Mr. FOLEY. Do I understand that you are recommending that the domestic consumption and exports would be taken together as the

maximum?

Mr. PFINGSTEN. Yes. Two things are involved there. I would like, of course, to say that we are not expecting the Government to buy for the strategic reserve if it shorts the amount that is needed for the domestic market or the exports.

In other words, you have nothing left in reality, unless you produce beyond that. At the same time, we do not want sales to be made out of the strategic reserves unless we have reached a point where we are not producing enough for the current needs, both domestic and export. Mr. FOLEY. Then, you provide that the Commodity Credit Corporation could tell the reserve quota by its normal carryover of stocks? Mr. PFINGSTEN. Yes.

Mr. FOLEY. By a takeover of the stocks. And that could be a method by which they could avoid buying at the so-called market prices for the reserves, could it not?

Mr. PFINGSTEN. Yes. We, of course, do not want to set any time to which they are limited to buying, because if there is excess production we think they should be allowed to buy it at whatever the price is, whether that be higher or lower than the 115 percent of the loan price. Mr. FOLEY. You are willing, for example, to take all of the present carryover stocks and put them in the reserves immediately?

Mr. PFINGSTEN. We would be agreeable to that.

Mr. FOLEY. What do you consider as manufactured dairy products? Mr. PFINGSTEN. Butter, powder, and

Mr. FOLEY. And one more?

Cheese?

Mr. PFINGSTEN. Yes; cheese.

Mr. FOLEY. Do you think that it is a necessary strategic reserve item, or are you doing it primarily from a price stabilization standpoint, in recommending that?

Mr. PFINGSTEN. We are not recommending it as a price stabilization item, because keep in mind that I am always bringing in the domestic consumption and the export requirements, that we do not go away from that, but the reason why we think that dairy products should be brought in is because dairy would be an item that would be harder to bring the production up fast on than in any other commodity, because it takes a number of years to produce a cow. We are coming into a period now where production is dropping. I think that it would probably be very nice at the present time; that is, if we did have such a reserve set aside. You cannot bring that up even in a year's time; that is, the dairy production, once you fall below, so that we are regarding this as in no way a price stabilization legislation but strictly and completely for the sales for strategic reserves to be used in cases of emergencies. We are not trying to use it to raise the prices, but we most certainly object to having it being used in any manner whatsoever to hold prices down.

Mr. FOLEY. Because of the storage manufactured prices might go up.

Mr. PFINGSTEN. It is possible. I would not be an authority on that particular subject.

Mr. FOLEY. Thank you. That is all, Mr. Chairman.

Mr. PURCELL. If there are no further questions, we thank you very much.

Mr. PFINGSTEN. Thank you.

Mr. PURCELL. At this time we will call Mr. Roy F. Hendrickson, executive secretary, National Federation of Grain Cooperatives, Washington, D.C.

We will be glad to hear from you now.

STATEMENT OF ROY F. HENDRICKSON, EXECUTIVE SECRETARY, NATIONAL FEDERATION OF GRAIN COOPERATIVES, WASHINGTON, D.C.

Mr. HENDRICKSON. Mr. Chairman and members of the subcommittee, I am Roy F. Hendrickson, executive secretary of the National Federation of Grain Cooperatives, Washington, D.C.

First, I want to congratulate you, Mr. Chairman, for your initiative in introducing H.R. 12067 and for scheduling these hearings. Reserve stocks of agricultural commodities for national security and for other purposes involve basic issues too long unsettled.

The widespread drought of 1934 reduced U.S. grain output sharply, especially corn. It created the need to import feed wheat from Canada. Since then, reserves or "an ever-normal granary" has been discussed without a clean-cut policy and program being established.

Presidents and many Secretaries of Agriculture have made proposals. We have had unplanned reserves. Some have been excessive. We have also exhausted supplies, due to sudden and unexpected increases in needs when reserves would have been of tremendous value. Mostly the so-called reserves of the past have been a byproduct of something other than deliberate design or plan.

