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Cablegate: Yemen's Wheat Nightmare

VZCZCXYZ0020
RR RUEHWEB

DE RUEHYN #1753/01 2551238
ZNR UUUUU ZZH
R 121238Z SEP 07
FM AMEMBASSY SANAA
TO RUEHC/SECSTATE WASHDC 8019
INFO RUEHEG/AMEMBASSY CAIRO 0811

UNCLAS SANAA 001753

SIPDIS

SIPDIS

AMEMBASSY CAIRO PASS TO FAS CAIRO

E.O. 12958: N/A
TAGS: EAGR EAID ECON YM
SUBJECT: YEMEN'S WHEAT NIGHTMARE

1. SUMMARY: The ROYG has penned a plan to increase its
control and regulation of the wheat sector in Yemen while
simultaneously creating a company owned in part by the ROYG
with the objective of importing 50 percent of Yemen's wheat
needs. The US Wheat Associates, Inc. advised ROYG against the
plan and told them to wake up and smell the market. END
SUMMARY


YEMEN'S WORST NIGHTMARE ?
-------------------------

2. On September 3, 2007 Hesham Hassanein, Special Projects
Manager, Middle East and East Africa for U.S. Wheat
Associates Inc., met with the ROYG Minister of Industry and
Trade, Yahya al-Mutawakil, to discuss the price of wheat.
The Minister told him that the ROYG's worst nightmare is not
high prices but that one day they will "wake up and have no
wheat and no bread in Yemen." He said that the ROYG is
looking at all options and that they have very little trust
in the private sector to maintain an adequate supply of wheat
for the nation. NOTE: Hassanein told ComOff that earlier in
the week, private wheat traders told him that they have no
trust in the ROYG and that they are worried that the
government will try to set prices or "take" their wheat
supplies. END NOTE. For that reason, Minister al-Mutawakil
told Hassanein that the government is considering a plan to
enter the market and buy wheat, approximately 500K Metric
Tons (MT). Hassanein warned that this might only serve to
drive prices higher in the market. He explained that news in
the market of a government buying large amounts of wheat
usually moves the market up.


3. Hassanein told the Minister that the U.S. Wheat
Associates is impressed by the skill and savvy of the wheat
traders in Yemen. Hassanein told the Minister that in his
professional opinion the traders are not hoarding supplies or
gouging prices. He explained that the price rise is a
reflection of the replacement cost of wheat as supplies
purchased at earlier lower costs move to market. He also
explained that the traders' supply contracts were adequate
and well placed. NOTE. The Hayl Saeed Anam Group recently
set a contract for 250K MT over the next three months.
Spacing the contracts out over time increases the likelihood
that a trader is not locked into a long term contract at high
prices. By ordering in quarterly increments, the chances are
improved that wheat may be purchased later when the prices go
down, thereby decreasing the cost of movement to market. END
NOTE. Hassanein suggested that the ROYG seek to work with
the traders and not attempt to compete with them. He
explained that the current prices should attract more
production which will in turn bring the prices down in the
future. The Minister told him that the Ministry of Planning
and International Cooperation (MOPIC) has a plan to present
to the U.S. Wheat Associates Regional Office in Cairo.
Hassanein told ComOff that there may soon be "too many chefs
in the kitchen", fighting over wheat. NOTE: The power point
presentation that Hassanein gave to the Minister may be found
at www.USWheat.org. END NOTE.


CHEF NUMBER TWO, MOPIC HAS A PLAN
----------------------------------

4. On September 6, 2007 CommOff spoke to Dick Prior,
Regional Vice President, Middle East and East Africa, U.S.
Wheat Associates, Inc.. Prior told ComOff that Ali Saif
Hassan, a consultant hired by ROYG MOPIC, had contacted him
about a proposal by the ROYG entitled "Wheat Importation
Mechanism." This is a three point plan in which ROYG appears
to take control of the private sector via regulation of
contract terms and surprise inspections of storage facilities
while forming its own partnership company with private
investors with the objective of importing at least 50 percent
of Yemen's wheat needs. Prior replied to Hassan that the U.S.
Wheat Associates does not see this as a solution because the
private sector in Yemen is performing well under the
circumstances in the market and the government-formed company
will lack the same level of experience. He added that if the
government gives this new company special provisions it will
"break the backs" of the current traders. Prior stated that
the privatization process in the wheat sector in Yemen seems
to be working well and this type of "company" will serve only
to interfere in that process and create long range problems.
Prior also explained to Hassan, as Hassanein explained to
Minister al-Mutawakil, that the problem of prices and
apparent wheat shortages is likely to be short-lived because
high prices tend to attract more production. By the time
this ROYG "company" is formed the problems may have
dissipated. Prior told CommOff that U.S. Wheat Associates
expects to see "some pressure ease within the next 1-2 months
but prices moving upward until next May." He added, however,
that the expected production increase will bring them down
again. NOTE: A copy of this ROYG Proposal is available
through Yemen Desk Officer Natasha Franceschi. END NOTE.


AN ALTERNATIVE PLAN FROM US WHEAT
---------------------------------

5. In his response to Hassan, Prior suggested that if ROYG
feels compelled to act in some way, they should work with the
current traders in Yemen to find a solution. Prior suggested
ROYG meet with the traders and agree on some formula
connected to the market price whereby the government can hold
prices down and traders will not lose money. He suggested a
direct subsidy, tax incentive or other incentive. He
suggested as an example a plan in which a Yemeni trader
brings in a vessel of Wheat at a cost of $380/MT (invoice
value) and his profit is 10 percent (or whatever is fair).
The total cost then is $420/MT - but the maximum market price
set by the ROYG is $250/MT. The trader can then sell at $250
but claim a $170 subsidy from the ROYG. This continues until
the costs are less than the set acceptable price. Prior
believes that such an arrangement would only need to last
8-10 months and would not interfere in the free market forces
while ensuring a supply for the country. He added that the
system could also be organized in such a way that the
beneficiaries of these subsidized prices are the very poor
who cannot live without such assistance, creating a sort of
welfare system that does not interrupt private business or
the supply of wheat to Yemen.


COMMENT: WAKE UP AND GO BACK TO SLEEP
-------------------------------------

6. While sympathetic to the pressure that the international
increase in the price of wheat is placing on the ROYG, the
U.S. Wheat Associates does not believe that the situation is
likely to continue and may in fact reverse itself as higher
prices lead to more production. The real nightmare for Yemen
will be the Government's ill-conceived and ill-advised foray
into the business of wheat importation and increased
regulation and control over the wheat sector. The wheat
sector is one of the few well-functioning fairly privatized
sectors in Yemen's economy. The U.S. Wheat Associates
alternative suggestion (if in fact ROYG feels compelled to
intervene) to work with the traders and possibly go to a
temporary subsidy system is not ideal but it is preferable,
for the sake of the free market principles currently at work
in the sector.

7. There is already some indication that ROYG may be taking
the advice of the U.S. Wheat Associates to heart. In a
recent phone call with ADCM Mike Sarhan, Minister
al-Mutawakil stated that the ROYG is approaching the problem
as a food security issue. ROYG is considering the option of
creating a safety net system by engaging in a one time
purchase of wheat in an amount adequate to cover the needs of
the nation for several months. They understand that
stockpiling wheat may enable them to reduce or prevent wide
price fluctuations in the domestic market. All other
options, however, are still on the table. Post will continue
to monitor the situation. END COMMENT.
SECHE

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