moneys for developing newer and more sophisticated strains of soybeans and to promote other breakthroughs, so that the U.S. farmer can enjoy prosperity from greater product yields. This has been the strength of the American people-businessmen and farmers-innovation and advances in technology to stay ahead of competition. We don't need legislation to supplant technology. It can't work and never will.

In summing up, the United States is the world's greatest agricultural producer and exporter. It has built up this business through free trade and enterprise. The United States is proud of its platform in dealing fairly with other countries who are less fortunate. If we prevent palm oil from coming into the United States, it will act like water flowing to the point of least resistance, which in this case will be our soybean oil and cottonseed markets throughout the world. Give the consumer a choice of the price he wants and the product he wants to buy. Let free trade and commerce operate, and supply and demand dictate the worldwide movement of commodities.

[Attachments to the statement follow:]

Palm oil imports, United States: January 1971 to February 1977

Total CPO imports 1971 through February 1977-1 Estimate.

226.9

431. 1

387. 1

441. 7

947. 2

68.7

109.3

70.3

63. 1

44. 8

57.5

44. 2

55. 1

64. 6

50. 4

97.2

50. 4

775. 6

104. 2

1 62.3

166. 5

3, 376. 1

TESTIMONY OF JAMES W. SHANNON ON PALM OIL IMPORTS, BEFORE THE U.S. HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON AGRICULTURE, MARCH 18, 1976

Mr. Chairman, my name is James W. Shannon, and I am the Executive Vice President in charge of all operations for PVO International Inc., headquartered in San Francisco, California.

PVO is a diversified, vertically-integrated, worldwide leader in developing, processing and marketing bulk vegetable oils, oilseeds, and vegetable oilseed

based products, including foods, specialty chemicals and industrial coatings. PVO is also a major operator of export grain elevators in California. Sales revenues for the last fiscal year were approximately 240 million dollars. Although PVO is a large factor in the international tarde of vegetable oil commodities, it also pioneered in the domestic crops of Flaxseed and Safflower. In fact, PVO currently processes and sells more domestically-produced Safflower Oil-based products than any other producer in the United States. The company also uses substantial amounts of Soybean Oil in the manufacture and sale of its edible products in the Midwest. Accordingly, we believe we have a good understanding and working knowledge of the domestic markets, as well as the international markets. While Palm Oil is processed and marketed by PVO, Palm Oil is not a dominant factor in PVO's current operations by any means. However, the company is expanding its participation in this market because of Palm Oil's functional advantages and its impact on world markets.

We are very pleased to have this opportunity to appear before your Committee to discuss the important question of whether or not inport duties or quotas should be established on Palm Oil entering the United States. Several important domestic agricultural interests and processors of agricultural commodities are recommending that some action be taken to restrict imports on the grounds that these imports represent a very real threat in our Soybean industry. We understand their concern, yet we believe that any action on the part of the American Government to restrict imports by imposing duties or quotas on Palm Oil would be very detrimental to the best interests of the country and indeed to the best interests of those who are proposing such a move for the reasons I will outline below.

Restricting access to the U.S. market provides no price protection to the U.S. Soybean or other U.S. Oilseed producers, since these prices are determined by supply and demand factors in the world as a whole. The fact is that the U.S. is a net exporter of edible oils and oilseeds in quantities which far exceed any imports past, present or prospective. The U.S. is exporting about 40 per cent of its total production of Soybeans either in the form of Soybeans or as oil. The U.S. is also exporting over half of its Sunflower production and about 30 percent of its Cottonseed Oil production. The figures on U.S. exports for recent years are included in Appendix A to my report for your information. Therefore, so long as we are a net exporter, the price which our producers can obtain for their Soybeans or for Edible Oils will be based on the world market. Restricting imports into the U.S. market will not in any way alter the supply and demand for Oilseeds and Edible Oils in the world market-except to divert Palm Oil from the U.S. market to the world market.

