Making the Soviets Steady Customers

Under heavy political pressure, the Ford Administration set out about six weeks ago to convert the Soviet Union from an in-and-out, market-disrupting buyer of U.S. grain to a steady customer that makes regular purchases in agreed-on amounts. Last week in Moscow, U.S. and Soviet negotiators signed a five-year agreement that should accomplish that goal and lessen the inflationary impact of future Soviet buying by enabling markets to anticipate it. In contrast to the furious criticism that has greeted past U.S. grain sales to the Soviets, this deal satisfied almost everyone except American farmers who wanted no limits of any kind on how much the Russians could buy. The deal could also open the way to U.S. purchases of Soviet oil.

Inflation Hedge. Under the new grain pact, the Soviets pledged to buy at least 6 million metric tons of U.S. wheat and corn in each of the next five crop years starting in October 1976--whether they need it or not (any surplus presumably would be stored against future Soviet food shortages). They will be permitted to buy as much as 2 million tons more in any year, unless U.S. grain supplies fall below 225 million tons. That has not happened in 15 years; current supplies are 263 million tons. But if the Soviets want to buy more than 8 million tons in any one crop year, they must negotiate with U.S. officials, who would have to decide how much could be spared without running up domestic food prices.

Once the agreement was signed, President Ford lifted the two-month moratorium on new sales to the Soviets from this year's crop; he had imposed it at about the time longshoremen began refusing to load ships with wheat bound for Russia. The Soviets, who face a disastrous harvest, as much as 56 million tons below the planners' target of 215 million tons, are now free to buy from this year's record U.S. crop. The U.S.S.R. had signed contracts to buy 10 million tons before the embargo; it probably will buy about 7 million tons more between now and the time the five-year agreement goes into effect. Last week the Soviets reportedly bought another 1.2 million tons of American corn.

Private economists think that the additional purchases will lift the food bills of U.S. consumers little if at all over the next twelve months--partly because the inflationary damage has already been done. The Agriculture Department has estimated that Russian grain buying would raise U.S. food bills 1.5% through 1976; Otto Eckstein, a member of TIME Board of Economists, figures that food prices next July will be 10% higher than last July, and that 3% to 4% of that will be the result of grain sales to the Soviets. But most of that rise is over; "the market already has discounted" additional sales, says Eckstein. Wheat and corn futures fell last week on the Chicago Board of Trade, wheat by 18-c- per bu. to $3.95; corn 7-c- to $2.86.

The price effects of the long-term agreement will depend on how much the Soviets actually buy, the size of U.S. crops and the amount of grain exported to other countries. Knowledge that the Soviets will be in the market could keep prices a bit higher than they otherwise would be; on the other hand, spreading out Soviet purchases should avoid the sharp price jumps that occur when they are bunched into short periods.

Ceiling Disliked. Farmers, grain dealers, farm-implement makers, railroads and shipping companies had all pushed hard for a long-term grain deal, knowing that without one the ban on further sales to the Soviets would not be lifted. But when the deal was announced many farmers angrily branded it unjustified Government interference in world grain markets. They objected to the requirement that the Soviets negotiate before buying more than 8 million tons a year, contending that the limit would prevent them from recouping sales lost during the moratorium.

"This thing is clear out of joint," complained Gene Wheeler, a Watonga. Okla., farmer and grain dealer. "Ford made a statement that he's gonna take the peaks out of the market. What he doesn't know is that when you take away all the peaks, you've got nothing left but valleys." Nebraska Democratic Governor J. James Exon decried the agreement as a Ford Administration "sellout" to gain votes from populous urban areas at the expense of farming states. These attacks are clearly extravagant. The requirement for negotiation on purchases of more than 8 million tons is a necessary precaution against inflationary disruption of markets, and the deal guarantees farmers an export market worth about $1 billion a year.

Possible Setback. For the Soviets the deal buys time to improve the nation's badly functioning agricultural system. Internal Soviet political stress is building over this year's crop disaster, which Western analysts feel could be a setback for Communist Party Chief Leonid Brezhnev. Says one diplomat: "The grain situation could put the leadership and Brezhnev on the spot." The necessity of buying grain from the capitalist U.S. is expected to be a touchy issue. Brezhnev can argue within the Politburo, however, that the U.S. wants Soviet oil as much as the Soviets want U.S. grain.

U.S. negotiators did try to work out an oil deal to be signed at the same time as the grain agreement but failed. The U.S. demanded a price 15% below the world price set by the Organization of Petroleum Exporting Countries; the Soviets balked. Instead, the two sides signed a "letter of intent" to resume negotiations on a deal under which the Soviets would ship to the U.S. the equivalent of 200,000 bbl. of oil a day at prices to be mutually agreed upon.

Some kind of oil deal is probable. The Soviet Union is badly in need of foreign currency, which it could get from oil sales, and will need even more to pay for U.S. grain. The U.S. is eager to tap the Soviet oil barrel, largely for political reasons. The U.S.S.R. passed the U.S. last year as the world's largest oil producer and now pumps 9.5 million bbl. daily v. 8.3 for the U.S. But Soviet consumption is rising fast too, so that the Russians have little oil to spare for the U.S.; the amounts talked of in the letter of intent would supply only 1.2% of U.S. daily needs. Rather, an oil deal promises political benefits for the U.S.: advancing detente, demonstrating to OPEC that the U.S. is determined to line up alternative sources of supply and defusing domestic criticism that East-West trade is a one-way street mainly benefiting the Soviets.

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