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Cablegate: Survey: Impact of Rising Food/Agricultural

VZCZCXRO6441
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHLO #1386/01 1371451
ZNR UUUUU ZZH
P 161451Z MAY 08
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 8648
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS SECTION 01 OF 03 LONDON 001386

SENSITIVE

SIPDIS

DEPT FOR EEB/TPP/ABT/ATP JANET SPECK

E.O. 12958: N/A
TAGS: EAGR EAID ETRD ECON PGOV PREL
SUBJECT: SURVEY: IMPACT OF RISING FOOD/AGRICULTURAL
COMMODITY PRICES -- UNITED KINGDOM

REF: STATE 00039410

1.(SBU) Summary: Rising food prices have pushed the UK's
consumer price index to three per cent; one per cent
higher than the government's target of two per cent.
Consumers' food bills are increasing, and food imports to
the UK have not grown. UK farmers have increased grain
production, but are not profiting from increased prices.
Higher inflation is not undermining the government, but
contributes to the growing loss of public confidence on
PM Brown's ability to manage the economy. The British
public is not highly supportive of biofuels. The Prime
Minister hosted a "food summit" and HMG is offering an
aid package for countries experiencing food shortages.
This cable follows the outline of questions contained in
ref a. End Summary.

Demand
------

2. (U) Rising UK food prices are expected to add
approximately GBP 572 ($1,144) to a family's annual
grocery bill according to the price comparison website
mysupermarket.co.uk. Figures released by the Office for
National Statistics (April 14) showed wholesale food
prices rising by 8.5 per cent over the last year.
According to MySupermarket.co.uk, a basket of 24 staple
foods has risen by an average of 11 per cent in the past
12 months. To an average family of four with a weekly
grocery bill of GBP 100 ($200), this increase represents
an increase of GBP 572 per year. According to the Index
of Producer Prices of Agricultural Products (2000=100),
the price of cereals increased from 135.5 to 236.4
between February 2007 and February 2008. Over the same
timeframe, fruit increased from 135.4 to 153.9,
vegetables increased from 138.8 to 152.5, and industrial
crops (potatoes, sugar beet, oilseed rape) increased from
115.8 to 260.8. The Index of Purchase Prices of the
Means of Agricultural Production (2000=100) shows that
animal feedingstuffs have increased from 118.3 in
February 2007 to 163.5 in February 2008. Statistics have
not yet been published as to how these price increases
will change consumption patterns.

3. (U) The most recent balance of trade statistics
(February 2008) show imports of food and drink falling,
having increased throughout 2007. However, since 1995
the UK's trade gap in food, feed and drink has widened by
66.6 per cent. The value of imports in 2005 was GBP 23.4
billion ($46.8bn) compared to GBP 9.9 billion ($19.8bn)
for exports. The UK is currently 58.1 per cent self
sufficient. Since 1995 self sufficiency in all food has
decreased by 21.2 per cent (Source: The Department for
Environment, Food and Rural Affairs). The group for
which the UK has the largest trade deficit is fruit and
vegetables while the smallest trade deficit is with
drinks. Non-indigenous type commodities accounted for 39
per cent of total food, feed and drink imported to the UK
in 2005.

Supply
------

4. (SBU) Real returns to UK farmers are not growing at
the same rate as wholesale retail food inflation,
limiting their reaction to rising prices. However, UK
grain farmers have increased the area planted to arable
crops, the increased prices available being one of a
number of drivers. In the case of wheat, anecdotal
evidence also indicates an increase in the proportion of
high-yielding (but lower quality) variants planted. UK
livestock producers are becoming increasingly vocal about
the increased feed costs with the hog sector going so far
as to suggest that mainstream production might cease in
the UK. Higher input costs have generally reduced
producer margins as retailers are hesitant to increase
prices. In the arable sector there is an increased
willingness to spend capital on more expensive inputs.
However, UK farming in general is coming out of a period
of very low to negative returns. Therefore, debt
management is superseding new investment.

5.(U) The EU's compulsory set-aside requirement has been
reduced to 0 per cent. (Note: Previously, farmers in the
EU needed to leave ten per cent of land fallow so that it
recovers between crops. End note.) Recent government
figures suggest that around half of the UK land that was

LONDON 00001386 002 OF 003


in set-aside has been taken back into food production -
about half a million acres. Additionally, while prices
of commercial and residential properties are falling in
the UK, the price of agricultural land is soaring. Good
quality arable land that was fetching GBP 3,000-3,500
($6,000-$7,000) per acre 18 months ago is now getting
twice that. The National Farmers' Union directly
attributes the price increases to global food shortages
and therefore the real value of food production.