American Soybean Oil as such, or in the form of Beans, will still have to compete with Malaysian Palm Oil or other Edible Oils in the world marketplace, and our domestic price canot be higher than this world market price without cutting off our exports. Further it seems to me that the marketers of Soybean Oil would be eminently better off to compete with foreign Edible Oil right "in their own backyard" because of materially lower transportation costs. The corelary that lower Soybean Oil prices will raise Meal prices is equally erroneous. Soybean prices have declined in the last year and a half from over 50 cents a pound to about 17 cents a pound at present. At the same time, Soybean Meal values have also declined. The fact is that the Soybean Meal values are determined by the supply and demand for protein feeds-also in the world market. These prices, although much lower today than at their 1974 high, have nevertheless been enough to obtain a crop in 1975 which was in excess of our domestic and export requirements. The prospects for new crop are lower-not because of imports of Palm Oil, but because the world market price for Soybeans is relatively less attractive to our agricultural producers in the world market for competing crops such as corn and wheat, etc.

Furthermore, I believe that any quantities imported in effect represent a trade between the imported oil and a corresponding quantity of oil that can be exported. With U.S. Edible Oil requirements taken as given, any quantity imported will be an exchange for a corresponding quantity exported, and similarly any reduction in the quantity of imports will be reflected as a reduction in the quantity of oil exported. If, for example, Palm Oil imports had been banned in 1975, and I realize that nobody has made such a proposal, the quantity of Palm Oil moving into the other markets in the world would have been 960 million pounds larger than it was. Our export of Edible Oils would have been correspondingly reduced

unless we make the unlikely assumption that the Palm Oil producers would have been willing to hold this Oil off the market or, alternatively, that overseas consumers would have continued to buy our Soybeans and Soybean Oil to the neglect of the cheaper Palm Oil.

The reason for the growth in Palm imports can be clearly understood in the framework of the much higher prices for Soybean Oil, both absolutely and relative to Palm Oil, during the 1974-75 crop year. In the 1974-75 crop year, the U.S. had a relative shortage of Soybeans. The crop was much smaller than the 1973 crop. Therefore, we had fewer beans to crush and to export. Soybean Oil prices consequently were very high, reaching a peak of over 51 cents per pound in October 1974 and averaging about 34 cents per pound for the entire crop year. Accordingly, Palm imports doubled last year, primarily because, for an extended period of time, U.S. Soybean prices were from eight to ten cents per pound higher than the price of Palm Oi!-not because Palm Oil was cheap because it wasn't. It is precisely at this time when you want to offer the consumer a choice; but if a quota is imposed there may be no choice.

At precisely the time we had this shortage in supplies in U.S. Soybean Oil, there was a growing supply of Coconut Oil and Palm Oil and the price of these Oils reflected these larger supplies. These supplies provided the important economic benefit of helping to fill the void in world markets, and it represented a substantia! benefit to consumers and to those who were anxious to see the rate of inflation diminish. For most of this period, both Coconut Oil and Palm Oil were available at prices far below Soybean Oil and the large increase in the rate of imports reflected this.

Another major factor for the increased usage of Palm Oil during the last six months of calendar year 1975 was the high price levels for Lard and Tallow. For example, Lard was selling at 14 cents per pound above Palm from July through October, 1975 and Edible Tallow was selling at a premium over Palm of from 6 cents per pound to 8 cents per pound for part of that time.

Palm Oil was an essential Fat and Oil for the food processing industry as there certainly would have been an extreme shortage of Edible Oils during this period had Palm Oil not been available. Palm Oil, therefore, has already acted as a deterrent to extreme price increases and help stabilize food priced to the American housewife.

In October, 1975 we harvested a record Soybean crop. The price of Soybeans and Soybean Oil have now become more competitive. At this moment, Palm Oil prices are actually higher than Soybean Oil prices in many U.S. markets. As a consequences, imports of Palm Oil are declining sharply. January imports of Palm Oil were reported to be 68.7 million pounds compared to 116 million pounds a month average for the October/December quarter. Shipments to the U.S. market in February and March, which will be reflected in March/April imports, are expected to average no more than 25,000 tons a month of 56 million pounds, about half the rate of shipments we experienced during the last half of 1975! Gentlemen, I submit to you that the market is working, and that price regulates markets better than any Government action.

Increasingly, our competition with the growing supply of Palm Oil is going to be evidenced in markets outside the United States. In Japan, the European Common Market, Southeast Asia, and in Latin America, Pa'm Oil is competing with Soybean Oil on both a quality and price basis. We cannot avoid this competition or ameliorate it in any way by domestic policy actions. Partly because of this, and partly because of rapidly growing competition from Brazil, our Soybean Oil exports so far this crop year have been running far below normal. The point is that any reduction in our imports of Palm Oil will still further depress our export potentia! and world market prices.

