ISSUE PAPER U.S.-U.S.S.R GRAIN AGREEMENT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R001700200010-6
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 11
• Document Creation Date: December 20, 2016
• Document Release Date: April 4, 2007
• Sequence Number: 10
• Publication Date: July 14, 1982
• Content Type: MEMO

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THE WHITE HOUSE
WASHINGTON
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CABINET
DATE: 7-14-82 NUMBER: 07738ocA
SUBJECT: FULL CABINET MEETING - JULY 15, 2:00 PM
DUE BY:
ACTION FYI
ALL CABINET MEMBERS
Vice President,
State
Treasury
Defense
Attorney General
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Education
Counsellor
OMB
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UN
USTR
CEA ^
CEQ ^ ^
OSTP e ^
REMARKS:
Baker
Deaver
Clark
Darman (For WH Staffing)
Harper
Jenkins
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CCCT/Gunn
CCEA/Porter
CCFA/Boggs
CCHR/Carleson
CCLP/Uhlmann .
CCNREBoggs
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Attached is the revised paper on U.S.-Soviet Long-Term Grain
Agreement/CM242, which incorporates comments received by
interested departments, for the July 15 Full Cabinet Meeting.
RETURN TO: ^ Craig L. Fuller ELI Becky Norton Dunlop
;Assistant to the President Director, Office of
A nnrov .d SAMa"/04/04 ? IA-RD k M&U61700200010-6
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Issue
The current U.S.-U.S.S.R. Grain Agreement will expire on
September 30, 1982. The Administration must decide whether it
wants a formal arrangement (and, if so, what kind) to govern
U.S.-U.S.S.R. grain trade after September 30.
I. Background
U.S.-U.S.S.R. Grain Trade Prior to 1975. An unfavorable
.climate, poor soil, backward technology, and an extremely
inefficient agricultural system make periodic crop failures in
the Soviet Union a virtual certainty. As a result, the Soviets
have, during the last twenty years, imported increasing. amounts
of grain to accommodate their domestic needs.
Soviet purchases from the U.S. were relatively modest until
1972, when the prospect of a major crop failure prompted them
to buy, over a two to three month period, 19 million metric
tons (mmt) of U.S. grain, including one-fourth of the total
U.S. wheat crop. The Soviets made their purchases quietly and
early, before prices adjusted to the sudden increase in demand.
The Soviets also were ,able to capitalize on USDA's wheat export
subsidy program and a recently negotiated credit arrangement.
These circumstances, as well as the domestic market disruption
caused by the massive grain purchases, led critics to label the
U.S. sales as the "great Soviet grain robbery."
The U.S.-U.S.S.R. Grain Agreement. The summer of 1975 brought
new reports of a looming Soviet crop failure. These reports,
coupled with the desire to avoid a repeat of the 1972 scenario,
prompted the Ford Administration to suspend grain sales to the
Soviet Union until an arrangement could be worked out that
would prevent Soviet disruption of U.S. domestic markets and
guarantee U.S. farmers a reasonable share of the Soviet market.
The ensuing negotiations with the Soviet Union produced an
agreement with the following provisions:
~ Jot referred to USDA. \/ l i er
plies.
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o The Soviets agreed to purchase 6 mmt of U.S. wheat and
corn, in approximately equal proportions, during each of
the five years covered by the agreement;
o The Soviets can purchase up to 2 mmt more of U.S. grain
during any year without consultations with the U.S.;
o The U.S. agreed not to embargo exports of up to 8 mmt of
grain to the Soviet Union;
o The Soviets are required to consult with the U.S. (to
determine a higher supply level) before buying more than
8 mmt of grain in any given year;
o There is an escape clause for the U.S. in the event of a
major U.S. supply shortage;
o Soviet purchases must be made at prevailing market prices
and in accordance with normal commercial terms..
o The Soviets agreed to ship the grain under the terms of
the U.S.-U.S.S.R. Maritime Agreement;
o The Soviets are required to space their grain purchases
and shipments as evenly as possible over each 12-month
period.
Since the agreement, there has been greater stability in world
grain trade and in Soviet purchasing patterns. Under the
agreement, the U.S. has expanded its share of the Soviet
market (see Appendix). Over this period, Soviet demands'for
grain have increased more rapidly than their production,
resulting in a higher level of Soviet grain imports.
