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Cablegate: Portugal: Impact of Rising Food/Commodity Prices

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RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHLI #1234/01 1441615
ZNR UUUUU ZZH
R 231615Z MAY 08
FM AMEMBASSY LISBON
TO RUEHC/SECSTATE WASHDC 6844
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 LISBON 001234

SIPDIS

E.O. 12958: N/A
TAGS: EAGR EAID ETRD ECON PGOV PREL
SUBJECT: PORTUGAL: IMPACT OF RISING FOOD/COMMODITY PRICES

REF: STATE 39410

1. SUMMARY: When it comes to rising cost of food and
agricultural commodities, Portugal is one of the most
vulnerable member-states in the European Union (EU). In fact,
the average Portuguese family will spend 620 euros (974 USD)
more for food in 2008 - a 38% increase over 2007. This
vulnerability is largely due to Portugal's heavy dependence
on agricultural imports and high import duties. Portugal
hopes that by increasing the land available for cultivation,
it will be able to boost domestic production. Temporary EU
measures to lift certain duties should also ease the burden
somewhat. However, current economic conditions suggest that
Portugal will need to look at more long-term shifts in policy
and technology in order to alleviate continuing price
pressures on agricultural commodities.

-----------------
THE VULNERABILITY OF IMPORT DEPENDENCE
-----------------

2. Portuguese households spend over 19% of their income on
food, a relatively high proportion compared to the 15%
average among EU member states. The only category of
expenditure that is higher is transportation, at 20.6% of the
average family's budget. Nearly every single staple of the
Portuguese diet increased in price over the past 12 months,
as reflected below by the Portuguese National Institute for
Statistics (INE). A recent Portuguese study predicts that
food costs will increase 620 euros (974 USD) per family in
2008 -- a 38% increase over 2007.

Price Change in Staples in 2007 (over 2006)
--------------

Dairy (Milk, Cheese) 14.0%

Eggs 14.0%

Bread 9.0%

Wheat 2.1%

Vegetables -15.0%


Note: The exception to the inflationary trend is a 15% drop
in the price of vegetables, explained by the Portuguese
Ministry of Agricuture as largely due to the competitive
trade between Portugal, and nearby producers such as Spain,
and North African countries such as Morocco. End Note.

3. Portugal's gradual but steady decline in the agricultural
sector drives its deepening dependence on imports and growing
sensitivity to world commodity markets. Portugal's
agricultural imports comprise 14% of total imports. Cereals
and grains is an area of particular vulnerability, with
imports increasing by an average of 44% in 2007, detailed
below by INE. The Confederation of Portuguese Farmers (CAP)
estimates that Portuguese farmers produce only 8% of the
cereals and grains required for domestic consumption.

4. Portugal imports many of its cereals and grains from
within the EU. South American countries such as Brazil and
Argentina represent a second source of cereals and grains
into Portugal. For example, Portugal imports more soybeans
from Brazil than any other country -- nearly four times the
volume of soybeans that it imports from the United States.
South American countries also dominate the corn market in
Portugal, a traditionally strong export crop for the United
States.

Increases in Select Cereal and Grain Imports, 2007 (over 2006)
----------------

Soy 87%

Rice 74%

Corn 31%

Wheat 131%


5. The Portuguese feed industry is particularly sensitive to
pricing pressures on cereals and grains. The approach of the
livestock industry to this upward price trajectory is to
embrace biotechnology and push the EU for the timely approval
of biotech events for import. It is the vocal position of
the Portuguese Association of Feed Producers (IACA) that
European livestock producers will be unable to compete in the
long-term with countries where biotech crops are more readily
available for use as feed.

LISBON 00001234 002 OF 002

-----------------
SHARP INFLATION AND THE "NEW POOR"
-----------------

6. The annualized inflation rate of 3.1% as of March 2008
continues to stoke deep concerns that the economy will
continue to underperform. Rising commodity prices constitute
23% of total inflation in Portugal. The vulnerability of the
Portuguese economy to "agro-flation" is heightened by the
heavy dependence of Portugal on imports in food and beverages
-- standing at a full 4% of the GDP. The pressure continues
to mount in ways one would expect. For example, government
employees recently requested that their cost of living
adjustment reflect the actual inflation rate and not the more
modest 2.1% that had been predicted.

7. The head of the NGO Banco Alimentar Contra A Fome (Food
Bank Against Hunger) states that rising commodity prices are
giving rise to a "new poor." In contrast to certain sectors
of the society that have traditionally felt the effects of
poverty, such as the elderly or very young, this category of
"new poor" includes employed people who struggle to pay for
basic foodstuffs, transportation, and housing. INE's most
recent statistics calculate that nearly two million people in
Portugal, a full 20% of the population, fall below the
poverty line.

-------------------------
TWEAKING POLICY NOT LONG TERM SOLUTION
-------------------------
8. The Government of Portugal (GOP), as an EU member state,
hopes to see benefits from two measures taken at the EU level
by the end of 2007. First, the EU decided to temporarily
suspend customs duties for cereals. It also decided to
abolish the compulsory set-aside regime for cereals and other
products, under which certain tracts of land must remain
fallow. This suspension is for an initial period of one year
and will be reviewed under the French EU Presidency later
this year. Furthermore, Portugal is hoping that the higher
price of cereals within the EU will prompt farmers to produce
more domestically.

9. The GOP continues to be a leader in the EU in advocating
biotechnology as a way to address agricultural shortages. It
is pushing for a quicker and more predictable approval
process in Brussels, as well as for greater acceptance of
scientific oversight of the European Food Safety Authority
(EFSA). The Ministry of Environment continues to express its
reservations about increased cultivation of biotech crops in
Portugal, though recent monitoring studies by the Ministry of
Agriculture go far in documenting the safety of biotech
cultivation.

------
COMMENT
------

10. As the 2009 national elections approach, the Portuguese
government will grow increasingly nervous about the political
implications of rising food costs unless the EU measures
designed to stimulate domestic production and stabilize
prices, described in paragraph 8, begin to yield concrete
results in the near-term. While Portugal may experience some
short-term relief from the temporary lifting of import taxes
and of the set-aside regime, Post believes that leaps in
agricultural productive capability will come from new
biotechnologies. A more efficient, transparent, and
predictable process for approving the cultivation and import
of biotech crops into the EU is absolutely essential for
sustainable long-term agriculture, and Post continues to
encourage Portugal in its pro-biotechnology stance.
Stephenson

© Scoop Media

 
 
 
 
 
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