Further, as Palm Oil production increases and Bulk Oil movement becomes dominant, freight economies increase and shipments become more regular. Palm Oil shipping rates to the United States have been below those to Europe, but with reopening of the Suez Canal and the closing of the London Palm Oil Pool, these rates may equalize and the United States may no longer be as attractive a destination for Palm Oil.

We would make a third point. Intervention by the Government in the marketplace can have unforeseen effects which can be very damaging. Producers of agricultural products should have access to markets on a worldwide basis and have the opportunity to compete fairly on the basis of price and price alone-assuming similar quality. The fact is that Palm Oil is a low cost vegetable oil obtained

from oil palm trees which will produce continuously for 35 to 40 years with minimum maintenance and proper rainfall and will yield over 3,000 pounds of Palm Oil per year per acre as compared to the average acre of U.S. Soybeans which produces about 360 pounds of oil. If Soybeans can't compete in the world marketplace because of the increasing production of Palm Oil, then all the domestic government regulation restricting importation is not going to change that world supply one iota. We are not alone in this view of non intervention in the marketplace. The Bank of America's Senior Vice President in charge of the Bank's worldwide agribusiness activities recently stated in an open forum.

"As long as Palm Oil can be produced at a low cost in Southeast Asia, Africa, and Latin America, it should be allowed free access to the world marketplace. Looking back a few years, there have been some real boners pulled that were discriminatory and should have never been proposed-let alone adopted. Price controls were a disaster. It was a serious error to embargo grain sales after the first big Russian grain sale. The so-called voluntary moratorium on grain shipments to Russia and Poland cost our farmers income, probably affected future production patterns, and may have inflated consumer prices. In the classical economic sense, it is doubtful whether by restricting exports or imports any government has in the long run actually benefited its consumers, producers, and taxpayers."

Measures taken by our Government now to react to the growth of Palm Oil imports by imposing trade restrictions could very well have similar long range detrimental consequences for the very people proposing such restrictions.

Of equal importance is that our trade representatives have for years been laboring long and hard to reduce trade barriers imposed by foreign countries to the detriment of our agricultural exports. Our negotiators have argued correctly that world trade is beneficial to exporters and importer alike, and that the importing country of our agricultural goods benefits much more than it is damaged by allowing us free access to the market.

Presently, our negotiators are in Geneva deeply involved in the Tokyo Round of GATT trade talks. We are informed that one of the principal points upon which the U.S. is insisting is that agricultural products and industrial products should be dealt with concurrently. The reason the U.S. representatives are taking this position is that if agricultural questions are left on their own, it will be much more difficult for us to overcome the resistance of importing countries to open up their markets to our agricultural goods. We could grant some concessions on the industrial side, but we would want some concession on agriculture such as the elimination of hidden subsidies and open access to the markets. There is nothing we could do which would weaken our position more now than to take the position that restrictions on the importation of agricultural products is justified by the need to protect our domestic agricultural producers from foreign competition.

There is a fourth point. The United States has for decades been at the forefront of those countries trying to assist the developing countries of the world to improve their lot. It is now generally agreed that it is far better to help these countries by giving them access to our markets than by giving them handouts of one sort or another. "Trade not aid" is more than a motto-it is a generally accepted principal. The countries that produce Palm Oil are, in order of importance, Malaysia, Indonesia, Zaire and Nigeria. All of these countries are in the category of non-oil producing developing countries-a category which encompasses the poorest of the poor in terms of their economic development. Are we to say to these people that the one product which they can produce more efficiently than we is to be restricted or excluded from our market?

Let's put the Palm Oil situation into perspective. The United States in 1975 had a net export surplus of 12 billion dollars of agricultural commodities, making it the largest agricultural exporter in the world. The total value of the 960 million pounds of Palm Oil imported is estimated to be about 200 million dollars, less than two percent of our export surplus of agricultural goods, and less than 15 percent of the value of our exports of Soybeans and Edible Oils. In 1976 with Soybean exports rising and Palm Oil imports falling the impact on our economy and on our Edible Oil market will be even smaller.

