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Cablegate: Purchasing Wheat and Barley in Iraq

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

UNCLAS SECTION 01 OF 06 KUWAIT 002415

SIPDIS

STATE ALSO PASS USAID/W
STATE PLEASE REPEAT TO IO COLLECTIVE
STATE FOR PRM/ANE, EUR/SE, NEA/NGA, IO AND SA/PAB
NSC FOR EABRAMS, SMCCORMICK, STAHIR-KHELI, JDWORKEN
USAID FOR USAID/A, DCHA/AA, DCHA/RMT, DCHA/FFP
USAID FOR DCHA/OTI, DCHA/DG, ANE/AA
USAID FOR DCHA/OFDA:WGARVELINK, BMCCONNELL, KFARNSWORTH
USAID FOR ANE/AA:WCHAMBERLIN
ROME FOR FODAG
GENEVA FOR RMA AND NKYLOH
ANKARA FOR AMB WRPEARSON, ECON AJSIROTIC AND DART
AMMAN FOR USAID AND DART

E.O. 12958: N/A
TAGS: EAID PREF IZ WFP
SUBJECT: PURCHASING WHEAT AND BARLEY IN IRAQ

-------
SUMMARY
-------

1. The Executive Director of WFP met with ORHA staff in
Baghdad on 13 May. The primary discussion point was WFP's
plan for purchasing the local harvest. WFP has set aside
USD 42 million for the purchase of approximately 100,000 MT
wheat in the north. DART held follow-up conversations with
WFP regarding the mechanics of making an additional local
purchase. WFP is willing to pursue a purchase to fill the
remaining wheat deficit in its Emergency Operation, as well
as assist in the purchase of the entire harvest. Pre-
requisites for this action are a functioning Grain Board and
a way to move money around in a secure environment. WFP is
preparing a proposal to the U.N. Office of Iraq Programs in
New York to make the purchase. FAO also plans to purchase
4,000 MT of wheat seed in the north and is willing to
discuss possibilities of purchasing some barley in
south/central. A summary of the week's discussions follows.
No firm decisions have yet been made, but parties are
drawing nearer to final steps. End Summary.

-----------------------------
WFP'S JAMES MORRIS MEETS ORHA
-----------------------------

2. The Executive Director of the U.N. World Food Program
(WFP) James Morris met with members of the Office of
Reconstruction and Humanitarian Assistance (ORHA) on 11 May
in Baghdad. WFP Regional Director Khaled Adly and Country
Director Torben Due were also present. ORHA staff included
George Ward, Robin Raphel, Susan Hamrock, Frank Ostrander,
Richard Wilcox, and DART Food Officer Regina Davis.

3. Ward opened the meeting by saying how crucial WFP's work
is to the success of the revival of the Public Distribution
System (PDS), and asked that WFP notify ORHA about
obstacles. After introductions, Raphel immediately asked
WFP about its plans for purchasing wheat from the upcoming
harvest.

4. Morris said that purchasing the local wheat crop was
important and that WFP needed to do it. He added that WFP
was thinking that the wheat flour requirements for months 5
and 6 of its extended Emergency Operation could likely be
filled by the wheat purchase. Morris also asked ORHA for
assistance in securing the warehouses, silos, and mills.

5. Raphel replied that the military/ORHA relationship was
improving. In the last week, ORHA had worked with WFP and
the military to get the GPS (global positioning system)
coordinates for the silos and warehouses that WFP needed and
now had almost all the coordinates. Regarding security, she
said that the coalition does not have forces to provide
security all hours of every day. But she added that ORHA
was budgeting for a local force to protect these structures.

6. Raphel said that estimates of the country-wide harvest
were 1.25 million MT of wheat and 500,000 MT of barley.
Purchase price estimates are between USD 130 and USD 150
million. In the past, the Government of Iraq (GOI) set the
selling price for the country, and last year's wheat price
was 155,000 dinars per ton (USD 77.50 at an exchange rate of
2,000 dinars to the USD). The barley harvest (primarily
used for animal feed) began on 17 May, and the wheat harvest
has already begun in the south. Raphel clearly stated that
she hoped that WFP could use Oil for Food (OFF) monies to
make the purchase.

7. Adly listed details that needed to be sorted through
before WFP could proceed with a local purchase:

A. There is currently no mechanism in place to move money
around the country.

B. The Ministry of Trade (MOT) Grain Board had a system in
place whereby it tested the quality of the wheat, ranked it,
and weighed it, as well as serving as the purchaser. The
Grain Board needs to be involved in this process, but
requires assistance in getting up and running again.

