of Agriculture-have provided the Department of Agriculture with weekly export sales data.

Throughout its existence, the export reporting system has been plagued by a variety of problems which have resulted in questions concerning its accuracy, effectiveness and efficiency. During the Russian grain sales of 1974 and 1975, data provided on export contracts by the system appeared to foster considerable uncertainty within Government and private sectors over actual export levels rather than to provide the element of certainty for which it had been created.

EXPORTER SURVEY

As part of our examination of the export reporting system, we surveyed agricultural commodity exporters to get their opinions on its management and administration and their attitudes on U.S. Government involvement in the agricultural export sector. From the information we requested on their organization, sales, and contract procedures, we also hoped to develop a general description of the agricultural export industry as a whole. The 195 exporters who participated in the survey were found to represent, in terms of sales and exports, almost all of the agricultural export industry.

The firms surveyed encompass a wide range of enterprises, from businesses doing a few thousand dollars in exports to multinational, billion-dollar corporations. Almost 30 of the firms claimed 1974 sales in excess of $100 million, but the majority of export business remains at the top. Seven of the firms accounted for more than 60 percent of total 1974 sales.

Exporters expressed a generally positive attitude toward the Export Sales Reporting System. For example, they acknowledged the Government's need to mouitor export sales and did not find weekly sales reporting to be burdensome. They accorded the Reporting System a moderate degree of success in achieving its objective of providing accurate, timely, and reliable export statistics, and they rated Agriculture's weekly reports as generally useful. When asked to rank 10 forms by order of preference that U.S. involvement in export markets might take, the exporters chose a reporting system similar to the present one over all other (and more extensive) forms of Government involvement.

The exporters' view of Government reporting, however, may well be more tolerant than enthusiastic, for they generally oppose more stringent controls. For example, more firms oppose than support the public disclosure of the terms of export sales contracts, even if information were aggregated to protect individual exporter identities. They oppose having to submit written explanations for contract decreases and oppose even more the penalties for unjustifiable decreases.

Exporters were generally dissatisfied with past Government actions which lead to contract cancellations or negotiations. They were generally satisfied with the voluntary Prior Approval System-a mild, pre-contractual review of large volume export sales. If Prior Approval were reestablished, however, exporters would prefer it to be temporary and voluntary, rather than permanent and mandatory.

The exporters gave us detailed information about contract decreases, cancellations and modifications and about delivery deferrals. Approximately 20 percent of the quantities contracted for export in 1973-74 were eventually canceled or deferred. Reasons cited for decreases included contracting for maximum rather than probable needs, overcontracting in anticipation of export controls, hedging to protect market positions, and disadvantageous price changes. More often than not, the decreases were attributed to actions of buyers rather than of sellers. Further analysis of 1973-74 contract information revealed that basis contracts (those with no specifically stipulated price) were much more frequently decreased than were fixed-price contracts and that contracts with unknown destinations were more often decreased than those with known destinations. About half of the 1973-74 decreases were against contracts made by exporters with their own affiliates. Exporters believe that contracts showing exact destinations had better chances of being fulfilled than did those showing pricing terms.

A copy of our exporter questionnaire and a detailed analysis of exporter responses are being provided for the record.

EXPORT REPORTING SYSTEM'S PRICE IMPACT

The influence of Agriculture's weekly export reporting system on agricultural commodity prices has been debated. Some farmers contend that it has depressed grain prices and cite the dropoff in prices since late 1974.

Consumers, on the other hand, are increasingly concerned about the effect of grain prices on the continuing rise of food prices in general. Since the export reporting system was established in part to assure "consumers of plentiful supplies *** at reasonable prices," the question of its possible price impact seems appropriate.

Using regression analysis, we studied the relationship between weekly agricultural prices and weekly data published in the export reports. The anlaysis identified a moderate relationship between changes in the weekly export commitment and weekly cash prices of corn and soybeans but none for wheat and soybean meal. Because of these inconsistent results, inferences could not be drawn concerning the system's price impact.

Next we analyzed the reporting system's possible impact on price variability. We developed indices of price variability for agricultural commodities based on month-to-month price changes in the 22-month period before reporting began and in the 21-month period since. After making adjustments for unusual market activity in 1973, we found no great change in price variability since the reporting system was established.

