STUDY ON WHEAT AND FEED GRAINS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP70S00385R000200030086-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 27
• Document Creation Date: December 12, 2016
• Document Release Date: May 4, 2001
• Sequence Number: 86
• Publication Date: March 3, 1967
• Content Type: MEMO

U.S. DEPARTMENT OF COMMERCE
BUREAU OF INTERNATIONAL COMMERCE
WASHINGTON, D.C. 20230
March 3, 1967
DOC Declassification/Release Instructions on File
MEMORANDUM
TO: Messrs. Nathaniel Davis (White House)
Winn Finner (Agriculture)
Robert Wright (State)
Joseph P. Goldberg (Labor)
,William N. Morell (CIA)
Martin I. Goodman (Maritime Administration)
Sherman Abrahamson (Commerce/OEC),- and
Richard E.-Hull (Commerce/GCO)
FROM: Theodore L. Thau
Executive Secretary
Advisory Committee on Export Policy
SUBJECT: Study on Wheat and Feed Grains
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Attached is a redraft of our summary report, with conclusions
and recommendations, dated March 1, 1967. It corrects some
errors found in the previous draft and makes a few editorial
improvements:
As you have told me that the February 14 version, with its
errors.corrected,, would be acceptable, to you as a draft
suitable for submission to our respective department and
agency heads, I have sent a copy of this Marchl redraft to
Secretary Trowbridge, and recommend that you now follow a
like course. Please advise your department or agency heads that,
because the conclusions and recommendations in this draft
relate to, but do not take into account, the new national
maritime policies and programs which are only now being
developed by Secretary. Boyd of the Department of Transportation,
Secretary Trowbridge is sending him a copy of this draft.
Secretary Trowbridge plans to get in touch soon with your
department and agency heads, as well as with Secretary Boyd.
Meantime, he welcomes any comments and suggestions they. may
wish to advance.
W
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Marc , 1967
SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
As a major world wheat exporter'and the principal supplier of feed grains
to world markets, the U.S. is capable of competing for such markets throughout
the world, including the East European Communist countries and the USSR. Be-
cause of increased costs and other burdens resulting from shipping (and related
export licensing) restraints imposed by the U.S. Government, U.S. firms are
unable to share in the wheat and feed grain purchases of certain of these
countries to the extent they might if these restraints were removed.*
The shipping restraints in question are, in substance, that 500 of wheat
and feed grain cargoes to the USSR must, be carried in U.S.-flag ships; that
50% of wheat cargoes to Albania, Czechoslovakia, Hungary, Bulgaria and East
Germany.must also be carried in U.S.-flag ships. With respect to feed grain
cargoes to the last five named countries, this 50-50 rule also applies, but
it is waived, and the entire cargoes are permitted to be carried in foreign
flag ships, if part of each such cargo is destined for and first unloaded in
a West European or Mediterranian country, including Yugoslavia. This 50%,
or 50-50, rule or restraint will be referred to as such hereafter. The part-
cargo unloading procedure, though sometimes called the part-cargo rule or
restraint, is more properly considered a "relaxation" or "waiver" of the 50-50
rule,,ywhich would otherwise apply to feed grain shipments to Albania, Czecho'-
Slovakia, Hungary, Bulgaria and East Germany. (The significance of this
distinction is that termination of the so-called "part-cargo rule" alone would
only reinstate the more stringent 50% U.S.-flag ship rule for such shipments.)
* This study is not concerned with the question of removing U.S. foreign policy
restraints on grain sales which are part of our embargo of substantially all
.trade with Communist-China, North Vietnam, North Korea and Cuba.
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The U.S. export licensing restraints referred to above are to enable
the Commerce Department to make sure that the conditions of the 50% shipping
restraint and the part-cargo relaxation are met by U.S. exporters of wheat
and feed grains to the affected countries.
In accord with special foreign policy considerations relating to U.S.
exports to Yugoslavia, Poland and Romania, the aforementioned shipping and
export licensing restraints are not applied to our wheat and feed grain
exports to those East European countries. Shipments to them may go freely
in foreign-flag vessels, subject to only one qualification which' is applicable
to Poland and Rumania. Although a,"part cargo" of feed grains may be first
unloaded in and destined for Yugoslavia, with the balance destined for
Albania,, Czechoslovakia, Hungary, Bulgaria or East Germany; the U.S. does
not also permit Poland or Romania to be the recipient of the "part cargo".
