8 Quebracho Extract

Quebracho extract is of great use to the nation in the war effort. It is a material which has been found most desirable for tanning the leather which goes into the shoes, harness, straps and other leather articles of the armed forces. It is of some interest to every man, woman and child whose ration stamps are used to buy a pair of shoes.

Practically all heavy leather tanned in this country has been tanned by use of a blend in which this material is an important ingredient. It comes from the southern part of South America, and there have been times when it was difficult, and others when it appeared it might be impossible, to ship the material to this country. The production and sale of the material is controlled by a monopoly pool or cartel, and this country is at the mercy of the pool in procuring the material in adequate quantities and at a reasonable price. The pool has exercised its power to curtail the quantity shipped to this country, to prevent any adequate stock pile in this country, and to raise prices out of proportion to any increase in costs.

In the Spring of 1942 the Department of Justice submitted the facts of this monopoly pool to a Federal Grand Jury in New York, and it promptly returned an indictment against five American corporations, one Canadian and one British corporation, and five individuals, officials of four of the American corporations. Pleas of nolo contendere were subsequently entered by three of the American corporations and four of their officials. Fines were levied against and paid by these defendants, totalling $59,002. A nolle prosequi was entered as to the two remaining American corporations, the two British corporations, and one official. The reason for the nolle prosequi in the case of the two foreign corporations was that they were outside the jurisdiction of the court.

The national interest in such a situation plainly warranted a diligent effort long ago to find an adequate substitute which would relieve us from entire dependence upon the ability and willingness of a foreign cartel to supply us with a vital material.

The extract is obtained from the quebracho tree. For commercial purposes the growth of these trees is limited to Argentina and Paraguay. Although there are quebracho forests in southern Brazil, the extract manufactured from these trees is inferior to Argentine and Paraguayan extract, and cannot compete favorably with it in the market. Ninety-eight per cent of the world production of quebracho wood and extract comes from Argentina and Paraguay. In 1942 the total production amounted to approximately 300,000 metric tons of extract and was valued at $25,000,000.

This war has naturally affected the market for quebracho in Europe. Several years before the war the German Government took steps to render that country less dependent upon the continuance of quebracho imports. Clauses were inserted in all Army and Navy contracts for the purchase of leather goods that at least 12 per cent of such goods should be tanned by German-manufactured tanning agents. This resulted in the development of a new industry based upon the production of tanning material from German trees. Tannic acid was extracted from the oak trees of South Germany and was permitted to find a place in the tanning industry by reason of the Government policy. Thus the German leather industry gradually became independent of quebracho importation from South America.

The loss of the continental European market due to the war was not felt to any great extent by the quebracho exporters because of the great increase of exports to the United States. During the war the imports of quebracho almost doubled due to the tremendous production of leather goods for the armed forces.

The quebracho industry consists of twenty-two producers in Argentina and Paraguay. Five of these are owned or controlled by the British corporation, The Forestal Land, Timber and Railways, Ltd., through its Argentine subsidiary, La Forestal Argentina S. A. de Tierras, Maderas y Explotaciones Commerciales e Industriales. These five companies have a productive capacity which constitutes approximately 57 per cent of the total capacity.

All producers, except four having a capacity of about eleven per cent of the entire industry, are members of a Quebracho Pool which regulates the production and sale of the product. Quebracho is sold by official agents of the Pool, and it recognizes two official agents in the United States: The Tannin Corporation and the International Products Corporation, both of New York.

Forestal of England controls La Forestal of Argentina through the ownership of a majority of its stock and a substantial portion of its bonds. One John B. Sullivan, Chairman of the Board of Forestal of England, is also the manager of Forestal of Argentina. Sullivan is an Argentine citizen who was formerly a citizen of the United States and a graduate of Harvard College.

By reason of La Forestal’s ownership of 57 per cent of the total productive capacity of quebracho in South America, which is approximately eight times the capacity of its next largest competitor, Forestal has completely dominated the quebracho industry. Its policy has been to restrict production and maintain high prices. Forestal’s economic dominance in Argentina has enabled it to exert a great influence upon the government of Argentina. For example, in 1942 the efforts of John B. Sullivan alone were primarily responsible for the imposition by the Argentine Minister of Agriculture of highly restrictive export quotas upon each producer. These restrictions were imposed upon the industry at a time when it appeared that the efforts of Forestal to continue similar restrictions upon the South American producers might fail.

Forestal’s domination extends not only over the production of quebracho, but over its distribution as well, including importation into this country. Through St. Helen’s Ltd., a Canadian corporation, Forestal of England owns substantially all of the stock of Tannin Products Corporation, a Delaware corporation, which in turn owns all the capital stock of The Tannin Corporation, a New York corporation.

The Tannin Corporation imports approximately 70 per cent of all quebracho extract consumed in the United States. The Tannin Corporation has been controlled by Forestal of England since 1913 and during the past thirty years its controlling officials have been completely subservient to the policies of Forestal of England. Thus Forestal controls this material from the tree to the United States consumer.