EXPORT REPORTING SYSTEM'S OPERATION AND MANAGEMENT

Our review of the system indicates that it falls short of providing timely, accurate, reliable, and complete agricultural export data. It does not provide prospective sales information and, therefore, is not as effective an early warning system as needed. Data currently reported by exporters is not suitable for evaluating foreign demand on which to base timely agricultural policy decisions. The data has limitations because export contracts are frequently canceled or extensively modified. As I stated earlier, our survey of exporting firms showed that about 20 percent of commodities originally contracted for export in 1973-74 were canceled or deferred.

Export sales contract data reported by Agriculture is subject to continuous modification. Thus, export reporting system estimates consistently differ from those of the Central Intelligence Agency, Council of Economic Advisers, the Treasury, grain exporters, other Agriculture data sources.

Although Agriculture officials administer the system in an efficient manner, the uncertain nature of export sales contract data virtually makes it impossible for the system to provide the type of concrete information needed for a timely early warning system. The data provided by the system can be used as one of several indices for evaluating total export demand, but it needs to be improved.

The quality of information provided by exporters could be materially improved if Agriculture modified reporting requirements to include additional information on export sales, such as:

Classification of foreign buyer (Government agency, affiliate, private reseller, processor, distributor, or other end user).

Contract pricing terms or formula (including identification of flexible (basis) vs. fixed-contract types).

Exact destinations ("destination unknown" entries).

Contract provisions such as loading tolerances, shipping dates, storage details,

etc.

Because the issue of contract decreases has affected the export reporting system's credibility, requiring written explanations for export contract decreases might reduce the extent of unnecessary and speculative contract changes. Fewer changes would, most likely, improve the quality, consistency, and credibility of data generated by the system. Data quality could be further improved and the system's reliability enhanced by penalizing exporters who modify contracts without acceptable justification. Such actions would expand the system's regulatory role and undoubtedly would be strongly opposed by grain exporters as indicated in our survey.

Agriculture's Office of Audit has recently examined the Department's export reporting system and is developing a report on the findings.

During the export reporting system's 3 years of existence, three different Agriculture organizations have been responsible for its administration. It is currently administered by the Office of the General Sales Manager, which has primary responsibility for managing Government-funded agricultural export programs. Export monitoring by an agency whose main purpose is to manage export programs raises a question as to the objectivity with which it would carry out its monitoring and quasi-regulatory responsibilities.

Proposed amendment to section 812

At the request of this committee, we prepared legislative language amending section 812 of the Agriculture and Consumer Protection Act of 1973 for congressional consideration. This proposed amendment is intended to make more and better export information available to the Secretary of Agriculture and to provide a mechanism to facilitate more timely decisionmaking. The proposed amendment accompanied with explanations is being provided for the record.

1974 SOVIET GRAIN SALES

In September 1974, as in 1972, the Soviets again entered the U.S. grain market on a large scale without advance warning of the nature and extent of their intended purchases. The export reporting system in effect, while an improvement over that in place in 1972, also was deficient and did not provide U.S. officials with any early warning. The executive branch's response was to defer and renegotiate these large sales to the Soviets, to adopt a temporary prior approval system, and to install a daily export reporting system.

These actions again demonstrated the crisis-oriented nature of the commodity management system. Firm rules and procedures for large disruptive transactions involving purchases by centrally planned economies such as the Soviet Union were not adopted until after a temporary embargo had been imposed. Government officials recognized weaknesses in the decisionmaking data base but there was no commitment to eliminate the weaknesses

1975 SOVIET GRAIN SALES

The Soviet Union's purchase of approximately 16.2 million tons of U.S. grains in 1975 was similar to its 1972 and 1974 purchases and accentuated many of the previous management weaknesses. The executive branch was again surprised by the unanticipated nature and large quantity of the sales-despite the existence of an export reporting system, better communication with grain exporters, and improved relations with the Soviet Union. To better understand the circumstances surrounding Soviet reemergence in the U.S. grain market, we asked high level Agriculture, State, and White House officials such key questions as: When and through what means did the U.S. Government first receive any indication of Soviet buying intentions?

What was the nature of U.S. Government involvement in the grain sales? What did the U.S. Government estimate the total size of the Soviet purchase to be?

