An exception cited by Secretary Simon that gives us great concern is that "Loans for palm oil projects designed primarily to produce oil for domestic consumption in the borrowing country will be approved." Now why does this exception refer to project loans rather than country loans. If a country wishes to shift to the export market its existing production used for domestic consumption and replace this with production from a project loan, it could qualify for a World Bank loan. We are not saying this will happen, but certainly the loophole is there for those who want to use it. We would feel much more confortable, if the policy is stated clearly as not to provide loans to countries that are already exporting palm oil.

A rash of studies on the palm oil industry have developed a number of rationalizations on paim oil and why palm oil has been imported into the United States. In our opinion, these studies, while seemingly erudite and scholarly, tend to obfuscate the basic issue. Some have referred to a shortage of lard and a short term reduction in the supply of vegetable oil in the U.S. or other factors to explain why palm oil has been imported. Gentlemen, we are simple people and we do not follow these convoluted explanations. The simple fact is that with a product such as palm oil that costs eight to ten cents to produce, and a market that fetches 20 cents, wild horses will not prevent this commodity from entering the 20 cent market. It has done so and will continue to be imported into the U.S. as the largest market in the world. Increased palm oil production will naturally find a home in such a market, especially with a profit margin on the order of say eight cents per lb. after transport costs are included. We need no complicated explanations as to why this occurs. The facts are simple. We wonder why such a simple explanation does not suffice to explain the phenomenon of greater exports of palm oil. Now, we have no quarrel with palm oil production as such, because they have a right to produce palm oil just as we have the right to produce soybeans. Our concern is whether a product that has such low costs should compete with us in the U.S. and in foreign markets with the benefit of subsidized loans, with more than ample supply prospects for vegetable oil.

We hope that this Committee will do what it can to bring an equitable and just solution to this problem, which, in our opinion, means that loans for palm oil production will be granted to countries that have a deficit of vegetable oil, and not to exporters.

As noted, the American Soybean Association advocates a free and open trade system in line with its traditional policies. At times, we have considered whether it could be consistent with this policy to ask for a tariff on palm oil since for all practical purposes, a countervail is not available to us for relief. We have not decided to advocate a tariff now but feel that the best course would be for subsidized loans to be stopped.

Thank you. We will be glad to respond to any questions.

Mr. GONZALEZ. Thank you, Mr. Johnson. Mr. Grassley, a member of the subcommittee, has arrived. He had earlier, very early on, expressed concern on this very matter when we were considering one other bill. So he was concerned about this situation about palm oil importation.

Are you satisfied with the decision taken by the Department of Agriculture and the Advisory Council not to support any more palm oil projects? Is that adequate?

Mr. JOHNSON. If all the other Departments do so, I think that must be considered.

Dr. KLING. May I respond to that, Mr. Chairman.

Mr. GONZALEZ. Sure.

Dr. KLING. Mr. Chairman, we were delighted at the announced policy of the Department, so much so that we passed a resolution at our Kansas City convention welcoming this new policy. Subsequent to this resolution we learned that there was, as they say, fine print which sort of explained the details of how this policy was going to be carried out. Now I should say that we have had verbal assurances that palm oil loans would be reduced to a minimum and that various international agencies or lending institutions would be told that we would not sup

port-that is, that the United States would not support additional palm oil loans in many cases.

But, the problem was that, unless our information is incorrect, we found that there are loans that are now in the pipeline, Mr. Chairman, that total perhaps $70 million or $80 million. And the information we have is loans that now would be eligible under the new guidelines include Zaire, $10 million; Cameroon, $20 million; the Ivory Coast, $20 million; another one to Papua and New Guinea of $12 million; another one to Nigeria with an unspecified amount.

And we naturally were dismayed, as Mr. Johnson said, when we learned this. And you don't have to be a Boston lawyer to read the letter that Secretary Simon sent to Congressman Mathis, Mr. Chairman, to realize that with a little agility you could get around the announced policy quite easily if you so wished.

We hoped that the administration would carry out its announced intention. Now we hope that the administration will carry out its announced intention.

We are here today essentially to express our apprehension concerning what seems to be loopholes in the policy.

Mr. GRASSLEY. Would the gentleman yield, Mr. Chairman?

Mr. GONZALEZ. Yes.

Mr. GRASSLEY. What you are trying to say I think is the whole thing is like a balloon: if you squeeze it up here, it pops out down here. Dr. KLING. Yes, sir.