This matter is too important in a Nation scheduled to have 200 million people before the end of this year, to be left to accident or drift, The buildup of stocks of wheat and feed grains from 1938 to 1941 was often criticized by farm program opponents in those years. But opponents quieted down when the stocks proved to be a great national asset in meeting the expended requirements for food during World War II. These reserves made possible the U.S. magnificent response to extraordinary military, lend-lease, as well as expanded domestic requirements. This country supplemented its Commodity Credit Corporation and other carryover stocks and its enlarged production by grain imports from Canada and Australia.

Later, in the spring of 1946, our stocks of grain were so low that people in responsible posts learned the hard way that, while surpluses may cause concern, shortages and bare shelves are far more serious and needless.

The officials who had firsthand experience with that grain crisis in 1946 and I was one of them-concluded: It would be a costly and needless error to permit such a crisis to arise again.

In the spring of 1946 the U.S. ceiling price on wheat under the regulations of the Office of Price Administration was $2, national average. The requirements for relief feeding of the newly liberated areas through the United Nations Relief and Rehabilitation Administration (UNRRA) were huge. Italy had one of the worst shortages. Sup

plies from the United States, Canada, Argentine, and other sources were near exhaustion.

To get the last of the wheat on farms in this country, it was necessary for President Truman to authorize the Commodity Credit Corporation to offer a bonus of 30 cents a bushel on wheat delivered by farmers in the latter part of April and all of May.

Farmers who had responded to pleas to sell their wheat in previous months felt this bonus was unfair to them. An adequate reserve would have served well, would have been fairer for all concerned.

The two most recent domestic documents recommending reserves are: 1. The recommendation for establishing reserves, made in the President's message relating to "A War on Hunger," sent to Congress on February 10, 1966. No action responsive to this message has been taken thus far.

2. The report entitled "Food and Fiber for the Future," made by the President's Advisory Committee on Food and Fiber in July of this year. A report of a special technical study made for that Commission by Dr. Frederick Waugh and others is soon to be issued.

On page 22 of the Commision's report, it is stated:

The Commission recommends establishment of a national security or strategic reserve, including emergency stocks for food aid. This reserve should be isolated from the market except as offsetting sales and purchases are required to maintain the quality of the reserve stocks. We do not have such a reserve now.

Continuing, the report said:

The normal needs of foreign demand and food aid can and should be made a part of the regular market for farm products. Food aid should be purchased either by the U.S. or the recipient government on the basis of announced plans made known to farmers in advance of planting.

However, unusual or emergency food shipments may be required, as in the case of the Indian drought. Reserve stocks should be available to meet such needs and to avoid giving incorrect price signals to formers.

I should like to underline the last eight words.

The volatility of grain prices, their tendencies to overreact, leads often to excessive fluctuations in prices that mislead farmers.

As a contribution to stability, buffer stocks that will act as cushions or shock absorbers will serve usefully without muting the price trend signals needed to guide farmers in planning their production programs. Continuing, the report said:

Whenever the reserve stocks are depleted, the Government should announce the rate at which the stocks will be replenished, and purchases should be separately identified so that producers and traders will know the demand is temporary.

The above quotations were a part of the report agreed upon by the Commission as a whole. The Commission was split on details which I need not dwell on here.

The majority report, on pages 73-77, in which I joined as a member of the Commission, states carryover stock objectives, on page 77. These took into account the recommendations contained in the Waugh study.

Here the majority said:

CARRYOVER STOCK OBJECTIVES

A study made for the Commission indicated, on the basis of past variations in production and demand, that reasonable total carryover objectives would be:

550 to 650 million bushels of wheat, 35 to 45 million tons of feed grains, 10 to 12 million hundredweight of rice and 5 to 6 million bales of cotton.

The Commission majority also said:

These reserve levels are adequate for both stabilization purposes, strategic reserves including emergency stocks for food aid and normal working stocks. In terms of actual operations, we believe that the reserve for emergency food aid and national security, though handled by the same authority as the stabilization carryover, should be managed under different criteria because of the different objectives to be met by the two programs.

The majority, in stressing the need for economic stability, including reasonable price stability for agricultural commodities, reasoned from its basic conviction that American agriculture faces the prospect of excess capacity until at least 1980.

