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REVIEW IRAQI AGRICULTURE: FROM

OIL FOR FOOD TO THE FUTURE OF

IRAQI PRODUCTION, AGRICULTURE

AND TRADE

HEARING

BEFORE THE

COMMITTEE ON AGRICULTURE

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JUNE 16, 2004

Serial No. 108–33

(

Printed for the use of the Committee on Agriculture

www.agriculture.house.gov

COMMITTEE ON AGRICULTURE

BOB GOODLATTE, Virginia, Chairman

JOHN A. BOEHNER, Ohio

Vice Chairman

RICHARD W. POMBO, California

NICK SMITH, Michigan

TERRY EVERETT, Alabama

FRANK D. LUCAS, Oklahoma

JERRY MORAN, Kansas

WILLIAM L. JENKINS, Tennessee

GIL GUTKNECHT, Minnesota

DOUG OSE, California

ROBIN HAYES, North Carolina

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

TIMOTHY V. JOHNSON, Illinois

TOM OSBORNE, Nebraska

MIKE PENCE, Indiana

DENNIS R. REHBERG, Montana

SAM GRAVES, Missouri

ADAM H. PUTNAM, Florida

MAX BURNS, Georgia

JO BONNER, Alabama

MIKE ROGERS, Alabama

STEVE KING, Iowa

CHRIS CHOCOLA, Indiana

MARILYN N. MUSGRAVE, Colorado

DEVIN NUNES, California

RANDY NEUGEBAUER, Texas

——— ———

CHARLES W. STENHOLM, Texas,

Ranking Minority Member

COLLIN C. PETERSON, Minnesota

CALVIN M. DOOLEY, California

TIM HOLDEN, Pennsylvania

BENNIE G. THOMPSON, Mississippi

MIKE MCINTYRE, North Carolina

BOB ETHERIDGE, North Carolina

BARON P. HILL, Indiana

JOE BACA, California

RICK LARSEN, Washington

MIKE ROSS, Arkansas

ANI ́BAL ACEVEDO-VILA ́ , Puerto Rico

ED CASE, Hawaii

RODNEY ALEXANDER, Louisiana

DENNIS A. CARDOZA, California

DAVID SCOTT, Georgia

JIM MARSHALL, Georgia

BEN CHANDLER, Kentucky

STEPHANIE HERSETH, South Dakota

EARL POMEROY, North Dakota

LEONARD L. BOSWELL, Iowa

MARK UDALL, Colorado

RICK LARSEN, Washington

LINCOLN DAVIS, Tennessee

——— ———

PROFESSIONAL STAFF

WILLIAM E. O’CONNER, JR., Staff Director

KEVIN KRAMP, Chief Counsel

STEPHEN HATERIUS, Minority Staff Director

ELYSE BAUER, Communications Director

(II)

(III)

C O N T E N T S

Page

Goodlatte, Hon. Bob, a Representative in Congress from the Commonwealth

of Virginia, opening statement ............................................................................ 1

Stenholm, Hon. Charles W., a Representative in Congress from the State

of Texas, opening statement ................................................................................ 4

WITNESSES

Christoff Joseph A., Director, International Affairs and Trade, U.S. General

Accounting Office ................................................................................................. 7

Prepared statement .......................................................................................... 42

Answers to submitted questions ...................................................................... 65

Edwards, Lochiel, president, Montana Association of Wheat Growers ............... 28

Prepared statement .......................................................................................... 72

Garvelink, William J., Senior Deputy Assistant Administrator for Democracy,

Conflict and Humanitarian Assistance, U.S. Agency for International Development .................................................................................................................. 5

Prepared statement .......................................................................................... 38

King, John, vice chairman, USA Rice Council of Helena, AR. ............................. 26

Prepared statement .......................................................................................... 67

Schatz, H. Lee, Special Counsel for Iraq Reconstruction, Foreign Agricultural

Service, U.S. Department of Agriculture ........................................................... 8

Prepared statement .......................................................................................... 34

Answers to submitted questions ...................................................................... 37

SUBMITTED MATERIAL

Natsios, Andrew S., Administrator, U.S. Agency for International Development, statement ................................................................................................... 38

(1)

REVIEW IRAQI AGRICULTURE: FROM OIL FOR

FOOD TO THE FUTURE OF IRAQI PRODUCTION, AGRICULTURE AND TRADE

WEDNESDAY, JUNE 16, 2004

HOUSE OF REPRESENTATIVES,

COMMITTEE ON AGRICULTURE,

Washington, DC.

The committee met, pursuant to call, at 10:00 a.m., in room 1300

of the Longworth House Office Building, Hon. Bob Goodlatte (chairman of the committee) presiding.

Present: Representatives Smith, Moran, Ose, Osborne, Rehberg,

Burns, Bonner, Rogers, Stenholm, Peterson, Dooley, Etheridge, Alexander, Scott, Herseth, Pomeroy, and Boswell.

Staff present: Brent Gattis, Lynn Gallagher, Matt O’Mara, Jason

Vaillancourt, Callista Gingrich, clerk; Brandon Farris, and Andy

Baker.

OPENING STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE COMMONWEALTH

OF VIRGINIA

The CHAIRMAN. Good morning. This hearing of the House Committee on Agriculture will come to order. At this time, I would like

to recognize the gentleman from Texas, Mr. Stenholm, for the purpose of making an introduction.

Mr. STENHOLM. Thank you, Mr. Chairman. It is my distinct to

welcome the newest Member to the House Agriculture Committee,

Stephanie Herseth of South Dakota, just winning the special election. She comes to us from a farm background, has spent a considerable amount of her time dealing with rural issues in South Dakota prior to being elected to the Congress. So Stephanie, welcome.

Glad to have you here.

The CHAIRMAN. Congresswoman Herseth, I want to add my congratulations to you, as well, and welcome to the House Agriculture

Committee. We have a very congenial working relationship across

the aisle, and we look forward to that kind of relationship with you

as well.

On behalf of the committee, I welcome our distinguished witnesses. Today we will review agriculture in Iraq. This hearing will

focus on the successful food assistance operation that enabled the

U.S. and the World Food Program to feed 26 million Iraqis during

the transition from Saddam’s Iraq to a free Iraq. We will also receive an update on the investigations into the Oil for Food ProVerDate 11-SEP-98 12:01 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00004 Fmt 6633 Sfmt 6633 F:\DOCS\10833 HAGRI PsN: HAGRI
2

gram, and we will have a discussion about the future of Iraqi production, agriculture and trade.

For most of its history, Iraq has maintained a strong agricultural

sector. The area of the Fertile Crescent in ancient Mesopotamia,

which lies on a plain between the Tigris and Euphrates rivers,

gave rise to the first known agricultural settlements 11,000 years

ago. Unfortunately, Saddam Hussein was destined to forget the

history of this cradle of civilization and did everything in his power

to neglect the agricultural industry of his country. Iraqi agriculture

research, improvements to infrastructure and advancements in

technology were essentially nonexistent during Saddam’s tenure

and much of Iraqi agriculture is a product of the 1950’s. Saddam

also destroyed one of the world’s largest wetland ecosystems when

he drained the marshlands of southern Iraq, displacing thousands

of Iraqi farmers. I am confident that the new leadership of free

Iraq will not treat this important industry or the Iraqi farmers in

the same manner in which Saddam’s tyrannical regime did.

The United States has and will continue to work with the Iraqi

government to make sure that the food security of the Iraqi people

is maintained. One of the most overlooked successes of Operation

Iraqi Freedom was that the humanitarian crisis that was predicted

by many never materialized. Many predicted a humanitarian disaster and a mass exodus of refugees from Iraq in the spring and summer of 2003, but that disaster never occurred. This was because of

the work of USAID and the World Food Program in reestablishing

the Iraqi Public Distribution System immediately after the conflict.

Today, you will hear how the U.S. Government worked closely with

the World Food Program by donating over 2 million metric tons of

food to the Iraqi people before, during and immediately after the

conflict. Food security was maintained and 26 million Iraqis were

fed.

Even though this food assistance to Iraq was provided temporarily during the transition last summer, the importance and effectiveness of the U.S. Food Aid Program in preventing disruptions to

the food supply and keeping needy people fed is clear. Currently in

the World Trade Organization negotiations, some countries, including the European Union, are criticizing the use of food aid. Opponents of U.S. food aid prefer that government-to-government ‘‘in

kind’’ food aid be banned, and that a U.N. agency sanction all food

aid, and that non-emergency food aid only be allowed to be given

in the form of cash to purchase food from the world market.

Each year, 10 million people die from hunger and malnutrition.

With millions starving around the world in Africa and Asia, I am

deeply troubled by the proposals of these countries which would effectively end the U.S. Food Aid Program. The executive director of

the World Food Program, Mr. James Morris, recently spoke of the

advantages of food aid. Mr. Morris said, ‘‘Is more food aid the answer? Yes, definitely, but only part of it. We need more investment

in agricultural infrastructure and scientific innovation, including

biotechnology. Well-targeted food aid has tremendous potential, especially for reaching poor women and children. I would match food

aid up against any kind of assistance on several important counts.’’

I am committed to maintaining U.S. Food Aid Programs so that the

3

bounty of American’s farmers and ranchers can be shared with the

needy around the world.

While the food security of the Iraqi people was a primary concern

for the planners of Operation Iraqi Freedom and the Coalition Provisional Authority that followed, the food security of the Iraqi people did not seem to be a concern of Saddam Hussein. The fact that

the Iraqi people were starving in the early 1990’s did not seem to

curtail the building of Saddam’s elaborate palaces all across Iraq.

The United Nations’ sanctions that were implemented after the

first Gulf War in 1990 allowed for the trading of food and medicine,

but it was evidence that Saddam’s regime did not make feeding the

Iraqi people a priority. The Saddam regime had twice denied the

United Nations’ proposals to establish an Oil for Food Program because he was not satisfied with the power he would have with the

program. Once the Oil for Food Program did get off the ground in

May 1996, Saddam had already devised his scheme to take advantage of the program. The United Nations allowed Saddam’s regime

to maintain sovereignty by negotiating contracts and deciding on

the contractors for oil sales and the purchase the humanitarian

goods.

Even though the United Nations did not have the final say in

which Oil for Food contracts were approved, the kickbacks, smuggled oil and after-sales service charges reported by the General Accounting Office were enough for Saddam to pocket over $10 billion

from the program. The Oil for Food scandal, which is currently

being investigated, is of great concern to this committee and the

American taxpayer. I am hopeful that the investigations currently

underway in the Congress, in the United Nations, and in the Interim Iraqi Government will shed some light on ways in which the

United Nations can learn from the lessons of the past and hold all

those involved in this scandal accountable.

In the meantime, we must look to the future of Iraqi agriculture

by helping Iraq rebuild its agricultural sector. The rebuilding has

begun, and on May 5, 2004, the Iraqi people assumed full authority

of the Ministry of Agriculture. I am confident that the Agriculture

Ministry will work to transform Iraqi agriculture into a marketbased sector.

Iraq can be self-sufficient in certain products like fruits and vegetables, but it is anticipated that they will have to import wheat,

rice and feed grains. In 1989, the U.S. exported over $1.1 billion

worth of agricultural products to Iraq. At that time, Iraq was our

12th largest customer. America’s farmers and ranchers want to

once again become a reliable supplier to the Iraqi people. The Coalition Provisional Authority and the Iraqi Ministry of Trade, with

the help of USAID and USDA, have been working together to move

Iraqi agriculture towards a more democratic and market-based system. I am hopeful that Iraq can make the transition to a marketdriven economy and that America’s farmers and ranchers will soon

be making commercial sales to the Iraqi people.

I look forward to hearing from our witnesses today, and at this

time, it is my pleasure to recognize the gentleman from Texas, Mr.

Stenholm.

4

OPENING STATEMENT OF HON. CHARLES W. STENHOLM, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS

Mr. STENHOLM. Thank you, Mr. Chairman, and thank you for

calling this hearing this morning to examine the U.N. Oil for Food

Program and the transition to a more normal trading relationship

between Iraq and its trading partners, which wee all hope will include American agriculture.

Iraq has traditionally been an important market for U.S. rice and

wheat producers and has the potential to be so again, if we are

willing to use our WTO Legal Export Program, such as the Export

Credit Guaranty Program, the Market Access Program, and the

Foreign Market Development Program. Between 1984 and 1989,

Iraq imported over $2.2 billion in agricultural products each year,

with a quarter of that coming from the United States. In the case

of cereals, the U.S. dominated, with a 59 percent share of the Iraqi

market. Almost all of those sales were made under U.S. Government programs. From 1983 to mid–1990, Iraq received nearly $5

billion in U.S. export credit guarantees, and by 1989, Iraq was our

12th largest agricultural export market.

Since the first food shipments began under the U.N. Oil for Food

Program in March 1997, the Australian Wheat Board has dominated Iraq’s wheat trade, with a 73 percent share, and the U.S. has

been virtually excluded from the Iraq rice market, with Vietnam,

Thailand and China each taking a share. As we will hear today

from the General Accounting Office, the former Iraq regime acquired $4.4 billion through surcharges on oil sales and illicit commissions from suppliers exporting goods to Iraq through the Oil for

Food Program, World Food Program has pointed out. Given this

background, I think we ought to be looking closely at how soon we

can get our export programs back up and running. In a recent response to a rice producer from Texas, Under Secretary Penn stated

the following.

Resumption of the GSM Program would require a multi-step process, involving

forgiveness or rescheduling or both of all debt by the Paris Club, review by the

Interagency Country Risk Assessment System, congressional appropriation of the

funds needed to forgive any U.S. debt, and the assignment of credit lines to banks

approved by the Commodity Credit Corporation. This can be a lengthy process.

Others have suggested that there is no regulatory or consistent

administrative rules that require the Secretary of Agriculture to

find that Iraq is not credit-worthy due to the $4 billion arrears

owed by Iraq to the United States. In fact, they argue that the

credit-worthiness determination should be forward looking, and

that the issue should be whether a new regime in Iraq would have

the means and inclination to repay new GSM debt in the future.

I will not put Mr. Schatz on the spot by asking him to choose between his boss’s view and the other view, but I would like to encourage USDA to continue its review of the appropriateness of

using export credit guarantees in Iraq in the near future.

Another important aspect of the role of agriculture in Iraq’s transition is food aid, and I would like to congratulate USAID for its

role in providing food to 26 million Iraqis. As the chairman has

mentioned, some of our trading partners have criticized food aid in

the current WTO negotiations and suggested that we go to cashonly donations. This is a dangerous path. As the director of the

5

U.N.’s World Food Program has pointed out, food aid is easier to

trace than cash. World Food Program and private volunteer organizations, such as CARE and Catholic Relief can consistently follow

food deliveries every step of the way to their intended recipients.

Food aid can also be targeted and nutritionally designed to reach

women and children, who are the most often affected by chronic

hunger. Cash assistance often does not reach women and children.

In addition, food aid can be delivered quickly, as the operation

in Iraq proved, feeding 26 million people and delivering more than

2 million tons of food in just 7 months. At its height, the operation

was moving 1,000 tons an hour, 24 hours a day, 7 days a week.

Mr. Chairman, thank you for your leadership on this issue. I look

forward to hearing from our witnesses.

The CHAIRMAN. Thank you, Mr. Stenholm. It is now my pleasure

to welcome our first panel.

Mr. Andrew Natsios, the Director of USAID, was scheduled to be

with us, but he was called to Haiti just yesterday, and we are very

pleased to have in his place Mr. William J. Garvelink, Senior Deputy Assistant Administrator for Democracy, Conflict and Humanitarian Assistance with the USAID, Mr. Joseph A. Christoff, Director, International Affairs and Trade with the U.S. General Accounting Office, and Mr. H. Lee Schatz, Special Counsel for Iraq Reconstruction, Office of the Administrator of the Foreign Agricultural

Service, U.S. Department of Agriculture.

Gentlemen, we welcome all of you. We will make note that your

full statement will be made a part of the record and ask that you

limit your remarks to 5 minutes, and we will start with Mr.

Garvelink. Thank you.

STATEMENT OF WILLIAM J. GARVELINK, SENIOR DEPUTY ASSISTANT ADMINISTRATOR FOR DEMOCRACY, CONFLICT AND

HUMANITARIAN ASSISTANCE, U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT

Mr. GARVELINK. Thank you, Mr. Chairman, and members of the

committee. It is a pleasure to be here today. I was to express the

apologies of Andrew Natsios, as you noted, he is in Haiti, and other

than that, he was planning to be here today, and I have his comments for the record, but we will make just a couple of observations

about USAID’s role in ensuring that the Iraq population was fed

over the past 15 months.