The purpose of this study is to aid government policymakers in deciding
whether economic and.foreign policy benefits that might flow from removal of
the U.S. restraints on sales of wheat and feed grains to the USSR, as well
as to,Albania, Bulgaria, Czechoslovakia, East Germany and Hungary (hereafter
called "the restricted countries of Eastern Europe"), would outweigh the
domestic risks and costs that might arise from that action.
c-The attachments are the several parts of this study made by Agriculture,'
CIA, Commerce, Labor, Maritime Administration, and State officials, relative
tq various aspects of the question of removing U.S. restraints on sales of
wheat and feed grains to the restricted countries of Eastern Europe and the
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USSR. They deal with (a).the grain production, consumption and import
requirements of the several countries; (b) the extent to which the
expected import requirements of the USSR and the restricted countries
of Eastern Europe might result in increased opportunities for such sales
i
by U.S. firms; and (c) the merits and mechanics of repealing or modify-
ing the present U.S. restraints--the 50-50.shipping requirement and its
part-cargo unloading exception--to make the U.S. more competitive in the
USSR and the restricted countries of Eastern Europe. This paper repre-
sents the agreed assessment of these officials of the several departments
and agencies who took part in preparing the study, except that the CIA
representatives.' role was confined to an assessment of the'grain.positions
of the various countries.
The Communist Markets
The Communist countries of the world, as a whole, are a growing but
uncertain market for free world grains, mainly wheat. In the present crop
Year* they will probably buy 12.- 1,4 million tons of free world wheat. Of
this, 5 - 7 million tons will probably be Communist Chinese purchases. The
balance will be taken mainly by the USSR and to a lesser extent by the
restricted countries of Czechoslovakia, East Germany, Bulgaria and Hungary,
* Year ending June 30, 1967.
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and the non-restricted countries of Poland and Yugoslavia.* In addition,
the Communist countries will likely take upward of 1 - 1.5 million tons of
free. world feed grains this year--almost wholly in the restricted coun-
tries of Czechoslovakia, East Germany, Hungary,.and Bulgaria, and also
in Poland.
It is considered likely that both the USSR and the restricted coun-
tries of Eastern Europe will be importing less wheat, while the latter will
be importing more feed grains, from the free world by 1970, assuming aver-
age weather conditions between now and then. The size of these markets in
any one year is expected to depend.on (a) a basic market in the USSR for.
1 - 2 million tons of wheat, largely to enable it to meet its domestic
requirements in the Soviet Far East and its commitments to Cuba; and (b) an
* The USSR has contracted to buy 3 million tons from Canada and 1 million
-tons from France. Poland is considered likely to buy 1 million tons,
and Yugoslavia 600,000 tons. Since the U.S. Government shipping restric-,
tons do not apply to these last two countries, it is probable that some
portion of their purchases will be from the U.S. Romania, which is also
not affected by the U.S. shipping restrictions, is not likely to buy any
wheat from the free world. Of the East European countries affected by
the shipping restrictions,.Albania is not considered likely to buy any
wheat from the free world; Bulgaria is expected to buy nearly 200,000 tons,
of which 100,000 tons is already committed to come from Canada;,Czecho-
slovakia may need 5 - 600,000 tons, of which ?300,000 tons are . already
committed from Canada and France; East Germany may need 5 - 600,000 tons,
of which Canada is already committed to supply 318,000 tons; and Hungary
might buy as much as 100,000 tons, of which 50,000 tons is. reported coming
from Canada. In addition, it is estimated that Australia and Argentina,
which harvested their wheat last December, may sell some to North Korea
and various countries of Eastern Europe, respectively.
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unpredictable Soviet demand for additional wheat because of domestic crop
failures; and (c) an apparently stagnating market for wheat in the restricted
East European countries (as well as in Poland, Romania and Yugoslavia),
coupled with a growing demand in Czechoslovakia, East Germany,, Hungary
and Bulgaria (as well as Poland) for free world feed grains. The main
elements of uncertainty involve the future level of Soviet wheat produc-
tion.
Wheat and the USSR
In the judgment of agricultural experts in CIA, Agriculture and ,State,
Soviet leaders have adopted more rational plans for agriculture, particu-
larly wheat production, and they are taking more concrete steps, as well as
e~:hibiting more determination to implement these steps, than had been the
case heretofore. If these programs are carried out at presently estimated
rates of plan fulfillment, given average weather conditions, the Soviet
Union would regain its position as a net wheat exporter by 1970/71.'
