To the Secretary of Agriculture, June 30, 1966: Your letter of June 16, 1966, concerns a broadened tobacco export payment program. The facts and circumstances pertinent to the matter, as disclosed by your letter, are set forth below. On June 10, 1966, the Department of Agriculture announced broadened tobacco export payment provisions to extend export payments of 5 cents per pound to most kinds of United States tobacco. This program will be applicable to all crops of the kinds of United States produced tobacco on which price support is offered for the 1966 crop. It is the purpose of the program to promote the exportation of United States tobacco by reducing the price at which it can be obtained in world markets. The margin between the price of the major types of United States leaf and that of foreign grown leaf has widened during the past several years. The United States share in free world trade in tobacco declined from 35 percent during the 5 years 1955-59 to 26 percent in 1965. You state that this program will help the United States regain and expand its foreign tobacco markets. The principal purchasing arrangements by foreign firms for obtaining United States tobacco are: a. United States dealers purchase on orders from foreign buyers for future shipment. b. Tobacco is bought and owned by foreign purchasers and stored in this country until shipment is made. c. United States dealers purchase a relatively small quantity on their own account for speculative sales. To provide for an equitable and orderly initiation of this program and to assure maximum program objectives, Commodity Credit Corporation proposes to make the export payments on all eligible tobacco exported after publication in the Federal Register of the terms and conditions under which the program will be operated. You state that not to do so would have such disruptive effect on trade arrangements as to substantially impair the effectiveness of the program. You are now in the process of preparing the regulations under which the broadened program will operate. You request our advice as to whether there would be legal objection to the inclusion in the program of tobacco which is exported after the effective date of the program but which may have been exported in fulfillment of a sales contract entered into prior to such date or may have been purchased prior to such date for export. For the reasons discussed in your letter, you believe that the making of export payments in connection with the exportation of such tobacco is essential to the accomplishment of the objective of the program and that Commodity Credit Corporation is legally authorized to make such payments. Your reasons are as follows: Most United States tobacco is sold under contracts entered into between the United States exporter and the foreign buyer well in advance of shipment. However, in trade practice such contracts carry the tacit understanding that the buyer is free to terminate upon notice for any reason whatever any time prior to actual acceptance of the tobacco. While contract cancellations are not prevalent under normal circumstances, under longstanding trade practice the buyer is permitted to cancel the contract and, therefore, tobacco contracted for is not always delivered. You know of no case where a United States firm has sought legal recourse where the foreign buyer canceled a contract. As a practical matter, you advise that competition and the desire to preserve amicable customer relations preclude such action on the part of sellers. You state that under these circumstances if export payments were not made on tobacco exported under pre-existing contracts the results would be wholesale cancellation of such contracts and disruption of longstanding customer-seller relations which would be extremely detrimental to program objectives. Foreign buyers would either, after disruptive delay, enter into new contracts with other dealers to obtain advantage of the payment, or look to foreign sources for supply. In the first event no reduction in payment would result and in the latter event an export outlet would be lost and the program objective negated. Knowledge of this program is universal among foreign tobacco buyers and you are confident they will take steps to obtain the benefit of the payment. In order, however, to assure that no windfall accrues to any United States exporter on existing contracts you propose to require, before payment, certification to the fact that the benefit of the payment has been passed on to the foreign buyer in a reduced price. A provision covering audit of the exporter's books and records by Government representatives will be included in the regulations. The making of payments with respect to tobacco bought by foreign buyers and stored in this country is also essential to accomplish the purposes of the program. Some tobacco is purchased directly during the limited auction marketing season. In other cases foreign buyers buy from dealers but leave the tobacco in this country for periods up to 2 years because of superior aging conditions and the lack of adequate storage space in some foreign countries. This tobacco is then exported as manufacturing needs arise. These practices are followed by some of the most important buyers of United States tobacco. You state that if export payments are not available on these tobaccos when shipped the owners thereof have options open to them similar to those of foreign buyers who contract with export dealers. They can sell the tobacco they own and either replace it with purchases of tobacco that is eligible for the payment or replace it with tobacco from other sources. You advise that here again, if they take the first course of action no reduction in payments accrues and if they take the second course the export is lost and the program objective negated. You point out that if payment were denied to a foreign owner of tobacco hut he