Mr. ESKILDSEN. Let me try to explain it. When we sell wheat to India we apply the cargo preference law, which means that 50 percent of it has to go in U.S.-flag vessels. These vessels are normally higher in price than the foreign-flag vessels. We ask India to put up in rupees the amount that they would have had to pay for ships had they been able to use foreign-flag ships.

That means that they pay up to a certain point. They pay for it in rupees. The remainder of that they do not pay for.

Mr. HAGEN. You pay for it.

Mr. ESKILDSEN. Yes, sir. But I think maybe a more important consideration here is the fact that U.S. dollar financing is concerned, which has its balance-of-payments implications.

We put up the whole cost of the U.S.-flag vessels, but we get paid in rupees up to the foreign-flag rate. However, we don't get back at all the amount that is over that.

Mr. HAGEN. When they use foreign flag do they pay the whole thing in rupees then?

Mr. ESKILDSEN. No, sir. Normally they have to use hard currency for this.

Mr. HAGEN. Their own hard currency.

Mr. ESKILDSEN. Yes, sir.

x

Mr. HAGEN. In the case of this Russian-Continental transaction I assume that the deal between the Russian Government and Continental was that they would deliver a bushels of wheat of a certain variety for a certain price per bushel, or hundredweight, or ton I guess it is, at a Russian port. Is that correct?

Mr. ESKILDSEN. This would be my understanding; yes, sir.

Mr. HAGEN. So that larger than expected export subsidies would mean larger profits for the exporter.

Mr. ESKILDSEN. Yes. As Mr. Lewis explained, there is a relation between what they pay for wheat, and what they get for the total delivery of wheat at the other end.

Mr. HAGEN. Isn't it a fact that Durum wheat sells higher on the U.S. market than these other two varieties of wheat?

Mr. LEWIS. It does generally on the U.S. market, yes.

Mr. HAGEN. What is the difference between, say, Hard Red Winter and Durum?

Mr. LEWIS. Yes, the market price for Durum is now higher.

Mr. HAGEN. What is the difference exactly.

Mr. LEWIS. I don't remember just what the prices are.

Mr. HAGEN. Is it substantial.

Mr. LEWIS. Not very, no. I think Durum now is close to the price of Hard Red Spring, which is just a few cents a bushel higher than Winter.

Mr. HAGEN. As I understand it, Durum wheat is used almost exclusively for macaroni-type products.

Mr. LEWIS. It can be mixed with bread. It diminishes the quality of bread flour. It can also be used for porridge.

Mr. HAGEN. In this particular transaction did the Russians request a certain percentage of Durum, and a certain percentage of Soft Winter, and a certain percentage of Hard Winter?

Mr. LEWIS. We of course have no direct knowledge of that except what we have been told by the exporter, and they have told us that

the Russians were very reluctant to accept Durum wheat and they also preferred the Hard Red wheat to Western White wheat.

Mr. HAGEN. There is plenty of all varieties in this country. Why didn't they get what they wanted? This is a commercial transaction.

Mr. LEWIS. Continental made an effort to sell them the Durum. Mr. HAGEN. Why did they make the effort? They make more profit on the Durum, don't they?

Mr. LEWIS. I can speculate that they made the effort because they felt there would be a possibility of being able to make a bid offer that would be accepted and enable them to come out on the trans

action.

Mr. HAGEN. More specifically, what is the basis of that motive? Had they hoped to pick up some of this 50-percent requirement with Durum a little easier than they could with the other wheat?

I

Mr. LEWIS. Sir, I haven't any direct knowledge of what Continental Grain Co.'s motives were nor what their intentions were. think it might be preferable for them to speak for themselves on that.

Mr. HAGEN. But they pushed the Durum on the Russians?
Mr. LEWIS. That is what they have told us, yes.

Mr. HAGEN. And actually all these categories of wheat are in large supply as far as the Department of Agriculture is concerned. Mr. LEWIS. That is true. I do understand that the Russians did buy some Durum wheat from Canada also, but this, as I understand it, was a problem of getting as much wheat out of Canada as Canada could physically handle.

Mr. HAGEN. The Russians normally don't use a great quantity of Durum wheat. They don't use much spaghetti or similar pastes.

Mr. LEWIS. They don't use pasta products, but they do produce some Durum wheat themselves which I think they generally mix with their bread flour or use for porridge.

