Chaff in the Great Grain Deal

When it was first announced last summer, the $1.1 billion grain sale to the Soviet Union was almost universally applauded. It promised to be a boon for U.S. farmers, a welcome assist to the nation's balance of payments and a step toward warmer relations between East and West. For all its genuine long-term benefits, however, the largest two-nation grain deal in history has produced a bumper crop of trouble. Now, as public discontent grows over rising food prices, the Administration's feckless handling of the transaction is being widely condemned.

Many farmers feel cheated because they let go of their wheat crop at about $1.35 a bu. in the early summer of 1972, before the Soviet purchases and heavy buying by other nations helped push the price received by farmers to more than $2 a bu. Congressmen are miffed that grain companies and ship operators collected needless federal subsidies. Shippers are recovering from a nationwide transportation tie-up that resulted from grain dealers' scrambling for freight cars to transport grain, much of it to the Soviets. Consumers have particularly good reason for anger: the deal contributed to a grain shortage in the U.S., driving up prices for bread, meat, poultry and dairy products.

Last month the General Accounting Office charged the Agriculture Department with "weakness in managing" the sale. Last week the Senate Permanent Investigations Subcommittee took up the grain sales in hearings marked by heated exchanges between Chairman Henry M. Jackson of Washington and Agriculture Secretary Earl Butz. Jackson called the grain sale "a monumental blunder born in Government secrecy and bureaucratic negligence."

That somewhat overstates the case. The grain deal was an important element in the Administration's policy of political as well as commercial detente with the Soviet Union. It opened up that country as a potentially important market for U.S. farm products. The sales accounted for more than one-fifth of the 60% rise in U.S. agricultural exports in the past fiscal year, to about $13 billion. The Soviet deal was not entirely responsible for the present farm shortages and sky-high prices. Japanese and Europeans bought far greater amounts than usual of U.S. agricultural goods last year.

By any measure, however, the Soviet purchases were so surprisingly large that they disrupted the U.S. market. When the Russians came to Washington in June 1972, to seek financing for what was then a $750 million sale, they left the impression that they would want mostly such livestock feeds as corn and soybeans, of which the U.S. then had plenty. As it turned out, the Russians bought about 433 million bu. of wheat, 246 million bu. of corn and 37 million bu. of soybeans.

There is no doubt that the Agriculture Department proved remarkably inept in the Russian deal; it erred on at least four counts:

1) Officials ignored early evidence--including explicit and repeated warnings starting as early as February from a U.S. agriculture attache in Moscow --that a frost-and drought-stricken harvest in 1972 would force the Soviets to make massive purchases of U.S. grain.

2) The Soviets dickered separately with U.S. grain companies, and the Agriculture Department did almost nothing to monitor the purchases. Thus the Soviets were able to keep U.S. businessmen and farmers in the dark about how much grain they were buying at bargain prices that were kept low by Government export subsidies. This lapse occurred even though the dimensions of the deal should have been apparent to the department. Executives of three major grain dealers--Continental Grain Co., Cargill Inc. and Louis Dreyfus Corp.--told the Jackson subcommittee last week that they had separately notified Assistant Secretary Carroll G. Brunthaver of the magnitude of the Soviet grain needs shortly after their negotiators were approached by the Soviets. Brunthaver testified. "I do not recall receiving any such information."

3) Butz failed to move quickly to stop Government export subsidies to the grain companies. If the domestic wheat price exceeded a target level of about $1.63 a bu.. including transportation from the farm to Gulf ports, an exporter could claim a subsidy for the difference. When the Soviets started ordering last summer, the subsidy was about 6-c- a bu. Incredibly, Butz's office let the payments continue for nearly two months after the first sales, until the subsidy swelled to 47-c-. If the handouts had been halted, the export price of wheat would have shot up, and the Russians would have had to pay more or buy less. In effect, the Government was unnecessarily paying part of the bill for the Soviets, even though they were desperate to buy. Finally, congressional complaints and pressure from the Office of Management and Budget stopped the hemorrhage of funds last August--after $300 million had been spent or pledged.

4) Even after it became apparent that the Soviets were on their way to acquiring one quarter of the entire U.S. wheat crop, Butz did nothing to put more farm land into production. This would have increased supplies and helped hold down prices this spring. Instead, earlier in 1972, Butz had actually moved to decrease the growing acreage. He did this by a policy of raising wheat "set-asides" (land that the Government pays farmers to keep idle) from 20 million acres to 25 million acres. It was only in early 1973, at the vigorous prodding of the Cost of Living Council, that Butz agreed to reduce set-asides to 7.4 million acres. At long last, the Administration two weeks ago said that it will remove all production controls on wheat and other basic crops this year in order to fight inflation.

In his defense. Butz last week told TIME Correspondent John Berry: "As late as last August, we had adequate stocks of wheat even with the Russian sales. What we did not foresee was the drought in India, the problems in Bangladesh, the short crop in Australia. Everybody was pressing us then, including Senator Jackson, to do something to raise the prices that farmers were getting. If he had been sitting in my seat, he would have made the same decision. I make no apology for my desire to raise farm prices."

Though some farmers complain that they did not make more on the deal, the fact is that their income jumped by $2.3 billion last year, to $19.6 billion, and no small amount of the gain is traceable to the sale to the Soviets. The Soviets also profited; they may have saved as much as $100 million by buying at the low, subsidized U.S. price. But no one else made much of a killing. Continental Grain officials testified last week that the company earned "less than normal profits" on the deal. Cargill actually lost about 1-c- a bu. on the approximately 73 million bu. that it sold to the Soviets--in part because of snags in the export-subsidy program. For example, the subsidies did not always cover the extra expenses caused by transportation tie-ups.

The deal has certainly cost U.S. consumers more in the form of higher food prices, although probably less than they suspect. Grain accounts for only about one-sixth of the retail price of bread. The increase in wheat prices since the spring of 1972 has added 1-c- or 2-c- to the retail price of a 1-lb. loaf of white bread. Other wheat-based products have gone up still more.

The deal is rich in lessons. One has already been applied: to prevent another unexpected foreign run on U.S. food supplies, the Commerce Department has set up a mandatory reporting system that requires grain exporters to file weekly reports of their sales.

Another caveat that could be too easily forgotten: the Soviets have proved to be impressively shrewd traders, eager and able to squeeze the last kopeck out of any transaction with capitalists. That kind of canny negotiating should give pause to the hundreds of U.S. executives who are rushing to do business with Moscow, especially those who want to exploit Siberian natural gas. In that deal, unlike the grain sales, the Soviets will be the sellers in a sellers' market.

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