Foreign Relations of the United States, 1964–1968, Volume XXV, South Asia

461. Memorandum From the President’s Special Assistant (Rostow) to President Johnson¹

Washington, October 10, 1967, 6 p.m.

SUBJECT

• NSC Meeting on Food Aid (Noon, Wednesday, October 11)

I think this meeting can serve two useful purposes:

• —to give you a clear picture of the outlook for food aid; and
• —to give you a chance to instruct us on what kind of food aid programs we should try to put together in the major customer countries, particularly India and Pakistan.

Papers

Attached are two Freeman-Gaud papers which have been prepared for this meeting. At Tab A² is a response to your request to the Secretary of State to examine each of our present food aid programs to find ways to move more wheat. At Tab B³ is a special memorandum on India which recommends a large wheat program in 1968 and spells out your major options on amounts, conditions, and matching arrangements.

The Wheat Picture

Orville Freeman’s PL 480 wheat target for FY 1968 is about 11 million tons. We have a little less than 6 million tons now contracted or under negotiation. An additional 2 million tons will be provided through our donation programs. The immediate problem is to find ways to move another 3 million tons in the next 8 months. It is clear that we can’t hope to do it without big programs in India and Pakistan—the potential elsewhere won’t add up to more than 500,000 tons.

We also have a longer term problem. The PL 480 target for FY 1969 is also 11 million tons, and we must try to meet that in a year of bumper crops in India and Pakistan. Thus, it is to our advantage to do our bargaining for all of CY 1968 now, when our clients need the wheat, rather than wait until next summer when they are rolling in their own. (Obviously, our own concern about domestic wheat prices is not going to decline between now and next November.)

You should know, however, that Freeman and Schultze think that meeting our PL 480 targets will probably not lead to any dramatic rise in domestic wheat prices. The grain traders know what our targets are. They have taken them into account in deciding what price to offer. The only prediction we can make with confidence is that if we do not meet our targets, the wheat price will fall further.

India

How we handle India will largely determine how much wheat we move. The monsoon is holding up well; chances look better and better for a bumper crop of 95 million tons of food grains. We don’t know precisely how much the Indians will need to import, but nobody is guessing higher than 7–8 million tons. Estimates of how much they really must import range as low as 3–4 million tons. We have settled on a PL 480 target for India of a little more than 6 million tons during calendar 1968.

It seems to me that we have three objectives to serve in designing this year’s approach to food aid to India:

• —to move as much wheat as possible;
• —to get the Indians to take the policy steps necessary to make use of the economic lift provided by a good harvest; and
• —to preserve the matching principle.

These objectives are at least partially conflicting. For example, if we insist on full matching of every bag of wheat by other donors, it is the unanimous consensus of your advisers that we will not move more than 1 million tons.

There is an additional complication this year in that 1–1 1/2 million tons of the total we can move will be for government-owned buffer stocks that allow the GOI to run a CCC-type price support program, and provide for internal food emergencies. This grain would go directly into the hands of the Food Corporation of India for storage and use from time to time as required. (We would hope to get the GOI to match it with their own domestic buying which in itself would serve to support producer prices and help to avoid a sharp price drop which could undo much of the economic benefit of the bumper harvest.)

The paper at Tab B sets out three policy options for next year:

1. insist on full matching;

2. a one-year agreement to provide a base amount of wheat (say the 3 1/2 million tons we supplied last year), plus an amount for building buffer stocks (1–1 1/2 million tons)—all this without matching. In addition, we would offer to match any contributions from other donors. (The estimate is that these would be about 1 million tons in such contributions. This would result in our moving upwards of 6 million tons.)

3. A six-month agreement providing for a base amount (again 3 1/2 million tons) plus 1 million for buffer stocks, with no matching requirement and no commitment on what we would do in the last half of 1968. (We would justify the fact of no matching requirement on the ground that the International Grains Agreement is scheduled to take effect on July 1, 1968, and provides that other donors must provide 2.3 million tons of wheat per year to poor countries. Our pitch would be that this guarantees the matching principle.)

Even with our best efforts, option 1—full matching—would move only about 1 million tons of wheat during 1968 and make it impossible for us to meet our target either in this fiscal year or in next fiscal year. It would eliminate any leverage we might have to get the Indians to reform their economic policies.

Option 2 would probably result in our moving about 6 million tons, of which 1 million tons would be matched by other donors. It would give us a reasonable shot at getting the Indians to make the reforms.

Option 3 would result in moving about 4 1/2 million tons of grain in the first half of 1968 and leave room for more. It would give us some basis for negotiating the reform package. This is the option recommended by Freeman and Gaud.

