Commodity Crisis
We were loading Russian ships for several years. I can remember that, too, because they're usually the biggest ships and they always have that hammer and scythe insignia on the
smokestack of the ships. . . . Then all of a sudden it just kind of quit. I don't know if this is one of the main reasons, but I had heard that, I think the United States was . . . subsidizing grain
toRussia because the Russians would take the grain and their people were not doing so well and then somehow . . . the grain got to the ports of Russia and then it would just sit there
andthere was no infrastructure to get it inland to the people and the grain rotted on the docks. And so eventually America just quit doing it. There's probably more to that story, you
know,politically, but who knows.
-Bart Bauer, Zen-Noh Grain Corporation[1]
The politics of America’s agricultural trade relationship with the Soviet Union is indeed complicated, fraught with contradictions, crises, and potential conflicts of interest. The growth of Louisiana’s grain industry long relied on export markets like that of the Soviet Union. Political decisions throughout the early twentieth century influenced what those markets could be and who America’s grain competitors were. For decades, the Soviet Union had been cut off from the benefits of American trade as a consequence of the chilling standoff between the two nations. Bad harvests in the Soviet Union in the 1960s created internal crises that required them to seek grain from outside sources. It was a business as much as a political decision to allow them to purchase American grain at that time. Unfortunately, this generated a hunger for American wheat and soybeans. By the early 1970s, another bad harvest created a rush on the American grain market with the Soviets buying at such unprecedented rates that they threatened to collapse the American wheat market. The American grain companies at the center of the Russian purchasing deals found themselves in the midst of crisis to meet this incredible demand without catastrophically damaging the domestic grain market. The sales agreements between the U.S. companies and Soviet officials inadvertently revealed the biggest scandal in Louisiana grain history when the physical supplies fell far below what was supposedly there on paper. In the summer of 1972, Soviet government officials met with executives of a few U.S grain companies behind the closed doors of a New York hotel. There had been some indication of activity with the Soviet Union but the details remained sparse for a significant amount of time. In mid-July,The Southwestern Miller, an industry paper, could only report that “Heavy futures activity and ship chartering . . . confirm mammoth, but as yet unconfirmed, sales of wheat and other grains to the USSR.” In his first book detailing the intricacies of the deal, investigative reporter James Trager indicates that “no consensus was yet apparent on indicated sales total or breakdown, but many felt that size would be ‘unprecedented.’” On July 18,The Southwestern Millerpublished a “guarded ‘guess’ that the Soviets might possibly have purchased 100 million bushels of U.S. wheat.” Acting on additional rumors of the size of Russia’s demand for wheat, Barney Saunders of Cargill had a study prepared of “an apparent maximum of hard red winter wheat available for ‘extraordinary demand’ such as Russian exports.”[1]This study, drawing on published USDA data, was finished by the end of July and was brought to the New York meeting between Cargill and the Soviets as part of their negotiation arsenal. All of the New York meetings had generated a sale of at least $750 million of American wheat, corn, and other grains to the Soviet Union. A problem arose only when it was realized that the U.S. companies involved, eager to secure such business, “had sold wheat [they] did not own.”[2]On reflection, it was clear “each [company] was engaged in the delicate process of trying to acquire wheat without disturbing the precarious price balance of the market. No company knew how much wheat any other company had sold the Russians; none knew the total amount of the Soviet purchase. . . . Continental had, in fact, sold at least 5.5 million tons, Louis Dreyfus 2.25 million, Cargill 2 million, Cook 900,000, Bunge 600,000, and Garnac 550,000.” In less than six weeks, Soviet purchases had “exceeded the $1 billion figure the USDA had projected for a full year’s purchases.”[3]Agriculture Secretary Earl Butz testified before a subcommittee in September 1972 that “nobody knew then, neither the Department of Agriculture nor the trade, just how much the Russians would buy. The export traders were not telling each other how much the Soviets were booking with them [and] exporters did not tell the Department of Agriculture.”[4]
Conditions for the sale manifested from a thawing in the Cold War in which the United States “decided to promote trade with Communist countries, and . . . the Soviet Union decided to risk dependency on the United States for huge amounts of grain." The circ*mstances allowing the sales to progress as they had (directly under the nose of the USDA) raised many questions of scandal and controversy in Washington. Writing in 1990, Joseph G. Gavin, III noted some contemporary observers had placed the blame on “a conspiracy between some government officials and the ‘Export Trade,’ while others suggested it was “bureaucratic mismanagement.” Still others suspected “consumer interests were deliberately traded off to help President Nixon win reelection or to obtain concession from the Soviet Union on Vietnam.”[5]Perhaps it was simply a lack of information that the Soviet Union used to their advantage. The most striking reality of this unprecedented situation was a severe decline in global grain production amounting to a loss of 35 million tons. Poor harvests, particularly in the Soviet Union, left the United States as virtually the only country with a significant grain surplus. At the opening of the decade, the Soviet Union “had the international liquidity to offset production losses by means of large purchases in the international market.” In 1967, similar crop losses had affected the Soviet Union and the Indian subcontinent almost equally.[6]It is possible, then, that in this new era verging on famine, Soviet leaders determined knowledge was their most valuable currency and, therefore, shielded their activity on the grain market from the global audience. Of course, purchasing U.S. grain in secret would also keep prices low.[7]
Initial sales to the Soviet Union began in December 1963 when Continental sold them 350,000 tons of durum wheat for $78.5 million. In addition, the Soviets agreed to pay $11.5 million for shipping. An Executive Order carried over from the Kennedy Administration requiring half of any Soviet grain sales to be shipped on American vessels resulted in higher shipping costs for Continental. Twenty-five million dollars in subsidies were relied upon to offset the shipping costs and allow Continental to continue offering wheat at competitive prices.[8]Shortly after these sales were finalized, Secretary of Commerce Luther Hodges ruled that “no exporting firm could have more than one quarter of the Soviet business.”[9]Whether this ruling influenced the Soviets to take their subsequent negotiations underground is uncertain, but it would offer some explanation for their excessive secrecy.
