The inside story of a groundbreaking trade agreement

by Arvin Donley
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When the phrase “Russian Wheat Deal” is mentioned in the United States, most recall the transaction in the summer of 1972 that sent 440 million bushels (nearly 12 million short tons) of wheat to the then-Soviet Union (USSR) for about $700 million. To that point, it was by far the biggest grain trade between the two countries. It was also notable that after the sale, the price of wheat and other grain commodities rose dramatically, leading the U.S. General Accounting Office to release a report concluding that the sale had been mishandled and helped push food prices up, and that U.S. taxpayers had paid unnecessary subsidies.

The 1972 wheat deal between the U.S. and USSR, because of its sheer size and the controversy surrounding it, overshadows a smaller but very significant wheat transaction between the two countries in 1963, when 4 million tons (nearly 150 million bushels) of U.S. wheat was shipped to the USSR. It marked the first commercial grain transaction between the two countries since the Russian Revolution of 1917.

A central figure in the 1964 deal was Ben Nordemann, who at the time of deal was in charge of wheat exports for U.S.-based Continental Grain Company (CGC).

Nordemann, who was hired by CGC in 1955, spent the first three years of his career in a variety of roles including finance, accounting, marketing, port and country elevator operations, merchandising, and barge, rail and ocean freight transportation. During that time, Nordemann worked in CGC offices and facilities in the Netherlands, France, the U.S., Belgium and Argentina.

In 1959, CGC sent Nordemann to New York, where he worked at the barley desk as a trader, and then moved to the wheat desk where he was in charge of exports, a role he held until he left CGC in 1971. All of this experience served him well when the CGC asked him to start negotiations with the USSR in October of 1963.

The following is the inside story on the 1964 U.S.-USSR wheat deal through the eyes of Nordemann, who submitted his comments to World Grain in April 2013.

“During the summer and part of the fall of 1963, I was working in the Paris office with the objective to create a closer relationship between the trading personnel of New York and Paris.

On Oct. 4, I was told by Pierre Haas, the General Manager of Continental’s European head office in Paris, that Michel Fribourg wanted me to come immediately back to New York and go to Winnipeg to meet the Russian trade delegation, which was negotiating wheat purchases from the Canadian Wheat Board.

I arrived in New York on Oct. 6 and immediately went to Winnipeg. With the help of John Dallas, our manager in Winnipeg, I tried to see the president of Exportkhleb, Leonid Matveev. He did not wish to give me an appointment, but Dallas, at my request, was able to arrange for me to get a seat next to Matveev on the plane to Ottawa. While on the plane, I started a conversation with Matveev in German, which he much preferred, since his English was rather poor. He invited me to the Russian embassy in Ottawa the next morning.

The meeting at the embassy was uneventful. I was asked to make an offer of U.S. wheat which, of course, was not possible, since exports to the USSR were prohibited. The last commercial grain transaction between Russia and the United States was in 1917. I left the meeting empty handed but with the clear understanding that I would stay in touch with them.

Sometime in early November, U.S. President John F. Kennedy had a meeting with Dobrynin, the longtime ambassador of the USSR to Washington. Dobrynin made it very clear that the Soviet Union wanted to purchase sizeable quantities of wheat from the U.S. and, to make the possible purchases more attractive for the U.S., he indicated that the USSR would allow American flag vessels to enter Soviet ports. This would be the first time that an American ship would enter the USSR since the beginning of the Cold War.

The first week of November 1963, during the last full cabinet meeting of President Kennedy (he was assassinated on Nov. 22), the subject of wheat sales to the USSR was discussed. Afterward the matter was surely mentioned to the various labor unions. On Nov. 10, 1963, an official Presidential proclamation was made that the U.S. was willing to sell 4 million tons of wheat to the USSR. Conditions were that any sales would be paid for in cash and no exporter could sell more than 1 million tons. Also, it stipulated that shipment would be made on U.S. flag vessels, whenever available. Needless to say, the Maritime Union immediately took this as a great opportunity for the U.S. merchant fleet, which was mainly used for PL480 shipments.

