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

VZCZCXYZ0003
PP RUEHWEB

DE RUEHQT #0416/01 1301630
ZNR UUUUU ZZH
P 091630Z MAY 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC PRIORITY 8821
INFO RUEHBO/AMEMBASSY BOGOTA 7545
RUEHCV/AMEMBASSY CARACAS 3021
RUEHLP/AMEMBASSY LA PAZ MAY LIMA 2591
RUEHGL/AMCONSUL GUAYAQUIL 3540
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/USDA FAS WASHDC 0601

UNCLAS QUITO 000416

SENSITIVE
SIPDIS

EEB/TPP/ABT/ATP FOR JANET SPECK
TREASURY FOR MEWENS
USDA/FAS FOR JEANNE BAILEY, DOROTHY ADAMS
USDA/FAS LIMA FOR AGRICULTURAL COUNSELOR

E.O. 12958: N/A
TAGS: EAGR ETRD ECON PREL EC
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - ECUADOR

REF A: State 39410

B: FAS Quito Price Report, Apr 22 2008
C: Quito 267
D: Quito 225
E: FAS Quito Briefing on Commodity Prices, 2008
F: 07 Quito 1794
G: 07 Quito 2019
H: 07 Quito 2095
I: 07 Quito 2114
J: Quito 36
K: Quito 374
L: Quito 315
M: Guayaquil 88

1. (U) This is a response cable to State 39410 (ref A), detailing
the impact of rising food and agricultural commodity prices in
Ecuador.

2. Summary: Price increases in food products contributed to 62% of
2007 inflation in Ecuador, due to increasing global prices for
commodities and Ecuador's reliance on imported inputs. In 2008,
mass flooding that hit the country in February caused a dramatic
increase in agricultural product prices. Floods harmed agricultural
production, especially in coastal regions, and closed many
transportation routes, hindering distribution. Since summer 2007,
the government of Ecuador has responded to food and commodity price
increases with a mix of interventions including price controls,
tariff cuts/increases, subsidies, and export bans. Although we have
not seen a significant impact yet, price control measures,
particularly for milk, could distort supply in the long term. Most
recently, the GOE has begun working more collaboratively with the
private sector and implementing targeted assistance programs to help
respond to increasing food prices. End Summary.

DEMAND

3. (U) Rice, milk, flour and wheat, corn, soybean meal, and cooking
oil (mostly palm oil) are the most important food and agricultural
commodities in Ecuador. Prices have increased for all of these
products (ref B). From February 2007-February 2008, prices
increased as follows: wheat 112%, palm oil 100%, soybean meal 82%,
rice 52%, and corn 24%. Milk and bread prices have also increased
significantly, leading to government interventions in an attempt to
control prices. Post FAS staff report they have seen a shift in
consumption from higher priced bread to lower priced potatoes and
plantains.

SUPPLY

4. (U) Domestic agricultural production is responding to the
changes in prices in the sector. Higher input costs have affected
food prices, particularly due to an increase in the cost of imported
fertilizers. Increases in soy prices have affected the cost of
animal feed. Dairy processors have said they would prefer producing
cheese to liquid milk because a price control on milk makes it less
profitable (in many cases unprofitable). There has not been a
significant increase in investment in food production, nor a shift
in production from food to non-food crops. However, exports of palm
oil have increased, possibly due to international demand for this
input for biofuels.

POLITICAL IMPACTS

5. (U) There have not been any protests or violence over the
increases in prices, although there have been public complaints,
particularly over increases in bread prices.

ECONOMIC IMPACTS

6. (U) The most significant reason for recent price increases for
agricultural products in Ecuador is mass flooding that hit the
country in early 2008 (ref C). The floods harmed agricultural
production, especially in coastal regions, and closed many
transportation routes, hindering distribution (ref D). The Ministry
of Agriculture estimates that the flooding caused damage or loss to
over 100,000 hectares of crops, including rice, corn,
bananas/plantain, coffee, sugar cane, soy and cacao. The economic
impact is estimated to surpass $125 million. The largest
inflationary spikes were seen in food products and non-alcoholic
drinks.


7. (U) Increasing global prices for commodities and Ecuador's
reliance on imported inputs also contributed to inflationary
pressure on both consumer and producer prices. In 2007, 62% of
Ecuador's inflation corresponded to higher food prices (ref E). The
categories showing the largest variation were vegetable oils, edible
animal fats, meats, rice and bread. Producer inflation reached nine
percent, rising faster than consumer inflation and putting pressure
on prices. However, Ecuador's medium- to long-term inflation
outlook appears stable. Rising prices have not had an impact on
issues such as deforestation, water availability, or soil
conservation.

GOVERNMENT POLICY RESPONSES

8. (U) The government of Ecuador responded to food and commodity
price increases with a mix of interventions including price
controls, tariff cuts/increases, subsidies, and export bans. In
July 2007, the private sector agreed to voluntarily fix prices for
rice, sugar, and flour rather than face mandatory price controls
(ref F). In September 2007, the GOE reduced tariffs on inputs, raw
materials and capital goods to increase production and control
rising prices (ref G). Tariffs on 1,957 products, including
agricultural inputs, were reduced from 5 to 20 percent to 0 to 5
percent. This measure was accompanied by increased tariffs on
imported manufactured goods including food products, beverages and
white goods. Also in September 2007, due to increased rice prices
because of higher demand from Colombia and Peru, the GOE instituted
a ban on rice exports (ref H).

9. (U) In October 2007, the GOE tackled rising bread prices by
lowering tariffs on wheat and providing subsidies to millers (ref
I). In January 2008, the GOE instituted a price control on milk to
combat rising milk prices (ref J). Most farmers are concerned with
the measure as they claim the fixed price is not sufficient to cover
their increased input costs. In April 2008 the GOE adjusted its
price control on milk (ref K) to attempt to combat scarcity in the
sector, as producers shift away from production of lower priced milk
where profit margins are small. In March 2008, the GOE introduced a
number of market-based programs aimed at increasing assistance to
the poor in meeting higher food costs (ref L). Notably, this
includes a discount card for low-cost grocery stores that will
provide poor consumers with discounts on basic food products.

IMPACT ON POST PROGRAMS

10. (U) Post's Foreign Agricultural Service has made a number of
changes to its PL-480 food aid program in response to rising food
prices. The program has been considering new proposals to finance
community projects focused on increasing production of staple foods.
In response to the recent flooding in Ecuador, the program will
focus special attention on existing projects in areas that have been
affected by the floods. For example, it plans to provide additional
funding for projects where crops have been ruined and the farmers
may not be able to pay back their loans.

COMMENT:

11. (SBU) Since summer 2007, the GOE has instituted a number of
market controls to try to stem price increases, although thus far
the range and depth of interventions have been relatively limited.
Increases in food prices continue to drive up the inflation rate,
which will increase political pressure on the government. Even so,
it is not clear if the GOE will respond with additional heavy-handed
interventions, such as price controls or export bans (ref M), or
will pursue more moderate measures such as negotiated price limits,
subsidies, or income transfers. The GOE now appears to be working
more closely with the private sector, which could help in crafting
more effective programs going forward. In the long run, measures
such as the price control on milk could end up distorting the market
by causing shortages and shifts in production, although to date we
have not seen such distortion.

JEWELL

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