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Cablegate: Discussion with Undp On Possible Use of U.S. Wheat

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 HARARE 002427

SIPDIS

STATE FOR AF, AS KANSTEINER AND PDAS BELLAMY AND JIM DUNLAP;
AF/S FOR DELISI AND RAYNOR;
NSC FOR SENIOR DIRECTOR FRAZER
USAID FOR ADMINISTRATOR NATSIOS;
AFR FOR AA NEWMAN, MARJORIE COPSON, AND KAREN POE;
DCHAA FOR ROGER WINTER;
DCHAA/FFP FOR LAUREN LANDIS, LESLIE PETERSON, DALE SKORIC,
AND JOHN BRAUSE;
USDA FOR MARY CHAMBLISS;
ROME FOR FODAG, AMBASSADOR TONY HALL AND TIM LAVELLE;
PRETORIA FOR FCS RICK HELM AND AID PAT DISKIN

E.O. 12958: N/A
TAGS: EAGR EAID ETRD ZI
SUBJECT: DISCUSSION WITH UNDP ON POSSIBLE USE OF U.S. WHEAT
IN ADDRESSING HUMANITARIAN FOOD CRISIS


1. Summary. Charge met with UNDP Resident Representative
Victor Angelo on November 4 to review recent developments in
the humanitarian food crisis in Zimbabwe. Angelo was
particularly interested in discussing a possible donation of
U.S. wheat/wheat flour to the World Food Program (WFP), which
would in turn monetize this commodity and thereby involve the
private sector in helping to address the food crisis, at
least in the urban context. The discussion centered on
possible complications, policy considerations (positive as
well as negative), and logistical issues. While nothing
concrete was proffered, nor committed to, by either side, it
is our view that provision of U.S. wheat/wheat flour could
yield important benefits, both programatically and
policy-wise. We request that Washington examine the
feasibility of such an intervention and look into the
availability of wheat/wheat flour that could be donated to
WFP for monetization. End Summary.

-------------
The Situation
-------------

2. Angelo underlined that the lack of food in rural areas
remains the principal focus of the UN's Consolidated Appeal
for Zimbabwe (CAP). However, there is also a growing food
crisis in the cities that is projected to put 850,000 persons
at risk, and possibly more if the ongoing rural to urban
migration expands. Certain commodity staples, such as maize
meal, are increasingly unavailable, and potential substitute
commodities are simply too expensive for the poorest, most
food-vulnerable urban population to buy. In the past, bread
was the principal alternative to maize meal, but it too is
increasingly in shortage due to dwindling wheat/wheat flour
stocks and looks to remain so for the foreseeable future.
The reasons for this are manifold.

3. In an average year, Zimbabwe produces approximately
300,000 metric tons (MT) of wheat against consumption needs
of 400,000 MT. The difference is normally covered by imports
of approximately 100,000 MT of hard wheat, which is required
for blending purposes with softer local wheat varieties.
Virtually all of Zimbabwe's domestic wheat production has
traditionally come from commercial farms, much of it as
irrigated winter wheat. Disruption of the commercial farming
sector by President Mugabe's purported "land reform" has
seriously damaged this production cycle. While there is not
yet an accurate figure for how much winter wheat will be
harvested from the past winter's crop (by the end of
November), the Food and Agriculture Organization is
projecting about 100,000 MT total for the year, leaving a
shortfall of 250,000 MT, taking into account planned imports
of hard wheat.

4. At this point, there is no prospect that the GOZ's Grain
Marketing Board (GMB), the parastatal that monopolizes both
the import of cereals and the purchase of local cereal crops,
will be able to cover this shortfall. A critical lack of
forex has thus far hampered GMB attempts to purchase enough
maize to cover the massive shortage of that commodity; in
this context, sourcing of sufficient wheat to meet normal
demand appears highly unlikely. It is a fact, however, that
demand has not fallen. In urban areas the demand for bread
has increased as a substitute for unobtainable maize meal at
a time when the supply of wheat/wheat flour is actually
diminishing. The results are predictable.