Unfortunately, it appeared that nobody had advised the President that the freight rates on U.S. flag vessels were substantially higher than on all other international flag vessels.

I immediately advised Exportkhleb of the situation and explained the consequences. The answer from their side was very clear. “The USSR will never accept to pay higher prices than those being paid on the international markets, adding that they found it unbelievable that an ally of the U.S. during the Second World War was expected to pay higher prices than the old common adversaries in that war like Germany and Japan.”

A complete stand-still of negotiations followed. Louis Dreyfus tried to form a coalition of the willing by forming a sort of cartel (with them as leaders) to handle all U.S. wheat sales to the USSR, using the argument that they were in a better position since they had already been selling Australian wheat to the USSR. Fortunately, both Continental and Cargill refused to agree to this proposal.

In the meantime, the Paris office had continuous contact with Moscow, and Pierre Haas made various visits to Exportkhleb. Regarding the possibility of sales of U.S. wheat, the answer was always the same: no higher prices than world market prices. The U.S. government made some efforts with the unions to drop the matter of using U.S. flag vessels, but this initiative was rebuffed. In effect, the Longshoremen Union was very much against any sales to the Soviets. After all, the Cold War was in full force.

Since domestic wheat prices in the U.S. were substantially above world market price-levels, all wheat for export was subsidized by the U.S. government via the Department of Agriculture’s agency, the Commodity Credit Corporation (CCC), in order to be able to compete in the international markets. These subsidies were set each workday after the close of the futures markets at 3:30 p.m. and were valid until the same time the next working day. They were fixed for various points of export: Gulf; Atlantic; Great Lakes and the Pacific Coast.

However, a special “bid-subsidy system” for durum wheat existed. CCC’s stocks of this type of wheat were very high. Durum wheat is practically exclusively used for the manufacture of pasta and couscous. (At the time pasta consumption in the United States was only a fraction of what it has been during the last 30 years or so).

On or about Dec. 21, 1963, I came up with the idea that if the CCC would accept an exceptionally high subsidy bid for a substantial quantity of durum wheat, which could cover the difference in the cost of freight between international and U.S. flag carriers, we might be able to break the existing deadlock, provided, of course, that the Soviets were willing to purchase a good quantity of durum wheat as part of any wheat sale.

I mentioned this possibility to my then boss, who was quite negative on the idea. Notwithstanding, at around 11:15 that morning I called George Shanklin, the person in charge of the wheat subsidy program in Washington, whom I knew very well. He personally liked the idea. He told me that in 15 minutes he would have lunch with Under-Secretary of Agriculture, Charles Murphy, and that he would bring up the subject. At about 12:15 he called me back and asked me to come to Washington immediately. I took the next flight and met with Under Secretary Murphy and Shanklin.

In short, I was told that they liked my idea, but they were not in a position to give complete “carte blanche” to negotiate a firm sale. At the end of the day, the President (by then Lyndon Johnson) had to make the final decision. This meant that we had to try to secure a firm bid from the Russians.

I returned to New York and I sent a telex to Exportkhleb telling them that if they would take a sizeable portion (around one third) of an eventual transaction in durum wheat, we might be able to break the deadlock. The following morning we received a positive answer, and I was told to go to Washington again to get my visa for the USSR at the Russian Embassy.

On Dec. 24, I flew to Moscow, where I arrived the next day and met with Gustav Meeroff, who was a commission agent of the Paris office and who assisted the company in trading with the Eastern Bloc countries.

The following day Meeroff and I met with Leonid Matveev. Meeroff started to speak Russian, but was immediately told to speak German or English so that I could understand what was going on. We continued in German. I explained why I was unable to make a firm offer, but that there was a very good chance, provided the bid was acceptable to us, we could probably get a positive reaction from the U.S. government. I was asked to come back the next day for further discussions. The next few days were quite hectic. I spent many hours discussing our desired price level and all contractual terms with the commodity people of Exportkhleb and with the freight specialists of Sovfracht, the state agency for all freight-related matters.

