U.S.-RUSSIAN GRAIN DEAL DRAMATIC COMMERCIAL COUP TURNS SOUR IN U.S. AFFAIRS

Press, Volume CXII, Issue 33051, 19 October 1972, Page 16

U.S.-RUSSIAN GRAIN DEAL DRAMATIC COMMERCIAL COUP TURNS SOUR IN U.S. AFFAIRS

(By

GUY DE JONQUIERES,

in the "Financial Times." London.)

(Reprinted by arrangement)

It started out as a dramatic political and commercial coup: a massive, hard-headed trade deal intended to cap President Nixon's lofty diplomatic negotiations with the Soviet Union and to impress the United States electorate with one more piece of foreign policy panache on the approach to the November elections.

It has turned out to be a dubious story of ineptitude, concealment and cronyism that has drawn fierce and untimely criticism from the Right and Left alike. One wit, borrowing a leaf from the annals of British crime, has baptised it “the great grain robbery.”

Whether or not any law was broken in the course of this long and complex affair remains to be seen. The complete facts surrounding the announcement that Russia had agreed to purchase SUS7SOm of United States grain over three years are not yet known and, perhaps, never will be. But it is already clear that in making the arrangements the Nixon Administration, and specifically the United States Department of Agriculture, was guilty at least of more than one serious miscalculation. “Human Events,” the conservative weekly, has called it “blundering.” Senator George McGovern has denounced it melodramatically as “the foulest deed of all.”

Bad estimating In the first place, it is patently obvious that the American experts wildly underestimated the severity of Russia’s crop failure this year and the size and range of its import needs. The Russians themselves may bear some blame for misleading the Americans. But even though the Secretary of Agriculture, Mr Earl Butz, himself saw acres of devastated wheat crops on a visit to Russia last April, he and his advisers returned to Washington talking of a potential order mainly of corn and feed grain worth about SUS2OOm this year. In the negotiations, the United States fought off Russian demands for special credit terms and apparently believed that it had won a bargaining victory when Moscow accepted normal United States Department of Agriculture arrangements, providing for a SUSSOOm

credit at 6 1/8 per cent interest.

Now, there used to be a school of thought which held that Russian traders, deprived of direct contact with the capitalist system, failed to understand the intricate workings of the markets. (When it comes to commodity markets, a lot of people in the West share their supposed mystification.) This theory was magnificently exploded between early July and mid-August of this year, when the Russian purchasers placed orders with American grain dealers for 419 million bushels of wheat, worth two or three times the value of the orders they had originally undertaken to place this year.

In order to fulfil their contracts, American grain dealers began buying wheat wherever they could find it, and as the orders grew prices began moving up sharply. As an incentive to export surpluses America has for many years provided a Federal subsidy to absorb the difference between domestic prices and world prices, and the size of the subsidy increased accordingly. On July 5 the price per bushel of hard red winter wheat at Gulf ports was SUSI.7O per bushel and the subsidy six cents. By July. 12, when Russia had discreetly shovelled in orders for 285 million bushels, the price was up to SUSI. 76 and the subsidy at 13 cents. On August 24, when the full extent of the Russian orders became generally known, the American price shot up to SUS2.I4 and the Federal subsidy level was at 38 cents.

Dictated terms No other country could have met even a fraction of the Soviet demand this year, which meant that the American Government could have dictated its own terms in the bargaining. But because it had miscalculated Soviet needs, the Administration supplied not only credit but also sizable amounts of Federal money, put at up to SUSIOO million to subsidise export sales that could have been made at virtually any price. In addition, it had an army of angry bakers on its hands, who have grown even angrier since the Price Commission has denied them permission to raise bread prices to compensate for the increase in the cost of flour.