Prior to the war, as part of the interagency process, humanitarian offices within USAID began preparing for a humanitarian

crisis in Iraq and began planning how to guaranty that the Iraqi

population continued to receive food supplies through the war and

into the post-conflict period. The humanitarian crisis did not happen, but Iraqis, most of whom relied on government rations before

the war, had to be fed. With the full cooperation of the U.N. World

Food Program, Iraqi officials, the State Department, the Coalition

Provision Authority and the Civil Affairs Officers of Coalition

Forces, USAID ensured that 26 million Iraqis continued to receive

their regular food rations, and they continue to receive them today.

Averting a food crisis in Iraq has been one of the U.S. Government’s major successes in Iraq. By March 2003, USAID had secured the agreement of the World Food Program to assume the

6

overall management of food distribution under the Oil for Food

Program, using Iraq’s existing Public Distribution System. For

years in Iraq, each Iraqi citizen has received a monthly food ration.

These rations have been distributed through a network of almost

45,000 food and flour agents. Rather than create a new system, the

World Food Program revived this national network and worked

with the Iraqis to feed the Iraqi population, and this system is still

being used today.

Managing this national food ration system has been an enormous

task. It requires almost 500,000 metric tones of commodities to be

distributed throughout the country monthly. A fleet of thousands

of private and public sector trucks make daily trips in and out of

Iraq, hauling food overland to more than 400 warehouses and silos

around the country. The 45,000 food agents pick up these commodities at these locations for final distributions to the Iraqi family. As

the war began in March, the U.S. assumed that Iraqi families had

2 to 3 months food supply. To ensure that there would be food

available after their supplies ran out possibly in June, we undertook several actions. USAID provided $45 million to the World

Food Program to fund its mobilization of staff and initial trucking,

warehousing and fuel contracts. USAID provided to the World Food

Program $200 million in cash and $181 million in Public Law 480

title II commodities and Emerson Trust food supplies. These actions totaled $426 million.

On June 1, 2003, food distributions began as planned through

the Iraqi Public Distribution System, and they have continued each

month ever since. For more than a year, the World Food Program,

Coalition Provisional Authority and USAID have worked with the

Iraqi Minister of Trade to train staff and prepare the Ministry for

the time when it would assume full control of the Public Distribution System, and now on June 30, the Ministry will take over the

system, and the last commodities procured by the World Food Program will arrive in Iraq by September 2004.

We fully support the hand over of the Public Distribution System

to the interim government of Iraq, but we remain concerned that

insecurity and management challenges might lead to disruptions in

the food pipeline. Delays in food deliveries not only threaten the

vulnerable, they could also create further instability among the

population. We will remain vigilant in the coming months and be

prepared to assist the new Iraqi government, should it become necessary.

Mr. Chairman, I cannot end my comments without noting that

2004 marks the 50th anniversary of the Public Law 480 Food for

Peace Program. Over the past 50 years, the U.S. Government has

contributed more than $50 billion to finance more than 376 million

metric tons of food in over 150 countries. More than 3.3 billion people worldwide have benefited from this program. It is a credit to

the dedication and commitment of this committee and its members

that the United States has been able to share its bounty with so

many of the world’s needy. We are all justly very proud of this program.

Thank you, Mr. Chairman.

[The prepared statements of Mr. Garvelink and Mr. Natsios appears at the conclusion of the hearing.]

7

The CHAIRMAN. Thank you, Mr. Garvelink.

Mr. Christoff, welcome.

STATEMENT OF JOSEPH A. CHRISTOFF, DIRECTOR, INTERNATIONAL AFFAIRS AND TRADE, U.S. GENERAL ACCOUNTING OFFICE

Mr. CHRISTOFF. Thank you, Mr. Chairman. Thank you for inviting GAO to this important hearing.

For several months, GAO has been reviewing the operations of

the U.N.’s Oil for Food Program, and today, I will discuss our findings and observations on that program, and describe current and

future challenges to achieving food security in Iraq. First, let me

discuss the Oil for Food Program.

Under U.N. sanctions, Iraq was allowed to sell oil to purchase

food and other humanitarian goods. From 1997 to 2002, the U.N.

controlled over $67 billion in Iraqi oil revenues and issued $38 billion in letters of credit to purchase commodities. The program

helped the Iraqi people by almost doubling their food intake over

the first 5 years of the program. However, the Iraqi regime acquired over $10 billion in illegal revenues during this period. This

included $5.7 billion in oil smuggled out of Iraq and $4.4 billion in

surcharges on oil sales and illicit commissions on imported commodities. Oil was smuggled through Syria by pipeline, across the

borders of Jordan and Turkey by truck, and through the Persian

Gulf by ship.

The Iraqi government also levied surcharges against oil purchasers and commissions against suppliers of commodities. The

surcharges were up to 50 cents per barrel of oil, and the commissions were 5 to 15 percent of the commodity contracts. Now how

and why did these problems occur? First, the Oil for Food Program

gave the Iraqi government the authority to negotiate contracts directly with companies that purchased oil and supplied commodities.

The MOU between the U.N. and the Government recognized the

sovereignty of Iraq in negotiating oil and commodity contracts.

Iraq’s control over contract negotiations was an important factor in

allowing the government to levy illegal surcharges and commissions.

Second, U.N. member states did not enforce the sanctions imposed in Iraq. Jordan maintained trade protocols with Iraq that allowed it to purchase heavily discounted Iraqi oil in exchange for up

to $300 million in Jordanian goods. Syria received up to 200,000

barrels of Iraqi oil per day, in violations of the sanctions, and oil

smuggling also occurred through Turkey and Iran.

Third, it is unclear how the United Nations assessed the reasonableness of the prices negotiated between the Iraqi government and

commodity suppliers. In September 2003, the Defense Contract

Audit Agency found that 48 percent of Oil for Food contracts were

potentially overpriced by 21 percent. Food contracts were the most

consistently overpriced. U.N. Sanctions Committee procedures stated that the Office of Iraq Program was to examine each commodity

contract for price and value. However, OIP officials stated that no

U.N. resolution tasked them with assessing the price reasonableness of the contracts. And the Sanctions Committee was responVerDate 11-SEP-98 12:01 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 F:\DOCS\10833 HAGRI PsN: HAGRI
8

sible for approving commodity contracts. However, it primarily

screened contracts for dual-use items rather than for price.

The United Nations and the Iraq Supreme Audit Board have

begun investigations into the Oil for Food Program. These investigations offer an opportunity to determine the extent of the corruption, the adequacy of internal control and ways to improve the

delivery of humanitarian assistance under economic sanctions.

Let me turn briefly to the challenges that Iraq faces in achieving

food security. Sixty percent of Iraqis rely on monthly food rations

as their primary source of nutrition. Ten percent are extremely

poor and need additional food aid. However, the transfer of the

Public Distribution System from the United Nations to the CPA

and then to the Ministry of Trade has not gone smoothly. CPA’s

failed plans to privatize the system and delay negotiations with

WFP resulted in localized food shortages in early 2004. Coordination between WFP and the Ministry of Trade has deteriorated. The

Ministry has not regularly provided WFP with complete and timely

information on food plans, stock reports or cargo arrivals. Furthermore, the worsening security situation has limited food deliveries

from neighboring countries. Port congestion and few drivers willing

to transport food have reduced the movement of food to warehouses. As a result, food stocks are tenuously low and the country

has less than a 1-month’s supply of several food items.

For the future, the Iraqi government must decide whether to continue, reform, or eliminate the public distributions system. The system is expensive and accounts for 25 percent of Iraq’s budget. So,

in conclusion, as investigations of the Oil for Food Program

progress, the Iraqi government must take action to restore food

stocks, target food to the most needy and procure food in an open

and competitive manner.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Christoff appears at the conclusion of the hearing.]

The CHAIRMAN. Thank you, Mr. Christoff.

Mr. Schatz, we are pleased to have your testimony.

STATEMENT OF H. LEE SCHATZ, SPECIAL COUNSEL FOR IRAQ

RECONSTRUCTION, OFFICE OF THE ADMINISTRATOR OF

THE FOREIGN AGRICULTURAL SERVICE, U.S. DEPARTMENT

OF AGRICULTURE

Mr. SCHATZ. Mr. Chairman, members of the committee, I appreciate the opportunity to review the work of the Department of Agriculture in Iraq over the last year and assess the outlook for U.S.

agricultural exports to that market.

What I would like to do this morning is provide a brief overview

of Iraq’s agricultural production, highlight the trade opportunities

ahead for U.S. exporters, and also bring you up-to-date on the activities that the Department and our private sector cooperators are

already doing to renew our relationships with Iraqis, and it truly

is to renew those relationships.

I arrived in Iraq in April 2003, shortly after the fall of Baghdad.

I spent 9 weeks at the Ministry of Agriculture as the first senior

advisor, trying to bring that Ministry back up online. Since my return to the U.S., I have worked full-time for the Department on

9

Iraq issues across the board. We have had an additional 10 USDA

employees working in Iraq on either short-term or longer-term assignments over the last year, and additionally, we have already

identified the two foreign service officers who will be our first staff

in the new Embassy in Iraq.

It might be useful to clarify the differentiation between the two

Ministries we work with. That is the Ministry of Agriculture and

the Ministry of Trade. The Ministry of Agriculture in Iraq focuses

on supporting production agriculture in that country for food, fiber,

livestock and poultry. The Ministry controls and administers land

ownership, manages the water distribution to the farmers and proposes domestic procurement prices. One of the biggest activities of

the Ministry is to import all production inputs, from seeds and fertilizers to fan belts for tractors for further sale onto farmers. The

Ministry of Trade’s focus is importing all the food distributed

through the Public Distribution System, which is essentially the

sum total of the market there.

Decades of State intervention and the economy have

marginalized private market-drive initiatives in agriculture. For

the past 20-plus years, Iraq’s agricultural sector has effectively

been cut off from innovation. The world’s adoption and adaptation

and use of high-yield varieties, modern herbicides and pesticides,

the full range of improved production practices and new post-harvest technologies have largely bypassed Iraq. But despite that extended mismanagement, this is a country that has the resources,

land, water and people, to still have a very successful agricultural

sector.

However, if agriculture is to flourish, it will take time and require new leaders that will make tough decisions on changes

ahead. Regardless of production gains, for the next several years,

and I believe much longer, Iraq will rely on imports to meet a large

portion of its food needs. To meet those food needs, the Ministry

of Agriculture imports and distributes nearly half a million tons of

food every month. We expect them to be the biggest purchaser of

food over the next 12 months, at least. In that period, those purchases are going to include 2.6 million tons of wheat, a million tons

of rice, 300,000 tons of pulses, 400,000 tons of cooking oil, 600,000

tons of sugar and a number of other commodities.

We have a potential for greater domestic production in Iraq and

continued huge flow of imports. We have them both. Now if we look

at just the growth potential in that market for one product and

that one product will be wheat, we see that the per capita wheat

consumption in Iraq today is 60 percent the level of Turkey, 70 percent the level of Iran, and only 80 percent the level of Syria. People

right next door in the neighborhood, very similar systems. We need

to remember that what these people have been receiving for 7

years is a food ration and not what they would choose to purchase

for their food use, if they had a growing economy. In the long run,

Iraq will remain a major commercial food market and a market

that will demand higher quality from the importers who are supplying that market.

Since late last year, USDA has begun work, even with the situation in the country, with our private-sector cooperators in Iraq.

That has meant most of the activity is outside of the country. The

10

U.S. Grains Council, the American Soybean Association have received USDA funds to help restart and grow Iraq’s broiler and

layer industry and modernize that industry out of its 1980 doldrums. We have also supported representatives of the U.S. wheat,

rice and pulse industry to meet with Iraqi buyers in Jordan earlier

this year. The result of just that first meeting with these people

was to identify specifications that for the first time in a number

years allowed U.S. products to be offered against Iraqi tenders.

We have also used the Foreign Market Development funds to

hire a consultant in Iraq to begin looking at opportunities for other

cooperators. Supporting and guiding market promotion activities

will be if not the key focus, a key focus of our new team in the Embassy. We are currently working to reschedule a team of Ministry

of Trade, decision-makers to visit the United States and will keep

your committee informed on our progress on that.

Thank you.

[The prepared statement of Mr. Schatz appears at the conclusion

of the hearing.]

The CHAIRMAN. Thank you, Mr. Schatz. Mr. Garvelink—as I

mentioned earlier, Administrator Natsios could not be here. Please

extend to him our congratulations on the upcoming 50th anniversary of the Food for Peace Public Law 480 Program. This program

has aided 3.3 billion hungry people all across the world during its

50-year history.

As you are aware, the European Union and others have proposals in the World Trade Organization negotiations to end the U.S.

Food Aid Program as we know it. What is your view on the future

of food assistance around the world if the U.S. programs are not

in place?

Mr. GARVELINK. I think the first implication of what would happen is people will die. 840 million people require food aid around

the world every day, and to meet that need, I think about 8 to 10

million tons of food a year are provided by the international community. The U.S. Government provides 4 million tons of that total.

Without that 4 million tons, it would be virtually impossible to

even approach meeting the needs of the hungry people around the

world. We provide about 56 percent of the food to all WFP appeals

and we cover the majority of their operating costs through our contributions.

If our program didn’t exist, WFP would have to dramatically

scale back its programs, and again, hundreds of thousands if not

millions of people would not be fed. I think in all honesty, our European Union colleagues are kind of long on talk but short on action. If you look at a couple current crises today, Ethiopia and

western Sudan and Darfur, our European colleagues have not come

through with the food assistance that is required, and if it had not

been for our Office of Food for Peace and USAID and Ethiopia and

presently today in Darfur, more people would be dying than already are in those countries.

Moreover, most of the countries who require our food aid are

fragile states and are very much in danger of becoming failed

states, and as we all know, failed states are a large breeding

ground for terrorists and other elements that would do harm to the

United States. I think our Food Aid Program with food aid is critiVerDate 11-SEP-98 12:01 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 F:\DOCS\10833 HAGRI PsN: HAGRI
11

cal first of all to feeding millions and millions of people each year,

but it is also critical to our national security, as we help fragile

states emerge from that and not fall back into state failure. So I

think our Public Law 480 program as it is, a food program is critical for the world’s hungry and for the United States.

The CHAIRMAN. As for food aid, the United States’ work in Iraq

is perhaps the best example of how food aid can contribute——

Mr. GARVELINK. Correct.

The CHAIRMAN [continuing]. To a solution to a major, major problem.

Mr. Christoff, what countries on the U.N. Security Council were

the most vocal about giving Saddam Hussein the benefit of the

doubt after the U.S. and Great Britain began to notice that some

of the Oil for Food contracts did not look legitimate?

Mr. CHRISTOFF. Mr. Chairman, I wish I had the minutes of the

Sanctions Committee hearings, those are not available, to really

understand who expressed what concerns. But I can tell you which

countries benefited from the Oil for Food Program through the

commodity contracts, and those key countries were Russia, France,

Egypt, United Arab Emirates, Syria, Turkey and more recently

China and Vietnam with the rice imports.

The CHAIRMAN. Thank you.

Mr. Schatz, despite its poor performance during the 1990’s, Iraq’s

agricultural sector is known to have an abundance of agricultural

resources compared with its Middle Eastern neighbors. This list includes fertile land and water from the Tigris and Euphrates rivers.

A Saddam government guided by cronyism, tribalism and political

patronage contributed to low agricultural productivity and a high

degree of import dependency in the past. But several other factors

also contributed to low agricultural productivity, such as disputes

over land ownership, water rights and lack of research and technological advancements.

Many of these problems still exist. How difficult will it be to remedy these problems in Iraq’s agricultural sector, and what can the

USDA do to help advise the Iraqi Mnistry of Agriculture on these

problems?

Mr. SCHATZ. I think the core problems are some things that take

for granted; is land ownership and water rights, be it ground water

or surface water. These are right at the heart of the problem because there is uncertainty in that system when you plant, and we

saw it last year in the fall, if you are going to still own that land

by spring. The inability to have clear title to land and water rights

has really created a situation where there is no credit available.

The answer to that was subsidized inputs to farmers to at least

keep them moving.