The Soviet Grain Embargo of 1980. On January 4, 1980, in
response to the Soviet military invasion of Afghanistan,
President Carter cancelled contracts for the sale of 13.5 mmt
of U.S. corn and wheat to the Soviet Union. The U.S. also
denied the Soviets access to an additional 3.5 mmt of grain
which had been offered to, but not yet purchased by, the
Soviets. Finally, shipments of soybeans, broilers, and some
other agricultural products were halted.
The Soviets were able to minimize the effects of the embargo by
drawing down their grain stocks and by increasing grain,
soybean, rice, flour, and meat imports from Argentina, Canada,
Australia, and the European Economic Community.
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The Soviets have since entered into new long-term purchasing
agreements with Argentina, Brazil, Canada, Hungary, and
Thailand, in an attempt to diversify their sources of supply,
resulting in a declining share of the Soviet market for U.S.
farmers.
In April 1981, President Reagan lifted the Soviet grain
embargo. This was followed by an agreement in August to extend
the expiring U.S.-U.S.S.R. grain accord for an additional year,
through September 30, 1982. In October 1981, the U.S. offered
the Soviets an additional 15 mmt of grain, raising to 23 mmt
the amount of U.S. grain available to the Soviets during fiscal
year 1982. To date, the Soviets have purchased a total of
13.9 mmt of U.S. wheat and corn.
U.S. Sanctions Against the Soviets in the Aftermath of the
Polish Declaration of Martial Law. Discussions concerning
negotiation of a new U.S.-U.S.S.R. long-term grain agreement
were under way within the Administration when the Polish
government declared a state of martial law in December 1981.
When the Soviet Union failed to respond to U.S. urgings to help
restore basic human rights in Poland, the President announced a
number of sanctions against the Soviets, including postponement
of negotiations on a new grain agreement and suspension of
negotiations on a new maritime agreement.
II. Discussion
Soviet Import Demands. Soviet grain production has declined
sharply during the past three years, after more than a decade
of steady growth. Following a record crop of 237 mmt in 1978,
the Soviet harvest fell to 179 mmt in 1979, 189 mmt in 1980,
and reportedly to 158 mmt in 1981, nearly one-third below
target. To avoid massive shortages, the Soviets have imported
more than 100 mmt of grain since June 1979. During the
marketing year ending this June, Moscow is expected to import a
record 45 mmt of grain.
Soviet hard-currency outlays this year for all agricultural
commodities -- including grain, other feedstuffs, meat, sugar,
and vegetable oil -- will probably reach some $12 billion, up
about $1 billion from last year, and a sharp increase from the
roughly $8 billion spent in 1980. Altogether, food imports now
account for roughly 40 percent of total Soviet hard-currency
purchases.
Even with a strong recovery in domestic grain production,
Moscow will continue to import large amounts of grain, an
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estimated 45 mmt of grin during *the next marketing year
(July 1982-June 1983). The ultimate level of Soviet grain
imports during the next marketing year will depend on:
o The size of the 1982 Soviet grain crop. USDA recently
reduced its projection for the 1982 Soviet grain crop
from 185 to 170 mmt;
o The extent to which the Soviets decide to maintain or
expand livestock inventories;
Hard-currency constraints. Increasing Soviet hard-
currency constraints or a decision by Western bankers to
curtail short-term credits could hamper Moscow's import
intentions;
o U.S.-U.S.S.R. trading relations;
o The extent to which the Soviets will allow increased
dependence on imported grains; and
o Soviet port capacity. Currently Soviet grain import
capacity is 45-50 mmt per year.
Soviet officials recently announced ambitious production goals
for grain and livestock for the remainder of the 1980s. They
also expressed their intention to reduce imports of foodstuffs
from capitalist countries. The history of Soviet agriculture,
however, suggests that achieving increased livestock production
goals will be extremely difficult if the Soviets reduce grain
imports.
