My dear Prime Minister:

I enclose herewith a copy of a memorandum which has been prepared in this Department on the subject of United States surplus disposal policies and their effect on Canada's interests, particularly in relation to the marketing of wheat. While it does not purport to bring out anything new, you may find it a useful summary of this important subject.

Yours sincerely,
Donald M. Fleming

[PIÈCE JOINTE/ENCLOSURE]

Note du ministère des Finances Memorandum by Department of Finance

Confidential

[Ottawa], July 17, 1958

U.S. SURPLUS DISPOSAL POLICIES

This study of U.S. surplus disposal policies, particularly the wheat barter programme, was made as a result of U.S. reaction to the Budget Speech reference²⁵⁰to the harm resulting to the Canadian economy from massive U.S. disposals of wheat and other grains.

U.S. EXPORTS OF WHEAT

The United States has, since 1953-54, subsidized all exports of wheat, as U.S. market prices have been supported at levels well above prices in world markets. The amount of the subsidy has varied with changes in U.S. and world market prices but it has been of the order of 70 cents a bushel. In addition, special export programmes of various forms have been responsible for moving a considerable part of total exports. These include sales for local currencies (authorized under Title I of the Agricultural Trade Development and Assistance Act of 1954 - P.L. 480 - and Section 402 of the Mutual Security Act), barter (authorized under several acts whose provisions are reinforced by Title III of P.L. 480) and donations to meet famine and other emergency situations (authorized under Titles II and III of P.L. 480). Special disposals of wheat (including wheat flour in terms of wheat) accounted for 74 per cent of total wheat exports in 1955-56 and 69 per cent in 1956-57. By programmes the quantities exported were:

For all agricultural commodities special disposals amounted to 42 per cent of total U.S. exports in 1955-56 and 42 per cent in 1956-57; the considerably higher figures for wheat are measures of the efforts made to dispose of the massive government-held stocks of this product.

Exports of wheat from the United States in the 1956-57 crop year were the highest on record and accounted for 43 per cent of world export trade in wheat. Disposals under U.S. government programmes were 29 per cent of world exports. Despite this achievement North American stocks of wheat increased because of a decline in Canadian exports and an increase in Canadian carryover. The conclusion is inescapable that the U.S. record was reached partly at the expense of the Canadian wheat grower.

PRICING METHODS

Disposals have been assisted not only by export subsidies and special programmes but also by pricing methods which have reduced the net prices of wheat. In a study entitled Multiple Pricing of American Wheat by Helen C. Farnsworth (Food Research Institute, 1958), an attempt has been made to set down the effective prices under different types of disposal of several grades of U.S. wheat, taking into account concessions granted in interest rates, the CCC payment of ocean transportation costs on sales for local currency and special prices for flour milled for export. The following table shows the calculated prices for 1956-57 of No. 2 Hard Winter wheat at Kansas City.

DISPOSAL POLICIES

On sales for local currency under Title I the President is required to take reasonable precautions to "safeguard usual marketings of the United States and to assure that sales under this Act will not unduly disrupt world prices of agricultural commodities." Barter transactions are to be made when the Secretary of Agriculture has "reason to believe that, in addition to other authorized methods and means of disposing of agricultural commodities owned by the Commodity Credit Corporation, there may be an opportunity to protect the funds and assets of the Commodity Credit Corporation by barter or exchange."

In Title I disposals the Secretary of Agriculture and U.S. officials have stressed the "welfare" aspect, pointing to the high proportion of disposals in underdeveloped countries and those without dollar resources. Secretary Benson, at the joint U.S.-Canadian meetings held in October 1957 said that in 1956-57, 88 per cent of Title I sales were made in twelve non-commercial markets and only 12 per cent in partly commercial markets. He admitted that in the previous year, when the proportion of partly commercial sales was 30 per cent, two transactions had been made which might have interfered with Canada's ability to compete. Apart from damage which may have resulted from these disposals to Canada's ability to sell wheat abroad, the "tied sales" and "usual marketings" features of Title I  agreements tend to perpetuate a pattern of trade which may deny future opportunities to Canadian exporters. It is, perhaps, significant that there has been a decrease in the amount of dollar wheat sales which U.S. officials have required to satisfy the "usual marketings" clause in Title I disposals. In 1957-58 the requirement has been written in to only one new agreement.

In 1956-57 the quantity of wheat exported under Title I agreements was 197 million bushels. Shipments under barter contracts were 88 million bushels, or 45 per cent by value of all agricultural products exported by means of this device.