* On December 27, 1966, Agriculture Minister Matskevich announced that the
1966 Soviet grain crop would be a record 171 million tons, but no official
.estimate for wheat is available. The official grain estimates are, how-
ever, known to be inflated. The actually usable crop of wheat in 1966 is
estimated by U.S. specialists on Soviet agriculture at roughly 70 - 75
million grain tons;'that of all grains at 135 million tons. This compares
with 48 million tons of wheat and 100 million tons of all grains, respectively,
harvested in the poor crop year of 1965. No quantitative estimate of the
USSR's grain "surplus" is available. We believe, however, that it can be
described as "substantial". Most of the surplus,is likely to be stored
as a hedge against~a future poor crop year, since replenishing depleted
government grain reserves has a high priority.
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On the other hand, Soviet performance in realizing previous programs
for boosting agricultural output has been poor, and substantial,achieve-
ment of the plans now being implemented would be a radical departure from
experience. Partially, due to adverse weather in four of the past five
years, grain production,has tended to stagnate. In each of the crop years
1963/64 and 1965/66 the Soviet Union purchased about 10 million tons' of
wheat from free world sources to meet domestic needs and export commit-
ments.
A careful analysis of recent Soviet measures to enhance production
indicates the likelihood of progress in the achievement of planned goals.
However, in the event of major shortfalls in inputs, a we of incentives
and mediocre weather, growth might lag sufficiently to require a rising
average level of Soviet purchases from the free world. Soviet import needs
might then be.substantial in the event of crop failures of the magnitudes
experienced in 1963/64 or 1.965/66. Moreover, a Soviet internal demand for
'grains'as animal feed may be a growing factor in the behavior of this
market.. Whatever Soviet needs may be, the over-all state of U.S.-Soviet
relations will. be a basic determinant in any Soviet decision to purchase
wheat from the United States. They would have to be faced with a pressing
need with no'other reasonable alternatives before they would buy U.S.
wheat,unless the Vietnam conflict is resolved.
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 The most probable outlook is for a substantial and relatively suc
cessful Soviet effort to achieve an increase in grains output, but the
impact of"this effort is expected to become more apparent as 1970/71
approaches. 'Soviet planners appear to have hedged in this direction by
contracting with Canada for average imports of 3 million tons yearly
through 1968/69.
Feed Grains and Eastern,Europe
Demand by the restricted and non-restricted countries of Eastern
Europe for free world feed grains was not significant until 3-4 years-
ago, when it began to grow because of increased demand there for meat,
poultry and dairy products. The USSR grows large amounts of corn and
other feed grains,, supplies quantities to Eastern Europe, and is not likely
to r ed any from the free world in the foreseeable future. The East
`.h
European countries that will most probably import substantial amounts of
feed grains between now and 1970/71 are, among the restricted countries,
Czechoslovakia, East Germany, Hungary and Bulgaria. Of the non-restricted
countries, Poland will probably continue to import feed grains from the
flee world, while Yugoslavia and Romania are more likely to be exporters than
importers, except in years of poor harvests.
U.S.'~ and Other Free World Suppliers of wheat and Feed Grains
Wheat. In recent years, Canada, Australia, France and Argentina have
been supplying most of the wheat imported by the Communist countries of
Europe and Asia. By 1970/71 they are likely to have a combined exportable
surplus of 13-14 million tons, after supplying their, domestic and free
world customers. They could further increase their production if Communist
demand should be heavy. On that basis, they could meet any likely Communist
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 world deficit between now and 1970/71, unless unusual production diffi-
culties should raise it substantially above the foreseeable figure of
12-14 million tons per annum. Between 6 and 8 million tons of this amount
.are expected to be purchased by Communist China.
Putting aside political problems in our relations with the USSR and
Eastern Europe, the consequence of these free world availabilities is
that the USSR and the East European countries are not likely to seek U.S.
wheat, unless it can be bought at a price and under conditions (e.g.,
credits) which are entirely competitive with those of other free world
producers.
At present, U.S. firms cannot compete for this business because of
the cargo preference rule. This rule, if applied strictly on a 50-50
basis, would raise the average price of U.S. wheat delivered to a Black
Sea port by $4.50 - $6.00 per ton. That added cost factor is enough to
preclude most Communist countries from buying any wheat from us, except
in years of crop disaster, as in 1963/64.
If the 50-50 shipping rule were abandoned, U.S. firms could expect
to share with other free world countries in supplying the USSR and Eastern
European markets for wheat, whenever they would exist. How much of such
.business we could expect to get would depend, among other things, on US-
USSR relations, and in particular, the severity of Soviet differences with
us over Vietnam.