President Nixon did away with Kennedy’s Executive Order in June 1971 at the same time that he lifted Truman’s embargo on trade with China from 1945 and cancelled the export licensing requirement for items sold to the Communist nations. These actions, Assistant Secretary of Agriculture Clarence Palmby later claimed, were the “roots of the 1971 Russian sales” that threatened to break the grain export system.[10]In July 1971, the Williams Commission, a governmental entity charged with studying “international trade and investment problems facing the United States,” produced a report “in favor of increased trade with the Soviet Union.”[11]The objective merits of this document certainly come into question when one considers that the Williams Commission included representatives from the grain trade who could greatly benefit from such increased trade.
Continental signed their first contracts with the Soviets in July or October 1971 (available documentation offers inconsistent dates for this initial sale). Michel Fribourg, the head of Continental was “an idealist,” as Trager sees it, and in the early 1970s had “a burning, selfless desire to cement East-West political relations through increased trade relations.” Since the company’s first sales to the Soviet Union in 1963, Fribourg had been on “a first-name basis with Moscow’s grain buyers,” paving the way for their grand deal a decade later.[12]When negotiations began again with Continental in 1972, the leader of the Soviet buying group “led the Continental people to believe he was buying grain only from them. He cautioned everyone at the meeting on the need for absolute secrecy.”[13]
Cargill joined Continental in the big sales in October 1971 when they sent a group of representatives to Moscow. Cargill came out of this meeting with contracts to sell 2 million tons of corn and 1.5 million of oats and barley to the USSR.[14]For the USDA, this purchase “[w]as a momentous breakthrough [and] as a promising opportunity.”[15]In 1972, Continental and Cargill were the two largest grain companies in the United States, handling close to “50 percent of the world’s grain shipments,” according toBusiness Week.[16]At the time of Cargill’s first sale of oats and barley, the Commodity Credit Corporation was the only American entity with enough supply to meet the Soviet order. Thus, Cargill would need to work with the USDA to purchase from the CCC stocks. A bargain was struck in which “the CCC would accept bids from the exporting firms for barley and oats at prices below prevailing domestic prices so that the exporters would be able to offer these commodities at prices competitive on the work market. In return, the traders would undertake to sell certain quantities of U.S. corn at market rates.” Cargill purchased oats and barley from the CCC even though they did not yet have contracts with the Soviets for the full amount of corn they had promised to sell. Cargill had told the USDA they would sell 12 million bushels of corn by the end of 1971, yet only half of that corn actually found its way to the USSR.[17]
The oats and barley arrangement became problematic when the CCC “was caught short on the amount of barley it had agreed to make available to the trading firms at reduced prices,” forcing them to look to the open market to fulfill that part of the deal. But the farmers they were relying on to sell their barley at cheap rates withheld their crops even when a three cent per bushel storage bonus was offered for those farmers if they turned in crops under loan from the previous three years ahead of schedule. As Gavin sees it, through the oats and barley arrangement, “the Department bent over backwards to help the Export Trade open up the Soviet market even if it meant manipulation of non-market policy tools to provide this assistance.” It became increasingly clear that the USDA’s desire to accommodate the needs of the grain traders “exceeded [their] ability to administer the sales without problems.” The 1971 sales with the shortage of oats and barley were only the beginning of a pattern of overextension reliant on grain stocks that proved insufficient.
On May 25, 1972, Secretary of State William Rogers and Peter Flanigan, Director of the Center of International Economic Policy, met with Soviet officials in Moscow to discuss a grain-credit arrangement. From this discussion and others with National Security Advisor Henry Kissinger, the Soviets agreed to a purchase of about $130 million of American grain in 1972, paying in all cash.[18]At the end of June, the Soviets sent two teams of specialists in grain purchasing, maritime shipping, and financing to the U.S. under the auspices of finalizing the credit arrangement. One team went into secret negotiations with the Department of Commerce while the other team went to work with the grain companies.[19]The Commerce discussions were kept secret “because their content was market-sensitive,” while the company discussion were kept secret for obvious reasons of market balance.[20]For James Trager, what was surprising about the agreement reached at this time as compared to that of 1963, “was that Moscow accepted terms it had previously called unacceptable. The Russians agreed to buy U.S. grain worth $750 million over the next three years, $200 million of it [in] the first year. The USDA’s Commodity Credit Corporation agreed to extend $500 million in credit at six and one-eighth percent interest any time during the three-year period the Russians chose to buy. The credit was [wholly] contingent on the Russians buying grain.”[21]
The 1972 sales were supported by subsidies from the U.S. government that averaged less than 30 cents a bushel. It was the astonishing size of the Soviet purchases that created a problem for the U.S. taxpayer because they would be paying roughly $132 million for the Russian wheat plus an additional $180 million towards grain shipments to other locales. In early July, that only amounted to only a few cents per bushel, but by late August 1972, the export subsidy had climbed to 38 cents per bushel. Unfortunately, even that was not enough to maintain the target price of $1.63 per bushel because wheat was now selling for $2.11 a bushel.[22]Martha Hamilton points out that in the previous fiscal year, “wheat export payments cost taxpayers $141 million” and Cargill had made a hefty sum of $34.8 million from those subsidies.[23]On July 3, 1972, Bernard Steinweg, Senior Vice President of Continental inquired with the USDA if the current subsidy policies for wheat would be maintained. Steinweg was assured by Assistant Secretary for International Affairs, Carroll Brunthaver, that nothing would change. It is significant to note that Brunthaver was new to his position, having held the job for less than two months, and made the subsidy decision without consulting other USDA staff members.[24]At the time, he believed the subsidy was needed to keep the Soviets from taking their business to other markets, not realizing these other markets did not have enough stock on hand to pose a real threat.[25]Brunthaver’s previous position with Cook Industries, a grain exporting company, also raised questions as to the true motivations behind his single-handed subsidy decision.
