EXEMPTION OF FOREIGN-OWNED RESERVES

FROM EXPORT CONTROLS

THURSDAY, MAY 22, 1975

U.S. SENATE,

SUBCOMMITTEE ON FOREIGN AGRICULTURAL POLICY,

OF THE COMMITTEE ON AGRICULTURE AND FORESTRY,

Washington, D.C. The Subcommittee met, pursuant to notice, at 10 a.m. in room 324, Russell Senate Office Building, Hon. Robert Dole presiding. Present: Senators Dole and Bellmon.

STATEMENT OF HON. ROBERT DOLE, A U.S. SENATOR FROM THE STATE OF KANSAS

Senator DOLE. I am pleased that hearings are being held on my bill, S. 1354, 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.

In my opinion, this bill has tremendous potential for increasing world food security. It is consistent with our free market economy and agricultural stystem. It accords with our self-help philosophy of food assistance and adds no additional cost to U.S. taxpayers or

consumers.

I understand there may be questions or objections about this legislation in its original form. The purpose of these hearings should be to air those objections and hammer out a solution to the problems raised.

But I believe the concept of this bill may have a great deal of support. There are many positive aspects of the concept, which is simple, yet effective in resolving many needs. The bill I have introduced would provide assurance to foreign buyers that if they purchase grains or oilseeds or the products thereof, agree to store the commodities in the United States for at least 12 months as a reserve, and make appropriate application, that upon approval the United States will guarantee that such quantity of the commodity will not-repeat, will not be affected in case of the imposition of export controls. This will encourage foreign buyers to store commodities in the United States and make timely purchases when they feel such action is in their best interest for the acquisition of reserves.

By exempting those reserves from any export restrictions, we will help consuming countries manage their own inventories from production season to production season. They will be able to protect themselves through forward buying and assurances of supplies. On

the foreign front it will enable nations to buy ahead. They will not have to live on a hand-to-mouth basis. They will be able to acquire and manage their own inventories located here or in their own countries.

This is legislation that accords with the philosophy of the World Food Conference in Rome. It facilitates and encourages steps to resolve the perennial starvation, and malnutrition in various places around the world. Yet it allows the Nations in need of food to help themselves. After all, each individual nation should be best able to recognize its own food requirements.

The philosophy of our own food for peace program has been to help less fortunate nations help themselves. My bill accords with that philosophy.

We have a great storage capacity already in existence-available for other nations to place their reserve stocks at appropriate rates. That storage system was built to contain the huge CCC surpluses that existed a few years ago and is now being underused. If foreign nations are permitted to use this storage, they will be able to establish reserve stocks without making the huge capital investments for storage facilities.

Many nations like India and Bangladesh have heavy economic burdens already. It makes sense to let them use the storage facilities we have already built so they can establish reserve stocks without the additional expense of building storage.

BENEFITS TO UNITED STATES

The benefits of this bill are not just for foreign countries, but apply equally to the United States.

The biggest advantage for us is that planning and orderly marketing will be greatly improved. When foreign buyers contract for 12 months or more in advance, producers will be able to increase their planting intentions to meet the demand.

American agriculture has a tremendous capacity to produce. When stronger market prices signal higher demand, farmers do everything possible to produce bigger and better crops. When weak market prices signal lower demand, farmers begin to cut back production as they are now. Advance contracting of 1 year or more would give farmers the market signals they need to meet the demand.

Buying a year in advance should also stabilize market prices. Seasonal buying by foreign nations has frequently caused sharp escalations in prices. Domestic processors and users of farm commodities have been frustrated by price rises because of problems created for cash flow planning and operating costs. Producers have been frustrated when prices have later fallen.

By purchasing reserve stocks for 1 year or more in advance, foreign countries should have less need to make last minute purchases that cause volatile market fluctations. Processors and producers alike would then be able to better plan income and operating costs.

So this legislation should reduce fluctuations in the market. By doing so, it will reduce the likelihood of our getting into selfdefeating export restrictions that have been the reaction to sharp price increases.

DOMESTIC NEEDS ASSURED

Since foreign needs will be met partially or totally in advance, our own food requirements will be better protected against unexpected drawdowns by export sales. Knowing foreign intentions further in advance, farmers will be able to better plan for a level of production adequate to meet our own and foreign needs. That should avoid any need to accumulate Government-held food stocks in this country which in the past has forced prices so low.

Critics of this measure will probably argue that by exempting reserves for foreign countries from any U.S. export restrictions, we could find ourselves, in the event of a severe crop failure, shipping food stocks abroad while the American public suffers. Such an argument is invalid.

Regardless of the proportions of a crop failure, market conditions would always apply to grain purchased by a foreign buyer for a reserve. In the event a domestic shortage might arise, foreign buyers would have a price incentive to sell their reserve stocks back to U.S. buyers. So we are protected by the market mechanism. And as I stated before, by improving the ability of farmers to plan ahead, we better protect ourselves from shortages in the first place.

Finally, by encouraging foreign buyers to store reserve commodities. in this country, we put to use the vast storage facilities we have built up in this country in past years. Instead of setting idle, as they are now, our storage facilities would be earning an appropriate return.

NO ADDITIONAL COST

This legislation would incur no additional cost to the U.S. taxpayers. By its stabilizing effect on the market, I believe it would result in lower food prices for American consumers. So at no additional costs to ourselves, we could greatly enhance our own and the World's food security.