The questionable character of the functioning of these American subsidiaries is indicated by portions of a letter written December 23, 1941, by Carl B. Ely, President of the Tannin Corporation, to J. B. Sullivan of Forestal, whom he addressed as “My dear Jack”:

“You will recall the formation for good and practical reasons of the Tannin Products Corporation in 1925, at which time a very large dividend was paid, which procedure continued in a more or less degree during the following years, particularly in 1929 and 1934. The company, as you will see, earned $3,284,427.28 and paid out dividends of $4,200,000.00. In other words, we declared practically $1,000,000 more during the sixteen-year period than we earned.

“Under the circumstances I have no fault to find with this, provided our principal stockholders, the Forestal Company, are aware of it and are prepared to take care of our money situation as the same arises....

“To come right down to the last analysis, we have been living on Government funds, which under proper business procedure should be reserved for income tax payments, but, as these payments are not due until next year, it has been possible to use this money. We owe the Government today $500,000. This money, together with your most helpful postponement of payments, has made it possible for us to have cash to pay the dividend we did. I believe that with the extra terms on future purchases of extract we will make our position stronger during the next six months, and we are trying diligently not to borrow from the banks, as in this particular case it would appear that such borrowing was done to pay dividends. This I believe would have a very bad effect on our good will and financial standing—and we enjoy today the good will and respect of the tanning industry as we never have before.”

I have already pointed out that Forestal controls five of the South American producers. One of the other seventeen is the International Products Corporation of New York. Another producer, Samuhi S. A., is controlled through ownership of a majority of its stock by two American corporations, Proctor Ellison and Howes Bros. of Massachusetts. International Products Corporation and Samuhi together have a capacity of about eight per cent of the entire industry. Both of these producers have been ineffective in preventing La Forestal from carrying out its policy of restricted output and high prices, and International Products has in the past frequently cooperated closely with La Forestal to further such a policy.

Since 1934 International Products Corporation has consulted with Tannin about the prices to be charged to quebracho extract consumers in the United States, so that the prices of both companies have been fixed, uniform and high. From May, 1934 to July, 1939, Tannin owned a substantial amount of the stock of International Products Corporation, and from May, 1934 until May, 1936, the president of Tannin, Carl B. Ely, was a member of the Board of Directors of International Products Corporation. On February 26, 1935, Ely wrote to Sullivan:

“I am giving the I.P.C. problems a lot of my time, and, as previously told you, have found that there is a lot to be done to straighten out that problem. I am working slowly so as not to upset the apple cart any more than is necessary....

“I am getting their sales policies straightened out and believe now there will be no more monkey business.”

From 1934 to 1939 International Products Corporation was a member of the Quebracho Pool, and by reason of its designation as an official pool agent for the United States gave up its business of selling extract in England and in Asia.

American purchasers of quebracho might well wonder whether this American company was more concerned with giving them a good deal or with favoring certain foreign concerns, from the concluding paragraph of a letter from one of its officials to its President dated November 16, 1939:

“You undoubtedly know that Mr. Seldes was successful in substituting Casado extract to fill the order we had for Forestal for 535 tons of Supremo for delivery in Buenos Aires for shipment to Japan. We paid for the Casado extract with a dollar draft and have since received from Forestal the sterling representing the sale. The net result of the whole transaction represents a loss of a little more than a $1.00 per ton, which, as explained in a previous letter, is really not a loss at all, as we will use this extract to fill orders for North America which will net us a nice profit.”

The production of Samuhi was so small, being about one per cent of the entire industry, that it could hardly contain any competitive threat to La Forestal. Nevertheless, our records show that for many years Forestal harassed this company by every means and sought to buy up its assets and its stock.

It is interesting to observe in what manner the quebracho extract pool operated to carry out Forestal’s policy of restricted output and high prices. Before the formation of the Pool the price per pound of quebracho extract was 2½ cents. By the terms of the pool agreement a directive committee, dominated by Forestal, was empowered to fix the prices of all its members. The directive committee between November, 1934 and January, 1941, decreed six price rises, raising the basic price of quebracho extract for the whole world market from 2½ cents up to 4⅞ cents, an increase of nearly 100 per cent. Sullivan admitted in July, 1942, that at the then existing price, which prevails at present, Forestal was making a net profit of 33 per cent on every ton of quebracho it sold.

The exorbitant profits of the quebracho manufacturers were severely criticized by the famous leading Argentine newspaper, La Prensa. The following excerpt was taken from a letter of May 20, 1936, written by the manager of the Buenos Aires office of the International Products Corporation to its president:

“Another matter, which has caused a lot of excitement amongst the manufacturers has been the inopportune declaration, made by the Chairman of the Forestal during the annual meeting of the shareholders, viz. that the understanding of the manufacturers was performed under the auspices of the Argentine Government, in other words, that the Argentine Government was really responsible for the agreement and that it was protecting the same. This news was reproduced all over the world and the La Prensa, the most important paper on the Southern Hemisphere, has seized the opportunity to denounce the huge profits made by the quebracho manufacturers, profits which in their opinion mean a loss for the Argentine Republic on account of the decrease in the export of both, Quebracho Extract and Logs. I am enclosing herewith the article, as appeared in the La Prensa of Monday the 18th. inst., and we would add this paper has on more than one occasion criticized the so-called ‘gentlemen agreement.’ Mr. Marti told me that he is at a loss to understand how the Baron made these declarations as Mr. Sullivan has always stressed the necessity of not mentioning the Argentine Government in connection with the manufacturers’ agreement, a fact which can be noted in the balance sheets of the other companies, who, referring to the higher prices, explain that they are due to a better understanding in the sales policy abroad. Anyway, I hope that his faux pas will have no serious consequences.”

