Mr. GONZALEZ. No, obviously the idea is, and it is still what the officials say, was that these loans were meant to be used for domestic production and consumption. And by inference, even those in the pipeline or anything in the future, Mr. Grassley, would be sanctioned only if it were for domestic use and not for exportation. But the burden of their testimony is that there are many many loopholes here that we need to look into and see if we can't kind of close them out a little bit. Mr. GRASSLEY. I would like to know whether our officials knew this when they agreed to these loans. Mr. GONZALEZ. In reading the reports on past occasions, Mr. Grassley, the impression I got was that their intention was not for export purposes. They were under the impression it was purely to help the internal economies and consumption. These are edible oils. Mr. GRASSLEY. Then you have to conclude that it could be misjudgment of how much money it took to do this and how big the investment ought to be, or else maybe somebody actually changed the official policy of the Congress or the administration. Mr. GONZALEZ. Well, this is surmise, and it is just my opinion that, as in most everything that we do, we have noble beginnings. The ugly head of greed and profit enters the picture and you begin to find very loose evaluation of policy. And before you know it, the thing has grown to where you finally see the effects and we begin to have the observations and criticisms that we now have. But I don't think that it was intentional policy of the lending institutions that they would be for the purposes of exportation. I make that statement from my reading of some of the past reports of the Council and other bank statements. It may be that I just don't know and there may be some policy statements that I am not aware of, but to my knowledge that was the intention. [In regard to the above matter the following information was submitted by the staff for the record:] [From National Advisory Council working group on Palm Oil, "IFI Financing of Palm Oil Projects" dated August 1976, pages 2-6] IFI LENDING FOR PALM OIL 1965-75 In the early 1970s, the World Bank forecast increasing world demand and rising prices for fats and oils. In this context and without objection by member governments, the IFIs increased their lending for palm oil projects. Of the 32 projects financed in the period 1965-75, 20 of them have been approved since 1970. In 1975, world market conditions for fats and oils, and most other nonfuel agricultural and mineral commodities, changed markedly and suddenly. The worldwide recession reduced the growth of consumption; and, at the same time, the world supply of fats and oils from all sources was increasingly rapidly in response to the unusually high prices of the preceding few years. Production During the period 1965-1975, the 32 IFI loans to 12 developing countries totaled $411 million (see Table I). Of the total, only $305 million was directly for palm oil production or processing as individual projects also include other projects such as cocoa, rubber and livestock. Using the projections made at the time individual loans were appraised, the maximum annual palm oil production from all IFI-financed projects combined will total 1.1 million metric tons (mt). Similarly, the estimated maximum export of oil will total 818,800 mt. or 74 percent of production. If the increases in output are projected through time, IFI-financed production is estimated to total 6 percent of world production of palm oil in 1975, increasing to 13 percent in 1980 and 15 percent in 1985 (see Table II). The effect on export increases is estimated to be 7 percent in 1975, increasing to 15 percent in 1980 and continuing at that level in 1985. During the same period, world production totals are expected to increase 64 percent from 2,865,000 mt. in 1975 to 4,700,000 mt. in 1980 and another 30 percent to 6,103 mt. by 1985. Similarly, exports are expected to increase 97 percent from 1,735,000 mt. in 1975 to 3,425,000 mt. in 1980 and an additional 31 percent to 4,500 mt. by 1985. TABLE II.