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The amount of suc4 potential U.S..sales of wheat, if we abandoned the
50-50 shipping rule with respect to the USSR and the restricted countries
of Eastern Europe, is, of course, uncertain. Our only wheat sale since
1964, in which the 50-50 shipping requirement was applied, was for 40,000
tons sold to East Germany, notwithstanding the restrictions.* Maritime
nations complained about this transaction as a treaty violation. At the
selling price of U.S. wheat, FOB Gulf Port, we could expect to gain
around $65 million for.each million tons of wheat we might be able to
sell to the USSR and Eastern Europe. 1,
Feed Grains. The U.S. presently supplies approximately 50% of world.
demand. Other free world producers are numerous, have comparatively small
surpluses, and generally little margin for substantially increased produc-
tion. We have sufficient land in reserve to grow as much as 45 million
tons more by 1970.
The U.S. already sells feed grains in the East European market.
Access to a portion of this market is impeded,however, by the application
of the 50-50 shipping. rule and its part-cargo exception. As stated above,
the part-cargo rule operates to waive the 50-50 rule, and allow shipment
entirely on foreign flag vessels, if part of each cargo for one of the
restricted countries of Bulgaria, Czechoslovakia, Hungary, East Germany
and Albania is destined for a free world country and is off-loaded at a
free world port, including Yugoslavia, but excluding Poland and Romania.
Full cargo shipments may, however, go on foreign flag vessels directly to
* In 1964 we sold Poland, a non-restricted East European country, about 700,000
tons of wheat, for $47 million. In 1965, Poland bought from us about 9,,000
tons. for about $56'0,000,while in 1966 we sold her about 200,000 tons, for
about $13 million. in,
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 Poland, Romania and Yugoslavia, as they are not affected by the 50-50
rule or the part-cargo exception, except that Polish and Romanian ports
are not treated as free world ports for part-cargo unloading purposes.
This need to off-load part,cargoes at West European or Mediterranean ports
may block some sales to'some of-the restricted East European countries
because of the inconvenience of arranging such sales.i As much as $1 - $2
per ton might be added to the ocean freight charges on feed grains delivered
to some of the restricted East European countries, if vessels have to dis-
charge part of the cargo at a port in a free world country and the balance
at a port in the restricted country.
How much more feed grains the U.S. could sell the restricted East
European countries, if the 50-50 shipping rule and its part cargo exception
were abandoned,* is difficult to estimate. Indeedg the entire amount
'those countries may need from the free world annually between now and 1970
is uncertain. It depends on the s
d
pee
poultry and dairy product consumption'of their peoples to rise, their own
feed grain production, and their imports from each other and from the USSR.
Government experts estimate'that the restricted East European coun-
tries are likely to need a total of about 0.75 to 1.25 million tons of
feted grains from the free world (over their domestic production and intra-
bloc trade) in each of the next few years, and that this amount can grow
* For the reason given above, removal of the so-called "part-cargo rule"
alone would not be beneficial.
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to as much as 1.75 million tons a year by 1970/71. USDA experts believe
that, of these amounts, U.S. firms should be able to sell the restricted'
countries about 2/3, or between 500,000 and 840,000 tons, of their free
world purchases, in each of the next few years, and 1.15 million tons a
year by 1970/71.
The foregoing estimates cannot, of course, be considered attainable only
by repeal of the 50-50 rule and the part-cargo exception. In 1965/66, with
the part-cargo exception to the 50-50 rule in effect, U.S. firms managed to
sell an aggregate of nearly1 million tons of feed grains to the restricted
Eastern European countries. The bulk of those U.S. sales went to East
Germany and Czechoslovakia, which may have paid an extra charge for receiv-
ing the grains through Hamburg because of our part-cargo rule.* Hungary
and Bulgaria bought smaller amounts from us**--possibly because ourpart-
cargo rule may have resulted in their having to pay an added charge for
unloading part of each cargo at a port in the free world, or possibly
because of lack-of funds, or for other reasons.
* Between January 1, 1965 and June 30; 1966, the U.S. exported to'Czecho-
slovakia $2.5 million of barley, $11.7 million of corn, $18 million of
grain sorghums, and $5.5 million of soybeans, which is used, for feed,
but not considered by us as a feed grain and therefore not subject to
the 50-50 and part-cargo rules. In the same period, we exported to
East Germany $11.8 million of corn, $3.1 million of grain sorghums,
and $560,000'of soybeans.
** Between January 1, 1965 and June 30, 1966, we exported to Bulgaria
$2.2 million of soybeans. In the same period, Hungary imported from
us $286,000 of corn, $954,000 of grain'sorghums, and $7.1 million of
soybeans. .