I think the problems are essentially endemic of the system, and

that in itself, quite frankly, to use the word system is part of the

problem. The divide and conquer, command and control, if you will,

mentality of the regime has made it impossible for anyone to really

be responsible for enough of their own enterprise to be very optimistic about it. When you talk to people in the Ministries, they

have Western educations. They know how to do things right. They

are anxious to do it. They need some upgrading in their skills because they realize they have missed 20 years of opportunities. But

12

it is going to be changing a couple of generations of a way of doing

benefits of the agricultural community, and as we all know that is

a tradition that changes a little slowly. So it is going to a very long,

uphill battle, with the best of intentions.

The CHAIRMAN. Thank you. The gentleman from Texas, Mr.

Stenholm.

Mr. STENHOLM. When you were listing the countries that benefited from the oil base, I didn’t hear you mention Australia. Is that

just an oversight?

Mr. CHRISTOFF. Australia was the chief procurer of exports for

wheat, in particular. So yes, that was an oversight.

Mr. STENHOLM. I thought that was the case. It is interesting,

when you say that there were overcharges of 22 percent, some

countries can forgive their debt, and they are really just forgiven

what they overcharged during that program. Weren’t they?

Mr. CHRISTOFF. Could be.

Mr. STENHOLM. Pretty good deal. One thing you said that I think

is really alarming looking forward—now not concentrating on what

may have gone wrong in the past, but if Iraq has a 30-day supply

of food, then I hope somebody is doing some planning as to what

is going to happen to continue to feed the Iraqi people after June

the 30, under what could be some very difficult situations, just as

this morning we find that there their oil flow has been disrupted

for at least 2 weeks now through bombings. That means that the

potential income to pay for food in the new government is going to

be less than it would have been otherwise.

What are the world’s plans, what are our plans now to assist the

new Iraqi government with the food that they are going to need

until they can get their feet on the ground, so to speak? Anybody

know? Mr. Schatz?

Mr. SCHATZ. I will take that one. Well, as someone who lives

with this day in and day out and there are another couple here in

the room that for the last year have watched this situation really

closely, while 30 days doesn’t sound like much, I am glad we are

not 3 weeks ago when we were down probably to about a 2-week

pipeline in the country. As the violence spiked about 2 weeks ago,

all the trucks went off the road. CPA officials on the ground were

instrumental in putting incentives to get those trucks back on the

ground, again to move more wheat out of Umm Qasr. Since the

spring, we have increased the capacity of that port to unload

Panamexes. We had quite a demiurge problem there earlier this

year. That has been overcome.

At the same time, we have within the last 10 days entered a period, which will run through September, when food supplies purchased earlier this year by the World Food Program begin to come

in. World Food Program is responsible for delivery to the final

warehouses, so they are using a lot of trucking from outside the

country. First U.S. wheat is coming in at this point in time under

the World Food Program contracts. It is coming in with trucks from

the Jordanian and Syrian side. Through September, supplies

should increase somewhat. There have also been some local purchases made of flour in the region to fill as a stop-gap measure. In

addition, within the next 30 days, we would expect the purchasing

13

by the Ministry of Trade to fill needs through the end of the year,

to begin and be completed.

There is funding available with the Ministry of Trade for the remainder of the purchases needed to meet their food aid commitments under the Public Distribution System through the end of the

year, and they will be forming their budgets for that system for the

next 2 months.

Mr. GARVELINK. If I could just add to that, I think that USAID

has also been in constant contact with the World Food Program.

They have a contingency plan together that will deal with the most

vulnerable portions of the Iraqi population. We have our food experts in-country that will be in, along with USDA, in the new Embassy that is there, and they are available to provide technical assistance of all different kinds, from food management to procurement to developing internationally-acceptable standards, negotiating procedures, documents, that sort of thing.

So I think everybody is keeping a very close eye on how these

next few months will evolve when there is an overlap between

what the Ministry of Trade does and the last 1.6 million that has

been procured by WFP and will be coming in through September.

So I think everybody is going to be very careful and ready to help,

if need be.

Mr. STENHOLM. Yes. Final question. Mr. Schatz, you certainly

have had experience on the ground, but when we talk about food

aid commercial production, there is always that fine line between

the aid program being disruptive to the normal market channels,

and in my opening testimony, I indicated my strong desire that we

look at ways in which we can regain some market share of wheat,

rice in this country, using the same tools that the opposition use,

that our competitors use.

Realistically, if you could just look at the next year, 365 days,

what percent of the total consumption needs of cereal grains are

going to be able to be financed through normal—although they

wouldn’t be normal. They would be abnormal. But commercial sectors, and what percent is going to have to be food aid in Iraq? Any

guess on that?

Mr. SCHATZ. I guess I would offer an opinion.

Mr. STENHOLM. Yes. That is all I am asking is opinion.

Mr. SCHATZ. We know that for the next 6 months, they do have

adequate financing. I think at this particular point in the new government’s just getting started, the importation of food is going to

be one of the top priorities. I think that is one of the dilemmas we

have in wanting to dismantle this public distribution system, but

at the same time realizing we already have some vulnerable populations and we don’t have an economy that is broadly taking off.

I think it is going to get priority for funding. Will it be able to acquire enough funding for the full year without beginning to look for

other options, short-term credits, those type of things, I think is

something they are going to be thinking about in 2005.

Mr. CHRISTOFF. If I could just add to that, it is going to be a difficult challenge for the Iraqis just because of the costs associated,

as Lee mentioned, with the this Public Distribution System. The

Iraqi budget is roughly $19 billion a year. The Food Distribution

System is going to cost up to about $31⁄2 billion to $4 billion to susVerDate 11-SEP-98 12:01 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 F:\DOCS\10833 HAGRI PsN: HAGRI
14

tain this monthly ration system. So it would have to a top priority,

and along with that is trying to understand what do you do with

this Public Distribution System? How do you target the food to the

most needy? If 60 percent of the population were dependent upon

it, there still were 40 percent that did not use the entire food basket. So how do you get down to that 10 percent that are extremely

poor and most vulnerable, and how do you manage a very costly

distribution system that is going to affect your future budget?

Mr. GARVELINK. Just to add one more element of the perspective

there. In some of the studies we have seen, the destitute and the

term is critically poor population, that comes to roughly 20 percent

of the population in Iraq, and that—by critically poor, the definition is less than $6 per year per capita of a family, and these families right now—when you are in the public distribution system,

there is a nominal cost of 250 dinar to get your monthly food ration. That is 18 cents. And it is very difficult for some of these families even to come up with that, so there is a real need to target

this system to make sure that the most vulnerable portions of the

Iraqi population are not left out, as the transition gets underway

at some point toward a market economy.

The CHAIRMAN. The gentleman from Nebraska.

Mr. OSBORNE. Thank you, Mr. Chairman, and thank you for

being here today. The first question I have has I guess been alluded to one way or another, and I believe Mr. Christoff, you indicated roughly $10 billion was skimmed from the Oil for Food Program, something like that. It was a fairly sizeable amount, and I

know that you realize where many of the trading partners were. I

think you mentioned Russia, France, Egypt, Australia; several

other countries. Is there any likelihood that any of that money will

ever be recovered? Because I believe that under the Food for the

World Program, Tony Hall, one of our former Members ran it, and

he was indicating that maybe as high as 90 percent of the food distributed was through Public Law 480 and other programs from the

U.S. So obviously, of that $10 billion, United States has a huge

stake, and this is probably not the appropriate venue. But does

anybody here have any conjecture as to whether any of that money

will ever be adequately accounted for or recovered in any way from

any of these trading partners?

Mr. CHRISTOFF. Part of the investigations I think that are occurring, the U.N. investigations is to begin looking at the actual contracts. There were about 30,000 contracts that were signed under

the Oil for Food Program. I think one of the most important things

to do is to look at which were the predominant companies that received contracts, which were the countries that those contracts

came from, and try to get a sense of the potential overpricing to

at least get a handle of the universe out there. Where should we

target any future investigations? When you are also talking about

where monies from the former regime might be hidden, the Treasury Department is heading up a 20-agency—interagency taskforce

called the Iraqi Assets Working Group that is trying to determine

exactly where former regime’s assets have been hidden, and they

have, through their efforts, recovered about $959 million of the

former regime’s assets out of an estimate of about $41⁄2 billion. So

15

there are efforts beyond the Oil for Food Program within the U.S.

Government to try to return some of the former regime’s assets.

Mr. OSBORNE. Well, thank you, and I think if you look at the palaces, more than 70, and we looked at the Water Palace which had

to be hundreds of millions of dollars, I would assume that some of

the assets are right there in plain view, and——

Mr. CHRISTOFF. The Mercedes are still over there, I am sure.

Mr. OSBORNE. Yes. Right. I have another question here. I think

this would be for Mr. Schatz. We have heard a lot from some dry

bean producers who are interesting in resuming trade with Iraq,

and they are having trouble getting registered with the Iraq Ministry of Trade, and I guess if you don’t get registered with the Iraqi

Ministry of Trade, you don’t do any business. And can you amplify

or explain to us what the process is, what the holdup might be, or

what the likelihood of any success might be in this regard?

Mr. SCHATZ. Well, I haven’t dealt with that issue since communicating with both the industry in Baghdad since about 8:30 this

morning. We have four companies from the dry bean industry who

have at this point in time submitted all documentation that they

were requested to submit to Baghdad. The farm and agricultural—

or the Armed Service Agency has an individual actually working

with the Iraqis who has been there 21⁄2 months, trying to help

them develop a system of registration of valid suppliers. We have

been hand-carrying these documents to the Ministry, and like I

say, at 8:30 again this morning, we have rattled some cages over

at the Ministry, saying look, we want either response or do you

need additional information? What we have recommend to the Ministry is that anybody who has submitted all documentation, if they

have not received a response by the time a tender is let in, we anticipate them really soon, they would still receive those tender offers. Our goal all along is to make sure that our people have an

opportunity to bid.

The difficulty we have found time and again over the last year

is that unless it is a crisis, many of these Ministry people simply

don’t take action. They focus on what is hottest on their plate at

that moment, and we don’t see anyone stonewalling. We think it

is just simply inaction as they focus on other items right now. But

we are confident we are going to get that work through before the

tenders are released.

Mr. OSBORNE. One last question. I know that MAP Foreign Market Development, Public Law 480 has been very important here.

Do any of you see problems with WTO regulations here? I know

that has been subject to some scrutiny, the $19 billion amber box

limitation, and are any of you qualified to reflect on that, as to

whether any of these programs have to be ruled against, or are

they on sound footing? Nobody knows?

Mr. CHRISTOFF. I don’t have a comment on that.

Mr. SCHATZ. No.

Mr. OSBORNE. OK. Then I am done.

The CHAIRMAN. Thank you, Mr. Osborne. The gentleman from

Georgia, Mr. Scott, do you have questions?

Mr. SCOTT. Let me ask this question with respect to U.S. efforts

to revitalize Iraq’s agricultural sector. To what extent do you feel

progress in rural areas is being hampered by the ongoing security

16

concerns? I am very concerned about that. I serve as the co-chairman of our Democratic Group on National Security, and I would be

interested to get your response on that. It would be Mr. Garvelink?

Is that right?

Mr. GARVELINK. Yes. Well, I think security obviously is a problem and it has slowed down activities but has not brought them to

a standstill. I think particularly in the areas around Basra where

we are involved with the Marsh Arabs and trying to re-stimulate

agriculture, their livestock, fish farming and that sort of thing, we

have been able to do a considerable amount of work. In other parts

of the country, of course, it becomes a problem.

Mr. SCOTT. Do you foresee any additional challenges in view of

the upcoming June 30 hand over, this administration? Are things

in place? Do you feel any apprehension because of that?

Mr. GARVELINK. Well, yes. The security situation is expected to

get worse in the coming weeks and that will have an impact on all

of our development activities, but hopefully we can get through

that and get back on-track with the new government and sort

things out and begin to move forward again on our agricultural

programs.

Mr. SCOTT. When last were you over in Iraq, or were you over

in Iraq recently?

Mr. GARVELINK. The last time I was there was probably late

March or early April.

Mr. SCOTT. Do you, just from your opinion as a relatively recent

person going over there, what is your assessment of our efforts in

winning the hearts and minds of the Iraqi people, given the fact

that you are involved in a very important part of that infrastructure agriculturally? Is your assessment that we are making

progress in that area, with the recent situation evolving, do you

think we are retrogressing in winning the hearts and minds of the

Iraqi people?

Mr. GARVELINK. Well, obviously it will be a bit of a guess because

I haven’t been able to travel throughout the country. I was only in

the central parts and them up in the north in the Kurdish areas.

But my sense is a lot of the reporting we hear, which is natural,

is on the military situation, and it is focused in Baghdad and Sadder City and other places. But I think if you travel more broadly

in Iraq, you will find that a lot of people are very happy with what

is going on. They are very appreciative of the types of assistance

that the U.S. Government is providing, and it is a little bit different environment than we might see on a day-to-day basis on television. At least, that is what struck me when I was traveling

around.

Mr. SCOTT. Yes. Well, thank you. Mr. Chairman, one other point?

The CHAIRMAN. Yes, please.

Mr. SCOTT. When I was over in the Middle East and visited in

Israel, and I assume that some of the geography and the climate

is the same, in terms of agriculture, they were making great gains

in the handling of the distribution of water in that very dry, arid

area. Is the irrigation systems similar to what they are using in

Israel, and are they handling some of the same challenges there,

or are you familiar with the——

17

Mr. GARVELINK. Well, I am not familiar with the system in

Israel, so I can’t really address that.

Mr. SCOTT. OK. All right. Thank you, sir.

Mr. SCHATZ. In Iraq, there is a massive program started actually

under Oil for Food. We think of it as a food program, but it was

much more of that. All of the inputs going into agriculture were

also part of the Oil for Food-funded program. The Iraqis had undertaken in the last 4 or 5 years a massive program to switch from

surface irrigation to more drip irrigation in their orchards, more

center pivot irrigation, starting to tap their groundwater resources

to get better efficiency, because one thing they have is a problem

with salinity, same thing in Israel.

Mr. SCOTT. Yes.

Mr. SCHATZ. So they are beginning to try to use that technology.

The dilemma is it is unclear exactly how good the planning process

was to decide to start mining a groundwater resource in the edge

of the Najaf Desert. So part of the difficulty with the development

is we see snapshots of things going on. I traveled in 9 weeks more

extensively than my replacement, who was there for 8 months because of the security situation. So it is very hard to get a feel

broadly for what is happening in agriculture. At the local level, we

are having some great progress. But to knit together a national

system that is sustainable from a national budget point of view is

a very big challenge right now with the security situation.

Mr. SCOTT. Yes. I can imagine. That is my opinion too. Thank

you very much. Mr. Chairman.

The CHAIRMAN. Thank you, Mr. Scott. The gentleman from Kansas, Mr. Moran.

Mr. MORAN. Mr. Chairman, thank you. Could you paint for me

the picture of what the size of the food market will be, agriculture

commodities currently and in the future will be? What amount of

money, the size of this market?

Mr. SCHATZ. Import market, or——

Mr. MORAN. And the follow-up question is and that what percentage of it is being provided domestically, and then what percentage will be an import market?

Mr. SCHATZ. Well, let us just take wheat for a minute, and we

will jump to rice.

Mr. MORAN. Well, wheat is a good one to take.

Mr. SCHATZ. I sent a message to the Wheat Commission this

morning actually in Kansas, some information. Right now this

year, we will probably procure in the neighborhood of half a million

tons of millable quality wheat out of the Iraqi crop. Iraqi crop this

year, wheat may be 2 million tons, a problem is basic agricultural

statistics. This is a State planning country, so we don’t really

know. We are not able to get out and survey. Last year, there was

about I think 800,000 tons we purchased, millable quality.

This year, we worked to get a lot of pretreatment chemicals out

to the seed people to try to get the smut down, so we think we are

going to have a better crop. That 500,000 tons is going to be mixed

with about 21⁄2 million tons of imported wheat to provide a total

wheat availability that is going to be 60 percent of Turkey’s. If we

got that production up double in the country, there is still the demand there if we have got an economy going. The Australian adviVerDate 11-SEP-98 12:01 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 F:\DOCS\10833 HAGRI PsN: HAGRI
18

sors and the American advisors have agreed all along we are not

afraid of a more productive agriculture sector, as long as there is

a better economy in the country, because this is a society that is

still going to eat more food.