I was told repeatedly that our prices were too high without any indication of what they might be willing to pay. I did agree that our ideas of the freight rates might be somewhat conservative as we were absolutely in the dark regarding the condition of the Russian ports and their discharge facilities. I must admit that I was quite astonished by the excellent knowledge Sovfracht had of prevailing international freight rates, etc.

These multi-daily talks lasted until Dec. 30. Since I did not see any progress in our discussions, I told Matveev that I planned to fly back to the United States on Dec. 31. Matveev said that his office would arrange reservations for my flight, but suggested an early farewell luncheon on Dec. 31 so I could make a flight, via Paris, which would allow me to be back in New York around 11 p.m. in order to be in time for a New Year’s Eve celebration at home.

The luncheon was at 11 a.m. Present were Matveev with about six members of his staff. Matveev made a short speech saying that it was a longstanding Russian custom not to discuss business while enjoying a meal. He continued to tell me that he was very happy that I had come to Moscow and that our discussions had been very professional and useful. Then, out of the blue, he gave me on behalf of the Soviet Union a bid for 1 million tons of U.S. wheat, including 300,000 tons of durum wheat, to various Russian Black Sea ports and to Nahodka (Siberia) for West Coast shipments at $2 above the price which I had consistently indicated during our discussions. Matveev asked me whether I wanted the offer in writing or whether I trusted the word of the Soviet Union. I decided on the latter and left without anything in writing. Many toasts followed and we drank to friendship between the Soviet Union and the U.S. Back in New York, I advised Fribourg, who immediately called for a meeting in the office on Jan. 2, 1964. Needless to say, the entire matter was of utmost secrecy.

At the meeting on Jan. 2 (present were Michel Fribourg, Loren Johnson, Harold Vogel, Roy Folck, Ed Pierce, and Charles Gutwirth), I recounted my experiences in Moscow. An important decision to make was how to handle the over-price of $2 per ton. Fribourg asked the participants for their opinion. All were in favor of keeping the over-price, except for me. I suggested to split the difference, and, if the bid was accepted by Washington, to advise the Russians accordingly. After giving it some thought, Michel Fribourg made, in my opinion, the crucial decision to accept to split the difference, which as it turned out later, very much contributed to the excellent future relationship between Exportkhleb and Continental Grain Company.

I contacted Washington and advised them of the positive reception I had received in Moscow, and a meeting in Washington was arranged for Jan. 4 at 2:30 p.m. in Secretary Freeman’s office.

Present for Continental were Loren Johnson, Roy Folck, Charles Gutwirth and I. Representing the government were Secretary of Agriculture Freeman and his Under Secretary Murphy, as well as George Shanklin; Dean Rusk, the Secretary of State, and Luther Hodges, Secretary of the Treasury.

Upon Secretary Freeman’s request, I talked of my experiences in Moscow and about a few other details of the possible transaction. Secretary Hodges asked if I thought the Russians would pay a higher price and how it could be achieved — perhaps a possible counter offer? I explained that in the grain trade a counter offer invalidates the original offer but I added that I did not think this would be the case, since the transaction, in effect, was between two governments. After some more discussions and questions from Secretary Rusk, Secretary Hodges said that he believed the time had come for Secretary Freeman to make a call to the Ranch. (President Johnson was at his ranch in Texas at that time.)

About 10 minutes later, at about 3:20 p.m., Secretary Freeman came back and embraced me saying: “We did it. Congratulations.”

When the reality had sunk in, George Shanklin told me to hold off booking the required subsidies for 15 minutes. The reason became quite clear when we learned that all wheat subsidies were raised by 3¢ per bushel, which meant that the government was giving us a gift of close to $1 million.

In accordance with the agreed upon strategy, we purchased most of the wheat from CCC stocks, which protected us from a possible surge in the next day’s futures markets when the sale was going to be widely known. In about 30 minutes we had practically covered the entire sale, and it was all done in Secretary Freeman’s office!

