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

VZCZCXRO8407
RR RUEHROV
DE RUEHDS #1228/01 1291103
ZNR UUUUU ZZH
R 081103Z MAY 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 0502
INFO RUCNIAD/IGAD COLLECTIVE

UNCLAS SECTION 01 OF 03 ADDIS ABABA 001228

DEPT FOR EEB/TPP/ABT/ATP JANET SPECK AND AF/EPS

SIPDIS

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

Ref: State 39410

1. SUMMARY: Ethiopia is witnessing significant food inflation.
However, this inflation appears to be caused primarily by internal
forces rather than global market forces. An expected poor upcoming
Belg season harvest is likely to exacerbate further the
already-tenuous food situation. The U.S. Agency for International
Development (USAID) and other donors are providing significant
programmed food assistance with an anticipated need for more this
year due to drought and rising prices. END SUMMARY.

2. DEMAND: Ethiopia's essential foods are cereals (maize, wheat,
sorghum, and the indigenous teff), oilseeds, and pulses (lentils,
chickpeas and horse beans). Prices of key commodities have risen
significantly, with food inflation in excess of 70% in the last
three years. Food inflation rose by 39.4%, on an annualized basis,
in March alone. In commercial terms, Ethiopia is not a significant
importer or exporter of cereals. Its dependence on domestic food
production and humanitarian food aid essentially insulate it from
world food price fluctuations. The country continues to suffer from
food deficits, and a significant amount of wheat is imported each
year mostly in the form of food aid with some small commercial
purchases. The Government of Ethiopia (GoE) has banned the export
of cereals, but the impact on prices from that ban is minimal as the
level of exports was small. The GoE has also banned the local
purchase of food for food aid programs. Ethiopia is a net exporter
of oilseeds, mainly sesame seed and niger. While oilseeds themselves
are not imported, the country's local edible oil industry is
moribund due to the high price of inputs and large amounts of edible
oils, especially palm oil, that are imported. The country exports
certain legumes, particularly white beans.

3. Maize is the main cereal consumed by rural populations. Teff is
primarily consumed by urban dwellers with higher incomes. There is
evidence of an overall shift to wheat from teff and maize with price
increases in the latter two coupled with growing urbanization.
Recently, increased demand for milled flour and bread along with
better information available to farmers and fears of a poor upcoming
harvest has shifted the price of wheat even higher. The rising cost
of wheat is having a particular impact on the urban poor.

4. A number of factors have increased market demand. Double-digit
GDP growth and aid programs including the productive safety net
program (PSNP), which provides food and/or cash assistance to the
most vulnerable population, have increased rural incomes from 592
birr per capita in 2004/5 to 691 birr per capita in 2006/7. The
National Bank of Ethiopia suggests that rural consumption patterns
now more closely resemble urban consumption, thus boosting demand
and raising prices. Rapid population growth (2.7% per year) puts
additional stress on the market from the demand side.

5. SUPPLY: Agricultural production in Ethiopia can be described as
"sticky" and slow in its ability to respond to market forces.
According to an economic analysis (Bellmon Analysis) performed in
early 2008, cereals production has increased 43% in the last three
years due largely to good rains and an expansion of the area under
cultivation. Consumption of pulses has risen over the last four
years partly due to substitution away from meat and partly due to
increased purchasing power; production has risen to address this.
In the Bellmon Analysis, farmers reported increased cultivation of
grains and pulses, but the associated field visits did not find
evidence of the increase. In general, Ethiopian agriculture is
based on small-holdings and obtaining additional land - controlled
and allocated by the state - to respond to price increases is very
difficult. Additionally, state control of inputs (seed and
fertilizer) along with inefficient distribution, hampers the ability
to respond.

6. The Prime Minister of Ethiopia has cited concern that farmers and
merchants are hoarding staples in order to "enrich themselves
illegally." A Bellmon Analysis update performed in April 2008 found
that farmers were holding, on average, the equivalent of three
months household consumption for a family of five. As rural incomes
rise, farmers are no longer dependent on selling upon harvest, when
prices are at their lowest, and instead are able to delay sales to
take advantage of higher prices later in the season. Farmers
indicated that they do plan to sell much of this stockpile. The
update also discovered that, rather than hoarding, traders were
actually unable to obtain the stocks of grain they anticipated. The
traders attributed this to the rise of independent Isuzu truck
drivers who are scouring the countryside for 5-10 metric ton loads
of grains and selling them to individual contacts at prices set via
mobile phone.

7. The expansion of mobile telephone coverage now allows rural
farmers and traders greater access to market information. Thus, the
traditional pattern of a "fire sale" immediately after harvest is
further being replaced by selling commodities over time in response
to market fluctuations. While this does have the effect of raising
overall prices, it must be viewed as a positive sign of market
development in the agricultural sector and a reduction on rural

ADDIS ABAB 00001228 002 OF 003


poverty. Ethiopia has inaugurated a commodities exchange, but due
to concerns over speculation the exchange will not allow the sale of
futures.

