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Cablegate: Impact of Rising Food Prices in Costa Rica

VZCZCXYZ0000
RR RUEHWEB

DE RUEHSJ #0347/01 1261536
ZNR UUUUU ZZH
R 051536Z MAY 08
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC 9664
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS SAN JOSE 000347

SENSITIVE

SIPDIS

DEPT FOR EEB/TPP/ABT/ATP JANET SPECK; PLEASE PASS TO USDA

E.O. 12958: N/A
TAGS: EAGR EAID ETRD ECON PGOV PREL CS
SUBJECT: IMPACT OF RISING FOOD PRICES IN COSTA RICA

REF: STATE 39410

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SUMMARY
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1. (U) Costa Rica has experienced rising food prices which have had
minimal political impact to date. There have been no food
shortages, although local price increases have been high as Costa
Rica imports 100 percent of its wheat, yellow corn, and soybean
consumption; 50 percent of its rice consumption; and 66 percent of
it bean (pulse) consumption. The regulated price of rice in Costa
Rica has been high by international standards in recent years, so
the impact of the recent rise in world prices has been muted. In
spite of food price increases, substitution by consumers has not
occurred thanks to wage gains, although wages generally have not
kept pace with the recent rise in prices. Most producers have not
abandoned planting of higher margin, non-staple goods. In political
terms, reports of shortages and sharp price increases in other
countries attract the most media attention, and President Arias's
May 1 State of the Nation address mentioned the global food and
energy concerns. Media focus on the pinch on the Costa Rican
pocketbook and domestic food security concerns is gaining strength,
however.

2. (U) As for policy changes, the leading opposition party has
suggested a more interventionist governmental response, but we do
not expect a drastic change in the GOCR's relatively market-oriented
approach any time soon. The GOCR is planning to play an indirect
role in increasing the share of profits received by producers. In
the mid-term, the GOCR has announced 2010 production target goals
for rice, white corn, and beans. For the longer term, the GOCR
wants to improve efficiencies through research, technology transfer,
and infrastructure in an effort to improve productivity and raise
production levels of rice and bean crops. Note: This cable
reflects the combined efforts of our Economic section, FAS office
and Regional Environmental Hub. END SUMMARY.

-------------------------------
FOOD PRICE TRENDS IN COSTA RICA
-------------------------------

3. (U) In accordance with reftel, Post prepared the following
report:

Begin Report

DEMAND: Costa Rica's food consumption pattern is that of a
moderately affluent nation generally open to international markets.
The nation has posted progressive gains on the FAO consumption
measure of grams per person per day relative to its Central American
(CentAm) neighbors since the late 1960's. For the most recent
period of data reporting, Costa Ricans consumed over thirty percent
more food per day than their neighbors, see below:

Food Consumption: Grams per Person per Day

Costa Cent
Year Rica Am Index
---- ------ ---- -----
1969-1971 1259 1169 1.08
1979-1981 1411 1267 1.11
1990-1992 1735 1352 1.28
1995-1997 1732 1333 1.30
2001-2003 1914 1452 1.32

Source: FAO

Rice and beans are dietary staples, but, when compared to the
region, the Costa Rican diet is notably different. Costa Ricans
consume relatively more fruits, dairy products, and vegetable oil
and consume relatively less grains and beans than their neighbors
(see table below):

Food Consumption: Percentage of Grams per Person per Day
By Food Group, 2001-2003

Costa Cent
Food Group Rica Am Index
---------- ----- ----- -----
Alcohol 2.9% 4.5% 0.65 (-)
Animal fats & prods 0.6% 0.7% 0.83
Cereals & products 15.9% 23.0% 0.69 (-)
Dairy products 25.4% 18.5% 1.38 (+)
Fish, seafood & prod. 0.9% 1.2% 0.76
Fruits, Nuts, Spices 24.9% 21.4% 1.16 (+)
Meat & prod. 6.1% 6.3% 0.97
Offals edible 0.3% 0.3% 0.95
Oilcrops, excl. prod. 0.6% 1.0% 0.65 (-)
Pulses & products 1.5% 2.3% 0.65 (-)
Starchy roots & prods 3.8% 3.5% 1.07
Sugar & Beverage Crops 8.8% 8.6% 1.03
Vegetable oils & prod. 1.8% 1.5% 1.17 (+)
Vegetables & products 6.5% 7.3% 0.89
Total 100.0% 100.0%