In a complex system tied to a target price determined by statistics from the Gulf ports, the grain companies could greatly benefit from delaying their application for export subsidies.[26]The companies asked the USDA for greater flexibility in registering for the subsidies and lobbied for the ability to register for them even before any sales contracts were actually signed. As one USDA official commented in 1971, “The traders virtually wrote the set of (subsidy) regulations.” In the past, subsidy registrations by the grain companies had been used to track export sales. The recently modified regulations that the companies were working under in the summer of 1972 allowed them “to speculate on the subsidy by holding off registration for days of higher prices.” This also kept the full scope of sales statistics out of the hands of the USDA. Clarence Palmby had wanted quarterly reports on Russian shipments to be produced, but that request was not made a mandatory policy and was ultimately dropped.[27]Shipowners were also eligible for subsidies related to these sales but they would only receive their money after a shipment was completed and the costs of the trip were fully audited. Still, as close to $9.69 per ton, they could expect about $55 million in subsidies. Because shipments were delayed both domestically in trying to get the grain to export terminals and internationally through disputes over freight rates, the bulk of the shipments and subsidy payments would be made in 1973. It was estimated that subsidy payments for all commodity shipments in 1973 would amount to $215 million with less than 13 percent of that money being dedicated specifically to the Russian grain movement.
James Trager reports, “Continental, which sold 191 million bushels of wheat to the USSR, applied for subsidies on about 70 million bushels in mid-July, when the subsidy was only between 13 and 15 cents a bushel. It applied for subsidy on another 50 million bushels . . . the second week in August, when the subsidy was from 31 to 36 cents. When Continental applied for subsidy on 71 million bushels in the final week of August, the subsidy was at its all-time high of 47 cents; but by then, says Continental, the company was registering contracts for wheat on which it had paid prices ranging over $2.10 a bushel to cover the sales it had made. Continental insists it lost money on those [last] 71 million bushels.”[28]By the end of August, when Clarence Palmby and James Good of Continental visited Brunthaver about a potential new grain buyer, speculated to be the People’s Republic of China, Brunthaver had begun taking steps to end the subsidy. The new policy was a two-tier system. For sales made prior to August 24, 1972, the grain companies had one week to register them at the flat subsidy rate of forty-seven cents. For sales made after August 24, the government subsidy would no longer hold the price at $1.63.[29]The subsidy was fully eliminated of September 22, 1972 when the export price for wheat at the Gulf was $2.45 per bushel.[30]
Cargill, who made money on their overall sales in 1972, also claimed to have lost money on the Soviet deal.[31]When the company sold one million tons of wheat (37 million bushels) to the Soviets in early July, “it owned less than 7 million bushels [and] was ‘short’ the other 30 million.” By the end of July, they were still short 20 million bushels but were confident enough to sell another one million tons to the Soviets in early August. Cargill only owned the grain that was sitting in its elevators waiting to be loaded onto ships for export, meaning the company would have to purchase the remaining grain from American farmers or small country elevators. Both Cargill and Continental were faced with the dilemma of acquiring enough grain to meet their contracts without sparking a purchasing frenzy that would drive up prices. Their delicate approach to these purchases was also meant to dissuade government intervention in the sales. The purchasing scheme adopted by the two companies is further complicated by the immensely intricate futures market: “The standard 5,000-bushel wheat contract [as of 1973] can be bought or sold on margin (earnest money) of only 5 to 10 percent. If the price of wheat to be delivered in March, May, July, September, or December goes up, the trader [i.e. Cargill or Continental] who has agreed to deliver wheat in that particular month (that is, sold short) must put up the difference between his original contract price and the actual market price; a 5 to 10 percent price rise can wipe out his stake – his broker will liquidate his contract unless he puts up more margin. If the price of wheat goes down, the trader who has agreed to accept delivery in a given month (bought long, that is) still has a commitment to pay the price in his original contract.”[32]
Cargill was certainly no stranger to the significance of profits and losses to their image with the federal government. Hamilton recounts, “In December 1971, the Eighth U.S. Circuit Court of Appeals upheld government arguments that Cargill violated the Commodity Exchange Act in trading on the Chicago Board of Trade. The charge was manipulating the market price of wheat futures through a ‘squeeze’ (a dominant position in the futures market). Cargill’s defense was that it made money on the deal. To be guilty of manipulation under that act, a trader must commit an ‘uneconomic’ act, Cargill said. The company also contended that ‘squeezes’ weren’t prohibited.”[33]A similar charge had been brought against Cargill in September 1937 when the company was suspected of attempting to corner the corn futures market on the Chicago Board of Trade. Ultimately, the courts and the Board of Trade ruled against the company, and it was “assessed a number of severe financial and trading penalties.” The company’s CEO, John MacMillan, Jr., retaliated by pulling Cargill out of the Board of Trade and using outside agents to work the market for several years.[34]
