Foreign Relations of the United States, 1964–1968, Volume IX, International Development and Economic Defense Policy; Commodities

333. Telegram From the Department of State to the Embassy in Australia¹

Washington, October 21, 1966, 1:14 p.m.

70493. Reftel Canberra 2153.² Confusion over figures stems from proposal to shift base wheat in new agreement from Canadian (Manitoba #1 at Lakehead) as in present International Wheat Agreement to U.S. wheat (hard winter #2 at Gulf ports). To make comparison between present IWA minimum and proposed minimum prices necessary to set differentials between U.S. and other wheats. These differentials not yet agreed. No differentials are established in present International Wheat Agreement.

Canada, Australia and Argentina have made clear they wish start with opening bid of $1.85 for U.S. hard winter as new minimum as suggested by EEC. Canadians said this equivalent to present IWA maximum and would thus raise minimum by 40 cents. Canadians admitted this calculation based on present market differentials of 29 cents. However, it is on basis of 20 cent rather than 29 cent differential between U.S. and Canadian wheats that Australia interprets $1.85 price as 30–32 cent increase rather than 40 cent increase in present minimum.

In any event Canadians made clear they prepared settle for less than $1.85 in negotiating new grains agreement. Said $1.77 their fallback position. They explained that this price for U.S. wheat would enable them to say that new agreement guaranteed Canadian farmer $2.00 (Canadian) wheat and thus justify other measures in new agreement which Canadians would find onerous.

U.S. said we prepared go along with opening bid of $1.85, that we would work hard for it, and if contrary our expectations this price or anything close to it proved to be negotiable with importers we would make necessary domestic adjustments.

On the other hand we were not prepared to commit ourselves rigidly to Canadian fallback position of $1.77 and suggested instead that $1.70 was realistic target. This represents substantial movement in U.S. position. We emphasized final price we could accept contingent upon satisfactory arrangement on other elements of agreement including differentials. Thus on price issue we are agreed on initial negotiating position and are separated by difference of 7 cents in ultimate fallback position. In fact we very doubtful that either UK or Japan would join an agreement with a minimum higher than $1.70.

There are additional considerations militating against our taking an extreme position on minimum price:

a) If pressed too far, exporters’ price demands will jeopardize other U.S. objectives in agreement including market access and importers’ contributions to food aid;

b) Excessively high price would further encourage irreversible expansion of production in exporting countries and thus could make minimum unmanageable;

c) High minimum price would mean extensive use of “negative subsidy” in U.S. For example, if $1.77 minimum for U.S. Hard Winter at Gulf were accepted, this would work back to typical Kansas farm return of $1.45. With present loan rate level of $1.25, large U.S. crop might push U.S. price to loan level for part of year. Export certificate (tax) of 20 cents a bushel would have to be collected to raise U.S. export price to agreed minimum. Although we have legislative authority for this, it remains in the courts. Persistent use of this device would revive “export tax” issue.

Above considerations all the more pertinent as all exporters agree objective should be to maintain market price within range rather than at minimum.

In post mortem with Westerman, Australians said they were mystified by Canadian walkout since talks seemed to make progress. Emphasized however that Australians felt as strongly about price issue as Canadians and considered U.S. proposal of $1.70 minimum for No. 2 hard winter at Gulf inadequate. Australians now estimate U.S. proposal would mean improvement of about 15 cents for Australian wheat, assuming historical differential between U.S. and Australian wheat. Westerman leaving for London today but rest of delegation staying behind for further work on exporters draft next week following visit to Canadian Wheat Board.

Re specific questions reftel:

1. U.S. agricultural interests would be happy with $1.85 minimum since this assures them return for export portion their crop at about current high market prices. U.S. Government would be able to administer $1.85 minimum but with difficulty as noted in opening paragraphs. If $1.85 price were agreed and larger U.S. production materialized in relation export demand without other supporting action, prices would tend to fall to loan level. With prices at loan level of $1.25 USDA would have to collect export certificate of approximately 28 cents per bushel, or raise guarantee (and program cost) significantly.

2. UK imports 170 million bushels wheat. $1.85 is roughly 10 cents above current market. Additional cost to UK balance of payments of $1.85 level at least $20 to 25 million. UK not likely to accept $1.85 minimum price, but may accept close to present US firm target of $1.70.

3. Canadians may have more immediate political problem than Australia. Canadian fallback position of $1.77 U.S. at Gulf can be represented to Canadian farmers as a guarantee of $2.00 (Canadian) for a key Canadian wheat on the farm. This has become a political symbol in Canada. U.S. offer of $1.70 could be represented in the same manner with appropriate market differentials that make U.S. and Canadian wheat competitive. Canada would like to use 20 cent differential established in period when U.S. not competing aggressively for world markets.

4. Believe U.S. price of $1.70 is probably maximum we can expect importers to agree to. Our $1.70 minimum in practice would mean $1.75–$1.80 market prices since prices must be kept above minimum to avoid market rigidities and market sharing arrangements which are necessary under the agreement if prices stay at minimum for any significant period. U.S. already committed to $1.85 if negotiable in balanced package in Geneva.

5. U.S. offered support increase to $1.85 with appropriate competitive differentials between U.S. and Canadian wheat. We refused accept Canadian position that if increase at least to $1.77 not obtained Geneva negotiations with importers would be broken off. Recommend President assure Holt that U.S. will give strong support to $1.85 minimum as negotiations with importers begin in November. Suggest leave until later question of final settlement of minimum price, which in any event depends on developments in the negotiations. Believe Australians will agree.

Recommend President stress that price is one of several key factors which have to be negotiated, and until whole package emerges, impossible to fix any final positions.

State, Agriculture (Schnittker), STR (Herter) and Bator concur in above recommendations.

Katzenbach

1. Source: Department of State, Central Files, INCO–WHEAT GATT. Confidential; Flash; Limdis. Repeated to Ottawa, Buenos Aires, and Geneva for GATT. Drafted by Ioanes and Schnittker (Agriculture), Hedges, and Fried; cleared by Eugene Rostow, Solomon, John P. Walsh (S/S), and Bator; and approved by Katzenbach.
2. Document 331.