt from any possible export controls.

Additionally, the question of periodic substitution and replacement of the commodities in the reserve to avoid spoilage, and how long the substituted commodities would have to be retained before they also became exempt from possible controls, would have to be dealt with.

The regulations would have to make clear whether or not title to the commodity could be transferred during the period of storage without affecting the exempt status of these reserves. Failure to carefully consider these questions and to provide for them could open a number of avenues to circumvention of short supply export controls, which would render these totally ineffective as a means of assuring that the needs of domestic consumers will be adequately met.

The regulations would have to specify whether or not commodities, once placed in storage and designated for the reserve, could be removed and exported prior to the expiration of the twelve month qualifying period, and they would also have to make clear whether, in the event of a domestic shortage, the commodities in the reserve would be available for resale in the U.S. The bill's sponsors apparently contemplate that they would be available for resale in the U.S. since they explain that market conditions in a time of domestic shortage would protect the American consumer by providing a price incentive to foreign owners to sell their stocks back to the United States buyers. We believe this would be unlikely to happen, however, particularly if there were also shortages abroad, since the original purposes of establishing the reserves would presumably be to meet anticipated shortages abroad. Foreign purchasers would be unlikely to have tied up their funds for an extended period in establishing these reserves had they not done so in contemplation of a shortage situation arising in their own country, and it could be expected that foreign governments would seek to assure that these stocks were not diverted to some other use.

In any event, if the reserves earmarked for export and exempt from export controls could be resold in the U.S. domestic market, this would, in fact, be tantamount to giving foreign owners of such stocks, a competitive advantage over American owners of similar commodities, who might be prevented by export controls from the option of selling their stocks abroad. If a poor harvest and export controls were anticipated, moreover, failure to assure that such reserves could not be sold domestically might also contribute to the development of a two-tier market, with reserve stocks available for either foreign or domestic sale commanding a higher price than comparable stocks not exempt from export controls. To assure that the reserve system could not be used to circumvent export controls, it would have to be most carefully policed.

The committee should be aware of the manpower and budgetary requirements which could result from enactment of this legislation. As is apprent from the issues already discussed, the costs inherent in attempting to administer and police such a system might be substantial, although they would be difficulty to quantify in advance.

Mr. Chairman, to discourage speculation and to avoid exempting from controls too large a proportion of domestic supplies of those agricultural commodities covered by the scheme, we believe either the law or the regulations should provide for joint approval by the Secretaries of Agriculture and Commerce before any commodities are authorized for inclusion in the reserve. The kinds and quantities of commodities or products proposed for inclusion in the reserve could then be examined carefully before any assurance was given that they would be exportable in the future notwithstainding any export controls which might be in effect, and the approval of the two Secretaries could be withheld, or the quantity to be approved reduced, if it was found that a particular foreign country or entity acting in behalf of a particular foreign country proposed substantially to exceed that country's normal purchases or requirements. This would be essential both to discourage speculation and to provide a measure of assurance to domestic consumers that adequate supplies of these commodities would, at all times, be available for domestic use.

In conclusion, Mr. Chairman, in its current language, S. 1354 is quite broadly written, which gives rise to a number of questions that must be addressed in order to consider the need for appropriate safeguards to prevent the bill from being misinterpreted or used at counter-purposes. We recommend full exploration and assessment of the issues identified above. We urge the Committee to hold further hearings and carefully study these questions before recommending legislation which might fail to accomplish its intended purpose, be subject to misinterpretation or prove difficult to administer. Careful consideration of all aspects of this reserve proposal by the Committee would create a legislative record leading to enactment of the bill which would prove invaluable in writing implementing regulations, and which would provide the necessary assurance that this new legislation could not be used to circumvent the intent of existing laws designed to protect the economy from the impact of unwarranted or excessive foreign purchases.

Thank you, Mr. Chairman and members of the Committee, for the opportunity to present our views to you today.

Senator DOLE. Carl Schwensen. Mr. Schwensen is the executive assistant of the National Association of Wheat Growers. Like the other witnesses, Carl, you can summarize or extemporize or present your statement in any way you wish.