Grain, Energy Cars Up

Though the Ford Administration long ago stopped calling inflation "Public Enemy No. 1, "price increases and the prospect of more are dominating the news to a surprising extent in the early days of economic recovery. Last week brought a mixed bag of actions. The Soviets let the U.S. Government know that they want to buy additional U.S. grain in quantities that--if the sales were permitted--would be very inflationary. President Ford decided finally to permit removal of controls on oil prices, gambling that increases will be relatively modest, and General Motors announced boosts in car prices smaller than in the past two years, but still substantial. Details:

Rationing the Soviets

Rumors have been widespread in Washington and the nation's grain-trading centers that the Soviets, having already bought 9.8 million tons of American grain, would shortly be back for more. Last week TIME learned that the talk is only too true. In secret communications to the Ford Administration, the Soviets have indicated that they want to buy as much as 11 million additional tons. That would push total purchases this year about a third above the 15 million tons of grain* the Soviets bought during the "Great Grain Robbery" of 1972, when they secretly gobbled up enough of the U.S. crop to help trigger an inflationary rise in food costs. Indeed, a purchase of some 21 million tons would amount to approximately 10% of this year's estimated grain crop.

The Russians, however, almost surely will not get their way completely. To the displeasure of U.S. farmers eager to make more big sales, the Soviets in effect will be rationed to a portion of their wants--how large a portion, the Ford Administration must soon make up its mind. Secretary of Agriculture Earl Butz last week renewed a request to all U.S. grain exporters to refrain from negotiating any more sales to Moscow until further notice. (The Administration has no statutory authority to order such a suspension, but grain-export companies obey Washington's wishes.) The notice is not likely to come until after the bulk of the U.S. harvest is reaped and counted in September. Butz emphasized that "we do want to sell more to the Soviet Union" and said that if current U.S. crop forecasts prove correct, "it will easily be within our capacity to do so." Still, the U.S. could hardly spare the entire amount that the Soviets want without serious inflation.

Butz's wait-and-see attitude was based largely on three considerations:

1) Lower U.S. crop forecasts. According to early estimates, the harvest of '75 was to be the bin-buster of all time, considerably exceeding even the record 1973 crop. Owing to a corn-damaging drought in Iowa and some flooding in Minnesota, Department of Agriculture experts last week revised their predictions slightly downward. The wheat harvest is now expected to be 2% less, at 2.14 billion bu.; and corn will come in 3% lower at 5.85 billion bu.

2) Bad Soviet harvest. With its customary secrecy, the Soviet Union refuses to supply accurate information about future grain needs. Last month, however, a U.S. Department of Agriculture team was allowed to examine virtually all major Soviet agricultural areas. The findings: because of sparse snowfalls that ruined much of the winter wheat and a drought that decimated the summer plantings, the Soviet grain harvest will fall roughly 25 to 30 million tons below the 215 million-ton goal. The CIA, using different sources, reportedly puts the shortfall at a stunning 50 million tons --far more grain than the Soviet Union can hope to buy on the world market.

3) Rising grain prices. In response to the lower U.S. crop forecasts and early Soviet buys, grain and meat prices on the nation's futures markets are continuing to climb. Quotations for wheat and corn last week rose 5%; hog futures, a prime indicator of the anticipated price of corn, hit a record $1.05 per Ib. Agriculture Department experts think American farmers are holding some crops in storage waiting for still higher quotes, and these experts hope that release of the food will push prices down later this year. Meanwhile, though, retail food prices in June rose at an annual rate of 25.3%.

In deciding how much grain to make available to the U.S.S.R., the Administration must also consider protecting the role of dependable supplier to established and more reliable export buyers. Agriculture sales are the nation's second largest export after machinery. Last week Japan's Agriculture Minister Shintaro Abe signed a three-year pact to buy 14 million tons of U.S. grain and soybeans annually. "We are not like the Russians, who come into the market every three years," declared the Japanese minister. "We buy regularly, and we feel this should be given due consideration by the U.S." India, the Common Market and other regular customers are also lining up to increase export orders.

