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

VZCZCXRO1360
RR RUEHLMC
DE RUEHMU #0664/01 1432249
ZNR UUUUU ZZH
R 222249Z MAY 08
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 2650
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHSUN/USUN ROME IT 0006
RHEFDIA/DIA WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RUEHCV/AMEMBASSY CARACAS 1265
RUMIAAA/CDR USSOUTHCOM MIAMI FL
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS SECTION 01 OF 04 MANAGUA 000664

SENSITIVE
SIPDIS

STATE FOR WHA/CEN, WHA/EPSC AND EEB/TPP/ABT/ATP
STATE PASS TO USAID
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR
USDA FOR OFSO - FLEE AND FOR OCRA - YWEDDERBUN AND JSLETTE
USUN ROME FOR AMB. VASQUEZ AND LDEVALCOURT

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

REF: A) MANAGUA 610, B) STATE 39410, C) MANAGUA350, D) 07 MANAGUA
2375

Summary
-------

1. (U) As an agricultural country, in which more that the half of
population lives in poverty, Nicaragua is both helped and hurt by
the current rise in food commodity prices. The most important food
commodities for human consumption are rice, beans, white corn, and
wheat. Three quarters of Nicaraguans are net food consumers; on
average, they spend two thirds or more of their incomes on food.
The country is self-sufficient in beans and white corn, but must
import some or all of its rice, wheat and yellow feed corn.
Nicaragua's basic grain production sector is made up of
approximately 400,000 small producers, working plots of 2-9 acres,
with low yields. Food commodity brokers and processors are
exploring ways to finance investment in agricultural production to
take advantage of rising prices, but government rhetoric critical of
free markets has complicated that decision.

2. (SBU) As a result of the current government's direct links to
many groups that traditionally lead protests in Nicaragua, criticism
of high food prices has been limited to public statements calling
for price controls. In response to the rise in food prices, the GON
has announced an array of policies and programs. Some, such as the
reduction of tariffs, are market-based, but most are re-distribution
programs with uncertain funding sources. From a USG program
perspective, financial and technical support for small farmers would
boost productivity and lead to lower consumer prices for
agricultural goods. Any program should include a nutrition
component, given that rising food prices will lead to a rise in
malnutrition. An essential ingredient of any work in Nicaragua
would be to provide producers with support outside of GON state
controlled mechanisms.

Demand
------

3. (U) The most important food commodities for human consumption in
Nicaragua are rice, beans, white corn, and wheat. Three quarters of
Nicaraguans are net food consumers; on average, they spend two
thirds or more of their incomes on food. According to a local
agricultural commodity broker, domestic food prices increased 60-70%
from August 2007 to April 2008. From January 2007 to January 2008,
purchasers for major hotels in Managua report a 90% increase in the
cost of food. Anecdotal evidence indicates that consumers are
reducing their intake of animal based proteins, such as beef and
chicken, in order to afford sufficient rice and beans. Many
families are cutting back on serving sizes, while the poorest may
skip some meals.

4. (U) Yellow corn, sorghum, and soy meal are used as poultry feed.
(Note: Most cattle in Nicaragua are grass fed. End note.) In
response to high yellow corn prices, poultry farmers are buying more
sorghum, the price of which is also rising. These higher costs, and
falling demand for animal proteins, have trimmed profit margins and
forced several small scale poultry producers out of business.

Supply
------

5. (U) In addition to several very large sugarcane and coffee
estates, Nicaragua's agricultural sector is comprised of
approximately 400,000 small producers, working plots of 2-9 acres.
Although arable land is abundant, productivity is relatively low. A
lack of financing, a scarcity of seeds, and the high costs of
fertilizer, pesticides, and herbicides may limit small producers'
ability to increase production to take advantage of price increases.
Farmers sow crops in mid-May with the return of the rainy season; a
second planting follows in August and a third, in some areas, in
December. Harvest forecasts are unavailable, however, given
difficulties in aggregating data for the sector.

6. (SBU) Food commodity brokers and processors are exploring ways to
finance investment in agricultural production to take advantage of
rising prices, but government rhetoric critical of free markets has
made the decision to do so more difficult. Unions and human rights
organizations controlled by the ruling FSLN party are pushing hard
for price controls, which would clearly create a serious
disincentive for investment.