8. POLITICAL IMPACT: To date, there have been no public protests or
violence over food costs, although one small demonstration regarding
overall inflation was reported. The ruling party handily won the
recently-completed local elections and seems to have a firm grasp on
power. There have been clashes between the Guji Oromo and Sidama
clans which have been attributed to competition for land for grazing
and growing khat, indicating stress in these populations. There are
several large biofuel projects underway, but to date they do not
seem to be taking place on land previously used for growing food
crops, thus public reaction is generally positive.

9. ECONOMIC IMPACT: The Bellmon Analysis concluded, and other
experts concur, that Ethiopia is relatively insulated from global
commodity prices (apart from the associated impacts of global oil
prices captured in transportation costs), and the fluctuations are
due to internal macroeconomic factors. When cereal price movements
are compared against the non-cereal index, it shows that most of the
food price increase is associated with overall inflation and not a
result of supply and demand. Thus, food is following an overall
(and recent) rise in inflation. For February and March 2008, data
shows that cereal prices are beginning to rise faster than the
overall rate of inflation. Reasons cited for the increased overall
inflation include an expanded money supply, the increased purchasing
power and market knowledge of the rural population, and the increase
in import prices (especially petroleum). IMF ResRep Arnim
Schwidrowski argues that the additional rate of food inflation may
be attributable to a particularly high income elasticity of demand
for food in Ethiopia (i.e. as incomes rise, the people but more and
better quality food). Global petroleum prices are also affecting
Ethiopian food prices by driving up the cost of fertilizer.

10. The food price impact is greatest on the urban and rural poor -
those who cannot produce food for themselves and must purchase it.
Despite overall GDP growth and the rise in rural incomes, these
groups area increasingly unable to meet their nutritional needs at
rising prices. An estimated 9 million people are currently in need
of food assistance. There have been press reports relating the
decrease in the ability of even middle-class Ethiopians to keep up
with rising prices. Sources have been quoted as saying they have
reduced their meals to two per day, have stopped purchasing meat,
and have cut back on the amounts of pulses and vegetables they
consume.

11. ENVIRONMENTAL IMPACT: There is no current information on the
environmental impact of rising food prices.

12. GOVERNMENT POLICY RESPONSE: The GoE has responded to food
inflation by subsidizing wheat and cooking oil to the urban poor,
banning grain exports, eliminating the value added tax on grains,
and instituting a task force to root out "illegal traders" who
speculate in commodities. Cereals traders are now required to post
prices clearly. All land is owned by the state. There have been no
verified reports of farmland being redistributed or any food-related
industries being nationalized. The National Bank of Ethiopia is
struggling to control overall inflation that has soared to nearly
30% on an annualized basis.

13. IMPACT ON POST PROGRAMS: Both local and global inflation have a
major impact on USAID's projects in Ethiopia, especially the food
aid program. With a serious drought this year, the GoE is not
allowing local purchase, so that donors are buying food regionally
and internationally. However, given that inflation is global, cash
donations procure less food. Since USAID ships food aid in kind
from the U.S., global inflation definitely impacts on how much can
be procured. USAID's Office of Food for Peace reports that commodity
prices have increased 41% in FY08 and that ocean freight rates have
increased by 26%. Ethiopia's food aid program is the second largest
in the world, with $196 million contributed so far in FY08. Overall
global inflation will have an impact on the amount of food that can
be purchased and shipped in upcoming periods. USAID recently
received $200 million in relief funds from the Emerson Trust and is
hoping for additional supplemental allocations to meet worldwide
emergency food needs. Ethiopia's food inflation has also
significantly eroded the purchasing power of Post's Locally Engaged
Staff (LES). While the Department has approved an 8.5% cost of
living salary increase for our LES colleagues, this has done little
to counter the 70% food inflation rate experienced since 2004.

14. POLICY PROPOSALS: Because commodity prices in Ethiopia are
rising due to indigenous factors, primarily overall inflation, the
GoE needs to undertake measures to curb rapidly rising inflation.
Indicators point to excess liquidity in the market, onerous foreign
exchange regimes and the heavy state role in the agricultural supply
system as threats to economic stability. In addition to working to
stabilize the overall economy, the GoE should continue its efforts
in conjunction with USAID and other donors to increase the capacity
of Ethiopian farmers to produce more and better crops. Further,

ADDIS ABAB 00001228 003 OF 003


reforms such as encouraging private sector participation in the
supply of inputs (fertilizer and seed) and land tenure reform to
allow farmers to leverage their holdings to improve their land and
crops could alleviate supply pressure and rigid supply response.

15. COMMENT: While food prices in Ethiopia are soaring, they are not
moving upward primarily due to global shocks. Instead, Ethiopia's
overall skyrocketing inflation coupled with increased demand and
relatively stagnant supply are creating the country's own "perfect
storm" for rising prices. While rising global prices will have an
effect on the ability of the U.S. and other donors to provide food
aid in the quantities needed, Ethiopia's homegrown crisis must be
addressed internally. END COMMENT.

YAMAMOTO

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