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Agriculture experts suggest, however, that our 1965/66 experience was
abnormal, as the West European countries which normally compete with us in
selling feed grains to the restricted countries of Eastern, Europe, as well
as several of the E ast.European countries themselves, had poor harvests that
year. They also estimate that in 1966/67 the production of the restricted
countries will be up, so that their aggregate imports from the entire free
world in 1966/67 will probably be below 1 million tons. On that basis they
suggest that our potential sales of feed grains to these restricted countries
would have been only about 400,000 - 500,000 tons, even if we had removed
the 50-50 rule and the part-cargo exception at the beginning of this crop
year. On the other hand, they estimate that our 1966/67 sales to these
countries will be at least 300,000 tons, even though we retain our shipping
restraints to the end of this crop year. t,r
Our financial benefit from any increased sales of feed grains to the
restricted countries of Eastern Europe can be estimated on the basis of
the selling price of U.S. yellow corn, which is currently about $60 per
ton, FOB, New Orleans. On this basis, each additional 1,000 tons we might
be able to sell them by dropping our shipping restriction would add
.$60,000 to our exports and thus to our balance of payments position.
There is currently being considered within the Executive Brance a pro-
posal'that a U.S. mission be formed to go to various Eastern. European coun-
tries to seek added markets there for U.S. feed grains. At this time,'
however,-no determination has been made as to the precise nature of the,
proposed mission, its membership, and when and where it would'go.
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Nature and Background of TJ.S. Government Restr.:in .s
Exports of wheat and feed grains are,
not embargoed to the USSI; and
Eastern Europe. Validated licenses are required by Uomnt:rce for such
exports, under the Export Control-Act. As previously stated, the pur-
pose of requiring licenses for such peaceful goods is basically to enable
commerce to see that U.S. Government shipping restraints on such trade
are observed. The Commerce requirement for such licenses is, of course,
a government-imposed restraint, but it is not considered much: of a burden
to sellers or obstacle, by itself, to our trade. However, it seems clear
that if the shipping restraints were abolished, all agencies concerned
would agree to placing these products under general license to all of
Eastern,Europe.
Cargo Preference Rule
The. chief obstacle to our selling any wheat or feed grains to the
USSR, and wheat to the restricted East European Communist countries is,
as indicated, our special requirement that 50Io..of such grains to those
countries must be carried in U.S.-flag ships.* Freight rates for U.S.-
flag ships to the USSR are currently $9 to $12 a ton higher than rates
charged by foreign flag vessels. This amounts to a 7.5% increase in the
export price of U.S. wheat and an 8.5% increase in the export price of
Shipping restrictions applicable to-feed grains are described on pages 9-10.
Shipping restrictions applicable to wheat are as'follows: The 50-50
rule applies to the USSR, Czechoslovakia, Hungary, Bulgaria, East
Germany and Albania, with no provision for a part-cargo exception.
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U.S. corn. With those premiums to pay, the USSR is not likely to buy apy
grains and the other restricted countries are not likely to buy any wheat,
from U.S. firms, except in cases of dire need and non-availability from
other suppliers, e.g., a crop failure in the USSR coinciding with poor
stock positions or shipping bottlenecks elsewhere.
Our present 50-50 shipping requirement stems from the decision of
President Kennedy, at the time he authorized our sales of wheat to the
USSR in October 1963, that the wheat should.be carried. in "available
American ships, supplemented by the vessels of other countries." The
American Maritime Association, an association of American Flag ship-
owners, had urged President Kennedy to treat such sales as if, they were
government-to-government transactions covered by the Cargo Preference-
Law (PL 664). The President rejected that approach, but chose to reach
a somewhat similar result under the Export Control Act, which authorized
,the President to control exports and to issue licenses subject to condi-
tions.
When it was early found that U.S.-flag ships would probably not be
available in sufficient numbers'and times to move more than half the
expected Soviet purchase, the decision was made that "at least 50% U.S.-
flag participation"would be the goal.
The International Longshoremen's Association then announced its,''
willingness to handle the shipments on the 50% basis. This was a breach
in, that Union's stated policy, which is infrequently applied, of refusing
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 to handle some Communist country freight. The Union, from then on, sought
to maintain the requirement. It strongly opposed Maritime Administration
grants of waivers in 1963/64, which allowed more than 500 of some,ship-
tents to Hungary and the USSR to go in foreign-flag ships.