-ESTIMATED SHARE OF TOTAL PRODUCTION AND EXPORTS OF PALM OIL FROM IFI PROJECTS FOR 1975-90 The World Bank has estimated its 23 IBRD/IDA projects will add 125,100 mt. to production in 1975, 475,000 mt. in 1980, 698,600 mt. in 1985 and 745,400 mt. in 1990. These amounts would represent over three-fourths of the IFI total in 1980 and 1985. Similarly, the exports from IBRD/IDA projects would also represent just over three-fourths of projected IFI exports for 1980 and 1985. The ADB has financed 5 projects, 2 of which are for processing only; however, these two projects are expected to result in an additional 102,000 mt. of palm oil in the peak year of production. The remaining 3 ADB-financed projected are expected to produce in their peak year of production 176,700 mt. and export 171,300 mt. (See Table I.) However, if the output is projected by year, the ADB projects are estimated to produce 25,100 mt. in 1975, increasing to 114,300 mt. in 1980, and even larger amounts in later years (see Table II). Over the 11 year period the IDB has financed 4 projects producing at maximum production an estimated 34,800 mt., all for domestic consumption. The total represents about one percent of total world production of palm oil in 1975. Estimates by year are not available for the IDB; however, because the amounts are about one percent of the total, which are not considered significant the one estimate is used throughout. Purpose The IFI loans have financed the rehabilitation of existing state and privatelyowned plantations, new public and private plantations and private smallholders to increase the output of palm oil. The major purposes of this effort are to increase incomes and foreign exchange earnings in developing countries. In Malaysia, for example, the IFIs made seven loans totaling $116.6 million, including one loan for processing palm oil. Total investment in the industry is about $2.5 billion of which the IFI loans account for about 5 percent. Most of the IFI loans were to the Government's Federal Land Development Authority (FELDA) for large land development and resettlement programs. The last loan, for example, $36 million from the IBRD, was to help support government plans to achieve high growth rates in agriculture through land development and settlement thereby reducing unemployment and underemployment. The project in volved clearing 63,000 acres of land for large plantations to employ 3,400 settler families. Settlers' average annual incomes were expected to increase from about $355 before the project to about $2,650 after each had finished repaying the cost of resettlement and housing, (about the 21st year from inception of the project.) In Indonesia, the IFIs financed seven projects for $51.1 million, mostly to increase smallholder production. The last project, the Gohor Lama Processing Plant financed in November 1975 by the ADB, was limited to processing but the plant is dependent on private small holdings and state-owned plantations. A 1972 IDA credit to increase palm oil production was directed toward increasing the incomes of 18,000 smallholders and their families, approximately 90,000 people. This project, similar to earlier projects in Indonesia, included other crops such as rubber, coconuts and cocoa; and it was expected to earn $57 million in foreign exchange and provide some 3,300 man-years of employment annually. In Africa, IBRD/IDA has made a total of 12 loans for palm oil. Nigeria and the Ivory Coast have each received three loans, the Cameroons and Sierra Leone two loans each and Ghana and Benin have each received one loan. In Nigeria, Cameroon, Sierra Leone and Ghana, the beneficiaries have been smallholders and most of the palm oil production is for the domestic market. For example, the three loans totaling $65.5 million approved in June, 1975 by the IBRD for Nigeria were to encourage smallholders in three areas. In the East Central area, 16,000 ha. of smallholder wild palm groves were to be replanted, and the Midwestern and Western Regions, a total of 12,000 ha. of smallholder oil palm were to be replanted and 14,000 ha. of nucleus oil palm estates planted. In all, some 14,000 farmers would benefit directly from the loans and from the development of cooperatives, extension services, and credit facilities. The three projects in the Ivory Coast and the one in Benin are primarily for export. The Ivory Coast projects, in their peak year, will export 62,200 mt. Similarly, the project in Benin for smallholders is relatively small, and will export an estimated 10,100 tons in its peak year. One of the projects in Cameroon will also export about 30 percent of its output (6,700 mt). Nevertheless the exports from these 5 projects would represent only 2 percent of estimated world exports of palm oil in 1980. Terms Of the 32 projects financed by the IFIs, half of the loans were made on soft terms and one loan has half IBRD and half IDA. The remaining 15 projects were made on near-market terms. Of the 16 soft loans, 10 were from IDA with fixed terms of 50 years, 10 years grace and a service charge of three quarters of one percent. The Special Fund (SF) window of the ADB made 2 loans to Indonesia at 2.5 and 3 percent for 30 and 24.5 years, respectively. The 4 IDB loans were from