On September 18, 1972, “The CEA [Commodity Exchange Authority], the USDA agency responsible for regulating the futures markets” opened a formal investigation into reported “inaccuracies in the mandatory grain trade reports about the size of open cash and futures positions.”[35]These inaccuracies pertained largely to the size of the grain companies’ outstanding sales commitments. The CEA had additional problems with trading speculation and the grain companies because the CEA “had largely relied on the professional traders to police themselves. Regulation, they said, actually declined in the years from 1965 to 1972, a period in which the volume of commodity trading zoomed from $65 billion a year to more than $200 billion.” Trager argues that “a group of grain traders was [also] alleged to have rigged wheat futures on the Kansas City Board of Trade in 1972. . . in order to drive up the export subsidy.” He notes, “The CEA referred the charges to the Kansas City Board itself, and the board’s investigation committees, made up of influential board members, including some Continental Grain Company officials, declared there was ‘no basis for complaint.’"[36]It was also revealed that several of the grain companies “were using questionable measures to keep the size of the [overall] Soviet purchases secret to prevent the market from exploding until they had bought enough to meet their contractual obligations.”[37]As Trager notes, these “grossly inaccurate” reports and other charges “arising out of the rush of activity in the grain market following the Russian wheat deals, led in 1974 to new federal legislation to overhaul the nation’s commodity exchange law.”[38]
In an October 21, 1974 memorandum to the President from Ken Cole, it was noted the Commodity Futures Trading Commission Act of 1974, H.R. 13113 “provides needed reform to the nation’s commodity futures markets. These markets have become increasingly volatile due to improper activities by some merchants.”[39]H.R. 13113 removed the responsibility of the Commodity Exchange Authority from the USDA and created the independent Commodity Futures Trading Commission. Under the USDA, the CEA was responsible for “administering the Commodity Exchange act of 1922,” wherein their role was “to protect the hedging and price functions of the Nation’s commodity futures markets with respect to 18 specific agricultural commodities,” including wheat, soybeans, and rice. As trade relations with the Soviet Union began to broaden in the 1960s and early 1970s, concerns emerged over the narrowness of Federal regulation under the CEA system. The strain placed on the grain market in the early 1970s as a result of the uneven handling of the Russian sales represented “one of the first manifestations of the increasing vulnerability of domestic economies to global economic developments.”[40]There had been “nothing in the [1972 credit agreement with the Soviets] setting maximum tonnages of any commodity, because it did not occur to the American delegation that the Russians could ever buy too much.”[41]In 1974, Washington officials sought to remedy these commodity issues by establishing “a full time, independent regulatory commission . . . with five Commissioners . . . appointed by the President.” This new regulatory body would “significantly enlarge the jurisdiction of the government’s regulation . . . to include
future trading including lumber and metals.”[42]President Gerald Ford signed the bill into law only two days after Cole’s first memorandum was delivered.[43]
Regardless of the monetary (and later political) implications of the game of wheat exchange undertaken in 1972, the real crisis arose from the short supply Cargill, Continental, and the other companies encountered, raising questions of U.S. supplies that existed on paper in the elevators but failed to materialize. This hit hardest at the smallest country elevators where some operators “who had not bought wheat futures to hedge their sales to exporters were forced into bankruptcy and thus reneged on contracts they had made with exporters.” In addition, “foreign buyers had ordered twice as much of the remaining 1972 soybean crop as the Agriculture Department considered ‘available for export,’ [meaning] the exporters had sold more soybeans than there were to sell. And even before the first bushel of the new wheat crop was harvested, nearly 38 percent of that crop - 18 million tons - had been sold for export, including 2.5 million to mainland China.”[44]Some dock workers, especially in the Gulf, tried to hinder the delivery of such grain by boycotting the loading of ships bound for the Soviet Union, but grain still made its way to the contested Communist ports. They understood that the Gulf stood in the eye of the wheat storm and diminishing grain stocks at home to supply these foreign buyers would only spike prices for basic foodstuffs like milk and beef. In preventing grain from leaving the Gulf they could perhaps buy time for the federal government to intervene and change the nature of the sales to keep repercussions for the American taxpayer to a minimum.