C. Pre-war, the GOI kept six months of stocks in its
National Strategic Reserve (NSR). A determination now needs
to be made about how much stock should be kept in the NSR.

D. The U.N. Security Council Resolution (UNSCR) 1472 has
language to accommodate the purchase of local commodities,
but expires on 3 June. Therefore, all transactions need to
be completed by that date. There is discussion of extending
it for six months, but no action has yet been taken.

8. Raphel replied that ORHA was in the process of
consolidating assets in 25 banks, and found themselves "not
being as agile, as they would like to be." She reiterated
that ORHA planned to give all Iraqi civil servants the USD
20 payment as a measure to tide themselves over until a
salary payment system can be established. Raphel stated
that a general salary schedule should be issued by the end
of the week (i.e., by 16 May), and that ORHA was committed
to paying workers retroactively to when they last got paid.

--------------------------------------------- ----
WFP THINKING ON THE LOCAL PURCHASE OF THE HARVEST
--------------------------------------------- ----

9. On 15 May, DART Chief Food Officer further discussed the
details of how such a purchase would take place with WFP's
Adly. WFP reports that it fully supports measures to re-
establish a marketing arrangement for the harvest, and
considers it critical to promoting stability and
contributing to the kick-start of the economy in general,
particularly for the rural populations.

10. Pre-war, the MOT Grain Board maintained a network of
collection centers spread throughout the production areas
and procured the grain at fixed prices, taking into
consideration the inputs provided to the farmers (seed,
fertilizer and pesticides) at highly subsidized prices. This
year, the Grain Board Manager reports that due to the war
and the looting which has taken place at the collection
centers, farmers have been advised that grain should be
delivered by the farmers to the MOT warehouses and silos
directly.

(Note: The DART subsequently learned that ORHA set the
price of wheat at USD 80 USD per MT and USD 50 USD per MT
for barley, but most recent information indicates these
prices may rise. ORHA realizes the initial prices are low,
but is trying to encourage farmers to seek other markets.
Because of the current wide fluctuations in the exchange
rates, the DART is concerned that setting low prices will
leave farmers with little cash to put forward towards buying
seeds, fertilizer, and pesticides for the planting season,
forcing them once again to be reliant on subsidies. DART
Field Team South reports that in a matter of three days the
exchange rate dropped in Basrah from 2,000 dinars to one
USD, to 1,700 dinars to one USD, to 600 dinars to one USD.
End Note.)

11. Without a functioning banking system, and the absence
of a secure working environment for the MOT/Grain Board (GB)
staff, WFP feels that implementing a program of this
magnitude will not be possible without assurances of
security from ORHA and the Coalition. Secure storage of the
grain is also a concern.

--------------------------------------------- ----
LOCAL PURCHASE IN THE THREE NORTHERN GOVERNORATES
--------------------------------------------- ----

12. UNSCR 1472 provides for the use of escrow account funds
for the procurement of food in Iraq. WFP has already
received $42 million from the OFF 13 percent account (the
account dedicated to projects in the north) with which it
plans to buy a portion of the harvest in the north,
approximately 90,000 to 100,000 MT wheat flour. (Note:
Estimate for the harvest in the three northern governorates
is more than 700,000 MT. End Note.) Because the monies
come from the 13 percent account, WFP prefers to buy in the
three northern governorates and WFP is required to
distribute the wheat flour purchase in the north under UNSCR
986. In the north, WFP reports that it is possible to
purchase through private sector companies, security
conditions are more stable, and there is an established
system of private sector banking arrangements in neighboring
countries where payments can be deposited.

------------------------------------
LOCAL PURCHASE IN SOUTH/CENTRAL IRAQ
------------------------------------

13. For the six-month emergency operation (EMOP) launched
by WFP to support the PDS, there is a current resource
shortfall of wheat in the range of 300,000 MT. Provided
that there is a further extension of the OFF which is
currently set to expire on 3 June (UNSCR 1472/76), it is
WFP's intention to procure the shortfall tonnage of 300,000
MT wheat through the GB during June/July. The pre-
requisites for the transaction are as follows: OIP releases
the funds; ORHA authorities re-establish a functioning Grain
Board; and a way to move money around in a secure
environment is established. (Note: The 300,000 MT would be
in addition to the 90,000 to 100,000 MT in the north, for a
total of about 400,000 MT. End Note.)