There is a continuous need for Congress and the executive branch to so legislate and administer as to insure that CCC will not weaken this marketing system by duplicating functions or structure. It should avoid introducing needlessly or accidentally added elements of uncertainty and risk. There is always much uncertainty in grain marketing; the potential of rapid changes in value, numerous risks attributable to wide ranges in weather behavior, as well as quick and surprising shifts in supply and demand locally, regionally, nationally, and internationally. There is no call to add to CCC's already large functions the role of riskmaker beyond that which is unavoidable due to its size and complexity.

For more than 10 years the practice under title I of Public Law 480 has been for USDA to issue purchase authorizations to countries in need, pursuant to a master agreement. These agreements are made with nations who will pay for grain and other agricultural commodities by depositing local currencies to the account of the United States. In subsection 3 of section 2, CCC would be authorized to supply out of reserve stocks all requirements under Public Law 480. This would include title I.

At the very least, title I sales should draw as at present from the open market. There, such requirements have created a major demand factor reflected in the day-to-day prices received by farmers. To deprive the marketplace of the demand provided by this claimant, handling title I sales over the CCC to be filled from its reserve stocks, would be a backward step-and a step in the direction of needlessly enlarging the role of the CCC.

CASH GRANTS INSTEAD OF COMMODITIES

I urge that an inquiry be made to determine if it would not now be less costly to make cash grants rather than shipments of CCC grain domestically for the preservation and maintenance of cattle herds as referred to in subsection 4 in section 3.

That program, initiated in a law passed by Congress in 1959, reflected the excessive stocks in the hands of CCC at that time. Today CCC stocks are low, neither excessive nor embarrassing. In fact, there are none in many areas. If cash grants for drought or other emergency relief were provided, the grain would be purchased out of the current flow of the aggregate market supply at the lowest transportation and distribution costs.

Instead, CCC is now forced to route grain from origins where it owns supplies to places of need. The location of its stocks, taking mileage and total cost of transportation into account, results in out-of-line hauls.

QUESTIONS RELATING TO RESALE PRICES

This bill is clear in section 3 in its reference to situations where the carryover will fall below 15 percent in the case of wheat, 10 percent in the case of feed grains, and 5 percent in the case of soybeans. In such cases, sales for export or for domestic unrestricted use would be limited to the market price provided it was not less than 135 percent of the current support loan rate. This would mean, in the case of wheat where the loan price is $1.25 per bushel, national average, that a resale price of 135 percent of the loan level plus carrying charges, farm basis, would range from $1.73 in July 1967 to $1.86 in June of 1968.

In the case of corn where the national average loan price effective October 1 will be $1.05 per bushel, 135 percent of the loan level plus carrying charges would mean a resale price ranging from $1.46 in October 1967 to $1.59 in September 1968.

In the case of soybeans where the loan or support price is at a national average of $2.50 per bushel, the resale price would range from $2.92 in October 1967 to $3.05 in September 1968.

The bill is silent on situations where the carryover would exceed the percentages given.

What would happen in case the Department acquires through a combination of its existing inventory plus acquisition of a reserve as authorized by this bill, plus takeover under the loan program where the total quantities would exceed the stated percentages?

This appears to be the case for grain sorghums now. There, CCC ownership on July 28 was in excess of proposed reserve.

We have heard suggestions that the Department should have authority to lower its resale price on a graduated basis in case the carryover advances, say to 20 or 25 or 30 percent of the year's needs in the case of wheat, corn, and soybeans.

To lower the resale price in those situations would be a price depressor, a drop in the "ceiling" price. Prices would be weakened by action of CCC in selling at the very time when strength was needed. Is it not true that the Department has an adequate option open to it if stocks increase beyond minimum reserve needs-the option of invoking its authority under supply-management programs?

When carryovers reached levels which appear excessive, would it not be consistent with the spirit of the 1965 act for the Department to interpret such excessive carryovers as an appropriate signal for employing supply-management programs it was authorized to carry into effect in order to bring supplies and demand into better balance? What is a better signal for their use than excessive carryovers?

Thus, the Department would be responding to the price trend signals of the marketplace, as well as the signals provided by the carryover data, to adjust production more nearly in line with requirements. In a very real sense, the loan rate is a price "floor" while the resale prices authorized for use by the Commodity Credit Corporation are "ceiling" prices. The guidelines used in its administration should be as clear as possible.