Continental’s 1963 sales had been severely challenged by a strike at East Coast and Gulf ports. This strike was in response to the Kennedy Administration agreement that grain shipments should be sent equally in Soviet and U.S. ships. The U.S. shipping industry publicly stated they “did not have enough bottoms to carry half of a four and one-eighth million-ton grain order, [yet] the powerful International Longshoreman’s Association (ILA) flatly refused to load Russian vessels unless American ships were allotted the same amount of cargo the Russians got.” The strike finally ended in late February 1964, but there is a belief that if members of Congress, the shipping industry, and these unions had been more cooperative from the outset, the grain sales to the Soviet Union at that time could have been much greater in scale. By the time the strike came to an end, “U.S. wheat [was selling] at $2.30 a bushel [and] required a 55-cent export subsidy . . . to enable Continental . . . to sell that wheat to the Russians at $1.75 a bushel, which was the world price at the time.” In response to the strike, President Nixon, “acting by authority granted him under the Export Control Act . . . scrapped an old rule that required special export licenses for anything sold to the Soviet Union . . . [O]nly a general export license [would be] needed [and] exports did not have to be reported until after shipment [was] made.” When the next big sale was finalized in November 1971, various maritime unions, including the ILA, “waived their demand that American ships be allotted the same amount of cargo as Russian ships” because any disruptive behavior on their part would only guarantee them “50 percent of nothing.” Strikes tied to “work-rule” disputes still blocked shipments from East and Gulf ports in 1971, but grain was able to leave through the Great Lakes ports.[45]In October 1972, a shipment agreement had been made with the maritime unions allocating one-third of the grain cargo to be shipped on U.S. vessels, one-third in Soviet vessels, and one-third in other vessels. Disputes over shipping rates delayed the shipments from leaving the U.S., with Russian interests claiming the world market rate was $7.50 a ton while the Americans believed it was closer to $10.35. The first American ship arrived at the port of Odessa on December 20, 1972, although some grain had arrived earlier on third party ships.[46]The delivery logistics tied to the July 1972 contracts bleed into sales procured in the following years, making it possible that the final shipments were not delivered until 1975 when a new trade agreement was finalized between the United States and the Soviet Union.[47]
The massive 1972 deal was made entirely in secret between representatives of the Soviet government and executives of the U.S. grain companies. The highly competitive nature of the grain trade itself promoted such secret negotiations and the Soviets took advantage of that fact. At the same time, numerous USDA officials resigned from their posts to take jobs with the big grain companies. Clarence Palmby, who was Assistant Secretary of Agriculture for Foreign Trade and Commodity Programs under President Nixon and served in that role until 1973, left that job to become corporate vice president for marketing, planning and development at Continental, the very company that had initiated grain sales to the Soviet Union in 1963.[48]Palmby had worked for the U.S. Feed Grains Council prior to joining Clifford M. Hardin’s USDA team.[49]One president of the Council during Palmby’s tenure was Samuel Sabin, a vice president of Continental.[50]As head of the Feed Grains Council, Palmby concluded “the solution to the farmer’s income problem was to eliminate production restraints and to increase the volume of U.S. grain exports.”[51]
Hardin had joined the USDA after serving as the Dean of Agriculture at the University of Nebraska and was succeeded by Earl Butz in 1971. Clarence Palmby was succeeded by Carroll Brunthaver in 1973. Butz had come to the USDA from Ralston Purina (later owned by Cargill) and Brunthaver had gotten his start at Cook Industries.[52]Further complicating the interconnectedness of the USDA and the grain trade, Martha Hamilton points out that two former “grain trade officers” had moved over to the USDA and “one of the four firms [Bunge had] recently picked up a fifth USDA official, the Export Marketing Services’ retiring chief administrator,” Clifford Pulvermacher.[53]In the midst of all this staff changeover, “Senator George McGovern . . . had come out with a charge that the ‘cozy’ relationship between the USDA and companies such as Continental, as illustrated by the job-jumping of men like Clarence Palmby, had somehow enabled the export companies to reap windfall profits” from the Soviet sales. Trager maintains “no scandal was ever substantiated [and] a Justice Department investigation found no criminal wrongdoing on the part either of a government employee, past or present, or of a grain company executive.”[54]
Palmby’s testimony before the House Subcommittee on Livestock and Grains in September 1972 led many congressmen to believe that he had “acted improperly” in his role with the USDA. The Justice Department and the FBI both looked into conflict of interest charges against Palmby given that he had helped facilitate these large sales for Continental, only to join their forces shortly thereafter. Two items cited by Hamilton in reference to this case state a federal conflict of interest statue existed that “prohibits any former officer of an executive agency from acting as an agent for anyone other than the United States in connection with any contract or other particular matter involving specific parties in which the United States has substantial interest.” Additionally, these documents reference USDA rules “which bar a former employee for one year after his service with the department has ended from representing anyone in connection with any such matter within the boundaries of his former official responsibility.”[55]Given this evidence, how could Palmby not be guilty of improper conduct, or even abuse of his position within the USDA? Yet, the FBI found no evidence to support such charges. There was still enough suspicion in the air outside Washington, however, for numerous farmers to file lawsuits against Palmby, the USDA, and some of the big grain companies.[56]
