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Cablegate: Response: Impact of Rising Food/Commodity Prices - Vietnam

VZCZCXRO9524
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHI #0498/01 1200448
ZNR UUUUU ZZH
R 290448Z APR 08 ZDK
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 7723
INFO RUEHHM/AMCONSUL HO CHI MINH 4654
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 03 HANOI 000498

STATE FOR EAP/MLS, EEB/TPP/ABT/ATP JSPECK
STATE PASS USTR FOR DBISBEE
STATE PASS USAID FOR ASIA/EAA DSHARMA
AGRICULTURE FOR FAS
TREASURY FOR SCHUN

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EAGR ECON ETRD EAID VM
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - VIETNAM

Ref: A) STATE 39410 ("Survey: Impact of Rising Food");
B) HANOI 377 ("PM Declares War on Inflation");
C) 07 HANOI 1729 ("Vietnam's Inflation Conundrum");
D) 07 HANOI 2013 ("Inflation Hits 10 Percent");
E) HANOI 394 ("Vietnam Cutting Rice Exports");
F) HANOI 206 ("Record Cold Snap");
G) HANOI 475 ("Vietnam Econ Highlights")

HANOI 00000498 001.2 OF 003

1. (SBU) Summary: Tackling rising food prices is part of Vietnam's
larger challenge of addressing soaring inflation rates, which hit
21.5 percent year-on-year in April. International agricultural
experts say that they are not worried about food security, even
among Vietnam's rural poor, noting that their local and provincial
contacts are not sounding alarms or reporting instances of food
shortages. Prime Minister Nguyen Tan Dung underscored this message
when he assured provincial officials on April 27 that Vietnam has
enough food for itself and to meet its export obligations. As a net
food exporter, Vietnam should remain sheltered from violence,
political instability and growing poverty rates feared elsewhere due
to food shortages. In fact, Vietnam and its large farming
population stand to benefit from rising global food prices,
particularly if Hanoi can tame the rising prices of agricultural
inputs such as fuel, and farmers can enhance their productivity.
End summary.

CONTEXT: HIGH FOOD PRICES PART OF LARGER INFLATION PROBLEM
-------------------------------- -------------------------

2. (U) The Government of Vietnam (GVN) continues to combat soaring
inflation rates (REF B, C and D), which hit 21.5 percent
year-on-year in April, according to Vietnam's General Statistics
Office (GSO). Food prices, which comprise roughly 43 percent of the
basket of goods Vietnam uses to calculate its consumer price index,
are up 34 percent from one year ago and are a significant
contributing factor to Vietnam's inflation. The price of rice,
Vietnam's main staple, has gone up by 51 percent in the last year.
Prices of other key products have also risen dramatically, with fuel
rising 42 percent in the last six months, housing and construction
materials up 24 percent from a year ago, and transportation prices
18 percent higher.

AMPLE STOCKS: MEASURES ADDRESS INFLATION NOT SCARCITY
----------------------------- -----------------------

3. (U) It was in the context of these broad inflationary pressures
that Vietnam, the world's second largest rice exporter, announced
plans to cut 2008 rice exports by up to 22 percent (REF E). Most
international and local experts agree that lowering the price of
rice, rather than concerns over available stocks, drove the GVN to
cap rice exports at 3.5 to 4 million tons this year. During an
April 27 teleconference with national and provincial officials,
Prime Minister Nguyen Tan Dung underscored that the country has
sufficient rice supplies, reporting that state-owned agencies will
continue to buy rice for national reserves and distribution to
regions which may face a shortage. The PM threatened to punish
organizations and individuals engaging in speculation, which he
blamed for the recent rise in food prices. While Vietnam's rice
export cap fueled fears of shortages across Asia and the world,
Vietnam is a net food exporter and so it will likely remain
sheltered from food shortages, threats of violence, political
instability or growing poverty rates. In fact, the GVN and
Vietnamese farmers are working to increase this year's output to
take full advantage of high global commodity prices.

