We cannot forget that the foreign grain trade of this country is a great agricultural asset. Certainly it is the brightest spot we have in our balance of payments. Any malpractice that would jeopardize or undercut this trade would certainly have serious repercussions.

For instance, we export over half of all of the wheat we produce in this country and to have that jeopardized or substantially reduced would cause severe economic problems to our entire agriculture sector. This certainly cannot be allowed to happen.

Consequently, I am very much interested in participating in these hearings, and in trying to find out first of all the problems, and abuses, and then the viable solutions.

Senator HUMPHREY. Well, thank you very much.
Senator Dole?

STATEMENT OF HON. ROBERT DOLE, A U.S. SENATOR FROM

THE STATE OF KANSAS

Senator DOLE. Mr. Chairman, the Grain Standards Act was originally passed in 1916 to provide a method of describing and measuring grain. Before that time, grain standards varied among States and sometimes among communities or even among elevators. The act provided for primary inspection by licensed State, trade or privately owned agencies and for appeal inspections by Federal inspectors. This basic concept was retained in the Grain Standards Act of 1968 which updated the original act by eliminating requirements for redundant inspections by several States when grain is shipped interstate and by strengthening export inspection provisions.

Reports from USDA indicate that the improvements contained in the act of 1968 apparently have not been fully implemented in effective regulations. Many positive steps have been taken by the Department, particularly in improved export inspections, stowage inspections, mechanical sampling, and recordkeeping. USDA indicates another set of proposed regulations has been published which would further strengthen export inspections. Administrative actions have also been taken within the Department to provide for improved inspection of ship stowage and loading. It is apparent that many of these improvements have been made since USDA discovered the inadequacies in their operations. Violations have surfaced recently. Abuses of this type and this magnitude apparently did not even exist until the past 2 or 3 years when our export volume greatly increased and the value of the commodities doubled and tripled. This combination of increased volume and value has undoubtedly attracted more illegal activities as evidenced by current indictments and convictions and the reported increase in complaints.

I was pleased to join the subcommittee chairman in asking the full committee chairman for authority to investigate this matter. The chairman of the subcommittee is to be commended for his prompt action in making this investigation operational and in scheduling this hearing to discuss and evaluate the problem with USDA and Justice Department officials. My concern, as I am sure it is the concern of the chairman, is to protect our producers against any loss in markets or market prices. Millions of dollars have been invested by our Government in market development. Our producers, through special

producer funded commodity organizations such as great Plains Wheat, Western Wheat Associates and others, have invested their own additional funds for market development. We must take steps to assure continued delivery of the quality of grain that our customers desire to purchase. This can only serve to enhance our overseas

markets.

In these hearings I would hope that we can learn more about the grain inspection system, the philosophy under which it is administered, and what specifically is responsible for weakening the system. With this information, we should be able to develop improvements in the existing laws to correct any inadequacies.

Senator HUMPHREY. And now, Under Secretary Campbell, we await your statement. We will have a number of questions that may necessitate your bringing to the table some of your associates here to answer some of our more detailed questions. If you will proceed.

STATEMENT OF HON. J. PHIL CAMPBELL, UNDER SECRETARY, U.S. DEPARTMENT OF AGRICULTURE

Mr. CAMPBELL. Thank you very much, Mr. Chairman, and members of the Committee. I wish to express Secretary Butz's regrets that he is not here. His previously scheduled appearance had to be cancelled because of activity on the floor of the Senate, and it was not with any reluctance that he would have appeared. He desired to appear, and we appreciate this understanding of the chairman with regard to the Secretary's schedule. And I am happy to appear here as a result of his trip abroad and his not being able to be here.

I do have associates with me. I have Assistant Secretary Feltner, Administrator Peterson, Ervin Peterson, of AMS; Mr. John Chernauskas, director of the Marketing Division of our General Counsel's Office. David Allshouse, Deputy Director, Otto Collins, Deputy Assistant Director, Jerry Oien, Transportation and Warehouse Division of AMS, the Agricultural Marketing Service, and David Galliart, Director, Grain Division, AMS, and Charles Pence, International Marketing Director for Grain and Feed, Foreign Agricultural Service. I appreciate the opportunity to appear before your committee today to discuss the grain inspection system. We very much welcome your concern and interest as expressed in your statement in the opening here today, in helping us in the Department develop and apply a system of grain inspection which will assure that grain in all markets, both foreign and domestic, is the highest quality obtainable at all times. Shortly, I will also comment on Senate Joint Resolution 88, the emergency grain standards amendments now pending before your committee.