Domestic Politics
-----------------

6. (SBU) The Labour government's stability is not
undermined by food price inflation. However, Prime
Minister Brown's economic reputation, which has recently
come under close scrutiny due to factors such as its
response to the crisis at mortgage lender Northern Rock
and its unpopular tax reforms, could be the subject of
further criticism if inflation remains above the UK's
target of 2 per cent for a sustained period.

7. (SBU) Public attitudes toward biofuels are changing as
organizations such as Oxfam, Greenpeace and Friends of
the Earth question not only their environmental impact
but also their impact on global food prices. In a recent
YouGov poll, commissioned by Friends of the Earth, among
the 55 percent of people questioned who knew what
biofuels were, fewer than one in seven thought they are
the best way to reduce emissions from road transport. At
an macroeconomic briefing by Oxford Economics (April 30),
a consultancy firm, analysts said they expect HMG to not
only review, but to change, its biofuel policy over the
duration of 2008 as people begin to realize biofuels "are
a stupid idea".

Economy
-------

8. (SBU) The most notable impact of rising food and
agricultural commodity prices has been on inflation. In
April 2008, inflation was 3 per cent, one percentage
point above HMG's target inflation rate. Oxford
Economics analysts expect inflation to reach 3 per cent
in 2009. Core inflation has actually been falling and
wage inflation has remained subdued, therefore increases
in CPI can be largely attributed to food and energy
prices. The Bank of England expects the impact of rising
food prices to feed through into higher inflation in the
short term but expects inflation to return to 2 per cent
in the medium to long term, according to its February
Inflation Report. According to the World Bank, the UK
will be a moderate loser in terms of the impact of
projected food price increases on trade balances in 2008.
Its trade balance is expected to worsen by less than 1
per cent of 2005 GDP.

Environment
-----------

9. (SBU) Rising food prices per se have not had an
appreciable impact on the environment and ecosystems of
the UK, including land use patterns, water use, soil
quality, and deforestation. Rising demand for organic or
sustainably raised vegetables, poultry, meat and dairy
products is driving interest in lower use of pesticides
and fertilizers, which would contribute to better water
and soil quality.

Host Government Policies
------------------------

10. (SBU) An April 22 summit hosted by PM Brown addressed
increases in food prices. Participants agreed that
action needed to be taken both for immediate social
protection and longer-term agricultural investment and
that care should be taken not to talk up a "crisis." The
UK press release following the meeting included a broad
range of proposed actions that the UK plans to pursue
both domestically and internationally. HMG will increase
support to the poorest. In addition to the GBP 50
million ($100m) per year it spends on social protection
and safety net programs in Africa, HMG pledged an extra
GBP 30 million ($60m) to support the World Food Program,
and an extra GBP 25 million ($50m)to Ethiopia for their
national safety net program. HMG also said it would work
in the G-8 for an international strategy and will work to

LONDON 00001386 003 OF 003


achieve a successful WTO deal, including a substantial
'aid for trade' package to help build the trading
capacity of the poorest countries. Additionally, the UK
will work within the EU to further reform the EU's Common
Agricultural Policy (CAP). HMG estimates that the CAP
cost UK consumers GBP 3.5 billion (47b) in 2005 through
higher prices. Reductions in tariffs and CAP reform
would reduce the cost of food to EU consumers and
increase the capacity of developing countries to produce
and export agricultural commodities.

11. (SBU) Domestically, HMG said it will work with
consumer groups, food producers, manufacturers and
retailers to address domestic price rises. It will also
increase research into improving yields. It announced
new funds for agricultural research over the next five
years. HMG also committed to reviewing its approach to
biofuels. It will review its impact on food prices and
the environment. If the review concludes that a
different approach needs to be taken, HMG will push for a
change in EU biofuels targets.

12. (U) Also on April 22, the Department for
International Development (DFID) announced a GBP 455
million ($910m) five-year aid package to address rising
global food prices. The package is designed to address
both short term needs and long term solutions. The UK
aid package includes: $60 million in support of recent
appeals by the World Food Programme for countries most at
risk; $800 million (GBP 400 million) over five years
devoted to agricultural research, that will double DFID's
current spend and help poor countries grow more food for
themselves; and $50 million (GBP 25 million) this year to
boost the incomes of the poorest people in Ethiopia.


Post Programs
-------------

13. (U) Rising food and agricultural commodity prices
have not affected post programs.

TUTTLE

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