SUMMARY OF BENEFITS

The benefits that would result from this legislation are numerous and I would like to reiterate them here in short form:

(1) Encourage importing nations to make long-term coverage of their food needs;

(2) Increase U.S. effectiveness in easing World food shortages without additional cost to U.S. taxpayers and consumers;

(3) Transfer foreign food requirements planning from this Nation

to the countries in need where it should be done;

(4) Strengthen farm commodity markets in the United States during periods of abundance when markets would otherwise tend to weaken.

(5) Facilitate better crop planning by U.S. producers;

(6) Increase food security for the United States;

(7) Preclude the need for U.S. food reserves;

(8) Stabilize our market;

(9) Improve operating costs planning for domestic processors; (10) Put U.S. storage facilities to use; and

(11) Avoid large capital outlays for foreign nations to build storage

facilities for reserves.

LESSONS OF EXPORT RESTRICTIONS

The origins of this bill go back to the lessons of the soybean expor control fiasco and the results of the World Food Conference in Rome We learned several lessons from the 1973 soybean export contro effort. We learned just how self-defeating such limitations rezy are. We learned how such controls proliferate from 1 to 41 differen items. We learned how a new bureaucracy had to be created t handle the tons of expensive paperwork required as a prerequisit to getting an export license, without which precious piece of paper no commodity could move. We learned of broken contracts and the inevitable windfall profits and windfall losses.

We learned that Japanese consumers felt great panic when they saw the source of 85 percent of their soy protein suddenly cut of without even prior discussion. We learned the international diplematic effects which initiated reverberations from chancery to chancery. We learned from our soybean fiasco that export markets cannot be expanded by cutting them off. Millions of dollars spent for marke development went down the drain in a flush of doubt about our reability as a supplier even after contracts were finalized.

We are now learning just how serious our market losses are as a result of the soybean export limitation. The Japanese reacted by investing huge amounts of money to encourage Brazilian soybear production. That increase has now taken place and we have lo markets that we will not get back. Gone are export earnings we wi not recoup. Witness the following example of Brazilian soybean acreage and production:

The March 1975 issue of "World Agricultural Production and Trade Statistical Report" has the following relative to Brazil:

The government has also announced plans to develop approximately 15 million square kilometers of scrublands in midwest Brazil-land that could b used for soybean production. If planted, this could add an additional 50 million acres and double Brazil's annual soybean output.

Note that acreage and production just about doubled between 1973 and 1975. While not all the increase can be attributed to expor controls in 1973, there is no doubt that it was accelerated.

Soybean exports during the 1974-75 marketing year will be down by over 100 million bushels from the 539-million bushel level of 1973-74. Despite the very short U.S. crop of 1974, the carryover will be up. Brazil has taken over a share of our export market.

The Common Market is working on a policy that would shift some of their acres into soybeans in France and Italy. And their com missioner of agriculture has already warned that if we reimpose export

controls on soybeans, they will make a serious effort to become selfsufficient in protein meal production by 1985. Such an effort would cost us at least $1 billion a year in export sales. The same could occur in market after market around the world-and we cannot afford it.

Fundamentally, export controls are an economic cosmetic which give false signals to the markets. Rather, we should let market forces operate. This policy has served our Nation well. We must resist the temptation to tamper with them.

Only under extreme conditions and I mean extreme national needs should export controls ever be implemented. They should not be used to benefit one segment or our economy for the benefit of another.

DOMESTIC FOOD SECURITY INCREASED

The recent low carryover stock levels of grains have generated recommendations under the general heading of grain reserves.

The stated purposes of these reserves are to insure against the effects of unusual crop disasters here and abroad and to meet unusual demands arising out of national security requirements.

We are hearing more and more regarding such Government reserve building and market intervention suggestions despite the fact that the Agricultural Act of 1973 contains a conscious decision in favor of the free market and the implication that it was desirable to keep the U.S. Government out of the commodity acquisition and disposition business. Government-owned reserves of grain and soybeans are both unnecessary and undesirable. The proponents of such measures claim that the private trade, including farmers and their co-ops, will not carry needed stocks from one year to the next. I need only point out that on September 1, 1974, the private sector carried over 172 million bushels of soybeans at a time when soybeans were selling at about $7.50 per bushel-over three times the loan rate. This carryover was by any standard an historically high level. It will be about 200 million bushels on September 1, 1975-all in private hands.

The Government costs of reserves would far exceed the benefits. The costs include adverse price and income effects on farmers and higher taxes or additional inflation budget deficits affecting all citizens. The record shows that periods of short supplies are relatively rare in American agriculture. Maybe it is because I have a long memory, but it was not too long ago that the American people showed great public resentment against the Government farm program because carrying charges on commodity credit corporation stocks rose to over $1 million per day. We all know that Government held stocks show up in the supply-demand equation. Potential buyers know that rules, no matter how well intentioned, to protect market prices are subject to change under public pressure. Thus, Government reserves have a depressing effect on farm prices.

Special Government-owned reserves are not needed for the protection of our domestic and foreign customers. Domestic consumers have a great deal of protection in the productivity, diversity, and flexibility of American agriculture. Reserves can, and should be carried by farmers, handlers, and processors. Government loan programs make a significant contribution to the maintenance of

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