If you were to drive through the streets of Baghdad right now,

first it would be more dangerous than it was a year ago. Secondly

what you would be impressed by is all the fresh fruits, all the vegetables you are going to see in the marketplace. There is an abundance of fresh produce, fruits in the marketplace throughout a very

extended season, starting in Basra in the south, going all the way

to the Kurdish areas in the north that markets actually through

a private-sector channel. So when we say OK, it is $3 billion of food

imports, we can’t put a figure on how much the cucumber crop is,

how much the tomato crop, the onion crop—but had I had to live

off the local economy a month after the war, I could have done it

very easily, if I had the money to pay for it.

Mr. MORAN. Are the fruits and vegetables domestically grown?

Mr. SCHATZ. They are domestically grown. A lot of work has to

be done on some varietal improvement, some post-harvest technology. They are not the kind that you would want to pick up at

your local grocery store and put in your bag, but they have got

pretty good flavor.

Mr. MORAN. Does the distribution of those fruits and vegetables

or other agriculture commodities transcend the regions, the tribes,

the religions of Iraq?

Mr. SCHATZ. If I understand the question, do they move freely

and long distances? They move to the major cities. We saw trucks

loading as far north as Mosul, and those trucks—we saw the same

ones later that evening all the way in Baghdad coming into the

wholesale markets there.

Mr. MORAN. What other countries are involved in food aid and

also in developing a market for their agriculture commodities? Who

are our competitors in Iraq, both in providing food aid and ultimately in selling agriculture commodities to Iraq as the economy

improves?

Mr. SCHATZ. I think the three toughest customers we are going

to have are Thailand and Vietnam on rice. Their rice quality has

improved a lot since our product has been in there. Iraqis remember our product. They prefer it. We have got quite a premium right

now because of our large exports earlier this year. Australia is

going to be a tough competitor. They have got a lot of flexibility in

that region. They have already got a lot of major customers. It is

in their back door. They have got a freight advantage. I think those

are the big three that we are going to see.

Mr. MORAN. My time is about to expire. You mentioned visas and

trade officials visiting the United States. What success have we

had of that occurring? I know in our case in Kansas, we thought

we had Iraqi trade officials visiting, and visas were not issued for

the entire party and the trip didn’t take place. Is that commonplace, or is that an anomaly?

Mr. SCHATZ. It is difficult to get any people into the U.S. now

compared to what we were familiar with a couple of years ago.

What happened in this case is at least one of the visas in a package

of visas got separated. I can report though at this point in time,

19

everyone on that entire team has received their visa and we are

currently looking at rescheduling that trip hopefully by mid-July.

Mr. MORAN. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you. The gentleman from North Dakota,

Mr. Pomeroy.

Mr. POMEROY. Thank you, Mr. Chairman. While I have my subcommittee chairman here, I would just like to pose a question to

you on another matter. The RMA is redoing the Standard Reinsurance Agreement. This was a provision that I added into the ARPA

legislation two terms back. There have been some controversy

about the terms of the renegotiation, and naturally, if they get it

wrong, it is going to impact significantly the effectiveness of this

legislation. I hope we will be having an oversight hearing on these

Standard Reassurance Agreement discussions underway and would

ask either the chairman or subcommittee chairman if any are

planned.

The CHAIRMAN. If the gentleman will yield?

Mr. POMEROY. Certainly.

The CHAIRMAN. I will tell the gentleman that we share his concern about that being done correctly. I have joined with the ranking member of the committee and others in writing to them as they

have negotiated this, and we have made some progress in terms of

getting them to look at this from a realistic standpoint. We are

very concerned that there be both efficiency in the administration

of the program and that there be fairness to the array of different

companies that are engaged in the process.

So we will continue to examine that, and while I cannot pinpoint

exactly the course that our oversight will take, we are definitely interested in examining this closely, and I would certainly welcome

the possibility of holding hearings on the matter. I don’t know if

the gentleman from Kansas has scheduled any on the subject, but

we certainly are watching it very closely.

Mr. MORAN. If the gentleman would yield?

Mr. POMEROY. I yield.

Mr. MORAN. Mr. Pomeroy, our subcommittee does have a hearing

scheduled in July concerning crop insurance. Not specifically the

RMA, but a follow-up to the series of hearings we have held in the

past on crop insurance improvements, and knowing your capabilities, I know that you will be there with the opportunity presenting

itself to ask questions of RMA on a topic that is slightly outside

the topic of the hearing. So you will have an opportunity to discuss

this topic with RMA officials in July at a hearing on crop insurance. We are also, as the chairman says, monitoring the negotiations, seeing the reaction, listening, paying attention and certainly

willing to work with you and Chairman Goodlatte to make sure

that our Subcommittee does what is appropriate to see that these

parties come together to provide crop insurance for American farmers.

Mr. POMEROY. Reclaiming my time, I thank both chairmen. I

have been not hesitant about giving RMA my own opinions as this

process has gone on, and I am pleased to hear the Chairman say

maybe a hearing would be held sometime in the future. Hold open

the possibility anyway because sometimes, it is useful in one forum

to get it all out, all views and just help us sort it out. It is an overVerDate 11-SEP-98 12:01 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 F:\DOCS\10833 HAGRI PsN: HAGRI
20

sight function I think appropriately undertaken. Again, if they get

it wrong, the Bill that we pass isn’t going to work as well as intend

it. And so it is a pretty direct stake here for us.

Mr. MORAN. If the gentleman would yield?

Mr. POMEROY. I yield.

Mr. MORAN. It has been my opinion that we want RMA and the

insurance companies to negotiate, and that Congress does have a

significant role to play in Oversight, but let us let the parties work

their selves through the process before we become parties to those

negotiations. But I welcome the opportunity to make certain that

the outcome is something that is advantageous to the crop insurance—the beneficiaries, the folks that you and I represent in North

Dakota and Kansas and across the country who desperately need

that program.

Mr. POMEROY. Reclaiming my time, I think that that is an absolutely legitimate rationale to watch. We are now on draft number

three though, and maybe at some point, we are getting closer to

where we ought to take a look.

Now to the matter at hand, and I see my time is about to expire.

First a couple of comments. To USAID, what you have achieved I

think is remarkable. The logistics that under-gird your work with

World Food Program are fantastic, and in the end, it is the result

of work under dangerous conditions by really dedicated and talented people. Two that I know of are Regina Davis, as well as the

National Guard Captain Devina French, who during her term there

was very involved with this in Baghdad, and there are an awful lot

of others. But, just as an example of the heroic performances that

have kept people from starving, and you really have done I believe

the United States proud in the operation of your agency.

Mr. GARVELINK. Thank you.

Mr. POMEROY. Now to Mr. Christoff, while we do with relief note

the success of our operations at keeping things from having people

starve so far, I am concerned about your observations about food

stocks being dangerously low and systems really pretty well shot,

as we look at the hand over coming up at the end of the month.

Is this an area where we should entertain very significant ongoing

concern relative to this working and did we basically blow a lot of

the last year on a failed effort to try and privatize and get a different system in place? Yield.

Mr. CHRISTOFF. Well, I think seeing as some of the efforts back

in November to privatize did delay the procurement of certain food

stocks and did cause some local shortages, but certainly over the

course of this entire year, Iraqis were still getting their monthly

food rations. Right now, the security situation is pretty bad in Iraq,

and therefore, you have food that is at the port that can’t get to

the warehouses, on the borders that can’t get to the warehouses,

drivers that are somewhat unwilling to drive in an insecure environment. So as I am hearing USDA and USAID say that vigilance

is importance to keep track of where the food stocks are in this unsecure environment, and yes, it is important to keep track of this

because food security—with 100 percent of the population having

receiving these rations, it is viewed as a right. It is viewed as an

entitlement, and it is viewed as something that is extremely imporVerDate 11-SEP-98 12:01 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 F:\DOCS\10833 HAGRI PsN: HAGRI
21

tant to the typical Iraqi family of seven who need the food on a

monthly basis.

Mr. POMEROY. While the chairman is distracted, I will sneak in

another point.

The CHAIRMAN. Without objection, the gentleman can have another minute to ask questions, since he did use some time on it

with another worthy topic.

Mr. POMEROY. I thank the chairman. One of the observers of this

whole matter opined we are fighting forces they don’t have an alternative system they are trying to put in place. They just want

wreck anything that is working, and so I do think it is a terribly

daunting challenge, and are you seeing food stocks diminish? Is

this the situation that is growing more alarming? Are kind of at

a dangerous and unacceptable status quo, but it is holding in an

equilibrium?

Mr. CHRISTOFF. Well, I think everyone is concerned about the

time up to the transition. We have consistently heard reports about

the insurgency, the foreign fighters, the increase in violence, the oil

pipeline that was disrupted and it is going to be out for 10 days

now, which is going to disrupt an important source of revenue for

the Iraqi government. So it is important to try to have, as what I

am hearing USDA say, contingency plans to try to deal with the

future of the food security situation in Iraq.

Mr. GARVELINK. Thank you. Just to add a point, about 2 or 3

weeks ago was the most severe time when we were down to about

2 weeks supply because of the security situation, the difficulty of

trucks moving, or their inability to move at all. I think the situation has improved in the few weeks, and now we are up to a month

and we would like to get the buffer stocks a lot higher than that,

so it is a very tenuous situation, but it seems to be improving a

little bit right now.

The CHAIRMAN. I thank the gentleman. The gentleman from

California, Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

Mr. Garvelink, am I correct in understanding from Ambassador

Hall that there are approximately 50 warehouses spread around

the country in which these food stocks are secured?

Mr. GARVELINK. Do you mean for the Public Distribution System?

Mr. OSE. Yes.

Mr. GARVELINK. I think there is about 400 warehouses and silos

scattered around the country in all 18 governance where the food

comes in from the ports, its truck comes from Umm Qasr. It comes

from Jordan and Akaba and Syria and Turkey and it goes to one

of those, and then the local folks come and pick it up there. But

I think there is about 400 of them.

Mr. OSE. Are the points of distribution secured?

Mr. GARVELINK. I can’t really answer that question. I would suspect they are secure in some of the outlying areas in the north and

south, and probably not as secure in and around Baghdad.

Mr. OSE. Well, I do want to compliment how AID and World

Food Program have taken the average Iraqi caloric daily intake

from 1,270-odd to 2,200. I think that has made an enormous difVerDate 11-SEP-98 12:01 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 F:\DOCS\10833 HAGRI PsN: HAGRI
22

ference in the survival rates of women and children especially in

Iraq, and I want to compliment you for that.

Mr. GARVELINK. Thank you.

Mr. OSE. It is not a question. You don’t need to make a statement. I am going to tell you don’t make a statement.

Mr. Christoff, I want to make sure I understand some of the comments in your testimony about the Oil for Food Program. I notice

in your scope and methodology, the second bullet point you used a

discount rate of 67 percent for smuggling through Jordan and only

33 percent through Turkey, the Persian Gulf and Syria. Now I

have some questions I am going to submit to you in writing. I presume the record is going to remain open for a couple days.

I want to go to Security Council resolution 986, which set up this

entire process. If I understand correctly, the Security Council

passed that Resolution, set up the Oil for Food Program and set

up a Sanctions Committee to monitor the program. Am I correct in

my understanding that the Sanctions Committee is the same as the

Security Council?

Mr. CHRISTOFF. Yes.

Mr. OSE. So the same members who are on the Security Council

are the same people on the Sanctions Committee?

Mr. CHRISTOFF. That is correct.

Mr. OSE. And the five permanent members of the Security Council include Russia and France?

Mr. CHRISTOFF. Correct.

Mr. OSE. All right. Now we are also a member of the Security

Council, permanent member, so we are a member of the Sanctions

Committee. Who at the Department of State represented the U.S.

Government in the oversight of the 30,000 contracts for various

items in the Oil for Food Program?

Mr. CHRISTOFF. The contracts were reviewed as part of a 60-person interagency review process that includes the Departments of

Commerce, Energy, State and Defense as well, and the Intelligence

communities to try to review all of the contracts primarily focusing

on whether or not any of the contracts include items that could be

used for military purposes, so called dual-use items.

Mr. OSE. OK. Someone somewhere had copies of these contracts?

Mr. CHRISTOFF. Yes. All members of the Sanctions Committee

were given copies of the contracts for review.

Mr. OSE. How can we get copies of those contracts? How can

Members of Congress access copies of those contracts? To whom do

we need to send the request?

Mr. CHRISTOFF. The [House Committee on International Relations], for example, has sent a request to the U.S./U.N. Mission to

try to obtain copies of those contracts. Yes. State has the contracts.

Mr. OSE. Well, we have been able to track through the Defense

Contract Auditing Agency estimated 7,500 contracts, or which they

have audited about 10 percent, so around 700. And of those 700

contracts, they have found significant unexplainable charges, much

to in line with what you have what you have laid out here. I am

trying to find out to whom would we send the specific request, either at Commerce or State or whomever, for this same information? Apparently International Relations has done the same thing.

I understand why the U.N. would want the investigation done by

23

Mr. Volker to be done in England as opposed to being jurisdictional

here in the United States. But to whom do we send the letter seeking copies of those documents?

Mr. CHRISTOFF. Well, we work through the U.S./U.N. Mission in

New York, and that would be the vehicle by which to request contracts, copies of the contracts. Now the information though there

is information at the U.S./U.N., at the U.N. There is also information in Baghdad that is being reviewed, in terms of the completeness of the contracts.

Mr. OSE. Well, there is an issue in Baghdad as to whether or not

we can actually access those contracts there and who is going to

provide them and who is going to pay for the research and so it

is a different issue. But you are saying that the contracts that were

reviewed numbering 30,000 the Sanctions Committee that the U.S.

Government somewhere has copies of those contracts?

Mr. CHRISTOFF. Yes. The Department of State should have copies

of them.

Mr. OSE. Thank you, Mr. Chairman.

The CHAIRMAN. The gentleman from Georgia, Mr. Burns.

Mr. BURNS. Thank you, Mr. Chairman. I appreciate the input

from the committee.

I want to just get you to give me an update. I appreciate the various programs and the focus we have to be—is on making sure that

these programs are administered effectively and that the U.S. taxpayers’ value is achieved. But ultimately, the Iraqi people must

feed themselves. When I visited Iraq in October and I saw their potential, can the panel comment on their ability to be self-sufficient

in food?

Mr. CHRISTOFF. Well, they have never been self-sufficient in

foods. Maybe the early 1980’s or at best or even before that. So

there is always the dependency on exports from all the agricultural

producing countries in order to help Iraq with its shortfalls.

Mr. GARVELINK. Well, it would just seem from the little I have

really focused on this that in prior years, agricultural production

and its inputs have been so heavily subsidized on one side by the

Iraqi government and peculiar policies have been put in place in

the other that is has been very difficult for agriculture to develop

over the past 15 to 20 years.

Mr. BURNS. In some areas of the north though, weren’t there

substantial irrigation projects that provided them the ability to provide certain supplies of grain?

Mr. GARVELINK. Yes. I think in the Kurdish areas in the north

which have been protected by the no-fly zone for a number of years,

I think they have flourished compared to the rest of the country.

Mr. SCHATZ. A large amount of that northern grain-growing area

though is dry land.

Mr. BURNS. That is true.

Mr. SCHATZ. They have had now 3 years of good rain, but they

had 2 years before that of just disastrous drought.

Mr. BURNS. Do you see their ability to contribute to their food

supply as a potential impact upon our policies?

Mr. SCHATZ. I think their challenge is going to be undoing 2 generations of being paid for a product that is not a quality product.

I mean, we had a lot of resistance a year ago. They just don’t unVerDate 11-SEP-98 12:01 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 F:\DOCS\10833 HAGRI PsN: HAGRI
24

derstand why we wouldn’t take wheat that had 20 percent dockage

in it, which is quite an amazing pile of wheat. It is going to take

a change in really all the cultural practices. The thing I think we

have to remember is when we look backwards, and you will hear

people say that they were a surplus agricultural producer, they

were exporting dates at a very high price at that point. That quality is down. Dollar value, yes. They were on that plus side. At the

same time, they didn’t have 271⁄2 million people. That population,

we heard the average family size is seven, so we know that we

have got a steeply increasing population.

