RUSSIAN GRAIN TRANSACTIONS

JULY 29, 1974.-Ordered to be printed

Mr. JACKSON, from the Committee on Government Operations, submitted the following

REPORT

I. INTRODUCTION

In the summer of 1972, the Soviet Union bought over 700 million bushels of grain from the United States. It was the biggest grain sale in American history. Of the 700 million bushels of grain, nearly 440 million bushels were wheat. This purchase represented 25 percent of the total American wheat crop.

The Soviets, through their overseas trading agency, Exportkhleb, bought the grain from six big grain companies.

The sales were hailed by Federal officials as historic achievements in easing tensions between the United States and Russia, in improving America's balance of payments deficits and in allowing American farmers to profitably and usefully dispose of long standing agricultural product surpluses.

However, critics said the grain sales depleted American reserves, created farm product shortages and forced up the price of food for American consumers.

It was also charged that the Department of Agriculture had unnecessarily paid over $300 million in subsidies to support the sales of wheat to the Russians and that, due to poor planning by government officials, freight terminals, shipping lines and Gulf state harbors were tied up to handle grain exports to the neglect of other products.

In addition, there was concern about a possible conflict of interest involving the American official who played a major part in establish

ing the guidelines for the sales with the Russians. This official, Assistant Secretary of Agriculture Clarence Palmby, went to Moscow in April of 1972 as the head of a team to negotiate the grain sales and, in June of 1972, before the negotiations were completed, left the government to become a vice president of the Continental Grain Company, the firm which went on to sell the Russians the most grain.

To look into the many criticisms of the grain sales, the Senate Permanent Subcommittee on Investigations began an inquiry in the early summer of 1973. Public hearings were held July 20, 23 and 24 and October 9, 1973.

II. CHRONOLOGY

THE KISSINGER DIRECTIVES

The Government of the United States, under the Presidency of Richard M. Nixon, sought to improve relations with the Soviet Union by increasing commerce between the two nations. The government encouraged the sale of farm goods to the Russians.

Federal policy was reflected in two White House directives by Dr. Henry A. Kissinger, Assistant to the President.

A January 31, 1972 Kissinger directive for the Departments of State, Commerce and Agriculture stressed the importance of trading more with the Soviet Union and of loaning the Russians money to help them buy American goods.

Dr. Kissinger said:

One of the possible areas for increased trade with Russia relates to agricultural products and CCC outlets. Agriculture should take the lead in a new public discussion. If negotiations with the Soviet Union should take place, the United States team should be headed by a representative of the Secretary of Agriculture. (P. 15.) i

The CCC Mr. Kissinger referred to is the Commodity Credit Cor. poration of the Agriculture Department. The CCC can provide a line of credit would be buyers of American farm products. The Chairman of the Board of the CCC is the Secretary of Agriculture.

A second Kissinger directive, issued February 14, 1972 to the State, Agriculture and Commerce Departments, cited grain sales specifically as an area of expanded trade with the Russians which the President wanted pursued.

Dr. Kissinger said:

The Department of Agriculture in cooperation with other interested agencies should take the lead in developing for the President's consideration a position and a negotiating scenario for handling the issue of grain sales to the USSR. This should include a recommendation on how the private transactions of the U.S. grain sales would be related to Government actions including the U.S. opening a CCC credit line and a Soviet commitment to draw on it. In cooperation with the Department of State, Agriculture should explore with the USSR the time and modalities of beginning such negotiations as soon as possible. This should be submitted to the President by no later than 2/28. (P. 15.)

1 Page and exhibit numbers cited in this report refer to pages and exhibits in the printed hearings.

WORLDWIDE GRAIN SITUATION

The White House desire to sell grain to the Russians came at a time when the United States had considerable grain reserves, when the major nations of the world were short on grain and when early indications were that the Russians might suffer from severe crop losses. From a business point of view, the United States was in a strong position in world grain markets as this nation had more than enough while the rest of the world was in short supply. For example, "The Wheat Situation," a quarterly publication of the Department of Agriculture, reported in its February 1972 edition that as of January 1, 1972 wheat stocks on hand in the United States amounted to more than 1.5 billion bushels, about 700 million privately owned and 850 million bushels controlled by the Agriculture Department's Commodity Credit Corporation. (P. 15.)