U.S.-U.S.S.R. Grain Agreement in the Context of the World Grain
Market. It is doubtful that a long-term grain agreement
between the Soviet Union and the United States would have much
effect on the total U.S. share of world grain trade during the
next marketing year. However, the existence or absence of such
an agreement is likely to have a significant impact on world
grain trading patterns in future years. If, by failing to
negotiate a formal trading arrangement, the Soviets were
discouraged from satisfying their import demands in the U.S.
market, they would have to seek new sources of supply. The
prospect of servicing a consistently large buyer, such as the
Soviet Union, would prompt other exporting countries to further
increase their production. (Since the 1980 Soviet grain
embargo, Argentina and Canada have increased their grain
production by roughly 25 percent.) This increased production
would compete with U.S. grain in world markets, reducing the
U.S. share of the growth in global grain trade.
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U.S. Foreign Policy Considerations. The U.S. is pursuing, and
encouraging its allies to pursue, a general policy of economic
restraint with the U.S.S.R., based upon fair burden sharing in
the West. A government-to-government agreement, especially one
perceived as newly-negotiated, that promotes grain exports,
would be regarded as an exception to that policy.
More specifically, negotiations with the Soviets would signal
an end to one of the President's measures against the U.S.S.R.
in response to the Poland crisis, undercutting the general
package of Poland-related sanctions, and implying that _ the
situation there has improved and that the U.S. is prepared to
adopt a "business as usual" stance. The Soviets could be
expected to promote this interpretation vigorously.
Resuming negotiations would conflict with the decision to
extend extraterritorially sanctions on oil and gas equipment
and technology. In the absence of real changes in Poland,
resuming negotiations would undermine U.S. credibility on
burden sharing and U.S. efforts to induce its allies to
exercise restraint in credit and trade arrangements with the
U.S.S.R.
U.S. Domestic Considerations. The U.S. farm sector is
experiencing serious economic hardships due to over-abundant
grain supplies, high interest rates, and a cost/price squeeze.
Pressure is being applied on the Administration to provide
various forms of assistance for farmers, including paid land
diversions, export subsidies, increased food assistance, and
higher price supports.
The negotiation of a new' long-term U.S.-U.S.S.R. grain
agreement that guarantees U.S. farmers higher minimum sales
to the Soviet Union would be viewed by the agricultural
community as a positive step in U.S.-Soviet grain trade and
as a demonstration of the Administration's commitment to the
agricultural sector. It would be perceived by the farm
community as consistent with the central feature of the
Administration's farm policy -- increasing agricultural
exports. Farmers regard the U.S.-Soviet grain agreement
issue as the litmus test of the Administration's commitment
to the agricultural sector.
The U.S. maritime industry and labor share a common concern
over the arrangements for shipping grain from the U.S. to the
Soviet Union. In the absence of a new U.S.-U.S.S.R. maritime
agreement, U.S.-flag vessels would be effectively precluded
from participation in carrying grain to the U.S.S.R. Such a
development could have an adverse impact on the cooperation of
U.S. maritime labor in implementing any grain agreement.
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III. Options
Option 1: Allow the existing U.S.-U.S.S.R. grain agreement to
expire without providing for any formal agricultural
trading arrangement between the two countries after
September 30, 1982.
Advantages:
o Would be consistent with the President's policy of
postponing negotiations on a new long-term grain
agreement with the Soviets until there were
improvements in the Polish situation.
o Could be presented as the Administration's attempt to
reduce government intervention in the international
marketing of U.S. agricultural products.
o Would end the no-embargo guarantee which gives the
Soviets special treatment not accorded to other
buyers, and limits the President's foreign policy
flexibility.
o Would be most consistent with our overall Soviet
policy and with the recent decision on the pipeline.
Disadvantages:
o Would give the ,Soviets unrestricted access to the U.S.
grain market and could lead to disruption of the U.S.
grain market if the Soviets were to resume their
erratic purchasing behavior of the early 1970s.
o Farmers would'view lack of an agreement as eliminating
their chances for maximizing their share of grain
sales to the Soviet Union, and this would be perceived
as undermining the President's commitment to help
increase agricultural exports.
o Could lead to the lowest level of U.S. grain exports
under any of the options, and thus increase federal
outlays for agricultural price support and production
control programs.
o Would eliminate one more ongoing U.S.-'U.S.S.R. tie,
and could affect the atmosphere of the upcoming U.S.-
U.S.S.R. summit.