I think they can contribute a lot more, but I think what we are

going to see is if that economy grows, they are going to demand

better quality, and that better quality is probably going to come

from outside the country. A year ago, I could buy Dole bananas on

the marketplace in Baghdad, and they were the same quality Dole

bananas I could buy here in the United States. This is a market

that when they have some money is going to be a market for just

about anything I think we can sell there that gives them a pointed

difference. We are seeing product moving in already in greater

quantities from Jordan, from the Emirates, as entrepreneurs are

putting together essentially a grocery store container, taking it on

a truck and selling that in the country.

So they can do better. I don’t fear them doing better, as long as

that economy grows, and I think it will because if you have a successful agriculture, you are going to have to have a successful country.

Mr. BURNS. Thank you. Thank you, Mr. Chairman.

Mr. OSE. Would the gentleman yield?

Mr. BURNS. I would be happy to yield.

Mr. OSE. Mr. Christoff, I didn’t ask my question as thoroughly

as I should have. Does GAO have copies of these contracts?

Mr. CHRISTOFF. Yes.

Mr. OSE. Have you seen the copies or the contracts themselves?

Mr. CHRISTOFF. We did look at some of the summary information

on the contracts that had been renegotiated. These were the contracts that also were part of the Oil for Food Program when it

ended and it was transferred. So we have some of those contracts

but not the comprehensive contracts.

Mr. OSE. Do you have a list of the 60-odd people who were part

of this——

Mr. CHRISTOFF. I would have to go back and check on that as to

who exactly was part of the 60-person interagency review process.

I could submit that.

Mr. OSE. I would appreciate that. Thank you, Mr. Chairman.

Mr. CHRISTOFF. My staff is reminding me of a few things in that.

State Department has the lists of the contracts. The entire contracts are either with—definitely with the United Nations and also

within Baghdad. But in terms of your desire to request the contracts, you would still be going through the State Department.

Mr. BURNS. Reclaiming my time, I would like to add my support

for Mr. Ose’s request to get the information that we need to make

sure that the oversight and the execution of these contracts are

reasonable for the American.

Thank you, Mr. Chairman. I yield back.

25

The CHAIRMAN. Thank you. I thank the gentleman.

Mr. Christoff, how satisfied are you with the organization and

progress of the investigation that the U.N. is conducting in this

matter?

Mr. CHRISTOFF. I am not really certain what progress the U.N.

has made up to this point. I met with Mr. Volker a few months ago.

He certainly is determined to try to get at the root cause of some

of the problems with the Oil for Food Program. His first priority

is to try to look at whether or not there were any U.N. personnel

that might have been involved in inappropriate or illegal activities.

The CHAIRMAN. Let us assume that Mr. Volker comes forward

with a report that identifies the culprits, and I think that is a fair

word to use here, both in terms of individuals within the United

Nations and individuals engaged in brokering these arrangements

and individuals in Iraq and in other countries. How effective do you

think the United Nations will be in taking action against its own

employees and the others that are involved in what is obviously a

major criminal activity?

Mr. CHRISTOFF. Well, I would hope they would take strong actions against any individuals that might have been engaged in inappropriate activities. We have been looking at this for 2 years. We

started our work a couple of years ago, and there were no evidence

that we found of any U.N. officials that might have done something

inappropriately.

The CHAIRMAN. And finally, how confident are you that this will

not occur in the future with this ongoing operation to provide food

as needed in Iraq?

Mr. CHRISTOFF. And with the new Ministry taking over, I am

hopeful that by having Inspectors General in place in the 26 Iraqi

Ministries, having a Supreme Board of Audit, which is the GAO

equivalent over in Iraq, and also WFP and others trying to teach

Iraqis how to procure in an open and competitive environment,

having codes of ethics and conduct that CPA has developed, I am

hopeful that all of this will take hold and we will go beyond the

corruption legacy that has existed within all the Iraqi Ministries.

The CHAIRMAN. I thank you. I expect that is a recess, but we will

check that. Does any other member of the committee have a followup question or two they would like to ask? The gentleman from

Texas.

Mr. STENHOLM. Mr. Christoff, if I understood what you just stated to the chairman that you looked at these contracts 2 or 3 years

ago and found no evidence of misappropriation of funds by U.N.

staff officials?

Mr. CHRISTOFF. We did not look at specific contracts, but what

I am saying over the course of all of our reviews, we did not uncover any evidence that U.N. personnel did anything inappropriate

or illegal.

Mr. STENHOLM. It strikes me in the GAO report where you now

have found that middle-man review also found the use of middleman companies potentially increase contract prices by 20 percent

or more. Who are we talking about there?

Mr. CHRISTOFF. First of all, that is the Defense Contract Audit

Agency’s report and that is—this is—had been used throughout the

Oil for Food Program in which you have one country that would neVerDate 11-SEP-98 12:01 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 F:\DOCS\10833 HAGRI PsN: HAGRI
26

gotiate the contract with Iraq and then purchase the commodities

for another country. Russia is a good example. Russia often negotiated wheat contracts with Iraq and then bought the wheat from

Argentina or Canada to then sell it. This consistent use of middle

men, the Defense Contract Audit Agency found that it oftentimes

would increase the overall contract price by 20 percent, and they

recommended in the future that the use of middle men be avoided.

Mr. STENHOLM. Pretty good recommendation.

Mr. CHRISTOFF. Yes.

Mr. OSE. Would the gentleman from Texas yield?

The CHAIRMAN. I will yield to the gentleman from California.

Mr. OSE. The provision in the original resolution, correct me I

am wrong, Mr. Christoff, was to preclude the use of middle men,

and that is one of the fundamental things that Volker needs to look

at, is that the original resolutions said you may not use middle

men because they anticipated this problem. And in the process of

implementing the program, that kind of got shoved aside and the

middle men came into the debate.

The CHAIRMAN. I thank the gentleman. I would like to thank all

of the members of this panel for your contribution on the ongoing

situation in Iraq. We will continue to follow this very closely. At

this time, we will move to our next panel. I would like to welcome

the members of our second panel. Mr. John King, vice chairman,

USA Rice Council of Helena, AK, on behalf of USA Rice Federation

and U.S. Rice Producers Association, and Mr. Lochiel Edwards,

president, Montana Association of Wheat Growers, Big Sandy, MT,

on behalf of the Wheat Export Trade Education Committee, National Association of Wheat Growers and U.S. Wheat Associates.

Gentlemen, we welcome both of you and advise you that your full

statement will be made a part of the record and ask that you limit

your oral remarks to 5 minutes.

Mr. King, we will start with you. Welcome.

STATEMENT OF JOHN KING, VICE CHAIRMAN, USA RICE

COUNCIL OF HELENA, AR, ON BEHALF OF USA RICE FEDERATION AND U.S. RICE PRODUCERS ASSOCIATION

Mr. KING. Thank you, Mr. Chairman.

Mr. Chairman and members of the committee, my name is John

King. I am a rice and soybean farmer from Helena, AR, and I am

testifying today on behalf of both the USA Rice Federation and the

USA Rice Producers Association. I am pleased to appear before the

committee today on behalf of the rice industry. On a personal note,

I will share with you how excited and honored I am to testify before Congress for the first time.

The U.S. rice industry wants to play a major role once again in

supplying rice to Iraq. With the current challenges facing the U.S.

rice industry, particularly in the milling sector, renewed Iraqi market access could have a tremendous impact in value-added sales

and enhanced economies in rural America. In the late 1980’s, Iraq

was the number one market for U.S. rice. The United States provided nearly 90 percent of Iraq’s rice imports, which totaled over

500,000 metric tons in peak years. In 1991, the U.S. Government

exposed export sanctions, and this market was lost. Rice is no

27

stranger to this situation, as Cuba and Iran were also once top export markets ultimately lost to the Government-imposed sanctions.

The impact of losing our number one export market has a significant negative impact on the U.S. rice industry and a positive impact on the rice industries of major competing rice export countries,

primarily Vietnam and Thailand. As a result of the embargo on exports to Iraq and based on a U.S. share of Iraq’s rice market in the

1980’s, we estimate that the United States lost about $1.9 billion

in rice export sales to Iraq from 1991 to 2003. The liberation of

Iraq in 2003 by coalition forces has brought freedom to the Iraqi

people. The resumption of trade has also provided hope for the U.S.

rice industry. The Iraqi market has grown from about 550,000 metric tons in 1991 to 1.1 million metric tons in 2004.

USDA estimates that Iraq will need to import over 1 million tons

of rice per year for several years. Reestablishing a viable commercial trading relationship between the U.S. and Iraq must be the

goal of rice producers, processors, exporters and the Federal Government. To help facilitate this, leaders from the U.S. rice industry

traveled to Amman, Jordan in February 2004 to meet the members

of the Iraqi Grain Board in an effort to restore a trading relationship between the two countries. A follow-up meeting between the

Iraqi officials and the U.S. rice industry was recently postponed,

but are hopeful that this will be rescheduled very soon.

Market development will be vitally important in the months and

years ahead, as U.S. agriculture attempts to reestablish its markets in Iraq. It is imperative that Congress provides full funding

for MAP and FMD at levels authorized in the 2002 farm bill if sufficient funds are to be available to meet current needs and reestablish our markets in Iraq. It is critical that GSM export credits be

made available for exports to Iraq as soon as possible. Some in the

Administration have suggested that no GSM–102 financing can be

provided to Iraq, since the former regime is in arrears. However,

it is our understanding that current law has—understanding that

under current law, having an outstanding debt or a rescheduling

arrangement does not preclude USDA from offering a country a

new GSM–102 credit.

There is no statutory impediment to prevent the Department

from offering a GSM credit program to Iraq. Given this situation,

we strongly recommend that the USDA announce its intention to

establish a program for a GSM–102 credit for Iraq as soon as possible. This credit package is a critical, critical component to helping

the U.S. rice industry rebuild its presence in this major market.

We are sympathetic to the needs to address Iraqi’s outstanding

debt to the United States and we are committed to providing whatever assistance that we can to accomplish this goal. But we are of

the strong opinion that Iraq’s debt issue can and should be addressed concurrent with the provision of new GSM credits.

In summary, Mr. Chairman, Iraq was a top export market for

the U.S. rice industry in the past, and we hope it will be again. We

urge Congress to support Market Development Programs to help us

rebuild relationships in Iraq, and we seek GSM credit assistance

to facilitate future sales.

Thank you again for the opportunity to testify here today, and

I would be pleased to address any questions that you may have.

28

[The prepared statement of Mr. King appears at the conclusion

of the hearing.]

The CHAIRMAN. Thank you, Mr. King.

Mr. Edwards, we would be pleased to have your testimony.

STATEMENT OF LOCHIEL EDWARDS, PRESIDENT, MONTANA

ASSOCIATION OF WHEAT GROWERS, BIG SANDY, MT, ON BEHALF OF THE WHEAT EXPORT TRADE EDUCATION COMMITTEE, NATIONAL ASSOCIATION OF WHEAT GROWERS, AND

U.S. WHEAT ASSOCIATES

Mr. EDWARDS. Yes, good morning, Chairman Goodlatte, members

of the committee.

I am Lochiel Edwards. I farm on the high prairies of Montana.

My family and I work to raise high-quality milling wheat for the

export market, as well as domestic mills. Today I am representing

the Wheat Export Trade Education Committee, which is our trade

policy arm in the wheat industry, the National Association of

Wheat Growers, which handles domestic policy and farm programs,

and for U.S. Wheat Associates, which is our foreign market development organization. I appreciate this opportunity to speak to you

on where we now stand and what needs to be done to rebuild the

Iraq wheat market.

I would first point out that we have in this country only 4 percent of the world’s consumers, and we have a large wheat industry.

We export 50 percent of our production yearly. We need markets

to have a viable, ongoing wheat industry to provide a grassroots

engine for our economic machine. As early as 1963, Iraq was an important customer of the United States wheat industry. There was

a year in the 1970’s when we had 100 percent market share. In

most years leading up to the 1991 Gulf War, we maintained about

one-third of the total annual Iraqi wheat import market at around

3 million tons a year. During the first Gulf War and the period following, Iraq refused to make any purchase from the U.S., not only

because of the war, but also because of the unilateral sanctions we

maintained against imports of their products.

Regaining market share is difficult at any time. The challenges

in a war-torn country will no doubt add to the difficulties of regaining market share that has been displaced by our competitors. During the 1980’s through 8 years of war between Iraq and Iran, Iraq

was a high-priority market for our industry and U.S. Wheat Associates put a great deal of work into servicing this market. Dealing

with the U.S. free market system was more difficult for Iraq than

the government-to-government system they were able to use with

the Canadian Wheat Board and the Australian Wheat Board.

While not able to sign long-term purchase agreements with Iraq

like our competitors could offer, the U.S. wheat industry signed a

protocol with Iraq’s State Organization for Grains, known as the

SOG, encompassing technical cooperation. The agreement provided

for an in-depth comprehensive program of technical assistance,

trade servicing and information, in return for SOG’s agreement to

give the U.S. wheat market consideration as a major source of supply in meeting Iraq’s annual imports.

By 1989, 1990, we allocated Market Development Funds for Iraq

three times higher than the funding activities in Egypt, which is

29

the region’s largest wheat importer. This was done because the potential market in Iraq was growing quickly. Today with an opening

of the market following the end of the Hussein regime, the U.S.

wheat industry is working to renew friendships and pick up where

we left off in offering all the assistance they need. We strongly believe that Iraqis and Americans alike benefit from the development

of an open and competitive marketplace, where economies and specific end-use needs rather than political considerations determine

what type of wheat is bought and from where. Open markets work

when given the chance. They work best when commercial buyers

are free to choose their sources of supply and when suppliers compete fairly and transparently.

The future for this market is positive. Iraqis are enthusiastic

about once again working with us. The U.S. Wheat Associates was

encouraged by a meeting with Iraqi’s Grain Board, Foodstuffs

Trading Board and the Ministry of Trade that was held in Jordan

this year. They clearly wanted to learn as much as they could

about getting back into the U.S. marketing system. We believe

Iraqis want a competitive purchasing system and they want the

U.S. to be a supplier and competitor. Iraq buyers have made a lot

of progress in understanding wheat quality specifications, and we

believe that will only get better as the Iraqis become reacquainted

with the U.S. marketing system and the role of the Federal Grain

Inspection Service in providing for official certification of quality at

loading.

There have been roadblocks in recent attempts to bring Iraqi

teams to the U.S. for training. One of these has been the difficulty

in getting visas in a timely fashion, even when the individuals

were invited and sponsored by the U.S. Government. Another difficulty is the lack of ability to extend USDA’s credit program. Iraq’s

debt will need to be restructured so the country can begin to recover without the overhang of an estimated $150 billion. As I stated in the beginning of this testimony, it will take a lot of effort to

reestablish U.S. wheat in this previously closed market. Our industry will do all that we can, but we need the assistance of the U.S.

Government in the following areas.

We need to work with other countries in debt forgiveness and

debt restructuring. We need to work on the allocation of GSM credits. Providing expeditious approval for visas for approved Iraqis to

visit the United States is needed. Funding for market development

activities and improvement in Iraq’s port and grain-handling facilities is also a priority. Two more are travel authority to visit Iraq

for market development activities, and the U.N. and other bodies

are investigating kickbacks of the previous regime. We would ask

that the U.S. Government firmly support that effort.

Mr. Chairman, I am very pleased to be able to report that Iraq

has purchased U.S. wheat this year. As the Iraqis regain their familiarity with the U.S. marketing system and rediscover the

unique qualities of U.S. wheat, we are confident we can recapture

this market. So thank you, Chairman Goodlatte, members of the

committee.

[The prepared statement of Mr. Edwards appears at the conclusion of the hearing.]

The CHAIRMAN. Thank you, Mr. Edwards.

30

Let me ask both of you, do you expect the United States to regain some of its former market share, in your case rice and in your

case wheat, under a free Iraq? Let us start with you, Mr. King.

Mr. KING. We definitely hope so. It is going to take the GSM

credits and other programs to accomplish that, and we had a huge

market before and we want it back.

The CHAIRMAN. Mr. Edwards?

Mr. EDWARDS. Yes. We are very confident we can regain those

markets. I think as this economy begins to build and the lifestyle

improves there, God willing, the need for high-quality wheat will

be—well, they will—it will come to us.

The CHAIRMAN. And what about your principal competitors? Do

you think any of them have a proximity that will give them an advantage over us, or do you think you can overcome that with your

quality and price?