The resulting controversy with the Unions led to revision 9f the
Commerce Department's export regulations to make it clear that the 50-50
,shipping rule applied to,both wheat. and feed grain purchases by the USSR,
and to wheat and wheat flour shipments to Eastern European countries,
other than Poland, Romania and Yugoslavia.* In effect, exceptions to the
50-50 requirement for wheat shipments were to be disallowed. It appears,
although we are unable to document this, that it was also decided at high
level that Commerce should extend the 50% shipping rule,. without publica-
tion, to feed grain shipments to the East European countries,,other;,than
Poland, Romania and Yugoslavia. As previously noted, the requirement was
not. applied to the latter three countries because both wheat and feed
grain could go to them under Commerce Department general license in
accord with the U.S. policy to treat them more liberally than other
Communist countries. It is understood that the Unions and the ship
owners knew of and accepted those procedures.
cv
By late 1964, it was decided that.it would not be commercially feasible
to apply the 50-50 requirement to a single cargo (10,000 tons) of feed
grain to a restricted East European country. The exporter in the particular
* Publication of the restriction for wheat shipments was in Commerce Current
Export Bulletin No. 890 (March.11, 1964).
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case was allowed to ship it in a 10,0.00 ton foreign-flag ship, but was'
cautioned by Commerce that any subsequent licenses would be subjected to
the 50-50 rule, calculated retroactively to include this first shipment.
'Part-Cargo Exception
The genesis of the
part-cargo exception to,the 50-50 rule is, as
follows: In late 1964, an exporter applied for a license to ship 23,000
tons of corn to East Germany as part-cargo on a large (30,000 ton) foreign-
flag vessel, along with 7,000 tons of other goods which were to be unloaded
a West European port. Although this shipping arrangement was approved
in principle, no license was issued in the particular case because the
transaction fell through. Other exporters, however, later applied for
and were allowed licenses on a similar basis. In theory, the foreign-
flag ship could first unload the other cargo in the West European port or
Mediterranean and then proceed to a port in a restricted East European
country to unload the balance of the cargo. This proved not generally
commercially feasible. Most cases in which such licenses were issued have
therefore involved unloading the full cargo in the free world port, with
inland or other transshipment of the portion licensed to the restricted
East European country by other means of transportation. No published
regulation deals with this procedure.
Since each such license application is in effect treated as a separate
transaction, this so-called part-cargo unloading practice, is essentially a
relaxation of the unpublished 50-50.rule. As previously stated, doing away
laith the part-cargo rule above would put exporters back'in the situation of
;.laving to ship under the unpublished 50-50 rule, unless that rule too were
dropped.
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A modest improvement could be made in operation of the part-cargo
rule by treating Poland and Romania (in addition to Yugoslavia) as if
they were "free world" destinations for the purpose of destining and
unloading the first part of a cargo in their, ports and for allowing the
onforwarding of the "balance" from their ports to restricted countries
like Czechoslovakia, E ast'Germany, Hungary and Bulgaria. Over-all,
however, the real issue is still the 50-50 cargo preference rule and the
potential labor union and ship owner reaction to relaxing or doing away
with it.
As stated, the officials ,of the several departments and agencies
who took part in this study; have not been able to ascertain clearly:
1. Whether the unpublished 50-50 shipping requirement on
shipments of feed grains to certain countries of Eastern Europe, other
than the USSR,,was imposed, as part of the Administration's effort to
induce the Longshoremen's Union to load the grain ships.
2. Whether the unpublished part-cargo unloading exception to,
the unpublished 50-50 shipping requirement on feed grains to certain East
European countries was specifically made known to and accepted by the
labor unions concerned.
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CONCLUSIONS
The issue raised in this study is whether economic and foreign policy
benefits considered likely to result from removal of these U.S. restric-
tions on wheat and feed grain sales to the USSR and certain East European
countries outweigh possible detriments that might result from political,
labor and ship owner objections to such action, 'including labor reprisals
and the difficulty of doing.anything effectively about them. The main
conclusions are as follows:
1. USSR and EE have become an important market for wheat and to a
lesser extent coarse grains. In-this crop year (ending June 1967), the
USSR will probably buy about 4 million tons of free world wheat pursuant
to commitments already made with Canada and France. The restricted and
unrestricted countries of Eastern Europe are expected to purchase
approximately 2.5 million tons of wheat from the free world, i.e., Canada
and France, plus some from the U.S. to the unrestricted country of Poland.
In an average, crop year between now and 1969/70, it is unlikely that the
USSR will seek additional wheat'from the free world beyond the 3 million
tons a year already contracted for from Canada. By 1970, under average
conditions, the Soviets may be in the market for'about 1-2 million tons.