We are here today to acknowledge frankly that there are many inherent problems in the current grain inspection system-problems which we ourselves have uncovered and already have taken some actions to correct. We acknowledge also that these are problems which we must overcome to improve the integrity of our national grain inspection system. We will have for submission to Congress very shortly our long-range recommendations for legislation to deal with this matter straightforwardly. We do not feel the emergency legislation is necessary at this time and we respectfully ask the Congress to

defer any action until at a very early date we submit to you our proposal for a permanent solution.

Mr. Chairman, we do not believe we need "stop-gap," short-term, emergency measures in this all-important area. We need permanent legislation at the earliest possible time and that is what we will propose.

With all due respect to the committee's interest in this vital matter and its desire for hearings, we must point out that the subject of these hearings is an area we have been looking into for better than 2 years. When this matter came to the committee's attention, we had already progressed far enough in our own inquiry-in cooperation with other Federal law enforcement agencies that indictments had been returned, people had been tried and sentenced, the investigation had been broadened, and a number of administrative actions had been taken to strengthen the current grain inspection system.

To put things in proper chronological order, Mr. Chairman, we initiated a full audit of the grain inspection operations in April 1973more than 2 years ago. In September 1973 in Louisiana we initiated an investigation because of allegations involving the grain inspection system. During the course of this investigation in 1973, we learned that the Federal Bureau of Investigation was conducting a companion investigation in the same area also related to grain inspection. We quickly coordinated these investigations with the FBI and they were subsequently placed under the guidance of the U.S. attorney in New Orleans.

The investigations rapidly expanded based on information developed in this cooperative law enforcement effort guided by the U.S. attorney. Both Secretary Butz and I, as Under Secretary, were kept fully apprised on an ongoing basis of investigation developments and findings. Because of his own serious concern about the reported irregularities, Secretary Butz consulted with Attorney General Saxbe who suggested that other investigations be coordinated through U.S. attorneys where evidence pointed to problems in other ports. The Director of our Office of Investigation met with Director Kelly of the FBI and officials of the Department of Justice to work out coordination of these investigations in all ports where there was substantive evidence of corruption. Secretary Butz also personally met with the U.S. attorney in New Orleans to assure him our complete cooperation and assistance.

The first fruits of these investigations came in August 1974 when a Federal grand jury in New Orleans issued a series of indictments based on findings developed in the coordinated investigation. Immediately afterward, another grand jury in Houston began an investigation based on leads developed in New Orleans. That grand jury returned indictments this past March. Then, a month ago, the same New Orleans grand jury issued additional indictments.

Investigations are currently being conducted in a number of cities. based on new leads that have been developed.

Mr. Chairman, I wish to point out to the committee that we proceeded in this matter without fanfare and without issuing a press release, and also without bringing it to the attention of Congress, because it involved a sensitive investigation and judicial matter. Öther audits and inquiries in the past in the same area involving similar

allegations on grain inspection provided a basis for civil and administrative actions but not criminal prosecutions. We felt justified, therefore, in taking all appropriate steps to maintain the strictest security possible so as not to interfere with ongoing judicial proceedings resulting from successful investigations. We still feel compelled to guard our every action and public comment so as not to obstruct or interfere with the continuing judicial process.

We are, however, happy to cooperate with this committee and the Congress to remedy the defects which our investigations have uncovered. We wish to do so in a manner which will not inhibit, interfere with, or cause the failure of the investigations in process, nor the prosecutions which may follow. And frankly, Mr. Chairman, we need your assistance and help.