still exported the tobacco he would be placed in a competitive disadvantage in his home market with other manufacturers who had benefited from export payments on their United States tobacco. This would lead to dissatisfaction, ill will towards the United States, and nullification of the program objective increase of United States tobacco exports-in future years. Most foreign countries have limited dollars to spend for United States tobacco. The proposed method of payment will enable and encourage these foreign customers to purchase a larger quantity of United States leaf. You are convinced that any payments made on either existing contracts or foreign owned tobacco would not only buy good will needed for long term attainment of program objectives but would actually be spent for additional purchases from the substantial stocks of United States tobacco held by producer associations and dealers. You advise that the initiation of the announced program has had a very direct effect, not only on tobacco exports, but on tobacco purchases by foreign buyers; and that export dealers report a virtual standstill in export trading pending a decision. Your letter continues: We estimate that there may be 100-120 million pounds of tobacco involved in the two categories of past sales and foreign owned tobacco. If the larger figure is correct, this would amount to $6 million at 5 cents per pound. As pointed out, however, we can have no assurance that the 120 million pounds of tobacco involved will move into export without the payment. Utter chaos will result in the tobacco trade if foreign buyers are forced to resort to cancellation of contracts and foreign owners are forced to sell their presently owned stocks in order to obtain the benefit of the 5-cent payment. Further delay in exports will occur and some exports may be lost altogether. We firmly believe the full objectives of the program-to make U.S. tobacco more competitive in the world market and increase exports-will not be accomplished without making the payment on these tobaccos. The tobacco export payment program will be conducted by Commodity Credit Corporation under the authority contained in the Commodity Credit Corporation Charter Act, particularly section 5(f). Section 5(f) authorizes the Corporation to "export or cause to be exported, or aid in the development of foreign markets for, agricultural commodities." The report of the Banking and Currency Committee of the House of Representatives on the bill which became the Commodity Credit Corporation Charter Act (Rpt. No. 1790, 80th Cong., 2nd Sess.) states in respect to this authority: Subsection (f) authorizes the Corporation to export or cause to be exported, or aid in the development of foreign markets for, agricultural commodities. It is essential to the agricultural economy of the United States that it maintain and expand its markets abroad for agricultural commodities. This subsection empowers the Corporation to carry out operations to this end. The annual budget programs of the Commodity Credit Corporation which have been submitted to and approved by the Congress have always provided for an export program. The budgets for the 1966 and 1967 fiscal years describe the export program of the Corporation in pertinent part as follows: Commodity export.-The Corporation promotes the export of agricultural commodities and products through sales, barters, payments, and other operations. Other than in barters for stockpiling purposes, such commodities and products may be those held in private trade channels as well as those acquired by the Corporation in its price-support operations. You state that for the reasons set forth in your letter, it is essential to the conduct of an effective program to promote the exportation of tobacco that the export subsidy be paid on all tobacco exported after the date the program becomes operative notwithstanding that such exportation may have been made in fulfillment of a sales contract entered into prior to such date or that the tobacco exported may have been purchased by the exporter prior to such date for export. Accordingly, the payment of the subsidy on all such exportations is, in your opinion, fully authorized under the broad authority conferred upon the Commodity Credit Corporation by its Charter and the export program described in its budget to conduct such operations as are determined necessary to promote the exportation of agricultural commodities. The Commodity Credit Corporation was created for the purpose (among others) of stabilizing, supporting, and protecting farm income and prices (15 U.S.C. 714). In addition to the authority vested in the Corporation by section 5(f), of its Charter Act (15 U.S.C. 714c(f)), it was given "such powers as may be necessary or appropriate for the exercise of the powers specifically vested in the Corporation" (15 U.S.C. 714b (m)). And, as you note, the legislative history of section 5(f) makes it clear that it is essential that the United States maintain and expand its foreign agricultural markets and that section 5(f) empowers the Corporation to carry out operations to this end. Thus, as indicated in your letter, the Commodity Credit Corporation Charter Act vests broad authority in the Corporation. Hence if, pursuant to such authority, you determine, on behalf of the Corporation, that for the reasons set forth in your letter it is essential to the conduct of an effective tobacco export program that the export subsidy involved be paid on all tobacco exported after the date the program became operative notwithstanding that such exportation may have been made in fulfillment of a sales contract entered into prior to such date or that the tobacco exported may have been purchased by the exporter prior to such date for export, we will interpose no legal objection to the inclusion of such tobacco in the program. 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