Barter exports constituted a much more disturbing element to trade than Title I exports. The major destinations of agricultural products shipped under barter contracts were the United Kingdom, the Netherlands, Japan, Belgium, West Germany and France, countries with ability to pay in dollars for essential imports.

Under former regulations, barter provisions allowed U.S. private traders freedom to find their own foreign markets and to negotiate their own terms. They could select CCC surplus commodities according to the deals they were able to arrange and export them subject only to the requirement that they would be trans-shipped only to friendly countries. The transactions were frequently triangular; the surplus agricultural product was shipped to one country, where a convertible currency was obtained for its sale, which was used to purchase material for the U.S. stockpile in a third country. In April 1957 the U.S. Department of Agriculture suspended operations under the programme, pending an examination of its effects on the market abroad for U.S. agricultural products. New regulations were issued in May 1957 designed to assure that each barter contract results in a net increase in exports of the commodity involved. Traders must undertake that agricultural commodities shipped under barter contracts will not be trans-shipped from approved destinations. They must specify the agricultural commodities involved in the transaction. Contractors must now pay interest where agricultural commodities are delivered in advance of the delivery of materials to the CCC (formerly no interest was charged). The result of the tightening of regulations has been a drastic curtailment of barter activities; for the first half of the 1957-58 fiscal year contracts were signed to the value of only $3 million.

THE BARTER CONTROVERSY

Canada's strongest objections to U.S. disposal methods have been directed at the barter programme. In the United States opinion concerning its effectiveness is divided. The programme is popular with Congress and naturally strongly supported by traders. It is opposed by the administration. The main reason which the U.S. Department of Agriculture has given for the tightening of the regulations is that barter transactions were interfering with cash sales. Another, and apparently lesser, consideration was the failure of Congress to reimburse the CCC for the money which it had tied up in materials acquired for the stockpile. This was a factor in causing the CCC to approach the limit of its borrowing powers.

The suggestion has been made that the barter programme was curtailed because of Canadian representations. This statement has appeared in print, but I am unable to find any confirmation from official sources that this was a factor, although there are some admissions of sympathy for the Canadian position. Walter C. Berger, Administrator of the Commodity Stabilization Service, testifying before the Senate Committee on Agriculture and Forestry in July 1957, said that he felt the wheat barter programme had been very unfair as far as Canada was concerned; he mentioned also Canada's concern over wheat exports under Title I of P.L. 480.

THE PRESENT POSITION

Last year's heavy exports in the United States reduced the June 30, 1957, carryover 125 million bushels below the previous year's figure but the carryover at the end of the crop year in Canada was 143 million bushels higher last year than a year earlier. Exports in the current crop year have shown an encouraging recovery in Canada but a big decline in the United States. From August 1, 1957, to April 30, 1958, they totalled 219 million for this country, compared with 191 million in the same period of 1956-57. United States exports at the same time have dropped to 290 million bushels from 410 million bushels.

In terms of crop outlook the situation is less encouraging. The United States Department of Agriculture has forecast a 34 per cent increase from last year in the wheat crop. The estimate of 1,271 million bushels includes a winter wheat forecast of 1,069 million bushels, which is a record for this type of wheat. Canadian crop prospects are not good, due to lack of rain during the growing period. In the circumstances, it is realistic to expect that there will be added pressure in the United States to push the disposal of surplus wheat. A further appropriation will be necessary before new agreements can be written under Title I, since the present authority expired on June 30, 1958. Legislation for this purpose is now before Congress. Some of the bills have also contained special barter provisions; it remains to be seen whether any barter proposal becomes law. Even if it does not, it should be borne in mind that the present barter legislation has no terminal date and that there is pressure to remove the present administrative restraints.

²⁵⁰Le budget du 17 juin 1958 de Donald Fleming faisait référence en ces termes aux politiques américaines d'écoulement des surplus: /Donald Fleming's June 17, 1958 budget contained the following reference to American surplus disposal policies:
"In addition, United States agricultural policies continue to be severely damaging to Canadian interests. Apart from direct restrictions imposed on Canadian agricultural products, we suffer severe harm from United States surplus disposal activities. Massive United States disposals of wheat and other grains on give-away or subsidized terms have done serious damage to Canadian exports in some of our best commercial markets. Despite frequent and energetic Canadian complaints these harmful practices have continued. We find it difficult to understand why the United States should treat its best customer and friendly neighbour in this way."