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Cablegate: Impact of Rising Food/Commodity Prices - Mozambique

VZCZCXRO7159
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHTO #0399/01 1280832
ZNR UUUUU ZZH
R 070832Z MAY 08
FM AMEMBASSY MAPUTO
TO RUEHC/SECSTATE WASHDC 8861
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLO/AMEMBASSY LONDON 0155
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MAPUTO 000399

SIPDIS

STATE FOR EEB/TPP/ABT/ATP

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

REF: A. STATE 39410
B. MAPUTO 231
C. 07 MAPUTO 1341

1. This message responds to the request (ref A) for Mission
Maputo's analysis on how rising food and agricultural
commodity process are affecting Mozambican society. As
instructed, it also lists post's recent cables on
agricultural issues.

------
Demand
------

2. Mozambique's most important food commodities are corn and
cassava, trailed by rice and wheat. While the country
produces corn, cassava, wheat and rice, it primarily meets
its needs for wheat and rice through imports. According to
the Ministry of Agriculture, the country will import 1.25
million tons of grain in 2008. Retail prices for these goods
have increased significantly this year. For example, a 50-lb
bag of rice has tripled from approximately USD 12 to USD 36
in the past 12 months. The GRM, which sets ceiling prices
for bread, mostly an urban staple, raised the price of the
least expensive loaves by 125 percent at the beginning of the
year. The GRM has urged for consumption substitution, and
Eduardo Mondlane University researchers have created an
ingredient mix that replaces 15 to 25 percent of wheat flour
for lower-cost cassava in bread. While this type of
innovation has met with some success, in general breadmakers
have responded to the higher costs and concomitant price
ceiling by reducing the size of loaves. As the vast majority
of Mozambicans live below the poverty line, price increases
have had an inordinately negative effect on the urban poor.

------
Supply
------

3. The food crop sector has experience sustained growth over
the past decade, during which total cereal production has
more than doubled. However, increased national output masks
a mixed performance at the regional level owing to erratic
seasonal rains and periodic drought and flooding. The south
and southern-central parts of the country have been most
affected over the past three years. The northern-central and
northern provinces, which are the most productive areas of
the country, have continued to produce bumper crops. Initial
data does not yet indicate whether domestic production is
responding to the most recent changes in prices. The sector
remains affected by serious weaknesses, including poor
infrastructure, low productivity, market fragmentation, and
unpredictable weather conditions. Although many roads have
been rehabilitated, large parts of the country, particularly
the more fertile northern regions, are isolated and often
inaccessible during the rainy season. Internal marketing of
surpluses from northern provinces is also restricted by the
large distances over which food has to be transported, and
provinces in the south are more competitively supplied by
South Africa.

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

4. Maputo suffered violent protests on February 5 after the
GRM increased bus fares in response to rising fuel prices.
The bus fare increase occurred after bread prices were also
raised in January, and the rioting was viewed as a
culmination of urban frustration in the face of these
changes. The government's immediate response to the rioting
was inadequate, though in the longer term, the GRM appears to
be making some efforts to address sustainable economic growth
for the country, and has installed new ministers with
reputations as competent technocrats in several ministries
with economic development oversight.

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

5. Initial data for 2008 from the GRM does not yet indicate
that rising food prices have had a significant effect on
inflation, balance of payments, trade balance, or the fiscal
situation. Nonetheless, in late April the GRM queried
international donors about the possibilities for access to
programs that could provide commodities at reduced prices or

MAPUTO 00000399 002 OF 002


funding for commodities, and officials have expressed concern
publicly that the GRM may have to begin subsidizing food
prices (bread) this year. The GRM has expressed interest to
mission officials in rejuvenating a PL480 Title I program,
even though GRM officials understand that no
government-to-government program can be contemplated until a
farm bill is passed in the U.S. Congress.

---------------------
Gov't Policy Response
---------------------

6. The GRM has publicly made food crop production a national
priority, and much of Mozambique's arable land remains
uncultivated. From a total request of 3 million hectares by
private companies to produce biofuels, the GRM has authorized
only 30,000 hectares of Mozambique's arable land to this
purpose. In late April, the cabinet-level Council of
Ministers approved guidelines for a program for the country
to increase food production (wheat, rice, potatos and
cassava), food processing and production and use of
fertilizers aiming at ensuring stability. The program
includes an increased budget for agriculture (through
revision of the general budget), fiscal incentives,
investment in research and in agro-processing, massive
training of agricultural extensionists, electrification of
rural areas, and local production of fertilizers. An
inter-ministerial commission led by the Ministry of
Agriculture is to coordinate this program. The GRM also
plans to launch in the near future a market friendly (smart
subsidy input provision program) to increase the use of
improved food crop seed and fertilizer. USAID is providing
technical assistance to develop and implement this program.

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

7. The current situation does not affect ongoing USG
projects/activities in the country from a policy perspective.
Indeed, several of the activities under PL480 (Borlaug and
Food for Progress, for example) are specifically designed to
address the needs and support the government's activities
noted above. However, inflation and increased expenses while
funding levels have remained static means that some programs
can no longer provide as much concrete support as before.

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

8. The mission continues to encourage the GRM's long-term
plans to increase agricultural production through investment
and development. Meeting the immediate, serious impact on
poor and low-income consumers is probably best handled
through targeted assistance, cash transfers, or other direct
means of support that will get food on their tables, but not
interfere with the market price signals that tell farmers to
produce more.
Chapman

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