To maintain high prices it was necessary to limit the production and the sale of quebracho in the world market. The method used to limit production under the pool agreement was to allocate a quota to each producer in accordance with his respective productive capacity. These quotas limited the amount of quebracho extract which any manufacturer could sell during a given period. Each member of the pool was compelled to make substantial contributions at regular periods to a so-called “battle fund” of the pool. These contributions were retained by the pool unless the producers adhered to the pool’s regulations relating to prices and quotas, in which case a portion of each producer’s contribution was refunded. So restrictive were these quota limitations that producers who desired to sell above their quotas often paid enormous prices to acquire the quota rights of other producers.

This rigid control of the market so severely limited the production of many companies that in 1941 several deserted the pool. These companies were LaChaquena S. A. and Cotan S. A. These two companies, together with International Products Corporation, Samuhi, and Weisburd & Cia. Ltda., a new concern, have been the only producers outside of the pool since 1941. Although the total productive capacity of these five companies did not exceed 12 per cent of the total industry, their threat of full production and decreased prices jeopardized its whole structure. To meet this threat, Forestal succeeded in persuading the Ministry of Agriculture in February, 1942, to impose export restrictions upon each producer which prevented exportation of more than approximately one-third of their total capacity. In addition, Forestal attempted to prevent companies outside the pool from shipping their extract to the United States.

One instance is the experience of Hammond and Carpenter Corporation, an independent importer which has sought to compete with The Tannin Corporation and International Products Corporation in the importation of quebracho. In February or March, 1942, J. A. Barkey, its Vice-President, attempted to import some extracts produced by Weisburd, an Argentine extract manufacturer, who entered the industry in 1941. He called at the offices of the Sprague Steamship Company and spoke to Mr. Bodemann of that company. Mr. Barkey later described the conference as follows:

“Mr. Bodemann retorted that it was very unlikely that our firm would be given any space for the reason that we were newcomers in the import of quebracho extract and for the further reason that the ‘Pool’ had supported his line during the lean years before the war and by reason of such support his line would be obliged to support the ‘Pool’ during the present emergency.”

Similar sentiments were voiced by Mr. Horgan of the Stockard Steamship Corporation. The aid of the Buenos Aires Agency of Moore-McCormack was also previously enlisted. In October, 1941, the Moore-McCormack line stated that “at the request of the Forestal Company they had promised their cooperation for the purpose of keeping out any of the new brands.... The understanding was that whenever they were offered outside extract and they had space they were to reject it and advise the other manufacturers, who would try to offer replacement.”

Forestal’s tactics are well illustrated by the case of Mr. T. Valentine, exporter and concessionnaire of a projected new company. International Products Corporation was informed in September, 1941:

“[It] has proved impossible so far to reach a satisfactory agreement with the new factory at Santiago del Estero. For this reason, the Forestal Company, in an endeavor to impede the exportation of the extract, has seen all the steamship companies requesting them not to give space to any outsiders, but to advise the Forestal who would immediately offer replacement cargo. The steamship companies promised to act accordingly.”

The Basal Agency had obtained shipping space for Valentine in the past. “The Basal Agency,” an official of International Products wrote to Feeney a week later, “has informed us that Valentine wants to book a further 200 tons on the next steamer but that they would refuse to take it if we or the Forestal would offer them replacement cargo.”

The effect of the restrictive government decrees and other measures taken by Forestal has been to force one independent, Cotan, S.A., back into the Pool, while another, Samuhi, S.A., is contemplating rejoining the Pool. It appears inevitable that within a short period of time the remaining independents will be forced into full cooperation with the Pool and that the industry’s policy of restrictive production and high prices will continue unless some completely satisfactory substitute may be found for quebracho extract. Apparently the tanners in this country find that wattle extract is the only tanning product interchangeable with quebracho extract, and it is therefore significant to observe that the wattle extract industry, which is located in South and East Africa, is also controlled by Forestal of England, and that the principal importers of wattle in the United States are the Tannin Corporation and International Products Corporation.

The chief official of one of the companies which stood up against the bulldozing tactics of the Pool wrote a letter to American Tanners Ltd., on February 7, 1935. After discussing in a critical manner the actions of the Pool and referring to a conversation with an individual whom he said could be “interpreted as a stool pigeon for Forestal,” he wrote:

“We also pointed out the fact that if the arbitrary methods of the gentlemen [the Pool] were pursued, that they were throwing away their markets, they were encouraging the fields of research and that they would wake up one day and find that the volume of consumption of Quebracho Extract had been greatly reduced due to the introduction of other materials which supplanted Quebracho and I cited the instance of what the tanners went through with substituted leather and how the volume of the market had never been regained and that the same thing would happen to Quebracho.”