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Cablegate: Stocking Up for the Holidays

VZCZCXRO2791
RR RUEHAO
DE RUEHCV #3500/01 3341521
ZNR UUUUU ZZH
R 301521Z NOV 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7145
INFO RUEHBO/AMEMBASSY BOGOTA 7132
RUEHLP/AMEMBASSY LA PAZ 2411
RUEHPE/AMEMBASSY LIMA 0666
RUEHQT/AMEMBASSY QUITO 2497
RUEHAO/AMCONSUL CURACAO 1070
RUEHGL/AMCONSUL GUAYAQUIL 0716
RHEHNSC/NSC WASHDC
RUEHRC/DEPT OF AGRICULTURE USD FAS
RUCPDOC/DEPT OF COMMERCE

UNCLAS SECTION 01 OF 02 CARACAS 003500

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
HQ SOUTHCOM ALSO FOR POLAD

E.O. 12958: N/A
TAGS: ECON EAGR VE
SUBJECT: STOCKING UP FOR THE HOLIDAYS

REF: A. CARACAS 2831

B. CARACAS 0444
C. CARACAS 3412

1. (U) SUMMARY: Economic inefficiencies, coupled with
retrograde government policies, future uncertainty, and
record-high consumer spending are making shortages an
increasing part of life in the Bolivarian Republic of
Venezuela. Recent weeks have seen recurring shortages of
sugar and milk and many goods disappear and reappear with
frustrating frequency. These disappearances seem only likely
to increase as stockpiling in response to shortages creates
more demand and shortages. END SUMMARY.

2. (SBU) Sugar disappeared from store shelves throughout
Venezuela in August of 2006 as Venezuela does not produce
sufficient sugar for domestic consumption, and production
this year was affected by a series of unfortunate events.
Sugar cane must be cut within a short time period after it is
ready for harvest, and this year the cutters went on strike
and prevented farmers from harvesting their produce during
the optimal period. Historically, refineries have exchanged
raw sugar based on refining capacity, but this year many of
the BRV-owned refineries were mired in corruption scandals,
shutdowns and other inefficiencies, resulting in production
problems throughout the whole sector. (Note: Four of the
fourteen refineries in Venezuela are government-owned. End
Note.) In addition, the price of sugar is controlled by the
BRV and at present the fixed price is below the cost of
production or importation (reftel A). The BRV resolved the
August sugar crisis through massive importation from Brazil,
though in the past week sugar has again disappeared.
(Comment: The structural causes remain the same as
previously, though it remains to be seen how the BRV intends
to resolve the situation this time. End Comment.)

-------------------------------------
PRICE CONTROLS EXPLAIN MOST SHORTAGES
-------------------------------------

3. (U) In addition to sugar, milk shortages have also been
an on-going problem (reftel B). Fresh milk is virtually
non-existent now and even boxed and powdered milk are in
short supply. As with sugar and some other goods suffering
shortages, the cost of production for milk now exceeds the
controlled price. In a similar vein, a bout earlier this
year between coffee producers and the government led to
large-scale shortages, government seizures and an eventual
renegotiation of the fixed price (reftel B).

4. (SBU) In a recent meeting with the Agriculture Chamber
(Fedeagro), econoffs were shown a 250-page study of the costs
of production for Venezuela's major agricultural goods.
Fedeagro is trying to convince the BRV to raise controlled
prices for many goods, but admitted that this was unlikely
given BRV concerns about inflation and food prices. They
were more optimistic that they could convince the BRV to
subsidize production. (Comment: Both price controls and
subsidies distort the market and while the subsidies could
prevent farmers and producers from being forced to sell their
products at a loss, they would not solve the problems of
underdevelopment of the agricultural sector. End Comment.)

5. (SBU) Additional shortages are expected as the Holiday
season swings into full gear. Approximately 60-70 percent of
Venezuela's foodstuffs are imported or are produced from
imported sources, as are most toys and Christmas items.
(Note: As an example, Venezuelans have the second highest
per capita consumption of pasta in the world--much of it is
produced here--but from imported wheat. End Note.) At a
recent Venezuelan-American Chamber of Commerce (VenAmCham)
event, many businessmen noted that due to the historically
high consumption levels, they have not been able to build up
inventories in advance of the Christmas shopping season. In
addition, delays in obtaining dollars through Commission for
the Administration of Foreign Exchange (CADIVI) has meant
that importers were unable to purchase their goods
sufficiently far enough in advance to have them here in time

CARACAS 00003500 002 OF 002


for the shopping season.

6. (SBU) Port infrastructure is at its breaking point due to
huge volumes and transportation problems from La Guaira to
Caracas. While notoriously inefficient, customs officials
appear to have gotten worse of late; one contact told econoff
that it took 30-45 days to get their foodstuffs through
customs at the port of entry. Another contact said that the
average time was 14-17 days, though that was up from 4-5 days
only last year. (Note: The head of the BRV Customs and Tax
Agency (SENIAT), Jose Vielma Mora, has been visiting ports
and making many public statements about his intention to
improve processing times as he tries to avoid being labeled
the Grinch in the run-up to Christmas. End Note.)

7. (SBU) There is a lot of money on the street in Venezuela.
Ever-increasing liquidity is fed by government fiscal
policies, such as issuing the "aguinaldo," or additional 3
months salary for government workers in November, and
negative real interest rates that discourage saving.
Additionally, commercial banks have been heavily pushing
credit cards with easy credit terms, and consumer debt is
rising. Central Government spending has also spiked, with
the BRV spending close to USD 6.8 billion in the past three
weeks, according to the Central Bank (as opposed to the
average USD 3.9 billion per month during 2006). This all has
led to increasing demand and caused scarcity due to the
aforementioned limits on supply.

8. (SBU) On top of all of the structural and seasonal
problems, the approaching elections on December 3 have led to
stockpiling by consumers anticipating a possible repeat of
the demonstrations and violence that followed the recall
referendum in 2004. The government has fed this cycle of
uncertainty, circulating a variety of rumors of
destabilization in recent weeks (see reftel C). (Note: Spot
visits to local grocery stores in recent weeks have found
customers fighting over shopping carts and shelves emptied by
mid-afternoon. Econoff spent 50 minutes in line trying to
check out this past weekend. The President of the
Association of National Supermarkets (ANSA) recently noted
that while sales are up 13 percent this month (over already
high amounts), they have two months of supply and no
shortages are expected during the holiday season. End Note.)

9. (SBU) COMMENT: The structural problems of the Venezuelan
economy are perhaps most evident in the shortages felt by
every day consumers. Anecdotal reports add to the growing
list of consumer products and raw materials missing in
Venezuela (last week there was a shortage of concrete in
Barinas state and a Brazilian contact noted that many of the
major infrastructure projects planned are delayed due to lack
of raw materials). The shortages are a result of BRV
economic meddling, but also of record high demand and
structural inefficiencies in the Venezuelan economy, none of
which are likely to change any time soon. END COMMENT.
BROWNFIELD

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