The notoriety of what later became known as “The Great Grain Robbery” was the very scandal believed to be at its core. Had the Russians robbed the United States? Had the USDA been in cahoots with the grain companies to generate larger profits for them? Were there ulterior motives for the Soviet purchases such as keeping U.S. grains out of the hands of the Chinese? What the sales ultimately did was trigger a “trade boom that caused earnings and net worth in the export Trade to double and triple in the following two years.”[57]Cook Industries reported record earnings in 1974 of $46, 226,000 as a result of this trade boom. Cook was the only grain company required by law to publicly report its financial activities because it was the only publicly held company.[58]It is widely acknowledged that “the grain trade leadership is a close-mouthed bunch. . . . With fewer than 500 stockholders and no desire to sell stocks publicly, the companies need not report to the U.S. Securities and Exchange Commission. SEC requirements . . . provide for reporting only basic corporate financial data and information on types of diversification and areas of growth. Cargill, Continental, Bunge, and Dreyfus [did] not have to reveal even this much.”[59]The men at the helm of these companies, according to Trager, “were allowed, in effect, to determine U.S. foreign and economic policy.”[60]By the time all was said and done, Continental, Cook, and Cargill were responsible for the majority of the trade with the Soviet Union, including increased movement of soybeans beginning in late 1972.[61]
In 1973, as Russian purchases showed no signs of slowing down, President Nixon ordered a temporary embargo on the export of soybeans as supplies of the crop began to shrink. The soybean embargo primarily affected Eastern European nations. The following year, President Ford implemented “voluntary” controls on grain exports destined for the Soviet Union. A 1974 deal between the Soviets and the U.S. grain companies to purchase more than $500 million of corn and wheat was ultimately cancelled when Agriculture Secretary Earl Butz admitted he “had not been ‘firm enough’ in warning Russian officials and U.S. grain company executives against such large sales.” Butz introduced a new monitoring system that would require the USDA to “approve all large [grain] sales to foreign buyers”[62]in an attempt to prevent a repeat of the 1972 sales and the disruption they had created in the U.S. market. The monitoring system was also intended to answer to Butz’s critics who had been calling for his resignation. As with the 1972 sales, the decision coming out of the White House was heavily influenced by the circ*mstances of an upcoming election. George Anthan of theDes Moines Registercommented in a 1974 article, the Ford administration did not want to “saddle Republican candidates with another political liability just weeks before the November 5 election.” According to Representative Wiley Mayne, the U.S. government was “supposed to have some right to inspect [the Russian] harvests . . . [The Soviets] reneged on that . . . and followed it up with the deliberate concealment of their intentions at the same time the Japanese and Europeans were telling us approximately what their needs are going to be.” At the same time, Representative Neal Smith accused Butz of being “unduly influenced by the big grain companies” and “incapable of looking out for the public interest.”[63]The 1973 embargo on soybean exports had left a bad taste in the mouths of some and Representative William Scherle asked, “Next year, when we have grain running out of our ears, who are we going to sell it to [if we are seen as unreliable]?”[64]All grain sales to the Soviet Union were suspended in early 1975 only to be lifted that October with the signing of a “five-year agreement to regularize Russian grain purchases in the U.S. market.” In the late 1980s, the United States and the Soviet Union signed a new five-year agreement for grain sales that was a virtual replication of the deal arranged in 1975 that had been designed to alleviate the grain shortfalls from the original sales of 1972.[65]The first sale in this new arrangement was two million tons of wheat by Cook Industries and 1.2 million by Cargill in July 1975.[66]
For some, “the most striking and unique characteristic of the grain sale episodes is how intensely consumer interests were engaged, directly or indirectly, in the formulation of trade policy.”[67]The realization that the big grain companies had essentially been driving U.S. foreign and economic policy up to this point led to stronger protest from consumers who were forced to pay higher prices at the grocery store as a direct result of the Russian sales. In response, the U.S. government revised their policies on grain exports and took steps to regulate domestic prices. The new system required grain sales “in excess of 100,000 metric tons” to be made public knowledge by 3:30pm on the next business day after the sale was finalized.[68]
The 1972 sales had long lasting effects that were primarily felt by New Orleans and the Gulf ports and grain shipments from interior origination points bottlenecked or elevators struggled to find enough railcars to move the amount of grain in question.[69]It took several months to a year for Continental and Cargill’s initial contracts to be completely fulfilled.[70]A 1978 proposed Senate bill had similar requirements to the policy changes from 1972, mainly that the name of the firm that made the sale and the price of the grain involved be released. Representative Neal Smith argued the system introduced by the USDA in 1972 had a “large loophole because foreign grain purchases made from foreign affiliates of American companies are not reported to the Agriculture Department” making the additional disclosure requirements a necessity in preventing another grain scandal.[71]
Notes
[1]Bart Bauer, Unprocessed Oral History Interview conducted February 26, 2018. Property of the T. Harry Williams Center for Oral History at Louisiana State University.
[2]James Trager,Amber Waves of Grain(New York, Arthur Fields Books, Inc., 1973),48, 50, 54.
[3]Martha M. Hamilton,The Great American Grain Robbery and Other Stories(Washington, D.C.: Agribusiness Accountability Project, 1972),93.
[4]Trager,Amber Waves of Grain, 57, 67.
[5]James Trager,The Great Grain Robbery(New York: Ballantine Books, 1975),37.
In 1969 and 1970, the CIA had estimated that the Russians would not spend more than $50 million on imported grain from the U.S. in any given twelve-month period. This estimate and the small scale of sales to the USSR in the 1960s led USDA officials to miss numerous red flags as they arose throughout 1972. See Joseph G. Gavin, III,U.S. Grain Exports, Russian Buyers and Short Supplies, 1971-1975(New York and London: Garland Publishing, Inc, 1990), 124 n.42.
In a press conference detailed byThe Baltimore Sunon July 9, 1972, the White House said the grain sale with the Soviet Union “will be negotiated between the Soviet Union and American private commercial exporters,” removing the USDA and other government entities from the negotiations from the very beginning. See “U.S. to Sell Soviet Union grain worth $750 million over three years,”The Baltimore Sun, July 9, 1972: 3.
[6]Gavin, III,U.S. Grain Exports, 3,6-7.
[7]Gavin, III,U.S. Grain Exports, 84.
[8]Gavin argues that the USDA would have need three pieces of information in order to even attempt to predict the magnitude of the Soviet’s purchases:
- Awareness that the Russians had committed to maintaining their livestock herds
- Awareness that the Russian grain harvest was in trouble
- Awareness of the global-production demand situation - dwindling supplies outside the U.S.