That night I confirmed the sale to Exportkhleb (at $1 below the price of their bid) and we immediately received a very nice answer, which included an invitation for Continental’s representatives to come to Moscow with their spouses for the contract signing celebration. Michel Fribourg selected Roy Folck, who was merchandising manager at the time, to go with me to Moscow. This was, of course, necessary since Roy was an officer of the company and at the time I was not.

Visas were arranged for the four of us, and Roy and Bonny Folck, with Helene, flew to Moscow, while I flew by myself (Helene and I never flew on the same plane because of our two young children). Upon arrival, we were given a contract representing exactly the terms and conditions that I had negotiated with them. There was, however, an attachment which listed some 40 objectionable types of seeds (all with their Latin names), that were not allowed to enter the USSR. Matveev told me that this was a routine clause in all Exportkhleb wheat contracts. I immediately sent this list by telex to New York.

The contract signing was scheduled for the next morning at 11 a.m. at the National Hotel in Moscow. While I was getting dressed for the ceremony, a telex was delivered to our suite, which read: “Under no circumstances, sign the contract – regards Loren.” This, undoubtedly, was a reaction to the list of objectionable seeds. After giving the matter a few minutes of thought, I destroyed the telex and flushed it down the toilet and acted as if I had never received it. This I never told anyone, not even Roy, since, in my opinion, not signing the contract at such a late time was not an option for us. Interestingly enough, Loren Johnson later never mentioned this telex to me.

The importance of signing the contract as scheduled became even clearer when we arrived at the National Hotel, and we were welcomed by quite a delegation from Exportkhleb and officials from the Ministry of Foreign Trade. The band was playing Alexander’s Ragtime Band, and all the tables had both Russian and American flags on them. Tass, the major Russian TV station, was there to film the entire proceedings. All in all it was quite extraordinary, considering the existing global Cold War atmosphere.

After the signing, we enjoyed a great lunch, following which Helene and I invited the top Exportkhleb people to our suite in the hotel. We had a great party, and at 11 p.m. Helene and I, plus a young employee of Exportkhleb, went to the train station for an overnight trip to Leningrad, (now St. Petersburg). The Folcks stayed in Moscow. They visited the American Ambassador and did some sight-seeing. After our two days’ visit to Leningrad, the Folcks and Helene returned to New York while I stayed on to negotiate a 50,000-ton rice transaction, which in itself is quite a story. After that I flew back and made a stop in Warsaw where I met with the President of Rolimpex, the Polish state organization in charge of handling all foodstuffs. Rolimpex had an office in New York which was quite active in purchasing grain under Public Law 480. They were important clients of Continental. We had great discussions. Rolimpex had a lot of commercial contacts and experience trading with the USSR. The president of Rolimpex gave me valuable advice of how to deal with the Russians should any disputes arise with the execution of our contract. This advice came in very handy at a later date.

After coming back to New York, I took Helene and the kids to upstate New York for a short ski vacation. After two days, Jim Good called me to tell me that all Continental’s export elevators were being struck by the Longshoremen Union. I immediately returned to New York, where, of course, I became very involved with the execution of the Russian contract. This, at times, proved to be quite challenging.”

Editor’s note: In addition to Continental Grain’s sale to Exportkhleb, Cargill also sold the 700,000 tonnes of wheat — 500,000 tons of winter and 200,00 tons of durum — to the Soviet Union in 1964.

Postscript
Only about 20% of the wheat was shipped on U.S. flag vessels.
Sovfracht was correct in its calculations of the cost of freight. We were able to charter at lower levels than we had calculated.
The advice of the President of Rolimpex was very valuable when we received a very large claim from Exportkhleb on quality problems caused by U.S. tanker shipments. We had reserved almost $500,000 for any problems. I was able to settle the claim in Moscow for less than $100,000 dollars (to be compensated on future sales).
This wheat sale of more than $80 million, the largest Continental Grain Company had ever made, laid the foundation for the company’s future substantial deals with 
Exportkhleb in grains, oilseeds, and rice from different origins.

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