14. ORHA and WFP are preparing a proposal to OIP requesting
funds for the purchase of the entire wheat harvest of
approximately 1.2 million MT. The funds from OIP would go
to the farmers, through the Grain Board (GB), for the
purchase of the entire crop, if the funds are made
available. WFP would feed the initial 300,000 MT into the
PDS under its EMOP. The remaining 900,000 MT would go to
the Grain Board as part of the National Strategic Reserve to
be used at a later date. GB could decide to feed it into
the PDS.

15. In the center/south, the entire system of grain
procurement was monopolized by the parastatal Grain Board.
Private sector bulk grain traders did not exist. As stated
in paragraph 7B above, WFP insists that a functioning Grain
Board is necessary to effect the transaction. To revive the
GB, the following must be achieved:

-- Rehabilitate the administrative structure of the Grain
Board by providing a secure working environment and re-
equipping the Board's offices;

-- Ensure back payment of salaries and regular payroll
implementation;

-- Rehabilitate warehouse and silo equipment such as
conveyor belts, weighbridges and weighing scales;

-- Provide secure means for funds handling and transfer to
effect payment to farmers, as well as cover operating costs
at the receiving centers; and

-- Facilitate an information campaign to inform farmers of
receiving center locations and method of payment.

16. Given the above measures, WFP could devise a system to
track the weight and quality of the grain. WFP could then
advance funds to the Grain Board to commence purchasing
operations. WFP is also willing to provide superintendence
(through an oversight firm), survey and monitoring services
to reconcile payments against receipts over time. But WFP
is firm that the Grain Board must be involved in order for
this to proceed in central/south.

17. Since barley is not part of the PDS, WFP would have no
need to purchase barley. The processes that need to be put
into place to effect the wheat purchase could also be
applied to the barley purchase. To that extent, WFP is
willing to assist. See FAO section below regarding the
barley.

-------------------
CURRENT SILO STOCKS
-------------------

18. In addition to the harvest, there are also large
quantities of wheat in the silos that are part of the NSR.
These stocks are accumulations from prior harvests. The
Central MOT has told WFP there may be one million or more MT
of wheat in the NSR. The MOT's Grain Board could feed these
stocks into the PDS in future months. The MOT is already
lending some NSR stocks to WFP for the upcoming PDS
distribution. In the past, NSR stocks were lent to the PDS,
and repaid with OFF stocks.

--------------------
PARTICIPATION OF FAO
--------------------

19. DART recently heard that the U.N. Organization for Food
and Agriculture (FAO) had agreed to purchase the barley
crop, used primarily for animal feed. DART made some
inquiries with FAO/HQ and learned the following:

A. In the current season, FAO was not planning to buy
barley for livestock feeding. The only barley procurement
done by FAO was in 2000, when it procured some 1,700 MT of
barley that was distributed to drought-affected farmers.

B. FAO does plan, however, to buy approx 4,000 MT of wheat
grain for seed use in the three northern governorates. FAO
is ready to pay the market price plus a premium to get the
best quality seed.

C. FAO has adopted contracts (under the 59 percent account)
to import approximately 70,000 MT of barley for feed use of
which some 25,000 MT can be shipped before June 3, the
expiration date of UNSCR 1672/76.

20. FAO/HQ told DART Officer Davis that it was willing to
explore the possibility of buying barley in country but,
like WFP, would need to request funds from OIP/New York for
the purchase. FAO staff from Arbil is to arrive in Baghdad
21 May and plans to discuss the issue with the U.N.
Humanitarian Coordinator in Iraq, Ramiro Lopes da Silva, and
with ORHA.

-----------------------------
ALTERNATIVES TO U.N. PURCHASE
-----------------------------

21. In a meeting in Basrah on 13 May, the DART asked the
WFP national staff about options for the farmers if they are
unable to sell their harvestto the MOT Grain Board. The
options given were:

A. Farmers could probably sell to private mills directly,
as they were never allowed to do this before. It is
important to note that the standard practice in Iraq was to
mix the higher quality Australian or Russian wheat (OFF
commodities) with Iraqi wheat in the silos prior to grinding
it into flour. Whether or not the mills have the purchasing
power is unknown.

B. Farmers could sell to animal farmers for animal feed,
but the price would be very low (10 to 20 percent of the
price that the GB is expected to offer).

C. Farmers could sell to other countries (once sanctions
are lifted). Also something they could not do before.

JONES

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