The U.S. cannot expect to hold domestic food prices within bounds and remain a dependable grain supplier to much of the world if it opens its granaries to periodic and disruptive incursions by Soviet traders. Secretary Butz hopes the Soviets will begin to behave like ordinary customers who will announce their grain requirements in advance. But if Moscow remains reluctant to play by the rules, the U.S. will be forced, just as Butz has now done, to make special ones. There is increasing sentiment in Congress that those rules should include the establishment of a licensing agency along the lines of the Canadian Wheat Board, which would review Soviet and other foreign applications before allowing the traders to approach American grain salesmen.

Ending Oil Controls

Vacationing on the green slopes of Vail, Colo., President Ford ended last week what suspense remained in the seven-month-long battle between the White House and Congress over oil price controls. He will veto, said the President, the six-month extension of the controls that Congress has passed and will officially send to him by month's end. If his veto is upheld, as previous ones have been, controls will end on Aug. 31, and the 60% of U.S.-produced oil that has been held to $5.25 per bbl. will be free to rise. The Administration hopes the climb will discourage oil use and spur domestic production.

To "cushion the economic impact" of sudden decontrol, Ford announced he will remove a $2-per-bbl. tariff on imported crude and a 60-c--per-bbl. fee on foreign refined products. That will cut the selling price of foreign oil to American consumers from its present $14.50 per bbl. and in effect lower the market ceiling toward which domestic oil prices could rise. If Congress overrides his veto of the controls extension, Ford has threatened to reinstate the tariff.

Last week the U.S. court of appeals in Washington ruled that Ford had exceeded his authority by imposing the tariff and fee in the first place. White House lawyers will challenge the ruling, even though the President intends to drop the levies anyway, because 1) the Government would like to hold on to some $1.2 billion already collected or due to be paid in import fees, and 2) Ford wants his authority to impose oil tariffs clarified. If the U.S. Supreme Court decides to take on the case and upholds the ruling, the Treasury will have to refund the $1.2 billion to oil importers.

To further soften the blow of decontrol, the Administration last week announced it will propose a "windfall profits tax" on oil companies. Details were not spelled out, but they are likely to follow a plan approved last month by the Senate Finance Committee. That plan, which involves an excise tax on crude oil, would take away as much as 90% of the money that oil companies will get from increases in the price of decontrolled crude and return much of the cash to adult citizens through income tax credits or refunds between $24 and $85 a person each year until 1981.

Guessing Games. The big question is how fast and how far oil prices will in fact rise and how much the increase may impede the recovery by draining away consumer purchasing power. Administration economists are increasingly sanguine. Their latest estimate is that because of decontrol the price of gasoline will rise only 3-c- a gallon, and the nation's total oil bill will go up only $5.3 billion over the next twelve months. Main reason for their optimism: a belief that stiff competition among oil companies resulting from a world glut of crude will keep the price increases moderate.

In sharp contrast, some political liberals, drawing on a congressional staff study, estimate that decontrol would contribute to a rise of as much as $40 billion in consumer living costs during the next year, or $400 to $800 for the average family of four. Those figures are probably too steep: they reflect guesses on how much oil increases might pull up prices of natural gas and coal and a belief that the $2 tariff would be retained, which has already been proved wrong. They also suggest a fear that higher oil prices will drive up prices of petrochemicals and many other products. The possibility of such a "ripple effect" is real indeed, though the congressional study may have overestimated it.

The coming end of controls represents a political victory of sorts for Ford. Congress rejected two presidential plans for a more gradual lifting of the price lid, partly because some Democrats convinced themselves that Ford would not dare to end the controls altogether. In doing so, the President is making a calculated economic and political bet. If it wins, the U.S. will take a long step toward energy self-sufficiency at a relatively low cost. If it fails and big increases fan rapid inflation, the recovery that gained momentum in July could well falter--just as the 1976 elections draw near.

*The Soviets in 1972 also bought 4 million tons of soybeans, which are not a grain; they are not buying soybeans this time around.

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