In the future, Palm Oil imports are going to be limited by the quantities which can be sold in the U.S. market, for purposes which rely upon Palm Oil's specific quality advantages. At present, we estimate these markets to be in the order of magnitude of about 50 to 60 million pounds per month, or say, 700 million pounds per year. Of course, if Soybean Oil prices once again sky rocket as they did in

1974-75, it is likely that Palm Oil imports would increase rapidly to fill the vacuum as they did last year.

The assumption of the reduced rate of imports of Palm Oil is based on the observed reduction in shipments to the U.S. from Malaysia and Indonesia as Palm Oil prices have moved up to approximately Soybean Oil levels.

Palm Oil has certain different qualities and purposes which give it a unique value for certain uses. Consumers who prefer Palm Oil for these qualities should have unrestricted access to it. Although there is a large measure of substitution of Palm Oil for domestically produced Edible Oils, there are certain uses for which Palm Oil is better just as there are certain uses for which Soybean Oil is better. The principal fatty acid in Palm Oil is Palmitic, and to this extent it more closely approximates Cottonseed Oil than Soybean Oil. It is solid at room temperatures and, therefore, cannot be used as a salad oil. On the other hand, it is more stable as a cooking oil and is used primarily in shortenings and for deep frying. It also has certain technical uses such as tinplating in the steel industry where no domestic oil can compete. Clearly then, the importation of Palm Oil in exchange for domestically produced oils is a trade which is advantageous to importer and exporter and will only be made if it is mutually beneficial. If duties, quotas or any other restrictions are placed on the importation of Palm Oil, some consumers are going to be penalized either by having to pay a higher price or having to use a less satisfactory product than they should like to

use.

There is no doubt that Palm Oil production is going to increase substantially in the years ahead, and nothing that we do is going to change that. The trees have been planted and the fruit will be harvested. It is estimated that by 1979, Malaysian Palm Oil output will be as much as 2.37 million long tons-up from 1.19 million tons in 1975. This is an increase of about 300,000 tons a year. Other origins such as Indonesia are also increasing production and U.S. Soybean and Soybean Oil producers will be faced with the competition. However, this competition will be felt more in the world market than in the U.S. market, since, generally speaking, world market prices for Edible Oils are based on U.S. prices, plus freight and transportation charges. In the world market, Brazilian Soybeans as well as Malaysian Palm Oil and Philippine Coconut Oil are competing with U.S. Soybeans and Soybean Oil. It is interesting to note that Brazil has fiscal and financial incentives available to its exporters to improve the competitive position of its exporters. By contrast, the Palm Oil producing countries have no such program. In fact, the Malaysian Government, which is supplying the major portion of Palm Oil moving in the world market, has been assessing an export tax on Palm Oil. This tax has been at times higher than 5 cents per pound (when prices of Palm Oil were very high) and is presently equivalent to about 12 cents per pound. Thus, the Malaysian Government is already giving some measure of protection to the producers of competing oils.

To bring the increase in world production mentioned above into perspective, it should be remembered that the worldwide increase in Edible Oil needs is over one million tons per year. By 1980, these needs could be increasing at a rate of 1.2 million tons per year. Thus, the increased Palm Oil supply will satisfy about 25% of the world's growing needs. The balance of these needs will be supplied by other producers-the largest of which are likely to be the U.S. and Brazil. Until recently, the U.S. was supplying by far the major share of these growing world requirements which have been very beneficial to our agricultural producers and to consumers the world over. We now must share this growing market with others, and we should be prepared to do so on a competitive basis, without fear or favor!

For the very reason that we believe it's wrong to interfere with the marketplace, we would join those who argue that we should not be subsidizing the production of foreign competitive crops. However, I think it should be noted in the record that neither Malaysia nor Indonesia are now receiving any subsidy. The loans which they have received from the World Bank are interest-bearing loans and are being paid back on schedule. It is conceivable that if an import duty were to be imposed by our Government, the Malaysian Government could reduce its export taxes correspondingly, the consequence would be no change in the landed cost of Palm Oil, but simply a transfer of revenues from the Malaysian Government to the American Government. Whether this makes any kind of sense in a situation where our Government has been trying to aid developing countries, the Congress can decide.