Of course any government, discovering the true situation, would have acted to limit its losses. This is what the United States Department of Agriculture did on August 25, announcing that the daily setting of the subsidy rate would no longer equal exactly the gap between American and world prices; in late September, the subsidy was suspended indefinitely. However, the Department did two curious things. First, it decided to raise the subsidy for the week preceding August 25 retroactively to 47 cents per bushel. And second, before the market closed on the day before the announcement it leaked the news to the six major grain dealers that a change in subsidy policy was imminent.

Subsidy anomaly Now a fascinating anomaly in the operation of the subsidy, which adds a whole extra dimension to speculation on the United States grain market, is that it applies not to the day when a dealer concludes an export contract but when he chooses to register it. This provision is designed to safeguard the secrecy of the dealer’s market operations and he is free to register when he likes. Thus a dealer who managed in early July to buy grain at SUSI.7O per bushel and arranged a contract to export it at SUSI.6S could, thanks to the United States Department of Agriculture, have rushed in his registration on August 24. He would have made a net profit of 42 cents per bushel on the deal. Not all of the dealers may have been able to cover themselves in time to make a really massive killing, and some may even have taken a loss on some parts of their contracts. But since they have not been moved to defend themselves against their critics by making full public disclosure of their purchasing positions, it may be presumed that none of them came out of the business too badly. Although Vice - President Spiro Agnew, in an apparently unguarded moment on the campaign trail, committed Mr Nixon to ordering an investigation of the affair by the Federal Bureau of Investigation, it is fairly clear that the overriding issue raised by this extraordinary turn of events is not a legal but an ethical one. By slipping the word to the grain dealers in advance, the Agriculture Department put them in a position to make windfall profits, while the farmers were left out in the cold. Some fanners in the north have been able to cash in on rising prices. But in the south-west, where the harvest comes earlier, they are seeing the grain that they sold for SUSI.7O or so at the start of the season

fetching prices some 40 per cent higher today. And they feel mighty sore about it. In all of this, the United States Department of Agriculture’s response has been one of prevarication and bluster. Its senior officials argue that the August 24 leak to the dealers was only a notification and not a specific warning. Estimates prepared in June and July of the Russian crop position, which could have tipped farmers off to grain price trends, were not published because of “differences of opinion in the Administration” over their accuracy.

In view of the political repercussions created by the scandal, one may wonder whether the Administration was really prepared to risk alienating a sizable section of the farm vote in November as the price for winning the favour of a handful of grain dealers. It may thus be reasonable to suppose that its actions stemmed from incompetence rather than conspiracy. Nevertheless, one result of the publicity has been to focus the attention on the unusually close relations that exist between the United States Department of Agriculture and the private merchants. In the last nine months, one senior official working on the administration of subsidies has left the department to join the Bunge Corporation, a major dealer, while another joined the department from the same company. Mr Clarence Palmby resigned on June 7 as assistant Agriculture Secretary to become a vicepresident of Continental Grain Company, and his place was taken by Mr Carroll Brunthaver, who had joined the department in 1969 from the Cooke Corporation. another large grain company.

Offcia! and dealers Mr Palmby’s movements have attracted particular attention from congressional investigators and the press. He told Congress that he received a job offer from Continental Grain in early March but did not take it seriously. Thereafter, he became deeply involved in the grain negotiations, visiting Moscow in April with the Secretary of Agriculture (Mr Butz) and holding discussions with a senior Russian trade official the following month. What Mr Palmby failed to relate, however, until confronted later by a television reporter, was that three days before the Moscow visit he signed a purchase contract and made a large down payment on a smart apartment in New York, where Continental Grain’s headquarters are located. Of the six referees he listed, four are senior executives of Continental. Revelations of this kind do nothing to dispel the criticisms that have already been levelled at the Nixon Administration’s dealings with the business world. But there is another moral to the tale, too. And that is that while the need to buy American grain is costing Russia dear and will almost certainly force it to sell some gold to finance the deal. America has not distinguished itself in its handling of the first big commercial exchange in what Mr Nixon has called the era of negotiation. Indeed, some people in Washington are even admitting that it has been taken for a ride.