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Cablegate: Czech Republic: Impact of Rising Food Prices

VZCZCXRO9777
RR RUEHAG RUEHAST RUEHBW RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHPG #0258/01 1191451
ZNR UUUUU ZZH
R 281451Z APR 08
FM AMEMBASSY PRAGUE
TO RUEHC/SECSTATE WASHDC 0271
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 PRAGUE 000258

SIPDIS

SIPDIS

STATE FOR EUR/NCE AND EB/TPP/ABT/ATP

E.O. 12958: N/A
TAGS: EAGR ETRD ECON PGOV PREL EZ
SUBJECT: CZECH REPUBLIC: IMPACT OF RISING FOOD PRICES

REF: A. PRAGUE 254

B. PRAGUE 35

1. SUMMARY AND COMMENT: The Czech Republic, like the rest of
Europe, is experiencing a significant rise in food prices but
at a higher rate than the average reported by the EU-27, and
this phenomenon is contributing to the country's record
inflation level of 7.5%. Czech nominal crops output prices
increased 24.7% from 2006 to 2007, compared to the average
EU-27 increase of 12.5%, making it the seventh highest in the
EU after Romania (34.5%), Bulgaria (33.8%), Hungary (32.4%),
Denmark (28.6%), Latvia (26.6%), and Lithuania (26.2%),
according to Eurostat. Despite the rising food costs, Czech
producer and consumer behavior has not yet changed, and there
have not been any public protests or violence. General
public discontent, especially among the significant number of
pensioners in this fast-aging European country, has been
about the general rise in the cost of living, which includes
but is not exclusive attributed to food prices. On average,
Czechs spend approximately 30% of their disposable income on
food, compared to the EU average of 10 - 15%, and the figure
is declining.

2. SUMMARY AND COMMENT CONTINUED: The Czech Association of
Food and Beverage Producers attributes the rise in food
prices primarily to increasing feed, fertilizer, energy and
labor costs. Secondarily, the Association believes food
price increases reflect Czech price convergence with the rest
of Europe, as well as the impact of increasing agricultural
land use for biofuels. While the Czech supply chain and
stocks of food and agriculture commodities remain stable, the
Czechs may use this opportunity to get Brussels to lower
their renewable energy target levels. As reported in ref A,
the Czechs recently committed to increasing its renewable
energy target from 8% to 13% by 2020 as part of the EU
climate change policy. However, the Czechs realize this
target is unrealistic and are looking for a way to
renegotiate with Brussels, and the growing concern about
rising food prices and the resulting discussion about the
wisdom of increased EU biofuel targets provides a convenient
opportunity. END SUMMARY AND COMMENT.

--------------------------------------------- -------
ALL FOOD PRICES RISING EXCEPT FOR PORK, BEEF, VEGIES
--------------------------------------------- -------

3. Nominal agriculture producer prices increased 26.1% and
industrial producer prices increased 5.3% from March 2007 to
March 2008, according to the Czech Statistical Office. A
further breakdown by category is provided below and
additional data is available in English on the Czech
Statistical Office website www.csu.cz. Milk, wheat, pork,
and poultry are the most important foods consumed in the
Czech Republic. In general, the Czech Republic exports raw
food materials and imports value-added food products. 90% of
trade is within the EU-27.

Among agriculture products,
-- Crop product prices rose 34%, mainly due to higher prices
of cereals (55%) and oil plants (60.5%)
-- Fruit prices rose 35.9%
-- Milk, eggs, and poultry prices rose 28.5%, 21.6%, and 20%,
respectively
-- Animal product prices rose 16.3%
-- Potato and vegetable prices fell by 44.6% and 11.3%,
respectively
-- Pork and beef prices decreased 1.2% and 3.4%, respectively

Among industrial products, "food products, beverages and
tobacco" rose 10.8%, of which,
-- "Dairy products and ice cream" prices rose by 17.3%
-- "Prepared animal feed" rose 35.6%
-- "Other food products" rose 8.6%

4. January 2008 inflation data from the Czech Statistical
Office revealed that CPI inflation hit 7.5% year-on-year, the
highest inflation rate since November 1998 and the fifth
highest among EU member states. During the month of January,
CPI inflation rose 3% due to increase in the lower VAT rate
from 5% to 9% for food and drugs, 9.6% rise in electricity
prices, and a 18.9% jump in state-controlled rents. The
Czech National Bank characterized the spike as a temporary
swing sparked by tax changes, increase in regulated prices
(electricity, gas, housing services), and "extraordinary
growth in food prices." With its inflation-targeting policy,
the CNB predicts inflation to ease back to 5.3% by Q4 2008
and 2.4% by Q2 2009.


PRAGUE 00000258 002 OF 002


--------------------------------------------- --------
LITTLE CHANGE IN SUPPLY, DEMAND, OR GOVERNMENT POLICY
--------------------------------------------- --------

5. In terms of consumer demand, some economists believe the
rise in food prices resulted in stagnation of food sales in
November and December 2007. However, the Association of Food
and Beverage Producers report that consumer behavior has not
changed in quantity and selection (i.e., no substitution
effect). On the supply side, cereal farming area has
increased in response to the rise in food prices; the total
area for wheat production has increased 5% from 2006 to 2007.

6. The Czech government has neither engaged in much
discussion nor initiated a policy response to the increase in
food prices. According to the Association of Food and
Beverage Producers, most of the discussion on the topic has
been at the EU-level in Brussels. The main concern for the
Association is the "sandwich effect" felt by food producers
as retail stores (supermarkets) seek lower prices and farmers
are increasing their prices to reflect the rise in feed,
fertilizer, and energy costs. EU biofuel targets are
expected to have significant impact on feed but not food in
the Czech Republic.
Graber

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