Mr. EDWARDS. I think it is quality and price. I think the major

factor will be, as my colleague says, the GSM credit situation and

what these other countries have in their toolbox to make deals. I

mean, that is where we run up against the State trading enterprise

problem that is pervasive in many areas of our trade policy. But

have to be able to play on the field, and if other countries—good

friends of ours, yes, but competitors nonetheless. If they have other

advantages such as credits from their government, for instance, we

are going to have to be able to play that game, and I think it is

to the advantage of the Iraqi people that they have a relationship

with America.

The CHAIRMAN. Are your organizations making any contacts now,

as we are in a transitional state of government, that are helping

you to build the kind of contacts you need with the new Iraqi government to establish the relationship that will enable you to get a

fair treatment in terms of their decisions about contracting for

wheat and rice?

Mr. KING. Well, the Rice Council and Rice Federation, yes, we

have. We have contacts with the Iraqi Grain Board and we have

tried to get them to come to the United States and I think it has

been mentioned earlier that they have not been allowed in yet. But

that—we definitely have been there and we have contacts and we

are ready to—we are going to sell some rice to them.

The CHAIRMAN. Mr. Edwards?

Mr. EDWARDS. Yes, sir. We are in contact constantly with Iraqis.

As I said, we met in Jordan not too long back and we have our—

we have the contacts. We just have the travel problems in getting

them here and us there and all the logistics that come from the

upset of war.

The CHAIRMAN. Sure. Well, I hope you will keep this committee

informed of your efforts and your progress and let us know if you

encounter difficulties. We are very interested in seeing that these

markets be reopened to each of your commodities.

The gentleman from Texas, Mr. Stenholm.

Mr. STENHOLM. Continuing along the Chairman’s questioning, let

us assume for a moment the completion of the DOHA round. Let

us assume for a moment that the Europeans have kept their promise to end export subsidies. Let us assume for a moment the Australians and the Canadians gave up their Wheat Boards. Would

31

U.S. wheat be competitive in the Iraq market and rice without the

benefit of credit guarantees?

Mr. KING. We definitely need the credit guarantees. Iraqi people,

as it has been mentioned earlier, have financing problems because

of the oil pipeline being blown up or whatever.

Mr. STENHOLM. How are we going to make a credible argument

that we need credit guarantees when we have asked and sustained

and had the others give all of their exports subsidies? How are we

going to be credible in our arguments?

Mr. KING. Well, of course, if the other countries have that.

Mr. STENHOLM. The premise of my question is that we have negotiated away all export subsidies and we have negotiated away

the Australian and Canadian Wheat Boards.

Mr. EDWARDS. OK.

Mr. STENHOLM. Then would U.S. wheat and rice be competitive

in the Iraq market without the benefit of credit guarantees?

Mr. KING. Well, on the rice side, that definitely would just depend on price and what happens in the future. It is a very hard

question to answer.

Mr. EDWARDS. Congressman, the export subsidies in our industry

in our national organizations are very much in favor of elimination

of those everywhere. Only a small part of that would be credit. I

prefer to think of this as a credit to a people who are broke. It is

not an export subsidy per say in our mind as an industry to set

up credit terms that should be repaid.

Mr. STENHOLM. Well, I think it would safe to say that if—and I

agree with you on that, the premise basic of both of your testimonies. We have to look at Iraq as a broke nation, and we can’t

look at the past. We have got to look to this day forward. We realize the United States has lost market share in rice and in wheat.

We have lost it under some very questionable practices that are

now being investigated by the appropriate U.N. authorities. But

that is all in the past. Now what we are looking at is how can we

be competitive? How can we regain a share of that market?

If we are going to have credit guarantees, it is reasonable to suppose that other countries will provide credit guarantees, and therefore, we will compete equitably in a level playing field with credit

guarantees. That is the premise of my question.

Mr. EDWARDS. And I believe that we should ask our allies, our

competitors to be transparent in their dealings. If Iraqi people need

credit, we believe they should have credit. We believe as a wheat

industry that the allocation of resources to feed people is going to

be at least as effective as military expenses.

Mr. STENHOLM. I agree, and this is the subject of the ongoing

WTO negotiations now, and that is going to determine the future.

But for right now, again, I think we need to use all of the tools in

our arsenal to maintain a level playing field for our wheat and our

rice producers in this case in the Iraqi market. And I hope that we

will have and we will use those resources, and I say will have. It

is going to be interesting when we see the mark-up of the agriculture appropriations bill next week as to whether—and how

many tools we are going to have left for us in this area.

But that is the short-term. Long-term, I do think that we have

to look at Iraq as a new country. Beginning July 1, they are a new

32

country and what has happened in the past, we better—as a free

world, all nations had better look at it from the standpoint of doing

what we can do to assist them in the area of food, both from a market basis and also from a food aid, and that is always a fine line

to walk between the two.

Thank you for your testimony.

The CHAIRMAN. The gentleman from California, Mr. Ose.

Mr. OSE. Thank you, Mr. Chairman.

Gentlemen, I am curious about some—the—I am looking for a little kind of trading process information here. Under the Oil for Food

Program—and I understand that the Iraqi government was authorized to sell X amount of oil. They would take the revenue, and then

the Iraq—Office of the Iraqi—oh, I had it here a minute ago. The

OIT would say OK, we are going to go buy food, and they would

get tenders for that. Now since the U.N. supervision of the Oil for

Food Program ended, have you been able to sell any rice or wheat

into Iraq?

Mr. KING. No. We have not sold any rice in Iraq since that time.

Mr. OSE. How about for wheat?

Mr. EDWARDS. Yes. Our sale was made before that program

ended, but it was not under the program. But we have made a sale

this year.

Mr. OSE. I want to examine that. When you guys did your sale,

how did it proceed? Was it Public Law 480 wheat or something

else?

Mr. EDWARDS. Let me confer with my expert here. OK. My expert doesn’t know, but we will get that information to you.

Mr. OSE. Well, my question is how does it proceed? I mean,

does—somebody asks you for a proposal. You respond to it. How do

you ensure that you are going to get paid? What I am trying to do

is identify where can people who wish to twist the system twist it,

to the extent of these commissions and kickbacks and other things

that might have occurred previous to your sale?

Mr. EDWARDS. Well, in our experience, that happens when you

are dealing with agencies. An Iraqi agency would have more opportunity for leakage or twisting, as you call it, of some of the funds

and maybe some kickbacks. When we are able to contact millers

and bakers directly and have the direct contact, such as in the

1980’s when we brought over millers and grain buyers——

Mr. OSE. Millers and bakers in Iraq?

Mr. EDWARDS. Yes. The Iraqi people.

Mr. OSE. All right.

Mr. EDWARDS. We brought them to the United States, sent them

to baking school. There is—we have got a great program at—in

Fargo, North Dakota, the Northern Crops Institute, that does some

of this education.

Mr. OSE. But that system went by the wayside.

Mr. EDWARDS. Well, we have not been able to have that movement for a decade really.

Mr. OSE. OK.

Mr. EDWARDS. But those are the deals that we like to interact

with because then there is not an extra middle man in there. I

mean, in the grain industry, there is always middle men as part

of it.

33

Mr. OSE. So essentially since the Oil for Food Program got established, you have had no such direct contact?

Mr. EDWARDS. Essentially, yes.

Mr. OSE. Now in those situations where you had direct contact,

you would have the baker or the miller say OK, we need so many

tons of wheat delivered at such and such a port by such and such

a day?

Mr. EDWARDS. Yes. Our private companies where the seller is out

of the United States. Of course, in Australia, and—they use their

Wheat Boards. But direct sales are what worked prior to the 1991

Gulf War, and the Iran/Iraq War of course complicated that also.

But the direct sales with the users in Iraq is what we have

found——

Mr. OSE. The reason, Mr. Chairman, I pursue this line of questioning is that I wanted to make it clear that the system existed

previous to the Oil for Food Program for commodity foodstuffs to

be delivered without this kind of behavior that seems to have occurred under the Oil for Food Program, and that since the Oil for

Food Program got implemented, we have had significant allegations of corruption and what have you. I just wanted to differentiate that the market people, the bakers and the millers, as opposed to the Iraqi government, that there were 2 basically different

approaches.

Thank you, Mr. Chairman.

The CHAIRMAN. I thank the gentleman, and I thank both of these

witnesses and wish you very well in your efforts to reestablish

what was once a very vibrant market for American agricultural exports, and we want to be of assistance to you any way we can. So

I reiterate what I said earlier. Keep us informed, and we will work

with you every step of the way to make sure that every opportunity

is taken to sell food to the Iraqi people. We also call upon you for

your support for the continued use of food aid in our international

relief efforts, not just in Iraq, but around the world. We find that

this is a vitally important program for U.S. foreign policy and for

starving people in many corners of the world, and without it, as the

representative of USAID said earlier, people will die.

So this is something that American agriculture needs to stand up

for, be proud of and to fight for because it is a good cause, and

those who would try to subvert it by suggesting that it is something that should be converted into cash, which can disappear into

the pockets of wealthy and affluent people, be used to subsidize effectively the agricultural programs of other nations rather than to

promote American agriculture since Americans are indeed the most

generous people on earth when it comes to helping starving people.

We need to make sure that that program is win-win for American

agriculture and the needy people of the world. There are always

ways we can improve the program, always things we need to do to

make sure that we do not have the program interfere with the legitimate markets in countries to encourage the production domestically in countries of various agricultural needs. But those can be

paid attention to and still make sure that the food to help starving

people is there when it is needed.

I thank you both for your efforts today and your industries efforts in this regard, and with that, I have some magic language

34

that Mr. Ose is definitely interested in because of the fact that we

have a need to hold the record open to get answers to some of the

very important questions that he asked and documents that he requested from earlier witnesses.

I want to thank all of the witnesses for appearing before the committee today, and the committee will continue to pay close attention to the progress in Iraq’s agriculture sector and we will look for

increased opportunities for America’s farmers and ranchers. The

committee will also follow closely the investigations it to the Oil for

Food Program in the hopes that all of those responsible for this

scandal are held accountable. The work in Iraq will not be easy,

but I am confident that a free and democratic Iraq will continue

to make progress in agriculture. When the committee visited Iraq

last December, we met with many hard working and dedicated

Americans and Iraqis who are determined to return this vital industry to the prosperous and stabilized sector it once was.

Without objection, the record of today’s hearing will remain open

for 10 days to receive additional material and supplemented written responses from witnesses to any question posed by a member

of the panel. This hearing on the House Committee on Agriculture

is adjourned.

[Whereupon, at 12:12 p.m., the committee was adjourned.]

[Material submitted for inclusion in the record follows:]

STATEMENT OF H. LEE SCHATZ

Mr. Chairman, members of the committee, I appreciate the opportunity to review

the work of the U.S. Department of Agriculture in Iraq and assess the outlook for

U.S. agricultural exports to that market.

I would like to provide a brief overview of Iraq’s agricultural production and highlight the trade opportunities and challenges ahead for U.S. exporters. I also will

bring you up-to-date on what USDA and our private sector partners are doing to

renew relationships with Iraqi public and private sector partners.

I arrived in Iraq on April 24, 2003, shortly after the fall of Baghdad. As the first

USDA employee in Iraq, I served for nine weeks as the senior advisor to the Iraq

Ministry of Agriculture for the Office of Reconstruction and Humanitarian Assistance and its successor, the Coalition Provisional Authority (CPA). Since my return

to the United States, I have continued to work full time on Iraq issues for USDA.

Ten additional employees from USDA have served in Iraq assisting in reconstruction efforts. USDA has already designated two Foreign Service officers to staff the

agriculture office of the new Embassy.

IRAQI GOVERNMENT AGENCIES

USDA has been working primarily with two government agencies—the Ministry

of Agriculture (MOA) and the Ministry of Trade (MOT).

MOA focuses on the domestic production of food, fiber, livestock and poultry. This

ministry controls and administers land ownership, manages water resources and delivery, may dictate what crops are to be produced, and proposes domestic procurement prices. It imports all production inputs from seeds and fertilizer to fan belts

for tractors, veterinary supplies and sprinkler systems. MOA is also responsible for

imports of two commodities—corn and protein meal for use in poultry production.

The Ministry subsidizes the sales of these inputs to keep food prices low.

MOT imports all food distributed through the Public Distribution System (PDS).

The PDS continues to operate, providing every man, woman, and child an adequate

food ration meeting goals set earlier in consultation under the Oil For Food program

as administered by the United Nations. Even prior to the Oil For Food program,

MOT’s Grain Board purchased all imported wheat and rice. This ministry contracts

for the milling and distribution of wheat through their own and private sector mills

to final market points. MOT buys domestic wheat and rice at pre-announced prices.

They operate their own truck fleet and grain silos.

35

IRAQ’S AGRICULTURAL SITUATION

Decades of state intervention in the economy have marginalized private, marketdriven initiatives in agriculture and nearly every other sector of the economy. A limited number of large agricultural producers and processors operate in Iraq, but they

are, for the most part, technologically still in the 1980’s. For the past 20-plus years,

Iraq’s agriculture and agribusiness effectively have been cut off from innovation.

Adoption and use of high-yield varieties, modern herbicides and pesticides, the full

range of improved cultural practices (tillage, planting, irrigation, fertilizer use), and

new post harvest technologies have largely bypassed Iraq agriculture.

But despite an extended period of mismanagement of its resources, Iraq still has

the land, water, and human resources needed for a successful agricultural sector.

However, if agriculture is to flourish, it will take time, and require tough decisions

on the part of the new leaders in Iraq, including how to budget their money. We

estimate that the Ministry of Agriculture, if their new budget allows, will need to

import over $1 billion of agricultural inputs annually for Iraq’s producers to boost

production.

For the next several years, and most likely longer, Iraq will need to rely on imports to meet a large portion of its food and fiber needs, even with substantial gains

in production.

PUBLIC SECTOR PURCHASES

To meet current Iraq food needs, the government of Iraq, through MOT, imports

and distributes nearly a half million tons of key food items monthly. That requires

about 500–600 trucks moving into the country daily. Supplying this Public Distribution System, as it is known, is a huge responsibility. It appears that the Iraqis will

continue to fund with their own money this massive public sector purchasing for the

near future. In fact, MOT leaders have discussed adding items to the ration to show

the Iraqi public that the situation is improving.

MOT has completed its first purchases since resuming responsibility for the PDS,

and we are assessing that effort. In the past, Iraq had a 6-month stock of goods in

warehouses to avoid shortages, but that luxury is not available today. But MOT,

along with the CPA, is working to rebuild at least a three-month buffer stock to better ensure adequate food availability.

We expect that for at least the next year, MOT will remain the major customer

for food sales to Iraq. In addition, there may be opportunities for small sales to traders in countries bordering Iraq, who will move those goods into Iraq for the limited

private food sector.

But commodities like wheat, rice, and pulses will move almost exclusively through

Iraq Government purchases. And the volumes, based on current monthly distribution plans, will be substantial. For the next 12 months, distribution requirements

met through imports, will be at or near the following levels:

Wheat 2.6 million tons

Rice 1 million tons

Pulses over 300,000 tons

Ghee and oil over 400,000 tons

Sugar over 600,000 tons

Full fat dry milk over 150,000 tons

Other items included in the PDS are tea, salt, infant formula, weaning cereals,

soap, and detergent.

CPA advisors have worked to move Iraqi buying to a more transparent, open system. But the terms of trade used by Iraq in recent years, and likely in the period

ahead, are considered quite onerous by U.S. traders. These terms include requirements such as: quality and quantity inspection at the final destination (not the origin of loading) in Iraq; arbitration in Iraq; transportation required on the seller’s

account to the final warehouse in Iraq; payment 30 days after the presentation of

all documents; and no allowances for demurrage. However, we must remember that

these same terms found willing suppliers under the Oil for Food (OFF) program.

We all recognize that the previous Iraqi government corrupted the operations of

the Oil For Food program. Today, advisors to the Ministries have developed new

management teams to change old ways of doing business. Every Ministry now has

an independent Office of the Inspector General to audit activities.

ANTICIPATED DEMAND FOR AGRICULTURAL PRODUCTS

We believe that there is much room for growth in the Iraqi market. If we look

at the levels of wheat consumption in Iraq we discover that per capita consumption

36

is about 60 percent of the level in Turkey, 70 percent of the level in Iran, and 80

percent of the level in Syria. In the long run, we believe that Iraq will remain a

major commercial food market—and a market that will demand high quality from

its suppliers.