4. (U) Local and international experts, including FAS/Vietnam, the
UN Food and Agriculture Organization (FAO) Representative in Vietnam
and the World Bank's (WB) Rural Sector Coordinator told Econoff that
they did not fear food scarcities, even among Vietnam's rural poor.
Severin Kodderitzsch of the World Bank noted that his national and
provincial official contacts are "entirely calm" about rising food
prices, and have not yet sounded alarms nor called for WB
assistance. "We have not heard of any instances of shortages,"
added FAO's Andrew Speedy.

DEMAND: LITTLE EVIDENCE OF SHORT-TERM SHIFTS IN CONSUMPTION
------------------------------------- ---------------------

5. (U) Once unable to feed itself, Vietnam has transformed its
agricultural sector to produce more than it needs domestically, and
now exports significant quantities of pepper, coffee, cashews,
seafood products and rice, among other products. Vietnam exported

HANOI 00000498 002.2 OF 003


4.5 million metric tons of rice in 2007, which accounted for roughly
12.8 percent of its total rice production and 20-25 percent of the
rice traded on the international market. Per capita consumption of
rice is currently around 150kg/year; 12 percent lower than ten years
ago (according to FAS/Vietnam's April 2008 Grain and Feed Report).
This change in consumption patterns is largely a result of rising
incomes and greater access to other foods as Vietnam has integrated
into the global market.

6. (U) As world fuel prices and the cost of inputs such as
fertilizer and pesticide continue to increase, Vietnam's GSO reports
that the price of rice has risen 51 percent over the last 12 months,
and 17 percent in just the first three months of 2008. Other key
agricultural commodities have also jumped in price. While national
data is not currently available for individual products, data from
the Ho Chi Minh City Statistics Office provides some indication of
price jumps, reporting that y-o-y meat prices are 59 percent higher,
fishery and seafood products 24 percent, and milk and butter are up
23 percent. Newspapers report that a small number of consumers may
be cutting their consumption of meat products and eating more
lower-cost goods such as vegetables, but there is little evidence of
a widespread shift in consumption patterns. Many of Vietnam's
poorest are subsistence farmers of commodities like rice and are
therefore less affected by rising prices on the market, while others
living close to the poverty line have to date been able to feed
their families despite the higher prices, according to FAO's Speedy.


SUPPLY: NO SIGN OF FOOD SHORTAGES
---------------------------------

7. (U) Despite an earlier cold spell which affected the north and
central regions of Vietnam (REF F), rice production is expected to
remain relatively consistent with last year. Analysts are
predicting only a slight decline in output from 35.36 million tons
in 2007 to 35.21 million tons in 2008, despite an approximately
35,000 hectare drop in the total harvested area for rice. Higher
anticipated yields and a shift to higher-production, more
pest-resistant rice strains should compensate for the reduction in
cultivated land. Government officials and industry observers are
encouraging farmers to increase productivity and switch to higher
yield varieties of rice to ensure domestic food supplies and to
enable Vietnamese farmers, over half of Vietnam's labor force, to
take advantage of higher global prices. Corn production, another
key domestic grain, is expected to increase 8 percent over 2007, as
a result of improved yields and an increased cultivation area,
according to FAS/Vietnam's April Grains and Feed report. In the
foreseeable future, there are no signs of food shortages in
Vietnam.

POLITICAL IMPACT
----------------

8. (SBU) Vietnam is politically stable and calm, despite rising
global commodity prices. Post is not aware of instances where food
prices have led to public protests or outcries. Moreover, many
believe that Vietnam's cuts in rice exports were as much a political
maneuver to demonstrate that the GVN is taking proactive steps to
address the rising cost of living, as they were to bring about real
price reductions. UN Development Program Senior Country Economist
Jonathan Pincus asserted that the GVN instituted the export cap as a
measure of "political stability."