7. (U) Nicaragua also suffers from a lack of physical
infrastructure. A low percentage of the country's roads are paved.
Ports are inadequate. Electric power generation barely covers
current demand. More agricultural distribution and processing
centers are needed. Nicaragua is particularly vulnerable to rising
oil prices because gasoline and diesel prices are not widely
subsidized and 80% of all electricity is produced using fossil
fuels. Two companies produce ethanol for export using sugarcane.
The companies use prevailing prices to determine the rates of sugar
vs. ethanol production. All ethanol is exported. At least two
companies on the Atlantic coast are cultivating African Palm to
produce biodiesel. At this point, production of biofuels has not
reduced the supply of local food (or sugar) for consumption.

8. (U) Nicaragua is a net exporter of plantains, honey, beef, beans
(red and black), cheese, and tubers. While Nicaragua's domestic
production of beans and white corn covers local demand, the country
is a net importer of rice (producing only 60% of its domestic
consumption needs), imports all of its wheat, vegetable oil, and
yellow corn for feed.

Nicaragua production and trade numbers for basic food commodities
for CY 2007

Commodity Production Consumption Imports Exports
--------- ---------- ----------- ------- -------
Beans (MT) 129.9 79.2 2.7 53.4
Rice (MT) 176.3 292.5 118.2 1.9
White corn (MT) 372.7 367.5 0.9 6.2
Sorghum (MT) 87.3 87.4 0.3 0.2
Beef (M Lbs) 202.1 71.8 0.4 130.7
Chicken (M Lbs) 195.6 197.3 2.2 0.6
Pork (M Lbs) 15.1 16.4 1.3 0.0
Milk (M Liters) 591.5 306.0 56.8 342.4
Eggs (dozens) 29.5 29.5 0.0 0.0
Veg. Oil (M Lts) 0.0 61.9 72.2 10.2

(Note: Consumption numbers include human and animal consumption. End
Note)

Political Impact
----------------

9. (U) Banners protesting food prices appeared during May Day
parades and some labor leaders (mostly the Sandinista National
Workers' Federation- FNT) and human rights groups have made public
statements protesting food prices. These statements demonized
producers and asked the government to implement price controls on
food items to benefit consumers. However, the rural poor are mostly
food producers who stand to benefit from the price increases;
efforts to control prices would likely be opposed by them.

10. (SBU) Food prices have not destabilized the GON because the
current government is linked to most of the groups that have
traditionally led public protests over the past 18 years. The
Sandinista administration has managed to keep a tight rein on
broader-based protests.

Economic Impact
---------------

11. (U) As an agricultural country, a rise in commodity prices could
benefit Nicaragua, stimulating greater production, increasing
exports and raising GDP. The immediate effect on the economy,
however, has been inflationary. Nicaragua's inflation has been the
highest in the region since the fall of 2007. 2007 inflation was
16.8% and is running at over 20% for 2008. The IMF estimates that
food and fuel prices account for about 30% of domestic inflation.
Off-budget Venezuelan support and a 33% increase in the minimum wage
have also driven inflation. GON officials have yet to introduce
policy measures that would address inflation, as promised to the
IMF.

12. (U) For three-fourths of Nicaraguans, food purchases account for
60% of income. Overall, 41.8% of the domestic consumption basket is
food and nonalcoholic beverages. The value of the basic basket of
goods has risen 21.3% in the last six months, so even the higher
minimum wage only covers about 23% of the basket.

Environmental Impact
--------------------

13. (U) With inputs such as fertilizer and improved seeds too
expensive to afford, many small farmers will likely seek to increase
production by increasing planted area without these important
inputs. This expansion could contribute to deforestation and soil
erosion as marginal land is put into production. Total area planted
in basic grains increased by 16.6% from 2004-2006.

Government Policy Response
--------------------------

13. (U) The GON has announced various programs to address the food
price increase, but funding sources are unclear, raising doubts
about implementation. These proposals are as follows:

- In response to short-term bean shortages in the fall of 2007, the
GON eliminated the tariff on imported beans for six months (Ref D).
The government extended duty-free imports of beans for all of 2008
and also eliminated tariffs for oat and barley based cereals,
certain noodles and pastas, wheat flour, and soy based foods. It
also established TRQs for wheat flour or wheat-rye mix, corn syrup,
and butter, and issued a rice TRQ of 35,000 MT in addition to the
CAFTA-DR rice TRQ.