Iraq has a long history as a commercial market. It was a major market for U.S.

agricultural products and our largest market for rice in the late 1980’s with annual

rice sales in the 400,000 - 500,000 ton range. While the World Food Program (WFP)

did have a presence in Iraq, it was not there to provide food aid. WFP had a monitoring (and in the north, distribution) role under the OFF program and earlier this

year assisted CPA and the MOT in making commercial purchases. While some isolated food aid for vulnerable groups in Iraq (displaced groups) may be appropriate

in the future, in general we do not see a need for U.S. food aid.

USDA’s long-term relationship with WFP decision-makers allowed USDA officials

to work effectively to ensure that U.S. exporters had an opportunity to compete in

the first open and transparent tenders earlier this year. As with any commercial

market, U.S. producers had to compete for sales. Our wheat industry demonstrated

its competitiveness with sales of 325,000 tons, representing one-third of purchases.

U.S. rice, however, faces a different situation. Strong early season U.S. sales this

year moved our rice prices sharply above those of our Asian competitors. Although

U.S. rice has an image of top quality and Iraq buyers are eager to resume imports,

the current premiums for U.S. rice have kept Iraq’s purchases focused on Asian supplies.

STATUS OF EXPORT CREDIT GUARANTEES

For the remainder of 2004, budgets developed for food imports will allow Iraq to

continue commercial cash imports with Iraqi funds.

As you are aware, in 1991 Iraq discontinued all payments against its purchases

from the United States under the Commodity Credit Corporation’s (CCC) direct

sales program, as well as the export credit guarantee programs. That total debt is

approximately $1.975 billion; late interest has accrued since then in the amount of

$1.92 billion. International discussions, through the Paris Club, have begun on the

forgiveness and rescheduling of Iraq’s debts. USDA awaits those results and in the

interim, USDA is reviewing the possibility of a future guarantee program.

U.S. GOVERNMENT AND PRIVATE SECTOR EFFORTS

Dangerous situations throughout the country have limited our ability to identify

and pursue broad capacity building and technical assistance projects. When such

work can be undertaken, indications are that the demand for assistance to help Iraq

catch-up with 21st century agriculture techniques will be substantial.

For now, USDA has fielded 10 advisors for varying periods of time to work with

Iraqis. A major function of USDA’s presence in the new Embassy in Baghdad will

be to continue to work with the Government of Iraq to identify and provide such

assistance to strengthen Iraq’s agribusiness sector.

Since late last year, even given the unstable security situation, U.S. private sector

trade groups, specifically our market development partners, have been working in

Iraq. Their work is limited to training and support from outside the country. U.S.

feed grain, soybean, wheat, rice, and pulse cooperators have renewed contacts with

Iraqi buyers.

Two of USDA’s Market Development Program Cooperators, the U.S. Grains Council and the American Soybean Association, have received USDA funds to help Iraq’s

broiler and layer producers restart and modernize their industry. A number of technical training seminars for managers of facilities have already been completed. In

addition, work is progressing to form a poultry producers association in Iraq. This

association would strengthen Iraq private sector involvement in the development of

a modern industry.

USDA also supported representatives of the U.S. wheat, rice, and pulse industry

to meet with Government of Iraq buyers in Amman, Jordan in February of this year

to begin the process of clarifying and modifying contract terms used by Iraq. As a

result of these initial meetings, U.S. commodities are once again able to meet Iraq

import quality specifications. Contract terms are still an issue, but upcoming meetings with the U.S. industry will continue to work on those outstanding issues.

USDA’s Foreign Agricultural Service (FAS) used the Foreign Market Development

Program to support the U.S. Grains Council in its proposal to contract an Iraqi specialist to undertake work on behalf of all cooperators desiring to penetrate the Iraqi

market. An initial Iraqi contractor has been hired.

Supporting and guiding market promotion activities will be a key focus for the

USDA team that will staff the Embassy.

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We are currently working to reschedule the first visit to the United States of a

team of senior MOT officials. These individuals already know the quality of U.S. agricultural exports, but there is nothing stronger than renewed personal contacts,

with our producers, handlers, and exporters to convince Iraq’s decision makers that

we are ready and able to meet their needs for quality agricultural products.

Mr. Chairman, that concludes my testimony. I would be happy to answer any

questions.

ANSWERS TO SUBMITTED QUESTIONS

Is the U.S. Government actively assisting domestic agriculture interested

in accessing the Iraqi marketplace? Specifically, I would like to know how

growers in my district, who are interested in selling goods to Iraq, can

enter the market. In addition, it would be helpful to know who is responsible, if anyone, for providing technical assistance to American agriculture

seeking entry in the Iraqi marketplace.

Iraq once was a significant market for U.S. agriculture and we would like to have

it back. Before the first Gulf War, Iraq was a one-million-ton market for U.S. wheat

and a 500,000-ton market for U.S. rice. The U.S. had total sales of well over $900

million for all food and agricultural products. We want to regain this market. USDA

has been focused on getting our products able to compete again from the outset and

is actively assisting various U.S. agricultural groups working to re-enter the Iraqi

marketplace and re-establish their position.

We currently have several market development activities underway despite the

fact that security conditions in Iraq have not allowed traditional Foreign Agricultural Service (FAS) market development cooperators to travel to Iraq.

• We have been working with our rice, wheat, pulses and vegetable oil cooperators

on several market development initiatives in Iraq. USDA organized a conference in

Amman, Jordan in mid-February with several producer associations to familiarize

Iraqi food grain buyers with U.S. quality standards and the structure of the different grain and pulse sectors. The Iraqis and the U.S. sectors represented were

pleased to reestablish contact after the long hiatus.

• One of several outcomes of the above seminar was an invitation by the U.S. rice

and wheat sectors to the Iraqi Grain Board to visit the United States. The Grain

Board is part of the Ministry of Trade. Visa delays and uncertainty related to the

transfer of power have postponed the travel from its originally scheduled time in

May, but we now are now exploring a delegation visit in September. A two-week

program is being planned by FAS, U.S. Wheat Associates, the U.S Rice Federation

and the U.S. Rice Producers, with stops in Washington, DC, Kansas and Texas.

• Both of these activities were funded using Market Access Program and Foreign

Market Development Program funds.

In the long term, U.S. agriculture should see a continuing market for the key commodities currently distributed by Iraq through the Public Distribution System plus

corn and protein meal for the poultry sector in Iraq. However, the private sector will

also play a growing role in food trade in the new Iraq. Private businesses are already free to import some food items in Iraq. As their economy grows, Iraq will join

other markets in the region and begin to import a broader range of U.S. food products.

FAS Commodity and Marketing Programs (CMP) provides technical assistance for

U.S. agricultural exporters seeking entry into foreign markets. CMP manages FAS’

targeted market development programs, including the Market Access Program, the

Emerging Market Program, Technical Assistance for Specialty Crops, and the Quality Samples Program. Deputy Administrator, Frank Lee, is the head of CMP and

may be contacted at (202) 720–4761.

Can you update the committee on the progress that has been made with

regard to increasing the buffer stocks since the hearing on June 16th?

In a July 7 phone call with U.S. Government representatives in Baghdad, the

level of wheat buffer stocks was reported to be holding at one month’s supply of imported wheat.

The domestic wheat harvest is now underway. Procurement by the Ministry of

Trade should add up to another two months supply to the national buffer stock by

the end of July.

38

STATEMENT OF WILLIAM GARVELINK

Mr. Chairman and members of the committee it is a pleasure to be here today.

I wish to express the apologies of Administrator Natsios who planned to be here

today but was called away on an emergency trip to Haiti.

I have his statement for the record and would offer a couple of observations on

USAID’s role in ensuring that the Iraqi population was fed over the past year-anda-half.

Prior to the war, as part of the interagency process, humanitarian offices within

USAID began preparing for a humanitarian crisis in Iraq and began planning how

to guarantee that the Iraqi population continued to receive food supplies through

the war and into the post-conflict period. The humanitarian crisis did not happen.

But the entire Iraqi population had to be fed. With the full cooperation of the UN

World Food Program, the State Department, Coalition Provision Authority and the

Civil Affairs Officers of the Coalition Forces, USAID ensured that 26 million Iraqis

continued to receive their regular food rations, and they continue to receive them

today. Averting a food crisis in Iraqi has been one of the U.S. Government’s major

successes in Iraq.

By March 2003, we had secured the agreement of the World Food Program to assume the overall management of the Oil for Food program, using Iraqi’s existing

Public Distribution System. For years in Iraqi, each Iraqi citizen has received a

monthly food ration. These rations have been distributed through a network of almost 45,000 food and flour agents. Rather than create a new system, the World

Food Program revived this network and used it to feed the Iraqi population, and

it is being used today.

Managing this national food ration system has been an enormous task. It requires

almost 500,000 metric tons of commodities to be distributed throughout the country

monthly. A fleet of thousands of private and public sector trucks make daily trips

in and out of Iraq, hauling food overland to more than 400 warehouses and silos

around the country. 45,000 food agents pick up these commodities for the final distribution to Iraqi families.

As the war began in March, the United States assumed that Iraqi families had

a 2–3 month food supply. To ensure that there would be food available after their

supplies ran out, possibly in June, USAID took several actions. USAID provided $45

million to the World Food Program to fund its mobilization of staff and initial trucking and fuel contracts. USAID provided to the World Food Program $200 million in

cash and $181 million in P.L. 480 Title II and Emerson Trust food commodities.

These actions total $426 million. On June 1, 2003, food distributions began through

the Iraqi Public Distribution System and have continued ever since.

Through the intervening months, the World Food Program, Coalition Provisional

Authority and USAID have worked with the Iraqi Ministry of Trade to train staff

and prepare the Ministry for the time when it would assume full control of the Public Distribution System. On June 30 the Ministry will take over the system and the

last commodities procured by the World Food Program will arrive by September

2004.

We fully support the handover of the Public Distribution System to the Interim

Iraqi Government, but we remain concerned that insecurity and management challenges might lead to disruptions in the food pipeline. Delays in food deliveries not

only threaten the vulnerable, they could also create further instability among the

population. We will remain vigilant in the coming months and be prepared to assist

the new Iraqi government should it become necessary.

I cannot end my comments without noting that 2004 marks the 50th anniversary

of the P.L. 480 Food for Peace Program. Over the past 50 years, the U.S. Government has contributed more than $50 billion to finance more than 367 million metric

tons of food to over 150 countries. More than 3.3 billion people worldwide have benefited from this program. It is a credit to the dedication and vigilance of this committee and its Members that the United States has been able to share its bounty with

so many of the world’s needy. We are all justly very proud of this program.

Thank you.

STATEMENT OF ANDREW S. NATSIOS

Mr. Chairman and members of the committee, I am pleased to have the opportunity to discuss with you today the U.S. Government’s successful efforts to avert

a humanitarian crisis in the aftermath of the war in Iraq.

In late 2002, Iraq’s Hussein regime continued to defy the United Nations Security

Council resolutions, ignoring warnings from the international community about the

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‘‘grave consequences’’ to follow. As the prospect for war became imminent, the U.S.

Agency for International Development (USAID) began to plan for a possible humanitarian crisis in Iraq. The situation in Iraq was made infinitely more complex because of that country’s dependence on the United Nations Oil for Food (OFF) program and a public food ration system that fed the entire population of 26 million

people.

USAID was asked to join an interagency working group. At their direction,

USAID initiated discussions with the United Nations World Food Program (WFP)

to determine our response options. We agreed that disruption of the public food distribution system, or PDS, would require major interventions by the United States

to ensure continued food distributions to the Iraqi people and to protect Iraq’s most

vulnerable groups. We prepared a three-fold strategy should conflict erupt: restart

the PDS as soon as possible; feed the entire population of 26 million, and be prepared to feed several million internally displaced persons (IDPs) and refugees if

there were a humanitarian crisis.

Through extensive planning, sufficient U.S. resources, and the hard work of

USAID, other U.S. Government agencies, the World Food Program, the Iraqi Ministry of Trade, and the U.S. military’s civil affairs personnel, we were able to reestablish the PDS in less than 30 days following major combat operations. On June

1, 2003, the food pipeline was open in all 18 governorates. This averted a humanitarian food crisis and maintains an acceptable level of PDS food supplies throughout

the country today.

Managing this unique food distribution system was an enormous effort. Under

typical operations, the PDS provides almost 500,000 tons of food to Iraq every

month. The monthly ration includes flour, rice, cooking oil, lentils or beans, sugar,

tea, salt, powdered milk, detergent, soap and infant formula. Last year, Oil for Food

resources were used to purchase these commodities. Today, funds from the Iraqi operating budget fund the purchase of commodities that are shipped to Iraq and other

regional port facilities. A fleet of thousands of private and public sector trucks then

make daily trips in and out of Iraq, hauling the food overland to more than 400

warehouses and silos throughout the county. Finally, local food and flour agents

travel to the warehouses, receive their assigned shipments, and return to their communities for final distributions. Each person in Iraq is qualified for a food ration

and families are assigned ration cards that allow them to receive monthly rations

from the agents who distribute the commodities from storefronts or private residences. A centralized database maintained by the Ministry of Trade provided population data and monitored births, deaths and relocations.

One of our early concerns was that this extensive system would become disrupted

during the war and that food suppliers would refuse to fulfill their food contracts

due to security issues. We also were unsure of the food stock supplies in Iraq prior

to the war. The U.S. Government estimated as much as three months supply of

food, however, we also knew that the regime had distributed double rations for several months in 2002 and early 2003. We were unsure how long food supplies would

last, and we needed to identify and secure resources for additional food supplies

should they be needed.

On March 28, 2003, WFP issued a worldwide emergency appeal for $1.3 billion

to fund a six-month operation to stand up the PDS and keep the food moving. To

help ensure an initial food supply line, USAID contributed $45,000,000 in cash to

support WFP’s preparation and mobilization costs, allowing WFP to position food

and personnel for the tasks ahead. In addition, we contributed $200,000,000 in cash

and almost $181,000,000 worth of Title II and Emerson Trust food commodities to

the WFP operation. In dollar terms, this became USAID’s second largest food assistance program in fiscal year 2003, totaling $426 million, and provided a total of

575,320 metric tons of food to the assistance effort.

In addition to food and cash, the USAID Disaster Assistance Response Team, or

DART, helped backstop other critical WFP operations. Food experts were deployed

with the DART and assigned to the key Iraqi cities of Basrah, Baghdad, Hillah, and

Erbil, as well as in Kuwait City and Cyprus. Throughout the spring and summer

of 2003, the DART food team assisted WFP, the Iraqi Ministry of Trade, and the

Coalition Forces with numerous food distribution activities. This included securing

warehouse stocks, assuring records and data were secure, liaising with civilian-military operations, prioritizing humanitarian efforts, assisting WFP Iraqi staff with logistics and obtaining military de-mining and other technical assistance. In September of 2003, we were confident that a food crisis had been averted, and the DART

returned to the United States.

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AFTER THE CONFLICT

Having averted a food crisis immediately following the conflict, USAID continued

to focus and assist with the management and distribution of food rations for all

Iraqi citizens. We soon realized that the Iraqis were capable of managing much of

the PDS tasks, but needed some training and equipment. Again, in partnership with

WFP, the newly organized Coalition Provisional Authority (CPA) and the military,

we began to take immediate actions to support the Iraqi food administrators so they

could effectively take the reigns of the PDS.

Some of these actions include assisting CPA and the Iraqi government with OFF

handover tasks, providing technical expertise to identify thousands of former OFFfunded projects and resources for the Iraqi people, including food contracts for the

PDS. We also played a key role in establishing the Baghdad Coordination Center,

an essential technical service center to be operated by the Iraqis that will help assure proper and transparent management of the former OFF activities. We continue

to contribute counterpart personnel to provide logistics expertise, supplier service

support, contract reference and processing support, payment services, UN liaison

and other essential services to help ensure that the food supply continues to flow.

We are providing food specialists in Baghdad to serve as technical advisors to the

Iraqis, helping arrange procurement training sessions with WFP in Rome and communications training in Amman, Jordan. Finally, we provided ministries with additional computer equipment to help improve communications and computing capabilities.

THE FUTURE

Iraq’s PDS continues to provide food to all Iraqi citizens. Though we realize that

independent market forces also contribute to food supplies in Iraq, we have not reduced our concern for Iraq’s most vulnerable groups nor our determination to assist

the Iraqi’s with their PDS operations, if needed. We also recognize the PDS is extremely costly to the government and inherently inefficient. But as long as Iraqis

are dependent on food rations, we will remain attentive to Iraq’s food supply and

involved.