Source: FAO
(+) denotes Costa Rican is significantly higher than the region
(-) denotes Costa Rican is significantly lower than the region

As measured in the local currency, the rise in price of the basic
"market basket" of foodstuffs paralleled minimum wage increases from
March 2006 to March 2007, with food prices rising 13.2 percent while
the minimum wage increased 12.7 percent. However, the rise in food
prices outstripped the rise in wages from March 2007 to March 2008,
23.9 percent versus 10.5 percent.

Rice is the only agricultural commodity under government price
controls. A two kilogram bag of 80 percent whole grain/20 percent
broken grain rice costs CR colones 888 (USD 1.79) at retail and the
March 2007-2008 12 month price increase was 14 percent, or barely
more than wage increases. (Prices of other grades of rice are not
controlled.) Price increases in sugar products averaged less than
wage increases in 2007-2008. Sugar demand is met by local
production. Most locally consumed animal products are produced in
the country. To date, the population has not changed its
consumption pattern of the main staples, even though some prices
have increased sharply.

SUPPLY: There is no shortage of food in the country at this time.
Costa Rica imports all the wheat, yellow corn, and soybeans it
consumes. It also imports roughly 50 percent of the rice it
consumes. Beans, another important staple, are locally produced but
roughly two-thirds of total consumption is imported. Almost all
imports of wheat, corn, soybeans, and rice originate in the U.S.
Black bean imports come primarily from Nicaragua (which reportedly
has imposed export restrictions) and China. Over the years, many
farmers shifted production from staple crops with lower relative
productivity such as corn and beans to more profitable crops such as
citrus, melons, or even beef cattle production. Most of these
farmers are not likely to go back to corn or bean production, unless
the long-term market outlook suggests that these crops will generate
greater profits.

Despite strong world prices, Costa Rican rice production has not
experienced a significant change so far. Current official rice
prices are as follows:

- farmers sell rice in the hull for $407 per ton;
- processors sell hulled rice for $790 per ton;
- wholesalers sell hulled rice for $814 per ton; and
- retailers sell 80/20 grade rice in kilogram packaging based on
$895 per ton.

Since these prices are set by the GOCR, are supposedly based upon
the cost of local production, are also influenced by consumer
considerations, and do not change frequently, producers making
planting decisions now are somewhat sheltered from the price signals
world markets are sending. As a result, area planted to rice may
not expand as much would be expected in a less regulated
environment. CONARROZ, the corporation made up of rice producers
and millers, has asked the GOCR for a 20 percent price increase to
be implemented in coming months. Whether the GOCR will approve the
full increase remains to be seen.

In general, the price increase of commodities such as soybeans,
yellow corn, and wheat are transferred to the consumer. The degree
to which this is happening depends on the cost structure of each
particular value-added industry, and the degree of protection from
import competition that each enjoys. For example, imported grains
constitute up to 85 percent of the cost of pork production, but
processors are reportedly not paying significantly higher prices to
producers who tend to be small and lack pricing power. Other
sectors such as poultry or dairy are vertically integrated, with the
larger and stronger companies directly importing grains, processing
them, and supplying their own feed production. Moreover, tariffs on
poultry and dairy products run as high as 150+ percent. Thus, these
producers can better manage rising costs and ultimately pass
significant cost increases to the consumer.

POLITICAL IMPACT: To date, the Costa Rican discussion regarding
food prices and quantities has been framed primarily by reports of
shortages and sharp price increases in other countries. The profile
of the issue has risen in the media since the World Bank, United
Nations, and other multilateral institutions highlighted the issue
at the recent IFI meetings in early April. The recent announcement
by Sam's Club (Wal-Mart) and COSTCO that they are limiting retail
sales of rice in the U.S. received considerable attention in the
local media.

