Wheat For Russia WIDE REPERCUSSION OF WESTERN SALES

Press, Volume CII, Issue 30271, 25 October 1963, Page 10

Wheat For Russia WIDE REPERCUSSION OF WESTERN SALES

(By ‘

“LYNCEUS"

of the “Economist”]

(From the "Economist" Intelligence Unit)

LONDON Oct. 15. Rarely, perhaps has any straightforward commercial transaction had wider repercussions than those attributed to the recent sale of 5f million tons of Canadian wheat to the Soviet Union, followed by President Kennedy’s authorisation of a sale of three million tons of American wheat to the same purchaser. They have set off a wave of speculation about the failure of the great Russian agricultural production drive of the past decade. It has been suggested in some quarters that the Russian grain purchases could ease the passage of the Common Market’s agricultural policy, and thereafter of agreement in the G.A.T.T. on new rules for agricultural trade; and that President Kennedy’s willingness to authorise American sales could foreshadow a wholesale reappraisal of American attitudes to East-West trade. Some brave spirits haVe even suggested that the grain deals could help to solve the topical problems of the world liquid it j’ system. So perhaps the first thing to do is to put the Russian purchases in prospective. Their impact was greatly enhanced by the fact that they seem to have been quite unexpected. When the Canadians concluded their latest agreement for the sale of wheat to Communist China this summer, they agreed to shave ten cents per bushel off the current world price to clinch the deal. They were anticipating a bumper harvest themselves (they still are) but they were evidently quite unaware of the havoc wrought by a wet summer following an appalling winter right across Europe and Southern Russia. The Real Surplus Having ordered all they could in Winnipeg, the Russian buying mission turned south across the fortyninth parallel. The Americans unlike the Canadians, would encounter no physical difficulty in supplying all the Russians’ requirements. The Canadians have a near-mono-poly in export of hard wheat, and hence, even in normal years, are unusually well off for customers. American wheat is mostly soft and this is the real surplus commodity. The Americans alone have some 32 million tons stored away in their silos: so even if the Russian deal goes through, it will make only a slight dent in the huge United States stocks. This is the first reason for thinking that some of the repercussions of the Russian grain purchases are being greatly exaggerated. The price of Canadian hard wheat is already rising, and it seems certain to rise further in coming months. But the soft wheat price, in view of the burden of United States surpluses hanging over the market, is likely to prove much less sensitive. Europe’s surpluses are also heavily weighted with soft wheat, while the traditional importing countries—Britain and Germany are primarily hard-wheat buyers. The shortage of hard wheat which looks like developing this winter could well force them to switch in part to soft wheat; and this could certainly help the French to dispose of accumulated stocks.

But the real stumblingblocks in the way of foe completion of the European agricultural policy are cereal price harmonisation and the Community’s so-called '•finance regulation. ” The likely level for cereal price harmonisation is around £35-37 per ton—and there is no prospect of world market prices coming anywhere near that level.

Continuing Imports? Behind all this conjecture, however, one conclusion seems inescapable. The U SS R’s much-vaunted “Virgin lands” programme in Kazakhstan appears to have

been a flop; and this could mean that the Russians will be importers, though on a smaller scale, for some years to come. If so, the problem of free world surpluses should at least be alleviated, and this could have a marginal effect on next year’s G.A.T.T. negotiations. On the other hand there is already anxiety in Canada that farmers may be encouraged by rising prices to plant excessive acreages; and the American farmers have rejected theit Government’s proposal for limiting grain planting. So this year’s exceptional demand could conceivably lead to bigger surpluses in future years. Tile beneficial effects of the Russian grain purchases on the world liquidity markets, however, are tangible and undeniable—so far as they go. This autumn there has already been at least two substantial waves of Russian gold-selling through the London market, presumably to pay for their grain purchases. As a result the London gold price has been forced down to within a few points of the official dollar parity, for the first time since the autumn of 1960, when doubts about the dollar originally began to take hold. The United States Treasury has been able to replenish its gold without embarrassing the United States; and the gold speculators have once more had a rough time, which may help to discourage them in the future. Last but not least, if the United States grain sale goes through it will mean a useful reduction in the United States balance of payments deficit. Extent of Benefits

But the extent of these benefits should also not be exaggerated. If the Americans sell three million, tons of wheat to the Russians this autumn, this is unlikely to cover one-tenth of their balance of payments deficit on the year. There is no prospect that Russian gold sales will be sufficient to render fears of inadequate world liquidity academic. 'lndeed if they strengthen the already excessive satisfaction of the central bankers with the status quo. they could even do more harm than good. As for United States policy on East-West trade, this is far more likely to be affected by the general political climate between Washington and Moscow than it is by the partial failure of the Russian harvest. Hostility towards “trading with the reds” has undoubtedly lessened in the United States this summer (although this does not extend to China and Cuba). But the wheat deal had so much to commend it that the really surprising thing is the length of time to took the Administration to pluck up the courage to authorise a sale.

Indeed it is this which commands attention about the wheat sales to the Soviet Union. They are among those rare commercial transactions with overwhelming advantages to the seller, and no apparent drawbacks. But it would be foolhardy to look upon them as a constantly recurring factor for the future which is going to transform the sorry confusion of international trade in farm products.