- The GON has charged The National Enterprise for Basic Grains
(ENABAS) -- in coordination with Citizen Power Councils (CPC) (Ref
C), a citizen-based parallel government structure controlled by the
First Lady -- with setting up points of sale for reduced price basic
grains. In November 2007, ENABAS used assistance from Venezuela and
Taiwan to buy beans and sell them at below market rates (50 U.S.
cents/pound vs. 90 U.S. cents/pound). ENABAS contends that its
action forced the private sellers to return the market rate to 50
U.S. cents/pound). ENABAS is the only agricultural organization
with a national presence and holds the largest amount of
agricultural infrastructure, much of it remaining from its 1980s
heydays - silos, warehouses, storing and drying services.

- On April 26, Ortega issued an "Agro-food Alert" that laid out a
program to increase food production by 14%, using financing and seed
distribution. It will cost USD 20 million, of which the GON has
funded only USD 5 million. CPCs are to be charged with seed
distribution.

- GON has announced the revival of the previous government's "Libra
Por Libra" seed distribution program which requires payment for seed
with an equal amount of seed. The program distributed improved
seeds, fertilizer, and technical assistance which increased yields
and helped Nicaragua become a net agricultural exporter in the last
few years. The GON has allotted USD 6-7 million and claims it will
reach 20% of producers. However, some agricultural cooperatives and
councils claim the GON has not informed them of the program and
worry that it will be administered by CPCs.

- The Ministry of Agriculture has announced a package of USD 52
million for financing for farmers.

- The GON announced the expansion of its "Zero Hunger" program to
provide 14,577 families with pregnant livestock and seeds.

- Ortega announced a plan to make Nicaragua self-sufficient in rice
by increasing rice production around Lake Managua. Funds from the
Venezuelan-led Bolivarian Alliance for Latin America (ALBA) will
finance this short term program.

- GON touts its new development bank "Produzcamos" as a source of
financing for producers, but the bank has not yet been formed.

- President Ortega's has called for ENABAS to broker commodity
purchases and sales to ensure that both producers and consumers
receive "fair prices." (Note: Ortega has not clarified what a "fair
price" would constitute and who would pay for the implicit subsidy.
End Note.) Ortega's stated goal is to eliminate all middle-men,
"who enrich themselves at the cost of the producers and consumers,"
and replace them with ENABAS. On April 26, he proposed that all
Central American and Caribbean countries only sell grains through
government to government deals in order to ensure "fair prices."

- In April, Nicaraguan Customs authorities implemented informal,
unwritten, uncoordinated export requirements that resulted in long
delays in the export of beans. The Minister of Agriculture
subsequently intervened to authorize bean exports.

- On May 7, the Nicaragua-hosted Food Security and Sovereignty
Summit resulted in much anti-U.S. and anti-free market rhetoric and
no concrete action plans. (Ref A)

Impact on Post Programs
-----------------------

14. (U) USAID's PL-480 food security programs will end in 2008.
There are currently no other sources of funding or plans to
implement new programs. Peace Corps will shift more of its USAID
funded Small Project Assistance to small-scale crop diversification,
agro-business, and other food security related activities.

Policy Proposals
----------------

15. (U) Financial and technical support for small farmers would
boost productivity and perhaps lead to lower consumer prices for
agricultural goods. Also important are efforts to identify and
develop markets for agricultural goods, whether as part of more
sophisticated supply chains or directly with consumers. Any program
should consider including a nutrition component, given that rising
food prices will also result in a rise in malnutrition. The
Preliminary Report of the 2007 Demographic Health Survey indicates
that 17% of Nicaraguan children below the age of five suffer from
chronic malnutrition and the FAO estimates that 27% of all
Nicaraguans suffer from some form of malnutrition. The problem is
most acute in the rural northern mountain and Atlantic coast
regions. The results of currently available demographic surveys
would allow any nutrition program to quickly identify pockets of
poverty (which match malnutrition patterns) and target feeding and
assistance programs that work in conjunction with agricultural
stimulus programs. An essential component of any work in Nicaragua
would be to quickly provide producers with support outside of GON
mechanisms such as ENABAS and CPCs.

TRIVELLI

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