Mr. GRASSLEY. So unless you get a consistent policy affecting U.S. relationships with all of these institutions and consistent with one overall policy—and have it enforced everyplace-then we really don't have any policy.

Dr. KLING. Yes.

Mr. GONZALEZ. This is the reason why earlier, before you came in, in my statement I expressed my keen disappointment that the administration officials just flat refused to appear. They denied any willingness to appear before the subcommittee.

I thought it was important to bring them in because we too obtained copies of the policies that were announced by the advisory council and felt that the fine print, as you say, is-well, it isn't fine but it is there. And it clearly indicated that the policy was contradictory. You know, on the one hand they were saying, "Yes, we have moved to stop" but on the other hand they are saying something else.

We will continue to make an effort to try to get the administration officials here but up to now we have been flat turned down. They said they had negotiations and they didn't think they wanted to discuss it. Mr. GRASSLEY. If the Chair would yield?

Mr. GONZALEZ. Certainly.

Mr. GRASSLEY. If you remember, this is why I brought the point un at the time we had the authorization bill 3 or 4 months ago, Mr. Chairman, I felt then that it was important to get a firm position from the administration not only because that is the ideal time to get it but also

Mr. GONZALEZ. But if you notice, we haven't moved on that bill. Mr. GRASSLEY. Yes; that is true.

Mr. GONZALEZ. For that reason.

Mr. GRASSLEY. Also I would sav this: namely, at that time the Treasury Department was very willing to give us a statement that this

was their direction. I think it was an effort to get us off guard and make us think something was happening, which really wasn't happening.

Mr. GONZALEZ. I might explain to the gentleman, since I have not had a chance, that this is the reason we moved expeditiously. You will recall we moved with somewhat undue haste on that bill. And I do recall your raising the issue and we did make it a part of the record. We had assurances from the then representative of the Department as you know. But since then my position has been, well, we will let the Senate move. In the meanwhile, however, we have questions and these hearings. And we thought it would be a good vehicle to employ these hearings to ask the questions and pinpoint the policy and then maybe we would move on the requested legislation affecting the Asian Development Bank.

If the world demand for edible oil grows at a normal rate, how long will it take for the market to absorb all of the excesses caused by the palm oil projects? Do you have any estimate?

Dr. KLING. Well if I may respond to that? As Mr. Johnson just told me but I should address it to the subcommittee, the net result will be that if you have an upsurge of more palm oil production, it will affect the acreage of soybeans.

We have the capability, not only in the United States but also some very sharp competitors such as Brazil, I mean, there is no problem in obtaining more soybeans in the world if the market situation is not prejudiced by unfair competition.

Soybean producers have shown that they can produce soybeans and they have increased their production and acreage very sharply and they can go much further but they will not produce soybeans if their alternatives are more attractive or if there is unfair competition that drives them out of the market.

Now I know that Mr. Bek-Neilson of the Malaysian Oil Palm Producers Council has said, don't worry; by the end of the century there will be so many more people in this world that they will be able to absorb all of the additional vegetable oil production in the world.

Well, I think there are people who take some exception to that. Moreover it reminds me of a situation where someone assures a bystander that a stream only has an average depth of 4 feet and that he should have no problem crossing the stream, but the poor man drowns anyway, midstream in 12 feet of water.

By the year 2000 it may be there will be more people in the world, but we are afraid that before we get to the year 2000 there may bewell, maybe part of that stream will have a depth of 10 or 12 feet and we will drown.

Moreover, every outlook statement that I have read concerning the prospect of supply of vegetable oil say over the next 20 years—and even I believe the study of the Economic Research Service-all say that under certain sets of conditions, Mr. Chairman, there could be quite an oversupply of vegetable oil in the world.

So that the main thing is that soybean producers are there to produce the soybeans if they are given the climate to do so.

Mr. JOHNSON. Let me respond, Mr. Chairman, in another sense. We are talking about reducing acres if this continues.

Mr. GONZALEZ. You are talking about soybeans?

Mr. JOHNSON. Yes, about soybeans. Because once the palm oil is in production, they don't stop. It is a minor cost to harvest. The cost is the investment of planting these trees. So once they are onstream, you have that competition from here on. Soybean producers have to adjust by reducing acres to respond to it. Subsequently we have lower soybean prices or lower corn prices or cotton prices because of the competition.

So it is a matter of trying to stop these things now before they come on stream.

Mr. GRASSLEY. Well, it is at least an investment that is good for 35 to 40 years.