5. The GOZ's attempts to impose a fixed sales price for a
basic loaf of bread, as well as a fixed price at which
millers and bakers purchase the wheat to produce bread, have
floundered. The fixed profit margin between purchase price
of flour and the sale price of bread has become nonsensical
as the exchange rate of the Zimbabwe dollar has plunged,
increasing the cost of imported inputs. Many domestic inputs
have also risen. As a result, millers and bakers complain
that they can hardly produce basic loaves of bread without a
loss, if the bread is sold at the mandated price.

6. This has led to a number of defensive market strategies,
including selling bread at double or more the set price,
easily accomplished in an environment where product shortage
dominates. Millers have also reportedly used the inadequate
supply of wheat allotted them by the GMB to mill cake flour,
which is used to produce premium breads, bread rolls, and
other products that are non-price controlled and offer a
higher profit margin. Bakers add onion flakes to dough or
prepare special crusts, declare the product a specialty item,
and thereby also sidestep GOZ controls. The end result are
products that are priced beyond the reach of the poorest and
most food vulnerable segment of the urban population.

7. Aware of this problem, the GOZ has reacted in its usual
ham-handed statist manner. November 5 newspapers published
statements by Ministry of Industry and International Trade
Permanent Secretary Comberbach ordering millers to desist
from milling cake flour and producing higher-priced products
until wheat supplies return to normal. This begs the
question of when this might occur. There is little room for
optimism that next year's winter wheat crop will reach past
levels, given the continuing destruction of the commercial
farming sector. It is also implausible that the GOZ will
generate sufficient forex reserves to source future wheat
purchases on international markets, given the concomitant
reduction in the production of tobacco and other cash crops.
In sum, all government directives and decrees aside,
Zimbabwe's urban poor are about to receive a painful,
first-hand Macroeconomics 101 lesson on the law of supply and
demand.

------------------------------
The Solution and the Mechanism
------------------------------

8. Angelo and DCM strategized over how this problem might be
overcome, at least until next year's maize crop is harvested
and hopefully provides some relief countrywide, assuming
normal rains and rebounding communal maize production.
Angelo said that the provision of wheat to the private sector
would be the ideal solution, since it has the advantage of
keeping the private sector in the urban food game (and the
GOZ out of it) and limits the need for the UN or others to
establish elaborate targeting, distribution, and monitoring
mechanisms in urban areas. It is obvious, however, that the
GOZ-imposed prices for wheat and bread, and the diminished
purchasing power of the poorest urban consumers, would
require some degree of subsidy if such an approach were to be
viable. Otherwise, millers and bakers would be
unwilling/unable to import wheat/wheat flour at world market
prices because the penury of their customers would mean that
there would be no market (or profit margin) for their end
product.

9. The best solution would be a delivery of subsidized wheat
that would sidestep GOZ control and go directly to the
private sector, to permit the production of a sufficient
quantity of bread that could be sold at a price that the
urban poor can afford. Angelo proposed the following
mechanism as a possible option. The USG would provide on a
grant basis a sufficient quantity (to be determined) of wheat
flour to WFP, which would in turn monetize this commodity
through direct sale to millers/bakers at the current fixed
price under terms that would commit the millers/bakes to
produce standard loaves of bread at a price affordable by the
urban poor, as in the past. The WFP would obtain from the
GMB import permits (and could do so, Angelo opined) for the
wheat, but at no time would the GMB or any other GOZ entity
take possession of the product or control of the process.
(There is precedent for this, since in the past the GMB
granted import licenses directly to millers/bakers when the
private sector was able to access sufficient forex to finance
such imports.) Angelo said that the WFP could use the
proceeds from the monetization in various way that would
support the CAP: financing unfunded supplemental school
feeding programming; paying for unfunded distribution of
medicines procured for WHO by the UK and the EU; financing
unfunded rural Food-for-Work programs and similar beneficiary
empowerment initiatives; or financing recurrent WFP costs
associated with humanitarian food distribution in rural
areas. WFP would provide to the USG all accounting required
to justify the use of funds earned from monetization.