RUSSIANS SHORT OF GRAIN

The seriousness of the Russian grain problem was reflected in a February 9, 1972 report sent from the American Embassy in Moscow by the Agricultural Attache, who reported that the winter grain crop had suffered considerable damage and that because the Russians might not meet their annual production goals, they could very likely be in the market to buy sizable quantities of feed grains later in the year. The Attache filed a similar report February 18. (P. 15.)

On February 10, 1972, Izvestia, the official organ of the Soviet government, reported that the Russian grain crop had been damaged and that resowing operations in the Ukraine would be more extensive than usual. (P. 15.)

During the month of February, the Soviet Union negotiated a contract with the Canadian Wheat Board to buy 3.5 million tons of wheat from Canada plus an option to buy an additional 1.5 million tons to be shipped before 1974. (P. 15.)

THE NEGOTIATING SCENARIO

Presidential Assistant Henry Kissinger asked the Agriculture Department to draft a "negotiating scenario" on grain sales to the Russians February 14. The Department responded February 25 in a memorandum for Dr. Kissinger and Presidential Assistant Peter M. Flanigan. The memorandum setting out the scenario was written by Clifford G. Pulvermacher, General Sales Manager, Export Marketing Service, Agriculture Department and approved by Clarence Palmby, his superior. The scenario was, according to Clarence Palmby, "developed by the ad hoc committee under my direction". (P. 39.)

The memorandum proposed that the Commodity Credit Corporation approve a line of credit enabling the Russians to buy privately owned grain from the U.S. In return, the Russians must agree to purchase a certain amount of grain within a specified time. The proposal noted that the purchases would be made through "private trade channels."

The negotiating scenario went on to say that the Agriculture Department would enter into an agreement with the Soviet Union through a "memo of understanding". (P. 16.)

MOSCOW VISITS PLANNED

Agriculture Secretary Earl L. Butz, on March 23, 1972, accepted an invitation from the Russians to visit their country in April.

It was also agreed that the Secretary's visit would be combined with the visit of a team of government negotiators who were to work out the details of an agreement enabling the Soviets to buy American grain on credit. Assistant Secretary Clarence Palmby would head the American team of negotiators. (Pp. 16, 17.)

MORE NEWS OF SOVIET CROP FAILURES

On March 31, 1972, the American Embassy in Moscow reported to Washington that 25 million acres of winter wheat had been lost in the Soviet Union. In addition, Russian farmers were faced with poor conditions for the spring planting due to low soil moisture. (P. 17.)

BRIEFING THE WHITE HOUSE

In early April-the exact date is not known-Agriculture Secretary Earl Butz reported by memorandum to President Nixon on his upcoming trip to the Soviet Union and on what the team of negotiators would seek to achieve in the grain discussions in Moscow. (P. 17.)

Secretary Butz said the team's objective would be to negotiate an agreement whereby the Commodity Credit Corporation would provide credit for the export of grains and the Soviets would commit themselves to buy agreed quantities of grain and possibly other commodities from the United States.

Secretary Butz said that the commodities would be sold through private trade channels, adding that the terms of the agreement would be spelled out in a memorandum of understanding. (P. 17.)

APRIL 1972 MOSCOW MEETINGS

A team of American government officials met in Moscow with Russian leaders to discuss proposed grain sales April 8 through April 14, 1972. The American negotiators were led by Assistant Secretary Clarence D. Palmby and Clifford G. Pulvermacher, General Sales Manager, Export Marketing Service, Agriculture Department. Secretary Butz accompanied the negotiators to Moscow but did not participate in the discussions.

The main issue discussed at the Moscow meetings was the credit terms which the United States was prepared to give the Russians to help them buy American grain. No formal agreement resulted from the April sessions as the Russians rejected the proposed credit terms and the American negotiators returned to Washington. (P. 11.)

During their stay in Russia-on April 11-the team of American negotiators was taken on a tour of Crimea, a peninsula in the southern Ukraine on the north shore of the Black Sea where wheat growing is a major industry.

Of this trip, the American Embassy reported to Washington:

The American party noticed a significant amount of grain winter kill and a general lack of moisture in the Crimean sector. The Russians said it had been dry last fall and there had