Did the U.S. Government have available any contingency plans in the event the Soviet purchases exceeded estimates and precipitated a potential short-supply/ high price situation? Had the U.S. Government, in anticipation of such a development, completed impact analyses reflecting the differing effects of varying sizes of purchases on the domestic economy?

Had there been any informal or formal communications between the grain exporters and the U.S. Government and between the U.S. and Soviet Governments on these sales?

Was there any interagency monitoring of the current sales?

We found that the U.S. Government had not received advance warning of the nature and extent of Soviet buying intentions prior to July 7, 1975. Agriculture had established informal communication between the U.S. Government and multinational grain exporters several months earlier, but intelligence sources, the agricultural attache in Moscow, and grain company officials had not revealed Soviet buying intentions before that date. The Soviets had also failed to inform the U.S. Government of their buying intentions despite repeated U.S. requests. and despite agreement to provide such data under the 1973 US/USSR Agricultural Cooperation Agreement.

Soviet buying intentions first became known on July 7, 1975, when U.S. officials. learned through public sources that the Soviets were arranging for shipments of grain to be purchased from the Canadian Wheat Board. Throughout thesummer of 1975, the Soviets did not reveal the extent of their purchasing intentions despite the Government's repeated requests.

U.S. Government officials contended that the agricultural export reporting system was not designed to reflect Soviet-or any country's-buying intentions until after a written contract was entered into and reported to the Department of Agriculture.

In 1975, as in 1972 and 1974, no formalized early warning system existed toprovide decisionmakers with accurate, timely, and complete export information. Voluntary submission of Government-requested information concerning major grain companies' negotiations of contracts with the Soviets did not represent a formal early warning system. In this instance, the lack of such a system only increased uncertainty over Soviet buying intentions.

Although the executive branch had anticipated Soviet purchases of approximately 5-million tons of U.S. grains in 1975, no impact analyses were initiated before the first official sales in July 1975. Therefore, when it became clear that the Soviets intended to purchase unspecified larger quantities of U.S. grain, the executive branch was not prepared to quickly determine acceptable levels of exports. Because of this lack of preparation, uncertainty over total U.S. wheat production, and rapidly declining Soviet production prospects for 1975, the U.S. Government announced temporary "voluntary" export controls until it could better assess the status of U.S. and Soviet market conditions. Concurrently, it entered into negotiations with the Soviets on a long-term grain purchasing agreement.

Throughout the summer of 1975, U.S. officials reiterated their commitment to a free market economy with minimum government intervention. Nevertheless, the U.S. Government clearly involved itself in the market in an effort to avoid and/or minimize potential domestic and international disruptions such as those associated with past large-scale grain sales. Although the Government did not resort to formal export controls as authorized by the Export Administration Act, the voluntary system effected temporary control of exports.

The announcement of a long-term grain purchasing agreement with the Soviet Union in October 1975 also represented a departure from the Government past policy of nonintervention in the market. The agreement, signed on October 20, 1975, to take effect October 1, 1976, contained the following key features.

Commits the Soviet Union to purchase a minimum of 6-million metric tons of wheat and corn annually.

Permits the Soviets to purchase an additional 2-million tons annually without government-to-government consultations.

Commits the U.S. Government to facilitate Soviet purchases under the agreement and not to exercise its authority to control shipments of these amounts except that it may reduce the quantity to be sold in any one crop year if the estimated total U.S. grain supply is less than 225-million tons in that crop year. Provides for consultations by the two governments in advance of purchases in excess of 8-million tons of wheat and corn in any one crop year.

Executive branch officials, in signing the agreement, claimed that it regularizes Soviet purchases, minimizes associated disruptions, and

Assures U.S. farmers a market in Russia for 6-million tons of wheat and corn a year for the next 5 years;

Provides additional assured demand which will assist farmers in making planting decisions;

Protects U.S. livestock producers and consumers and other foreign customers from large Russian purchases of U.S. grain without prior consultation;

Provides the United States with $4 billion to $5 billion in potential foreign exchange earnings (at prevailing prices) over the next 5 years; and

Assures that sales under the agreement will take place at the prevailing market price through traditional exporter channels.