---------------
Policy Benefits
---------------

10. Angelo and DCM next discussed the benefits of such an
approach, as opposed to the drawbacks.

-- There would be no GOZ or GMB control over the process,
other than granting import licenses.
-- There would be less pressure on maize supplies to rural
areas from increased substitution of bread products for urban
consumers.
-- The program would bring the beleaguered private sector
into the humanitarian program, long a goal of the CAP and
bilateral donors.
-- Because of private sector and market involvement, there
would be no labor-intensive need for WFP to organize
distribution and oversight mechanisms.
-- The affordability of the bread end-product would be
self-targeting in that it would keep this staple commodity
available to the urban poor, preventing politicization of the
initiative.
-- The fixed profit margin between GOZ-prescribed wheat
prices and the set price of bread would prevent bakers from
making large windfall profits. (Indeed, lack of
profitability at current set prices might be the real issue.)
-- This program would balance the food need equation between
predominantly ZANU-PF controlled rural areas, until now the
sole beneficiaries of humanitarian feeding, and the
increasingly needy and predominantly pro-opposition urban
areas.
-- There would no complicating biotech issues.
-- The proceeds from monetization would help provide local
currency for UN humanitarian program costs.
-- The introduction of wheat/wheat flour would not cause
meaningful market distortions in an environment of massive
shortage and the extant GMB monopoly over purchase and
distribution of locally produced wheat stocks.
-- (for the USG) WFP management of the monetization would
relieve the USG of labor-intensive management and oversight
of a bilateral monetization program.

-------------------------------
Drawbacks and Issues Unresolved
-------------------------------

11. There are also a number of potential negatives to such
an approach, although Angelo and DCM agreed that most of
these can be overcome with some creative thinking.

-- The program would support GOZ subsidies and fixed food
prices that are not determined by sound market principles.
(In the current economic meltdown and in the context of
unrealistic GOZ economic policies, including exchange rates,
some level of subsidy must be factored in if any program is
to function. The conditions for a freely functioning market
do not exist at the present, and it would be necessary to
approach this as a mixed market/humanitarian intervention and
view it in the perspective of ongoing rural feeding programs,
many of which are basic food giveaways.
-- Selection of which millers/bakers to participate must be
based on past performance, capabilities rather than political
connections, and willingness to bake basic loaves rather than
more profitable products. This would require careful UN
oversight.
-- Potential for "black market" abuses in urban areas would
need to be monitored.
-- The availability of cheaper food in cities might serve as
a magnet to starving rural populations, swelling the number
of those moving toward the cities. (This is already
occurring as we write, cheap and plentiful bread or not.)
-- The quantity of wheat/wheat flour would need to be great
enough to close significantly the 250,000 MT shortfall.
-- Logistically, there would be timing of delivery and
warehousing issues.
-- Logistically, a large influx of wheat flour would put this
commodity in competition with maize for already overtaxed
port, rail, and trucking facilities.

---------------
Recommendations
---------------

12. We emphasize that no commitments were made nor implied
in the meeting, which is best characterized as a
brainstorming session. Angelo stated, however, that he
believes it feasible for the UN to undertake a program along
the lines discussed above if the USG is able to provide wheat
or wheat flour. The availability of this commodity under the
Emerson Trust -- and competing needs in Afghanistan, the Horn
of Africa, and elsewhere -- will obviously play a determining
factor. The Mission recommends that Washington carefully
examine the admittedly rough-hewn proposal above in terms of
policy and practicality. If sufficient wheat/wheat flour are
available, we believe that such a program -- or one that
follows a similar script -- could help fulfill Zimbabwe's
humanitarian food needs while simultaneously addressing USG
policy concerns.

SULLIVAN

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