ECONOMIC IMPACT: OPPORTUNITIES AND CHALLENGES
---------------------------------------------

9. (U) Vietnam remains a heavily agrarian economy. Rising global
food prices offer lucrative opportunities for farmers to reap
greater profits on the domestic and international markets.
Professor Dao The Tan, former Director General of Vietnam's
Agriculture Science and Techniques Academy, pointed out that many
agricultural workers are abandoning recent efforts to diversify
their crops to instead increase rice production in response to
skyrocketing world prices. The rising costs of inputs (such as
fuel, fertilizer and pesticides) and transportation, however, are
cutting into these potential gains.

10. (U) On a macro-scale, insomuch as food prices are driving higher
inflation, they are impacting Vietnam's growth. In late April, the
National Assembly approved a GVN proposal to revise the projected
GDP growth rate from the 8.5-9 percent target to seven percent.
National Assembly members would not, however, budge on the poverty

HANOI 00000498 003.2 OF 003


reduction target of 11-12 percent (REF G). National Assembly
Economic Commission Chairman Ha Van Hien directed the GVN to observe
closely the impact of rising prices on Vietnam's farming families
and rural communities, warning that the high inflation rates Vietnam
is experiencing, if not properly addressed, could threaten to erase
the economic benefits they have attained as a result of Vietnam's
recent economic success.

ENVIRONMENTAL IMPACT
--------------------

11. (U) The Ministry of Natural Resources and Environment's (MONRE)
Insitute for Environmental Strategy and the Ministry of Agriculture
and Rural Development's (MARD) Institute for Agriculture Strategy
and Policy report that no research has been conducted on the
environmental impact in Vietnam caused by rising food prices.
Deputy Prime Minister Nguyen Sinh Hung, however, recently instructed
the GVN to look into increasing productivity and land use efficiency
at 130 state-owned farms. Higher food prices and the push for
greater agricultural productivity have drawn into focus Vietnam's
challenge of land allocation. The rush to attract foreign
investment and fuel the modernization of the economy has led to
growing urbanization; rice paddies are overtaken in the interest of
developing new industrial parks and factories. Higher commodity
prices may lead some provincial authorities to re-evaluate recent
land allocation decisions in pursuit of the most profitable use of
that land.

GOVERNMENT POLICY RESPONSE
--------------------------

12. (U) On March 31, Prime Minister Dung unveiled a seven-pronged
strategy to combat inflation (REF B). This was preceded by the
March 26 announcement of rice export cuts -- the first and most
visible action the GVN has taken in response to rising food prices.
In addition to capping exports, the GVN has instructed traders not
to sign new rice export contracts until June, at the earliest, to
ensure domestic supply and depress prices on the local market.
Existing rice export contracts have not been affected. Prime
Minister Dung has also asked the Ministry of Finance to look into
rice export taxes, although it is not clear whether this would be in
addition to or in lieu of the export cap. MARD and MONRE officials
have encouraged farmers to increase productivity to move from
subsistence farming to a level where they can better meet the
growing global demands for agricultural commodities. The
DPM-ordered investigation of land use at state-owned farms is also
part of Vietnam's effort to improve agricultural output, which the
GVN views as a key component of tackling inflation.

IMPACT ON POST PROGRAMS
-----------------------

13. (U) Post has not seen any impact on programs from the rising
cost of food.

POLICY PROPOSALS AND COMMENT
----------------------------

14. (SBU) The causes of Vietnam's inflationary issues are broader
than the food price increases (REFS B, C and D), and any effort to
tackle increasing food prices must be made in tandem with efforts to
address those other factors. FAO and World Bank experts described
Vietnam's rice export cap as "unnecessary," and opined that based on
their past experiences, such a measure will likely not bring about
the GVN's desire for lower prices. These experts suggest instead
increased spending on agricultural research, irrigation projects and
national poverty and hunger reduction programs would be a much more
effective way of holding down prices while staving off concerns over
food shortages. On balance, Vietnam has the potential to reap
benefits from the run up in global food prices, particularly if the
GVN finds a way to tame the soaring inflation rates at home.

15. (U) This cable was coordinated with FAS/Vietnam and ConGen HCMC.

MICHALAK

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