In addition to our assistance with the PDS, we have begun other food security

related activities to reduce risk for the most in need. In April of this year, in collaboration with the Ministry of Agriculture and the CPA, we prepared an Agricultural

Transition Plan designed to restore agricultural production and create jobs to bring

about a transition to a market-led agriculture sector. We plan to support the Ministry’s efforts in policy and economic analysis, enforcement of a regulatory framework to protect human health and the environment, and with applied research and

farmer extension. If rehabilitated and managed properly, we believe that the agricultural sector in Iraq will have the physical and human resources that can significantly contribute to economic recovery in generating employment and income and

in improving food security. Increased food security and a revived agricultural sector

will allow Iraq to wean its population from the PDS, opening the way for food sufficiency and free market enterprise.

It should be underscored that until these and other infrastructure, institutional

building and economic improvement efforts begin to impact Iraqi society, many

Iraqis will remain dependent on the PDS as the main source of food. Although we

fully support the handover of PDS responsibilities to the interim government on

June 30, we remain fearful that interruptions in the PDS food pipeline, resulting

in food shortages. Delayed food deliveries not only threaten the vulnerable, they

could create further instability among the population.

We applaud the hard work of the talented and dedicated people oft the CPA,

WFP, and the countless others who have made this effort one of the U.S. Government’s most successful in Iraq. Yet we by no means believe the task is finished. Several key technical improvements are still necessary for the successful continuation

of the PDS aftr the CPA closes its doors. A critical concern is the tenuous nature

of the food supply pipeline. We must remain vigilant in the upcoming months to assist the new Iraqi government should it be necessary.

50 YEARS OF U.S. FOOD AID

Before I conclude, let me add that this year marks the 50th anniversary of the

Food for Peace program. Over the past 50 years, the U.S. Government has contributed more than $50 billion to finance more than 367 million metric tons of food to

over 150 food insecure countries. More than 3.3 billion people worldwide have been

recipients of U.S. food assistance. In addition to the successful effort in Iraq, other

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countries worldwide have benefited from this long-standing U.S. assistance program.

In much of Asia and Latin America, where famine has taken millions of lives,

basic food security has been established and sustainable development has become

a reality. In many of these places, our food aid investments have played an important role in helping to bring this about. Japan, South Korea, Mexico, Argentina, Morocco, Chile, and even a number of European countries were recipients of early P.L.

480 programs. Many of these graduated countries have gone on to become major

food donors.

Some of the most notable achievements occurred in the aversion of widespread

famine in Ethiopia; the feeding of four and a half million people in southern Africa;

the prevention of a humanitarian food crisis in Iraq and the successful response to

Afghanistan’s drought—which included the shipment of nearly 400,000 metric tons

of food to that country, benefiting 10 million people between 1999 and 2002. The

World Food Program played a key role in these successes.

The year 2003 saw one of the largest amounts of food distributed through Title

II in its 50-year history—and just slightly below what was distributed in 1985, the

year of the terrible Ethiopian famine. In fact, if you add the 401,000 metric tons

we received from the Bill Emerson Humanitarian Trust, last year was the biggest

year since P.L. 480 was passed.

Despite the investments and the progress made over the past 50 years, nearly 840

million people are still food insecure. And though critical for addressing short-term

food needs and saving lives, USAID recognizes that simply feeding people from one

day to the next is not going to end hunger.

Our food aid will obviously continue to focus on people’s short-term food and nutritional needs. But we have to invest in longer-term solutions, as well. It does not

make sense to spend hundreds of millions of dollars feeding people in a country like

Ethiopia and only provide a tiny fraction of that to help them improve their agriculture.

Consequently, USAID is working toward implementation of both short and longterm interventions which link agricultural development, trade and food aid in order

to promote food security. The United States is committed to supporting a variety

of proven and innovative programs to address hunger, and USAID’s Office of Food

for Peace is making a dramatic shift in its approach to addressing food needs.

The American people can be proud of the many accomplishments of the Food for

Peace program over the years. I look forward to working with you on both responding to emergencies and to improving food security abroad.

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ANSWERS TO SUBMITTED QUESTIONS

When describing the shortage of buffer food stocks in Iraq in your testimony and during the hearing on June 16, you describe the security situation as one of the main reasons. Is the problem with the delivery of food

to warehouses occurring in all parts of Iraq? Are there regions in Iraq that

are better off than others?

According to USAID and WFP officials, information on food supply and buffer

stocks has been an ongoing concern for those working on the Public Distribution

System. They have never been totally confident that the supply numbers provided

by the Iraqi government were accurate and, therefore, continue to be unsure as to

exactly how much food is in any one place at any one time. The government has

often shuttled food from one spot to another to cover shortages, further obscuring

the overall food supply picture. Recently, threats of shortages were compounded by

a reduction of deliveries from ports of entry to the warehouses, mostly along the

major southern and western corridors. They report that, as of the end of June, the

situation had improved and more food was moving than had been the case during

May.

Regarding which regions may have a better food supply, it is difficult to say with

precision given the lack of accurate data. However, officials believe that the northern three Kurdish governorates have tended to have fewer problems than central

and southern Iraq. The areas around Fallujah and Ramadi currently are more likely

to have supply problems than the rest of the country, given the uncertain security

environment.

Can you update the committee on the progress that has been made with

regard to increasing the buffer stocks since the hearing on June 16?

According to USDA officials working with the ministries in Baghdad, as of July

7, 2004, Iraq continued to have a month’s supply of imported wheat. They reported

that the domestic wheat harvest was under way and will soon add a 2-month supply

of domestic wheat to existing stocks. WFP-procured food appears to be moving without major difficulties at this time, but it is unclear whether this food will be reserved as buffer stock or immediately delivered to fill ongoing Public Distribution

System needs. Monitoring current food supplies is hampered by the current security

situation.

Please provide a list of participants (and agency affiliation) involved in

the interagency review process related to the ‘‘Oil for Food’’ program.

The primary U.S. Government entities that were involved in the interagency review process are the Departments of

• Treasury (Office of Foreign Assets Control),

• Commerce (Bureau of Export Administration),

• State (Bureaus of International Organization Affairs, Non-proliferation, Near

Eastern Affairs, Economic and Business Affairs and U.S. Mission to the United Nations),

• Defense (Threat Reduction Agency and Navy),

• Energy,

• and Justice.

The intelligence agencies were also involved in the process. We do not have the

names of individuals.

Oil purchases within Jordan received greater discounts on Iraqi oil compared to other countries. Specifically, Jordan received a 67 percent discount, and the Persian Gulf and Syria received a 33 percent discount. Why

does this disparity exist, and what incentive might the former Iraqi regime

have had to provide such discounts? Does a pattern exist between third

party purchasers of oil who used Jordan vs. other nations?

According to oil experts, 33 percent was the typical discount for Iraqi smuggled

oil, but the oil smuggled to Jordan was more heavily discounted. The discount

helped Iraq maintain trade with Jordan and do business with Jordanian financial

institutions. Jordan stated in a letter to the U.N. Security Council that the sanctions severely hurt its economy and that it depended on favorable trade with Iraq.

Because the Oil for Food program controlled the price of oil, Iraq had to smuggle

oil to Jordan to allow the discounted price. The sale of Iraqi oil to Jordan was further established in a trade protocol between Jordan and Iraq outside of the Oil for

Food program. The U.N. Security Council noted the protocol, but took no further acVerDate 11-SEP-98 12:01 Jul 12, 2004 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6633 F:\DOCS\10833 HAGRI PsN: HAGRI
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tion. We have no information on a pattern between third party purchasers of oil

through Jordan vs. other nations.

According to the testimony of Mr. Christoff, the GAO had access to renegotiated Oil for Food contracts. Please submit copies of those contracts

that the GAO has reviewed.

GAO did not have access to any of the actual contracts, amendments, or letters

of credit associated with any Oil for Food contracts. GAO reviewed and reported on

summary information provided by the U.N. Office of the Iraq Program (OIP) on the

3,059 contracts—including 2,808 renegotiated contracts—turned over to the Coalition Provisional Authority (CPA) on November 21, 2003. According to several CPA

and U.S. government officials, the CPA did not receive a complete set of original

contracts, amendments, or letters of credit from OIP for these contracts. The CPA

also stated that the disks containing the database of contract documents provided

by OIP contained errors and inaccessible files. A senior OIP official, however, stated

that his office submitted all required information, including an operational database, to the CPA at the time of the program’s transfer. The CPA provided GAO with

copies of the disks it received from OIP. These disks contain thousands of files with

contract-related information. However, the disks are not organized to facilitate analysis, and many files are inaccessible.

The DOD Inspector General’s Office and the Iraqi Board of Supreme Audit,

through a contract with Ernst and Young, are in the process of securing Oil for Food

documents in Iraq. The Committee should consider requesting copies of renegotiated

contracts from these entities.

The United States was a member of the sanctions committee, which was responsible for reviewing commodity contracts, and a U.S. interagency team reviewed

these contracts, as noted above. The Committee should consider requesting copies

of these contracts from the State Department.

The State Department provided GAO a list of the approximately 30,000 commodity contracts for all 13 phases of the Oil for Food program. The list is in hard copy

and includes the contract number, country, company, the type of goods, and the contract amount. State informed GAO that it would consider making the list available

to others upon request. Accordingly, the Committee should consider requesting a

copy of this list from the State Department.

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STATEMENT OF LOCHIEL EDWARDS

Good Morning Chairman Goodlatte and members of the committee. My name is

Lochiel Edwards and I farm on the prairies of Montana. My sister, brother, and children work together with myself to raise high quality wheat for domestic flour mills

and for overseas export. I am currently President of the Montana Association of

Wheat Growers.

Today I am representing the Wheat Export Trade Education Committee, the trade

policy arm of the wheat industry; the National Association of Wheat Growers, the

organization responsible for domestic policy and farm programs; and for U.S. Wheat

Associates, the industry’s foreign market development and promotion organization.

I appreciate this opportunity to speak to you on where we now stand and what

needs to be done to rebuild the Iraq wheat market.

Let me begin by highlighting two points that wheat producers in the United

States take into account when looking at export opportunities around the world.

First, 96 percent of the world’s consumers live beyond our border. The four percent

within the United States do not consume enough wheat to sustain a viable wheat

industry.

Second, we consistently export nearly 50 percent of our total production. As you

can imagine, our success or failure hinges on the ability of U.S. wheat to be exported around the world. Trade is a vital component for ensuring the financial viability of U.S. wheat farmers. Every market, regardless of size, is an important market.

As early as 1963, Iraq was an important customer of the United States wheat industry. There was a year in the 1970’s when we had 100 percent market share. In

the mid and late 1990’s there were some exports to Iraq. However, in most years

leading up to the 1991 Gulf War, we maintained about a third of the total annual

Iraqi wheat import market at around 3 million tons per year. During the first Gulf

War and the period following Iraq refused to make any purchase from the U.S. not

only because of the war, but also, because of the unilateral sanctions we maintained

against imports of their products. Regaining market share is difficult at any time.

The challenges in a war torn country will no doubt add to the difficulties of regaining market share that has been displaced by our competitors.

We are very pleased that a new market-oriented Grain Board is up and running.

Even with renewed ties from the past, it will be tough going for U.S. wheat to regain market share. We are going to need the assistance of the U.S. Government.

I’d like to take a couple of minutes to explain some of the wheat industry’s relatively recent history in Iraq, and then look to the immediate and long-term future.

During the 1980’s, through 8 long years of war between Iraq and Iran, Iraq was

a high priority market for our industry and U.S. Wheat Associates’ put a great deal

of work into servicing this market. Dealing with the U.S. free market system was

more difficult for Iraq than the government-to-government system they were able

to use with the Canadian Wheat Board and the Australian Wheat Board.

While not able to sign long term purchase agreements with Iraq like our competitors could offer, the U.S. wheat industry signed a protocol with Iraq’s State Organization for Grains (SOG), encompassing technical cooperation. The agreement provided for an in-depth comprehensive program of technical assistance, trade servicing

and information, in return for SOG’s agreement to give the U.S. wheat market consideration as a major source of supply in meeting Iraq’s annual imports.

With the support and backing of the U.S. Department of Agriculture, we were

able to offer several months of training to key officials of the SOG. Iraqi millers

were trained in Kansas and many bakers were awarded scholarships to 19-week

courses at the American Institute of Baking. They received assistance that allowed

them to computerize their grain inventory system. Key Iraqi grain inspection officials received training at the North Dakota’s Northern Crops Institute and key

grain purchasers received training, with the financial support of USDA, in grain

marketing.

By 1989/90, allocation of our market development funds for Iraq was three times

more than funding for activities in Egypt, the region’s largest wheat importer. This

was done because the potential market in Iraq was growing quickly.

Unfortunately, with the escalation of the Iraq-Iran war Iraq’s industry representatives were unable to attend any activities outside of Iraq. To meet this constraint

between1988 and 1990, U.S. Wheat Associates offered training in grain inspection,

transportation, storage, milling and baking within the country. In 1990/91, political

strains and eventual war halted all U.S. market development efforts.

Some U.S. hard red winter wheat went to Iraq for a couple of years in the mid

1990’s, until May 1998, when Iraq’s regime said it would refuse to grant contracts

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to companies in America. That was an abrupt end to a wheat marketing year that

saw exports of 817,400 metric tons of U.S. wheat to Iraq.

With an opening of the market following the end of the Hussein regime, the U.S.

wheat industry is working to renew friendships and pick up where we left off in

offering all the assistance they need. We weren’t and are not looking for special

deals. In fact, we believe that any allegations of improper past arrangements should

be fully investigated.

We strongly believe that Iraqis and Americans alike benefit from the development

of an open and competitive marketplace where economics and specific end use needs

rather than political considerations determine what type of wheat is bought and

from where. Open markets work, when given the chance. They work best when commercial buyers are free to choose their sources of supply and when suppliers compete fairly and transparently.

Unfortunately, we’ve faced many roadblocks on the road to normal trade relations.

For nearly a year, despite the fact that our competitors were allowed into Iraq, our

government prohibited us from travel into the Iraq. Finally, in February of 2004,

almost a year after the war began, our market development experts were able to

meet with Iraqi wheat buyers. The process of rebuilding friendships and providing

assistance has begun.

The future for this market is positive. The Iraqis are enthusiastic about once

again working with us. U.S. Wheat Associates was encouraged by a meeting with

Iraq’s Grain Board, Foodstuffs Trading Board and the Ministry of Trade that was

held in Jordan this year. They clearly wanted to learn as much as they could about

getting back into the U.S. marketing system. Our team in Iraq believes that they

want a competitive purchasing system, and they want to have the U.S. as a supplier

and competitor.

Iraq buyers have made a lot of progress in understanding wheat quality specifications, and we believe that it will only get better as the Iraqis become reacquainted

with the U.S. marketing system and the role of the Federal Grain Inspection Service

in providing for official certification of quality at loading. There have been roadblocks in recent attempts to bring Iraqi teams to the U.S. for training. One of these

has been difficulty in getting visas issued in a timely fashion, even when the individuals were invited and sponsored by the U.S. government, and representatives

from the government were to accompany the team. Efforts were made to bring a

team to the U.S. in April for training, but the clearances could not be obtained. Belatedly, the visas were issued, and we are now trying to reschedule the trade mission.

Another problem is the lack of ability to extend USDA’s credit program. Iraq’s

debt will need to be restructured so that the country can begin to recover without

the overhang of an estimated $150 billion. As I stated in the beginning of this testimony, it will take a lot of effort to re-establish U.S. wheat in this previously closed

market. Our industry will do all that we can. But we need the assistance of the U.S.

Government in the following areas:

(1)Work with the other countries in debt forgiveness and debt restructering;

(2) Allocation of GSM credits;

(3) Expeditious approval of visas for approved Iraqis to visit the United States;

(4)USG funding for market development activities and improvement in Iraq’s port

and grain handling facilities;

(5) Travel authority to visit Iraq for market development activities;

(6) The UN and other bodies are investigating alleged kickbacks of the previous

Iraq regime. The U.S. Government needs to firmly support that effort.

I am very pleased to be able to report that Iraq has purchased U.S. wheat this

year. As the Iraqis regain their familiarity with the U.S. marketing system, and rediscover the unique qualities of U.S. wheat, we are confident of a brighter future.

We look forward to a time in the near future when we once again control a strong

share of this important market.

Æ