Mr. HAGEN. Is this wheat that is being handled taken directly from the CCC stocks by Continental?

Mr. LEWIS. Yes. Continental bought the entire lot from Commodity Credit Corporation.

Mr. HAGEN. The whole amount?
Mr. LEWIS. All of the Durum.

Mr. HAGEN. All of the Durum?

Mr. LEWIS. All of the Durum. The Hard Winter and the Soft wheat might or might not come from CCC stocks, but it is up to Continental to get it wherever they prefer. However, it will reduce CCC stocks to that extent, to the full extent, because total exports and total demand this year will exceed the free supply of wheat, so that the trade will have to come to CCC for the net balance. Mr. HAGEN. Ordinarily on the dollar sales abroad of wheat they go out and buy on the open market, don't they?

Mr. LEWIS. Yes, they generally do that or they may buy from CCC in accordance with standing offers of sale which are regular routine.

Mr. HAGEN. If they buy on the open market, then they go to CCC and get a payment in kind for the export subsidy?

Mr. LEWIS. Yes. The payment in kind, incidentally, is redeemable only from CCC stocks.

Mr. HAGEN. So they can pick up the subsidy out of CCC stocks. Mr. LEWIS. Yes.

Mr. HAGEN. Do you have any idea what profit per bushel or per ton an outfit like Continental makes?

Mr. LEWIS. I don't have any specific knowledge on this transaction or any other specific transaction.

Mr. HAGEN. You have a general idea, though, what the profits are in this business.

Mr. LEWIS. Yes; the margins, as I mentioned, are frequently in the range of a penny a bushel or less.

Mr. HAGEN. That would be typical-a penny a bushel or less? Mr. LEWIS. I would guess that it would be typical.

Mr. HAGEN. Suppose the CCC stocks weren't available. You have discretion as to whether or not you will sell CCC stocks?

Mr. LEWIS. The CCC does have wide authority, broad authority, and our sales policies are established by the CCC Board and approved by the Secretary and we carry them out in accordance with the established policy.

Mr. HAGEN. The point I was trying to reach was if Continental had to go on the open market for it, the price of the grain they are buying might go up considerably, but as long as they have this CCC grain available they are protected against any price raises of the American farmer.

Mr. LEWIS. There was not a sufficient quantity of Durum wheat available to Continental in the free market to have put together this large quantity of a specific grain in the very short time available except by going to CCC.

Mr. HAGEN. I can't really understand the reason why there is such a large supply of Durum. A couple or 3 years ago it was in short supply.

Mr. LEWIS. This is characteristic of Durum, Mr. Hagen. It is grown in a very small area of North Dakota, Montana, Minnesota, and South Dakota and except for southern California

Mr. HAGEN. And that is the reason we get a special quota in California.

Mr. LEWIS. And because it is concentrated primarily in this area it is subject to yield variations that are very extreme. It is also subject to the development of new kinds of rust, which will attack a strain of Durum wheat which had been immune to the older species of rust, and very seriously affect the crop until a new resistant strain of Durum wheat can be developed to overcome the rust. This has created very sharp fluctuations in yield.

Mr. HAGEN. Which of your categories of wheat are in the greatest oversupply?

Mr. LEWIS. I believe that Durum would head the list, at least until this transaction. Hard Winter wheat would be close behind.

Mr. HAGEN. That is the kind they grow in Kansas?

Mr. LEWIS. Yes.

Mr. HAGEN. Do you pay any part of the freight bill within the United States on any of this grain?

Mr. LEWIS. We in a sense will do so because we will price the Durum, and have priced the Durum to Continental Grain Co., at a price which reflects the normal market value at the head of the lakes, and now, since the lakes are closed, we must rail it to Atlantic ports and this will represent some absorption of extra freight.

Mr. HAGEN. This is in addition to the 72 cents or 73 cents export subsidy?

Mr. LEWIS. Yes, sir.

Mr. HAGEN. So in effect you have suffered a loss by Continental insisting on the Durum, is that right?

up.

Mr. LEWIS. No.

Mr. HAGEN. You have an additional freight bill you are picking

Mr. LEWIS. We consider it to our advantage to sell Durum whenever we can and we had about 25 million bushels of Hard Spring and Durum wheat positioned on the Atlantic coast before the freezeup. This was shipped on lake vessels, much of it, and we are replenishing that supply to keep the merchandising inventory available during the winter months.