If, J however, the USSR were to experience a bad crop, its purchases
would probably be greater.
With respect to all of the East European countries the demand for
free world wheat in an average crop year is estimated to be in the order'
of 2-3 million tons between now and 1970, of which the restricted countries
would take about 1-2 million tons, mainly from Canada and France. In,a
bad crop year, this could rise to about 3 million tons to the restricted
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countries, though their dependence on the free world would be affected
by the availability of supplies from the USSR. Feed grain imports by
the restricted countries of Eastern Europe are likely to be about 0.75
million tons this crop year. Their demand for feed grains will be
increasing through 1970 and, if 1970 is a year of average weather, those
countries might import as,much as 1.75 million tons. If it is a bad
,crop year, they might import more.
2. Competition for Communist wheat markets will be keen because
free world commercial demand (as distinct from food aid) is stagnating.
At'the same time,, wheat production is being expanded in the U.S., Canada,
Australia, Argentina, France and the U.K. This increased production
will be pressing on commercial markets, even if allowance is made -for
their and our increased food aid programs.
3. The long-run U.S. economic advantage lies in our becoming com-
petitive in Communist country markets for grains. The U.S. now accounts
for a quarter of wheat sales to free world commercial markets, but we
make only occasional sales to the restricted East European Communist
countries and the USSR. Under freely competitive'conditions the U.S.
can, in time, gain a share in those markets commensurate with its posi-
tidn in other markets. The U.S. could expect to supply possibly two-thirds
of the coarse grain import needs of the restricted East European countries,
in view of its dominant position as supplier of such grains.
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 4. Full U.S. participation in -rain exports to the restricted East
European Communist countries depends on the removal of the shipping impedi-
ments which make our grains non-competitive. The 50-50 shipping requirement
adds 7-9% to the delivered cost of U.S. grains in the USSR and in the restricted
countries of Eastern Europe. The prohibition of full shiploads in foreign-flag
vessels,can possible add as much as 2-4% to the delivered cost of U.S. feed
grains to some of the restricted countries of Eastern Europe. This part-cargo
.requirement benefits only competing foreign suppliers. Since the extra cost
resulting from the part-cargo exception (when it occurs) is only about $1-$2
per ton, compared with a differential of between $9 and $12 per ton when U.S.-
flagships are used, it can be assumed that all present shipments of U.S. feed
grains to the restricted countries of Eastern Europe move in foreign-flag ships.
5. Removal of the 50-50 shipping requirement would not'increase U.S. wheat
exports to the USSR this crop year. Soviet wheat production is larger than it
has been in any recent year. Moreover,.the USSR has a contractual arrangement
with Canada for 3 million tons each year through 1968/69, and with France for
an additional 1 million tons in this crop year.
6. The U.S. could make additional feed grain sales in the future to the
restricted countries of Eastern Europe, if we were free of the unpublished :50-50
shipping preference and part-cargo unloading exception. With these restrictions,
we probably will sell this year between 250 and 300 thousand tons of feed grains
to. the restricted countries of Eastern Europe. Without them, we may, by 1970, be
able to double, or even more than double, that volume, to those countries; while
with the restrictions there would probably still be some growth, it is
believed that the amount would be signficiantly less.' Indeed, it is believed
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that without the restrictions some additional amount might. still be sold to
on,- or more of these countries before the end of this crop year (June 30, 1967).
7. The U.S. balance of payments could gain in the long run from removal of
these special shipping requirements. This could be on the order of $100 million
annually from wheat sales and as much as $50 million a year from feed grains, by
1970/71, assuming average crop conditions. However, in the absence of a Vietnam
settlement,. we believe the Soviets would have to be faced with a pressing need,
with'no,other alternatives, before they would buy U.S. wheat. Other factors,
such as ability to'pay, will also affect the level of purchases by the East
European restricted countries.
8. Our ability to maintain a flexible and forthcoming posture in East-West
trade is impaired by existing U.S. impediments to trade in grains. Removal of
theseiimpediments would constitute an important new initiative which would
further the President's objective of encouraging our trade with the USSR and
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other Eastern European countries in non-strategic goods.
9. The removal of the 50-50 shipping requirement for commerical grain
shipments would remove a standing inconsistency with our treaty obligations,
to various friendly countries not to discriminate against their vessels in
foreign commercial trade. Treaties of Friendship, Commerce and Navigation
with 30 countries prohibit such discrimination.
10. the major thrust of the President's policy toward the USSR in the
economic area involves the removal of the various restrictions which have,
served to reduce trade to a minimum. In this case, a restriction which serves'
no real purpose and is a source of annoyance to the Soviets can be removed
without legislative action.