For the most part, Gavin contends, the decision to purchase U.S. grain was political, not economic, making it difficult to estimate what choices would come out of the USSR. It is also claimed, however, that by the time the Soviets entered the market with a finalized CCC credit agreement, the USDA had a substantial amount of information related to the aforementioned three points but each point was discounted for various reasons and it is probable that the USDA did not consider all three in tandem. See Gavin, III,U.S. Grain Exports, 86-87, 89-90.
[9]Gavin, III,U.S. Grain Exports, 36-37.
Export subsidies had been available for rice between 1958 and 1966. As the world price for rice rose, the subsidy was eliminated in mid-1967.The subsidy got as high as $2.91 in 1960. See Marshall R. Godwin and Lonnie L. Jones, eds.,The Southern Rice Industry(College Station, TX: Texas A&M University Press, 1970), 27.
[10]Gavin, III,U.S. Grain Exports, 67.
[11]Gavin, III,U.S. Grain Exports, 39.
[12]Caroline Miles, "US Trade Policy in the 1970s: The Report of the Williams Commission,"The World Today28, no. 3 (1972): 102. See also Gavin, III,U.S. Grain Exports, 41.
[13]Trager,The Great Grain Robbery, 22.
[14]Trager,The Great Grain Robbery, 30-31.
[15]Gavin suggests the total amounts were 2 million tons of corn and 1 million tons of oats and barley split between Cargill and Continental at a cost of $150 million. See Gavin, III,U.S. Grain Exports, 46-47.
[16]Trager,The Great Grain Robbery, 9.
[17]“The Incredible Empire of Michel Fribourg,”Business Week,March 11, 1972: 84. See also Hamilton,The Great American Grain Robbery, 13.
[18]Gavin, III,U.S. Grain Exports, 45, 49.
[19]Gavin, III,U.S. Grain Exports, 49, 51, 60, 79.
[20]Gavin does indicate that the presence of two teams was known to U.S. officials yet later testimonies suggest Washington was kept in the dark about meetings between Soviet representatives and the grain companies. See Gavin, III,U.S. Grain Exports, 80, 92.
[21]Gavin, III,U.S. Grain Exports, 80.
[22]Trager,The Great Grain Robbery, 20.
[23]Trager,Amber Waves of Grain, 71.
[24]Hamilton,The Great American Grain Robbery, ii.
[25]Gavin, III,U.S. Grain Exports, 94.
[26]Gavin, III,U.S. Grain Exports, 95.
[27]According to Trager, “The export subsidy was set each day; it was announced in Washington at 3:30pm Eastern time, and normally went up or down a penny or two, according to the market, although there was nothing automatic about it. If the price at Gulf ports dropped below $1.63 a bushel, no export subsidy was required.” See Trager,The Great Grain Robbery, 26-27.
The Gulf was established as the reference point with the International Grains Agreement of 1967. Why the Gulf was chosen for this role is uncertain, but it places the Louisiana grain industry in a significant position on the global stage. See Gavin, III,U.S. Grain Exports, 55.
[28]Gavin, III,U.S. Grain Exports, 58, 96, 119 n.11.
[29]Trager,Amber Waves of Grain, 85, 72-73.
It is interesting, given their reliance on the subsidies, that in February 1970, Continental produced a produced a print advertisem*nt forThe Southwestern Millerin which they proclaimed, “To find the most efficient producer of any given product, competition for markets must be free of government intervention, subsidies, tariffs, restrictions, licensing and other blocks to free trade.” See HamiltonThe Great American Grain Robbery, 26.
[30]Gavin, III,U.S. Grain Exports, 100, 101.
The new system was not immune to abuses as its hasty implementation “was an open invitation for firms to make registrations for subsidies on sales that had not yet been made.” See Gavin, III,U.S. Grain Exports, 102.
An Export Marketing Services audit from September 14, 1972, revealed that “subsidy registration for 5,689,631 bushels with subsidy value of $2,739,915 were invalid . . . and two companies refunded payments already received.” See Gavin, III,U.S. Grain Exports, 129 n.58.
[31]Gavin, III,U.S. Grain Exports, 106.
[32]Their losses were reported to be over $600,000.See Gavin, III,U.S. Grain Exports, 110.
[33]Trager,Amber Waves of Grain, 73, 37.
[34]“Cargill Appeal Denied on Charge of Juggling Wheat Future Prices,”Wall Street Journal, December 13, 1971. See also Hamilton,The Great American Grain Robbery, 22.
[35]Wayne G.Broehl, Jr.,Cargill: Trading the World’s Grain(Hanover, NH: University Press of New England, 1992), xviii. Wayne G. Broehl, Jr.,Cargill: From Commodities to Customers(Lebanon, NH: University Press of New England, 2008), 5.
In 1978, ADM pleaded no contest to charges of fixing prices on contracts in the Food for Peace program. Repeatedly, ADM found itself on the receiving end of complaints linked to price fixing. This ultimately led to a large FBI investigation into the company’s activities in the late 1990s. See Kurt Eichenwald,The Informant: A True Story(New York: Broadway Books, 2000), 27.
[36]Trager,The Great Grain Robbery, 199. Gavin, III,U.S. Grain Exports, 105.
[37]Trager,The Great Grain Robbery, 99.
In 1991, ADM officials “disclosed that they had uncovered more than $6 million in trading losses dating back years . . . Fraudulent trading records were [later] discovered, and the total losses eventually exceeded more than $14 million.” See Eichenwald,The Informant, 27.