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Option 2: Extend the existing U.S.-U.S.S.R. grain agreement
for one year.
Advantages:
o Would maintain a formal trading arrangement that would
assure U.S. farmers of some access to the Soviet
market and insulate domestic users from possible
Soviet disruption of U.S. markets.
o Would continue the status quo, thereby blunting the
charge that the U.S. was making a concession to the
Soviets in the absence of an improvement in the Polish
situation.
o Would allow for a more positive trade atmosphere with
the Soviets than there would be in the absence of an
agreement, and thus would leave open the.possibility
of entering into negotiations on a new long-term grain
agreement subsequent to an improvement in the Polish -
situation.
Disadvantages:
o Would be perceived by U.S. farmers as harming their
chances for maximizing their share of grain sales to
the Soviet Union and thus undermine the President's
commitment to help increase farm exports.
Could be perceived as a weakening of U.S. sanctions
imposed against the Soviets as a result of the Polish
situation, and conflicting. with the recent decision on
sanctions on oil and gas equipment and technology.
o Could undermine ongoing U.S. efforts to enlist the
support of its allies in restricting government
credits to the Soviet bloc.
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Option 3: Extend for two or more years the existing
U.S.-U.S.S.R. grain agreement amended to provide
higher minimum purchase requirements.
Advantages:
Would insulate domestic consumers from possible Soviet
disruption of U.S. markets for a longer period.
o Ensures higher minimum farm exports to the Soviet
Union under all market conditions, demonstrating the
President's commitment to increasing agricultural
exports.
Disadvantages:
o Would signal a U.S. retreat from the sanctions imposed
in response to the Polish situation and could undercut
our efforts to secure changes in the policies of the
Jaruzelski regime.
o Would undermine ongoing U.S. efforts to enlist the
support of its allies in restricting government
credits to the Soviet bloc. Our allies would view
this option as inconsistent with the pipeline.
decision. It would damage our credibility with the
allies on burden-sharing.
o Would broaden the no-embargo guarantee to higher
amounts, enhancing the special treatment given to
the Soviets.
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Option 4: Negotiate a totally new U.S.-U.S.S.R. grain
agreement.
Such an agreement might include four basic features:
1. A minimum purchase level for the grains covered under
the agreement. The minimum purchase level would be
adjusted each year on the basis of a two-year moving
average of actual Soviet grain purchases.
2. A "prior consultation level" -- expressed as a
percentage above the minimum purchase level --
beyond which the annual Soviet purchases could
not go, without prior consultation with the U.S.
3. A provision to encourage the Soviets to buy
value-added agricultural products.
4. A provision that any decision on supply- availability
above the prior consultation level would require
commitments on both sides to purchase and sell
specific amounts.
Under current international circumstances, it is highly
unlikely that the Soviets would agree to a new agreement that
would be viewed as an increase in U. S. leverage over Soviet
affairs.
Advantages:
o Would achieve a greater integration of the U.S. and
Soviet trading. systems.
Would assure U.S. farmers a reasonable share of the
Soviet market, based on actual levels of grain trade.
0 Would force the Soviets to be more forthcoming with
respect to their buying intentions.
Disadvantages:
o Would signal a U.S. retreat from the sanctions
imposed in response to the Polish situation, and
could undercut our efforts to secure changes in the
policies of the Jaruzeiski regime.
o Would require protracted negotiations that could
extend beyond the expiration of the current agreement.
o Would provide the Soviets much greater opportunity to
press for stronger supply guarantee provisions.
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U.S.-SOVIET GRAIN TRADE 1973-1982
Total USSR US Grain US Share of Total
Grain Imports Exports to USSR Grain Imports
(mm t) USSR (% )
(mmt)
FY 1973 22.5 14.1
FY 1974 5.7 4.5
FY 1975 7.7 3.2,
FY 1976 25.6 14.9
FY 1977 8.4 6.1 73
FY 1978 22.5 14.6 65
FY 1979 19.6 15.3 78
FY 1980 27.0 8.3 31
FY 1981 38.8 9.5 24
FY 1982 45.0 13.9 31
(projected)