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11. The main obstacle to a removal of these shipping requirements is
the previously expressed or anticipated opposition of the maritime unions.
This is true, even though these requirements, while damaging U.S. economic
and political interests, have demonstrably failed to benefit U.S. shipping.
Opposition centers in the National Maritime Union,. the Seafarer's Inter-
national Union and, most important, the International Longshoremen's
Association, which is in a
position to make its views felt by refusing to
load. The maritime unions have been supported.by the APL-CIO. The par-
ticipants in this study,.neverthele'ss, agree that no repeal or removal of
the 50-50 rule as to wheat for the USSR or for the affected countries of
Eastern Europe should be undertaken without prior consultation with labor
leaders,,to the extent such consultations are warranted by"commitments to
labor. The same is true of the unpublished application to feed grains of
the 50-50 rule and the part-cargo exception for certain countries of
Eastern Europe.
12. There are risks in raising the subject with labor at this time.
If Labor is strongly opposed to rescinding these rules, the risks might
include (a) a boycott on foreign shipping, particularly the vessels of
countries in East-West Trade; (b) shipping tieups-which could interfere
with.::cargo for,Vietnam; (c) labor pressure for extension of,50-50 to all
cargo for the USSR and Eastern Europe, i.e. making shipments now subject
to the part-cargo rule fully subject to 50-50, or extending the present
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 coverage of 50-50 to all countries in Eastern Europe and all cargo to-that
region; (d) heightened labor opposition to further U.S. East-West trade
initiatives; and (e) labor insistence on a larger government'assistance to
the U.S. maritime industry to'offset the real or imagined injuries'of
rescinding present restrictions. Although U.S. flag shipping is fully
employed now and for the foreseeable future in the Vietnam sea,lift and the
carriage of Agriculture and AID cargoes, there are still risks in raising
this issue with labor at this time.
13. Uncertain Nature of Commitment to Labor. The basis for applying
the,'50-50 shipping requirement, and the part-cargo exception, to feed grains,
is not a matter of record in any of the agencies participating in this study.
Therefore, the exact nature of any commitment to labor on these unpublished
rules is uncertain. However, government officials in the several agencies
(Labor, Maritime Administration and State) which deal with the maritime
labor unions are of the opinion that the 'operation of the various restrictions,
both written and unwritten, is known to the labor unions.
14. Discussions with labor might better be addressed to the cooperation
of maritime unions With.government programs to improve East-West trade
relations. Putting the narrow question
of rescinding these or some-part of
these regulations to labor invites a confrontation, whereas, in a broader'
context, this issue becomes only one element in seeking the major foreign
policy objective of improved East-West relations.
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 Approved For Fjease 2002/
RECOMMENDATIONS TO THE PRESIDENT
1. The 50-50 shipping rule and part-cargo exception only interfere
with possible sales to Communist countries that would benefit our agri-
cultural sector and our balance-of-payments, and they are of no benefit
to American labor.
2. There probably would be political costs in eliminating the .50-50'
requirement as related to the Soviet Union because of the "dug-in" labor
position on handling cargo for the USSR. Eliminating the part-cargo
exception alone. would not be helpful as it would leave.the more restrictive
50-50 rule in effect.
3.. It would be desirable to have both the 50-50 and part-cargo require-
ments eliminated. With respect to wheat, there would be no special advan-
tages in seeking elimination of the restriction this year as no large sales
are in prospect. However, getting rid of the 50-50 rule and the part-cargo
exception on feed grains to the restricted countries of Eastern Europe
(Albania, Bulgaria, Czechoslovakia, East Germany,. and Hungary) might permit
some increased sales even now. Indeed, in connection with the proposed
U.S. mission seeking markets for feed grains in various East-European
countries, it is important that we be prepared to remove restrictions on
shipments of feed grains. We,doubt that such a mission could be expected
significantly to .expand U.S. feed grain sales to the restricted countries,
if the restrictions are maintained.
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-. r:.I SJ Ja fiV IJJ j Y.~__
C. Seek the much more limited objective of allowing part-cargoes
APPROVE:
Make no change in the existing rules at the present time.
of feed grains to be unloaded in the unrestricted countries of Pbland and'
Rumania, just as they presently maybe unloaded in West European and
Mediterranean ports, including Yugoslavia. This could reduce the unloading
cost and thus facilitate increased sales of feed grains to Hungary and
Bulgaria, and possibly also to East Germany and Czechoslovakia.
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OjOiffl: }W' ;orell, Jr.
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