[38]Gavin, III,U.S. Grain Exports, 134 n.66.
[39]Trager,The Great Grain Robbery, 100.
[40]Ken Cole, “Enrolled Bill: Commodity Futures Trading Commission Act of 1974, H.R. 13113,” October 21, 1974,Box 10, folder “10/23/74 HR13113 Commodity Futures Trading Commission Act of 1974 (1)” of the White House Records Office: Legislation Case Files at the Gerald R. Ford Presidential Library.
[41]Gavin, III,U.S. Grain Exports, viii.
[42]Joseph Albright, “The Full Story of How America Got Burned and the Russians Got Bread,”New York Times,November 25, 1973: 36.
[43]“Enrolled Bill H.R. 13113 - Commodity Futures Trading Commission Act of 1974,” October 17, 1974,Box 10, folder “10/23/74 HR13113 Commodity Futures Trading Commission Act of 1974 (1)” of the White House Records Office: Legislation Case Files at the Gerald R. Ford Presidential Library.
[44]Public Law 93-463.
[45]Trager,The Great Grain Robbery, 77, 201.
[46]Trager,The Great Grain Robbery, 17-18, 25-26, 18-19.
[47]Trager,Amber Waves of Grain,81, 83.
[48]Grain sold in 1975 was likely still making its way through the Gulf when Bart Bauer began working at the Zen-Noh elevator in 1982.
[49]Palmby’s timing for his departure is a bit suspect as it came after the CCC credit arrangement was finalized in Moscow but prior to the first meetings between the Soviets and Continental. Considering Continental was the first company the Soviets approached, did Palmby’s transition into his new role with the company ensure that they benefitted from the opening of Soviet purchases? Continental had offered Palmby a job in March prior to his trip to Moscow, raising further suspicions of conflict-of-interest throughout the progression of the Russian deal. See Gavin, III,U.S. Grain Exports, 94, 132 n.62.
Richard Nixon, in an interview for ABC News, commented that he thought the sale of 150 million bushels of wheat to the USSR in 1963 would “turn out to be the major foreign policy mistake of [the Kennedy] administration, even more serious than fouling up the Bay of Pigs.” In his view, the U.S. was subsidizing Khrushchev “in a time when he’s in deep economic trouble. It pulls him out of a very great hole and allows him to divert the Russian economy into space and military activities that he otherwise would have had to keep in agriculture.” See Trager,The Great Grain Robbery,16.
Ironically, the Russian grain sales that took place during Nixon’s administration were considered his biggest economic policy gaffe.
See Gavin, III,U.S. Grain Exports, 66.
[50]The U.S. Feed Grains Council is a nonprofit industry organization that sponsored projects in the 1970s to increase livestock and poultry production in foreign countries that would in turn boost export levels of U.S. grains. The Council’s current website notes they “develop export markets for U.S. barley, corn, and sorghum.” At the heart of their past and present missions lie the interests of the grain trade. See Gavin, III,U.S. Grain Exports,65. See also U.S. Grains Council, “About the Council,” 2019,https://grains.org/about/about-the-council/.
[51]Hamilton,The Great American Grain Robbery, 164.
[52]Gavin, III,U.S. Grain Exports, 32.
[53]Trager,The Great Grain Robbery, 28.
[54]Hamilton,The Great American Grain Robbery, 59. Wayne G. Broehl, Jr.Cargill: Going Global(Hanover, NH: University Press of New England, 1998), 193-194.
[55]Trager,The Great Grain Robbery, 103-104.
[56]18 U.S.C. § 207 (a). Sec. 7 C.F.S. § 0.735-14. See Hamilton,The Great American Grain Robbery, 67-68.
[57]Trager,The Great Grain Robbery, 27-28.
[58]Gavin, III,U.S. Grain Exports, 110.
[59]“The Incredible Empire of Michel Fribourg,” 84. See Hamilton,The Great American Grain Robbery, 13.
[60]Hamilton,The Great American Grain Robbery, 42-43.
[61]Trager,The Great Grain Robbery,199.
[62]Gavin, III,U.S. Grain Exports, 157.
[63]Clark Mollenhoff, “Butz Admits He Erred in Grain Deal,”The Des Moines Register,October 8, 1974: 1.
This deal had been brokered with Continental and Cook.
[64]George Anthan, “USDA Officials: Sale ‘Lost’,”The Des Moines Register,October 8, 1974: 4.
[65]George Anthan, “USDA Officials: Sale ‘Lost’,”The Des Moines Register,October 8, 1974: 4.
[66]Gavin, III,U.S. Grain Exports, 5, ix.
[67]“Corn Delivery to Begin in October,”The Des Moines Register,July 22, 1975: 4.
[68]Gavin, III,U.S. Grain Exports, xi.
[69]“Tighter Grain Sales Reports Culled from Commodity Bill,”The Town Talk,August 20, 1978: 47.
[70]Trager,Amber Waves of Grain, 185.
According to the traffic manager of a country elevator group, trying to coordinate such large movement the aftermath of the sales was “the worst mess I’ve seen in the twenty years I’ve been in this business. We’re grabbing anything we can get our hands on – coal cars, baggage cars, anything that will hold a bushel of grain.”
[71]Trager,Amber Waves of Grain, 83.
[72]“Tighter Grain Sales Reports Culled from Commodity Bill,”The Town Talk,August 20, 1978: 47