You should be aware that both options 2 and 3 would probably lead to charges that the Administration, having built the matching principle into a major political asset, has abandoned it as soon as it became clear that other donors wouldn’t play. We would have a reasonable defense. But there might well be some heat. (Of course, it is not at all certain that it will be in anyone’s interest to make this a cause celebre in an election year.)

The timing of our approach to the Indians is critical. The argument in the attached is that if we go at them with a six- or twelve-month package now before their big harvest hits the market, we have a reasonable chance of moving a lot of wheat and getting a reasonable quid pro quo in terms of economic reforms and commercial sales. If we string it out piece by piece, our bargaining position will suffer as the immediate need for food declines. Thus, the recommendation is for a relatively long-term agreement to be negotiated within the next six weeks.

In light of the above and the discussion tomorrow, we need your general guidance on the following questions:

• —How large an India food package should we put together? One month, six months, or a full year?
• —How should we treat matching? Should we insist on dollar for dollar matching; should we confine matching to grain above and beyond a base amount and a contribution for buffer stocks, or should we finesse the problem by maintaining that matching is taken care of by the International Grains Agreement?

Pakistan

You will recall commissioning Ben Oehlert to see whether he could sell some wheat to Ayub on the basis that we would match new sales with PL 480. Oehlert had a good meeting with Ayub last week. There was no specific pledge to buy wheat—Ayub said he had to talk to his Finance Minister—but he was friendly and did promise that if he bought wheat from anybody, he would buy it from us. Oehlert sees him again tomorrow morning; we may get an answer then. (This conversation involves only about 120,000 tons—value: $9 million.)

Pakistan’s crop outlook is at least as good as India’s, probably better because they have more than 2 million acres sown with the new high yield wheat seeds. Our estimate is that the best we can do under PL 480 in CY 1968 is about 1 1/2 million tons, of which 500,000 tons would be for buffer stocks. (There is not as much groundwork in Pakistan as in India on the buffer stock proposition. All we have is an educated guess that they will agree to establish such stocks.)

Our bargaining problem in Pakistan is the same as in India—if we can get a large agreement negotiated before the new crop comes to market, we have a fair chance of moving a lot of wheat and of using the deal to get the Paks to agree to an import reform package which we think is very important. If we can’t move quickly, we will be selling a less and less attractive product.

The question on Pakistan is the same as for India: how large a package shall we prepare for immediate negotiation? The recommendation is that you authorize a CY 1968, full-year package calling for 1.5 million tons.

Other Customers

The memorandum at Tab A reflects a careful canvass of all our PL 480 clients looking for ways to substitute food for AID dollars or otherwise to move more wheat usefully. This review has come up largely empty. The proposals made at Tab A, taken together, will not increase wheat shipments by more than 500,000 tons at the outside—most of what would be accomplished by expanding our donation programs. The non-donation increases result from conservative re-estimates of the “usual commercial marketings” of the wheat exporters—including the U.S.—in these countries. (We have to be very careful about this; in cases like Korea, every cut we make in usual marketings cuts directly into our commercial markets. It does us no good to substitute PL 480 shipments for dollar sales.)

The truth is that ways have not yet been found to make substantial substitution of wheat we have in abundance for dollars we don’t. My own recommendation would be that you tell the group you consider this an interim report, and send them back to work on a final report to be submitted to you by the end of next week.

Summary Recommendation⁴

I would vote that you give us the following instructions tomorrow:

1. Begin talking to the Indians in terms of a six-month, 4 1/2 million ton wheat package, to be negotiated immediately. This package would not mention matching on the ground that it is taken care of by the coming into effect of the International Grains Agreement.

2. After the current wheat-sale proposition is settled, begin talking to the Paks about a CY 1968 package of 1.5 million tons.

3. Accept the memorandum at Tab A as just an interim report on the question of substitution of wheat for dollars. Ask for a final report to reach you by the end of next week.

W.W. Rostow ⁵

1. Source: Johnson Library, National Security File, Memos to the President, Walt W. Rostow, Vol. 45, Oct. 10–15, 1967. Confidential. Drafted by Hamilton.
2. Reference is to an October 10 memorandum from Gaud to the President entitled “P. L. 480 Program Possibilities.” (Ibid.)
3. Reference is to an October 10 memorandum from Freeman and Gaud to the President entitled “Food Aid for India in 1968.” (Ibid., Vol. 46, Oct. 16–20, 1967)
4. There is no indication on the memorandum of the President’s response to these recommendations.
5. Printed from a copy that bears this typed signature.