Post knows of no public protests or violence resulting from food
price increases. However, popular awareness of events is starting
to catch up with the rest of the world. The developing story line
in the media has emboldened some in the agricultural sector (most
notably rice growers) and in the political classes (most notably the
leading opposition party -- Partido de Accion Ciudadana, PAC) to
pressure for a more interventionist governmental response that goes
beyond the Arias Administration's relatively market-oriented
approach.

ECONOMIC IMPACT: The impact of rising food prices is lessened by
Costa Rica's relative prosperity. The National Statistics Institute
found that unemployment in July 2007 had dropped to 4.6 percent, the
lowest in over a decade. The economy has remained strong since
then; for example, the number of tourists visiting Costa Rica in the
first quarter of 2008 was 17 percent higher than the previous year.


Home survey data from 2004 shows that for the poorest 20 percent of
the Costa Rican population, 46 percent of consumer spending is on
food, as contrasted with 21 percent spent on food for the wealthiest
20 percent of the population. For the population as a whole, 30
percent of consumer spending is on food. Food prices have not had a
noticeable effect on macroeconomic variables.

ENVIRONMENTAL IMPACT: Adviser to the Minister of Environment Ana
Luisa Leiva noted that rising food prices have not had a noticeable
environmental impact to date. Furthermore, Ministry of Agriculture
representatives stress that any increases in area cultivated for the
principal crops of interest would not come at the expense of forests
or protected areas.

GOVERNMENT POLICY RESPONSE: Most staple crops already enjoy low
import duties: one percent on wheat, corn, soybeans, and rice
imported by CONARROZ to meet the gap between production and
consumption. (Note: other rice importers must pay a 35 percent
duty.) Therefore, the cost of imports is determined by the
international market and the cost of transport. So far, the
government has not imposed export restrictions on any agricultural
product.

The broader trends of food prices are not lost on the head of state
as President Arias mentioned global food and energy concerns in his
May 1 State of the Nation address. From the perspective of Ministry
of Agriculture officials, the GOCR is planning to play an indirect
role to try to facilitate relations between producers and
industrials or producers and middlemen with the goal of increasing
the share of the profits received by producers. In the medium term,
the GOCR announced at the end of April the outline of a program that
would achieve certain production targets within two years: local
production would meet 80 percent of the demand for rice and 70
percent of the demand for white corn and beans. However, the
mechanics of such a plan remain unclear. For the longer term, the
government wants to improve research, technology transfer, seed
quality, and infrastructure, in an effort to improve productivity
and higher production levels. In addition, the GOCR is also
evaluating options to reduce transportation costs between the main
grain port (Caldera on the Pacific) and processing facilities, many
of which are located in the Central Valley. The GOCR has not
undertaken any new initiatives to assist segments of the population
that are vulnerable to food price increases.

End Report.

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COMMENT
-------

4. (SBU) Rising international agricultural commodity prices
increasingly impact the Costa Rican pocketbook directly and
indirectly. The PAC's use of food prices as a bargaining chip and
rhetorical aid could prove to be politically volatile, although
their oratory is mostly posturing at the moment. Rising food prices
could bolster the popularity of the notion of food "security"
defined as self-sufficiency, or production meeting 100 percent of
consumption. This definition, which has been refuted by GOCR
officials and some economists in the media, has great emotional
appeal and could strengthen the hand of those who oppose trade
liberalization, including CAFTA, and those who seek greater
government intervention in theQgricultural sector. If Qe global
food challenges reach crisis level, especially if other Central
American countries are hard hit, and if the domestic debate
continues heating up as the CAFTA-DR legislative agenda progresses
toward a critical juncture between July and September, food price
issues could complicate CAFTA implementation.

5. (U) From the broader economic perspective, the rise in food
prices will likely continue to fuel overall inflation. Those hit
hardest will be individuals already near or below the poverty line
who are not experiencing strong wage gains (and are not likely to).
Consumers in this segment will have to make tough purchasing
decisions about how to feed their families when they visit their
local "pulperia" or "super."
BRENNAN

© Scoop Media

 
 
 
 
 
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