Critics of the agreement, including farmers, consumers, and congressmen, contend that it has created additional uncertainty rather than resolving the disruptions associated with massive grain purchases. They claim that the agreement: Limits the President's authority to impose short-supply export controls on corn and wheat.

Fails to include substitutable commodities, such as soybeans and soybean meal. Fails to clearly cite the authority for such an agreement (a thorough legal analysis of the agreement was not completed until several weeks after it was signed).

Was negotiated and signed without the advice and consent of the Congress. Is unenforceable because grain is a fungible commodity distributed by multinational corporations whose market activities are not regulated by the agreement. Fails to provide for Soviet disclosure of forward estimates and stocks as promised in the 1973 Joint Agricultural Cooperation Agreement.

Fails to protect U.S. domestic consumer interests by not restraining the volume of Soviet sales in the event such sales create unacceptable high levels of inflationary food prices domestically.

Fails to comment on the potential for shipment of subsidized grain in the event market conditions change during the term of the agreement.

Represents increasing government intervention in the market, gives the Soviets privileged market status, and establishes a precedent for government-to-government, long-term grain purchasing contracts that may cause other major importers of U.S. grain to seek such agreements and privileged market status.

The controversy growing out of the grain agreement and the Government's voluntary export restraints in 1975 has concerned the Congress. Consequently, wẹ prepared a legal analysis of the Government's actions in these two instances. From our analysis we concluded that:

The President has authority under the constitution to negotiate international agreements affecting foreign commerce, notwithstanding the constitutional responsibility of the Congress "to regulate Commerce with foreign nations."

The suspension of sales to the Soviet Union was based on voluntary action by exporters at the request of the executive branch. Since the suspension was not legally binding, it was a lawful exercise of executive branch authority.

The President has independent Constitutional authority to enter into such an executive agreement as the long-term Soviet grain purchasing agreement which affects foreign commerce and such action on his part is not precluded by the Export Administration Act. However, the U.S. Government does retain its statutory authority under the Export Administration Act to impose export controls should Soviet purchases be of such a nature to necessitate such action.

The President's authority to institute legally binding and enforceable export controls is derived from and dependent upon the authority delegated to him by the Congress in the Export Administration Act.

It is presently difficult to assess the extent to which the long-term grain agreement is a viable and effective alternative to the traditional Soviet approach of substantial buying without prior notification. It has clearly raised additional uncertainties that may only be resolved as its application is tested under a variety of circumstances. For example, concern will continue over the extent of Soviet responsiveness to the agreement's terms and conditions. And doubt will continue as to how the U.S. Government will manage possible extreme circumstances that may confront both signatories. Such circumstances include unexpected changes in the market environment and possible difficulties in the foreign policy area that might necessitate reconsideration of the entire issue.

Even with the agreement in force, the 1975 Soviet grain experience clearly reflects a need for the U.S. Government to improve grain export policy decisionmaking and monitoring. U.S. forecasting of foreign supply and demand, particularly for the Soviet Union, is becoming increasingly important.

FORECASTING SOVIET PRODUCTION AND DEMAND

Soviet production estimates for 1975 were continually revised throughout the summer of 1975. By the end of the crop year, the Soviets released data showing they had produced approximately one-third less than U.S. and Soviet agricultural economists had forecasted earlier that year. Poor weather conditions in 1975 and in previous years had been the primary causes for revising Soviet production. Despite concrete evidence of erratic Soviet grain production in past years, U.S. officials persisted in portraying the Soviet's 1975 crop in optimistic terms until its production shortfall became obvious.

Agriculture's original forecast of 1975 Soviet grain production was 210 million metric tons. This was less than the 215.7 million metric tons planned by the Soviets, but equal to estimated Soviet utilization requirements. The Soviet Union's poor weather conditions were not considered serious by Western agricultural experts then in Moscow.

Production forecasts were revised downward to 200 million tons in early June with imports expected at around 10 million metric tons. Forecasts were again revised downward in early July to 195 million metric tons with 15 million metric tons of imports expected. Poor weather caused late July forecasts to be revised to 185 million metric tons of total grain. By this time the Soviets had already purchased 14 million metric tons including 10 million from the United States and were estimated to need 6 million more tons. Early August estimates were 180 million metric tons produced and 25 million metric tons of imports.