Mr. HAGEN. Are there any savings to the United States derivable from shipment from the west coast rather than from the gulf or the Atlantic coast?

Mr. LEWIS. We do have a very ambitious program to export Hard Winter wheat to Japan off the west coast and this likewise involves some freight subsidy vis-a-vis the cost through the gulf, but we can sell it off the west coast while the customers won't come after it at the gulf, primarily for logistical reasons. They don't have available transportation out of the gulf, and there are other considerations.

Mr. HAGEN. I guess the Russians are insisting that some of this wheat be delivered into Siberia, so to speak, do they not?

Mr. LEWIS. I understand that they prefer to have the pressure on their ports distributed fairly evenly and for that reason asked for some wheat off the west coast.

Mr. HAGEN. Will those wheat sales going through Asia then leave from west coast ports?

Mr. LEWIS. We expect they will.

Mr. HAGEN. Those are all the questions I have.

The CHAIRMAN. Mr. Murphy?

Mr. MURPHY. Mr. Eskildsen, yesterday the Maritime Administrator submitted us some guideline rates, but he did not submit any rates from the Great Lakes ports, and Mr. Lewis just said that probably part of the freight bill of this grain from lake ports would be picked up by the United States. Is that correct?

Mr. ESKILDSEN. Of course, the period during which this particular transaction takes place is while the lakes are closed. I believe, as I recall, in Mr. Giles' testimony he indicated that rates would be published on the Great Lakes should they be useful. Mr. Ryan here may be able to add something to this.

Mr. RYAN. I am quite certain from past transactions in other fields of 480 that Maritime will establish rates wherever we need them, whether it be Duluth, or Milwaukee, or any port.

Mr. MURPHY. Do you anticipate these movements coming out of the Great Lakes?

Mr. RYAN. If Continental's contract calls for February and March loading it is unlikely the lakes would be open in time for that, but if future sales materialize it is entirely possible that there could be some lakes loading or at least St. Lawrence loading.

Mr. MURPHY. There is a restriction on vessels in the lake ports as far as draft is concerned based on the depth of the St. Lawrence Seaway? Mr. RYAN. That is right.

Mr. MURPHY. What would be the maximum size vessel that would probably come out of the lakes?

Mr. RYAN. The accepted figure is a vessel of 25-foot draft, but what they do is go into the lakes and take on as much as they can and then they can come down to the St. Lawrence River area and top off and finish their voyage from there, so actually you can have any depth you want. I think we had a 30-some foot vessel up there, but it didn't go into the lakes all the way. It went to the St. Lawrence River area and took cargo that was brought down the lakes on lake vessels or barges.

Mr. MURPHY. Actually that seaway, if they use these lake ports, then kind of restricts the American merchant marine some more, to smaller vessels?

Mr. RYAN. Restricts the small American vessel?

Mr. MURPHY. Restricts it to the smaller American vessels?

Mr. RYAN. Not necessarily so, because I think some of these American vessels that are 15,600 to 30,000 deadweight can pick up cargo in the St. Lawrence River area as can foreign-flag vessels. I don't really see at the present time any large American or foreign vessels going all the way up to Duluth, for example, for a lot of grain, but they would probably load Duluth grain in the St. Lawrence River area, which would be hauled down by barges.

Mr. MURPHY. What would the effect have been on the grain transaction if the guideline rates had been established at Public Law 480 rates?

Mr. ESKILDSEN. I would think that it would have been more difficult to convince the Russians that they ought to buy wheat. By the Public Law 480 levels you are referring to the fact that we only have one guideline? We have two guidelines on Public Law 480 now; haven't we?

Mr. RYAN. Yes. As we understand it from our discussion with the Maritime Administration, the basis for the rates to the Russian ports, particularly Black Sea and the cargoes going into Western Europe, is predicated on the same formula employed to arrive at the rates for Public Law 480 programs, except they did reduce the rates on the Russian cargoes by 20 percent, but they reduced our rates by 20 percent also.

Mr. MURPHY. What if these rates had not been reduced?

Mr. RYAN. Then the American-flag rate was at the, say $22 level for the Black Sea, which would be the originally constructed rate based on, I presume, our voyage rates to Egypt, Israel, and Turkey. I would guess that the supplier, Continental, would have a tough time selling to the Russians at the $22 American-flag rate.

Mr. MURPHY. Do the Russians need the grain badly enough that they would pay a higher price?