Mr. JOHNSON. Yes.

Mr. GONZALEZ. It is estimated that by 1980, 15 percent of the total world production will have been financed by these institutions. Where is the other 85 percent? Where would the other 85 percent come from? Would that come from the subsidization by the producing country or commercially or do you have any information?

Dr. KLING. Well, sir, the answer is that, as far as I can see—and I know some people who have gone into the palm oil business-it is a bonanza. It is a sure-fire proposition where you just can't lose.

The cost of production is so low and the profits are so great that quite a bit of commercial money and investment money have gone into palm oil production.

Now remember also that a good deal of palm oil production was brought into being some years back. We are talking about increments now. So the bulk of palm oil production has probably been financed either by commercial investment or by investment of government development banks in the various countries such as Malaysia, Mr. Chairman, and also by some of the large American corporations that operate in countries like Malaysia and Indonesia, who have foundwell, I know one case where it is profitable for them to shift from rubber to palm oil because palm oil is such a good thing.

Our question is if it is such a darn good thing, why does production have to be subsidized?

Mr. GONZALEZ. What is the price differential between soybean and palm oil?

Mr. JOHNSON. I think today about a 4-cent differential.
Mr. GRASSLEY. But last winter it was extremely-

Mr. JOHNSON. The prices of palm oil and soybean oil were about the same last winter.

Mr. GONZALEZ. In other words, they just don't put that much palm oil into Palmolive soap?

Dr. KLING. Well, the palm oil is used primarily today in shortening. Most of the additional palm oil is going toward edible use. Now there is another development. They have developed new technology for palm oil which makes it possible to use palm oil in the manufacture of margarine and salad and cooking oils.

Palm oil is a hard oil. You don't have to hydrogenate it in order to give it the consistency of shortening. But they have developed methods of fractionization whereby the palm oil can be used for margarine and for vegetable oil; not very much yet but it is growing like the dickens. I think it has doubled in the last year-doubled from a relatively small amount.

But we can see the handwriting on the wall that it may not be too far off when a good part of the margarine and vegetable oil consumption in this country will come from palm oil-despite the fact that palm oil is a highly saturated oil and is really not indicated for people with cardiovascular disease.

I think consumers would benefit by being educated about the saturation of palm oil. And finally, even palm oil producers are sensitive to this because they are now trying to develop varieties of palm oil that are not quite as saturated as the old varieties. They have said there is a little success in this.

Mr. GRASSLEY. Congressman Poage made the same statement on the House floor when we had this up for debate and pointed out how it could really affect the health of the American people.

Mr. GONZALEZ. Congressman Poage will be a witness this morning. I notice our distinguished fellow Texan, Mr. de la Garza, is also here. Congressman Robert Stephens, who is also a member of the subcommittee and a very distinguished member of the full Committee on Banking, Currency, and Housing, is also here. Unfortunately he has decided to take leave from the Congress. I haven't heard that he is going into palm oil investment. Mr. Stephens, do you have any questions?

Mr. STEPHENS. Thank you, Mr. Chairman. This is a very interesting development because in my State of Georgia we have a great production now of soybeans. We have over the years increased our production. When the soybean price went up about to about $12.50 a bushel, everybody learned about soybeans. That was about 3 years ago.

But the thing that is interesting to me is the fact that we have been developing the underdeveloped countries by various and sundry types of loans. Most of the loans that the Inter-American Development Bank has engaged in, to my knowledge at least, have not been this kind of agricultural development.

They have been in the realm of reservoirs for water supply like in Guatemala and the development of recreational facilities like in Cancun and Mexico.

Now I know that we have had in our assistance program the development in Santo Domingo of a very fine agricultural cooperative system like we have here with the county agents in the United States, but I did not realize we were making this kind of loan.

Of course, in the realm of cotton, in the past we in the South went along with lots of the cotton restrictions and we found out that we didn't reduce the production of cotton; we just lost the acreage in our section because it went out somewhere else beyond Mississippi and on out to California.

I think that is what you are talking about now, that is, the fact that you would lose this to some foreign countries.

Mr. GONZALEZ. Pardon me for interrupting you, but a minute ago didn't you make reference to loans by the Inter-American Development Bank?

Mr. JOHNSON. Yes, sir.

Mr. STEPHENS. It is in the statement that that Bank and the Asian Development Bank have both participated in lending.

Mr. GONZALEZ. I was looking over the Council's report. They show two Inter-American Development Bank loans in their listing.