the Fund for Special Operations (FSO) with interest rates between one and 2 percent and maturities of 16 to 40 years. The remaining 15 palm oil loans were made on hard terms, mostly by the IBRD at near-market rates. Specifically, the rates ranged between 6.25 percent for the earlier loans to rates of 8.50 for IBRD and 8.75 percent to the ADB with terms from 20 to 25 years. [The following information was supplied by the World Bank:] WORLD BANK INFORMATION NOTE PALM OIL The Issue: Why has the World Bank financed palm oil projects in LDCS-a fact which now affects producers of other fats and oils? Comment: An increase in the volume of palm oil imported in the U.S. prompted the U.S. Department of Agriculture to recommend that the U.S. Government should not support palm oil projects in LDCs and to impose a tariff on palm oil imports. The U.S. position in international agencies is under revision. The U.S. soybean producers also protest Bank financing of these projects, which they claim "subsidize production of a competitive product." Summary: The World Bank has lent about $272 million for palm oil projects in nine underdeveloped tropical countries. The Bank has financed palm oil projects because: a) They are economically sound; b) For many countries oil palm was the most profitable agricultural crop; c) About $100 million was lent to West African countries which consume domestically almost all the palm oil produced; and d) Oil palms are particularly suited as primary crops in smallholder settlement projects, which benefit large numbers of rural families. Thus, these projects are a way of helping the rural poor. PALM OIL PUBLIC ISSUES I. BACKGROUND 1. Prices for soybean oil in international markets dropped sharply during 1975. The following table illustrates the weakening of the markets for soybean oil and soybeans during this year. The table also shows that prices for soybean meal remained stable thereby cushioning the pressure on soybean markets.1 MONTHLY PRICES FOR SOYBEANS AND THEIR PRODUCTS IN INTERNATIONAL MARKETS, 1975 2. The decline in prices for soybean oil affected primarily the profitability of the soybean industry; it lowered the crushing margins (the difference between the combined value of oil and meal extracted from soybeans and the price of soybeans) of soybean processors and prices offered to soybean farmers. Prices for soybeans and their products were at record levels in 1974 (remember U.S. $10 a bushel for soybeans), at a time when the world experienced a food scarcity. Even now, prices for these commodities are well above their average during the 60's (see Table 1 in Annex 1, page 31). 3. Prices for palm oil followed the drop in soybean oil prices during 1975. As it is generally priced below soybean oil there is an incentive to substitute palm oil for the slightly more expensive soybean oil. U.S. imports of palm oil reflect this. During 1975 the United States imported 436,000 tons of palm oil. which represents an increase of 133 percent of her 1974 palm oil imports. 4. The dramatic increase in U.S. palm oil imports and the somewhat bleak economic situation in the U.S. soybean economy sparked a study by the U.S. Department of Agriculture. A report of the study was released in January 1976 under the title Palm Oil Historical Perspective and Future Prospects. The main findings of this report surfaced a few days later in the U.S. press. The following are two examples: (a) Dan Morgan in the Washington Post (February 1, 1976) says that "A sharp increase in the volume of palm oil imported into the U.S. has caused the U.S. Agriculture Department to recommend that the Government reverse a long-standing policy of helping poor countries plant palm trees and build processing plants . . . The Department warned that duty-free imports of the relatively cheap palm oil will severely hurt U.S. soybean cotton farmers." The Washington Post adds that "A Treasury Department official said the Government would look with 'skepticism' on and new requests (or assistance) pending the completion of an Agriculture Department study of the impact of the global oil boom". (b) The Journal of Commerce (February 2, 1976) carried a Commodity News Service story saying that "State and Treasury Department sources 1 Soybeans contain about 17 percent oil and 80 percent high protein meal. Soybean meal is a major component in livestock feeds; soybean oil is used mainly in the manufacture of cooking oils, margerine, shortening, and various non-food products. Both commodities are recovered simultaneously in the extraction process. Their combined value (minus the cost of extraction) determines the price of soybeans (Table 1, Annex). |