We are very much aware that we need the help of Congress to remedy the problem. The authority which under the law permits us to establish a grain inspection organization does not give proper assurance that the violations so far uncovered will not reoccur. Therefore, we will be submitting to Congress shortly a recommended change in the law with regard to grading and weighing of grains and feed stocks in the domestic and international trade areas. This will be a permanent bill intended to give our customers the assurance that grain sold and shipped from the United States is exactly what the certificate says it is. Temporary or stopgap measures will not suffice. Now, at this point I would like to give you the legislative background of our grain inspection system to place it in its proper historical perspective. We had no Federal or State standards or inspection and grading systems when commercial marketing of grain began in the United States in the early 1800's. So, grain merchandisers established their own standards and grading systems in the mid-1800's on a market-to-market basis.

But because of the confusion resulting from market-by-market grades and grading procedures, some State-operated grading systems came into being in the late 1800's and early 1900's. It soon became apparent that national standards and a national inspection and grading system were needed. Thus, the Grain Dealers National Association adopted national grade standards in 1909.

Congress responded in 1916 to the need for mandatory grade standards and a national inspection and grading system by passing the U.S. Grain Standards Act. That act created the two-level system that continues in use today. Basically, this system provides for a primary level inspection conducted by State, trade, and privately owned inspection agency employees licensed by USDA, and a supervisory and appeal level operated by USDA.

Although the act has been amended on three different occasions since 1916, the Department has never had authority to conduct original inspections in this country. The grain industry has maintained over the years that any involvement of USDA in the conduct of original inspections-other than at Canadian ports-would remove all management decisions from State departments of agriculture and organizations employing licensed inspectors, and further could cause a breakdown in the appeals procedure.

While the use of licensed nonpublic employees for inspection and grading work has been terminated in other commodities-such as eggs

and poultry and cotton-we are compelled by law to continue to utilize licensed, nonpublic employees for grain inspections.

We wish to emphasize that we moved forward aggressively with our investigation and with administrative actions which I will detail later, because of our deep concern over our reputation as a dependable supplier of quality grain for the world. The role of U.S. grain exports is of utmost significance to this Nation's economy. The volume of U.S. exported grain is enormous. To have our foreign markets for grain cut off by dissatisfied foreign customers threatens our whole economy. In 1974, the U.S. exported $15 billion worth of grain. That was enough to pay for all our imports of agricultural commodities, and in addition, contribute some $5 billion toward balancing our international trading

accounts.

Our volume of agricultural exports has been built upon our reputation as a dependable supplier. But beyond that, our customers have also looked to the United States as a supplier of quality products. The integrity of our official certifications have assured them they were getting the grade and quality of commodities they paid for.

The full use of our capacity to produce food and feed grains for the world depends on the integrity of our inspection system and the assurance of quality. The sale of our output in excess of our needs depends upon our international trade in food and feed grains. Therefore, any compromise in this area endangers our entire national

economy.

The grain inspection program differs significantly in concept from the Department's meat, poultry, and egg products inspection programs. These differences grow out of differences in statutory authority. Inspection of meat, poultry, and egg products is tax-supported, mandatory, and designed to assure the wholesomeness of these products. Grain inspection is fee-supported and is designed to measure differences in physical characteristics of the product, based upon USDA grades. Inspection of grain for wholesomeness is the responsibility of the Food and Drug Administration.

Only grain sold by grade for export or represented as officially inspected is required by the U.S. Grain Standards Act to be inspected. Grain moved in domestic commerce is not required to be inspected, although much of it is inspected at the request of buyers and/or sellers. In either case, the integrity of the inspection system and of official certifications of grade is essential to public confidence in this aspect of our grain marketing system.

Presently, there are 111 official inspection agencies performing inspection services at 183 designated inspection points. The agencies are divided into three broad categories: 23 are operated by States; 41 are operated by boards of trade, chambers of commerce, and grain exchanges; and 47 are operated by individuals under various private ownership arrangements.

We would be less than candid if we did not point to the multiple problems in the current system. We recognize that there is a possible conflict of interest between industry and non-State official inspection agencies resulting from the dependency of the private agency for its income upon the users of its service.

Further, agencies operating at an export elevator which is owned by a single grain firm, or an agency operating under the general direction of a board of trade whose membership is principally composed of

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