Cablegate: Trade Ministry Considering Market-Oriented Approach With

VZCZCXRO1632
RR RUEHBC RUEHDA RUEHDE RUEHDH RUEHKUK
DE RUEHGB #3286 3550952
ZNR UUUUU ZZH
R 210952Z DEC 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 5817
INFO RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCNRAQ/IRAQ COLLECTIVE

UNCLAS BAGHDAD 003286

SENSITIVE
SIPDIS
USDA FOR GSM JOHN BREWER
E.O. 12958:N/A
TAGS: EAGR EAID ECON ETRD KCOR PREF WFP IZ
REF: BAGHDAD 3055
SUBJECT: TRADE MINISTRY CONSIDERING MARKET-ORIENTED APPROACH WITH
PDS IMPLICATIONS

1. (SBU) Summary and Comment: Two reform proposals originating from
within the Iraqi Ministry of Trade (MOT) would liberalize state
control over food production and processing. The first deals with
Iraq's corrupt and inefficient food rationing program, the Public
Distribution System (PDS). The proposal would privatize flour
milling and could positively impact $700 million in existing U.S.
wheat sales. The second is a possible sharing of MOT grain handling
facilities for private imports of animal feeds and other
commodities. It is too early to gauge the GOI's commitment to
implementing either proposal, but that these steps are being
considered at all is encouraging. End Summary and Comment.

Wheat Flour & Rice Reforms

2. (SBU) High-level officials at the Ministry of Trade (MoT) and its
purchasing arm, the Iraqi Grain Board (IGB), are discussing
significant changes to the Public Distribution System (PDS). These
changes, if instituted, could be positive steps toward market
orientation. Under discussion is a plan that would reduce the PDS
allotment of wheat flour and rice given to each Iraqi. This
component of consumer demand would, in the future, be met by the
private sector. We are seeking copies of both plans from the MOT
contact who briefed us on the details of the plans.

3. (SBU) Virtually all Iraqi private sector flour mills are under
exclusive contract with the MoT to mill flour for the PDS. Most
mills are outdated and operate at only 25-50% of their rated
capacity. Under this plan, flour mills could choose to be released
from PDS milling contracts thereby becoming genuinely private sector
entities or renegotiate/bid competitively for new PDS contracts.
The plan as envisioned would act as a catalyst to allow the
re-emergence of a private sector milling industry.

4. (SBU) The MoT is exploring similar options for the other major
PDS commodities including rice, sugar, and vegetable oil, as first
steps toward possible disengagement from supplying state-rationed
food to Iraqis. This type of reform could also provide a boost to
retail food shops that currently compete against free food
commodities distributed through PDS agents throughout the country.
Private Use of MoT Grain Handling Facilities

5. (SBU) MoT has also indicated that they will consider facilitating
the import and distribution of feed grain commodities (corn,
sorghum, soybeans, and protein meals) to the private sector through
the use of their existing infrastructure. Most feed is currently
imported by truck from Syria or Turkey whereas transportation by
ocean-going vessels would be much more efficient if the private
sector had access to port facilities in Umm Qasr. The initiative is
significant because the lack of availability and high price of
animal feed continues to hinder Iraq's agricultural economy and
results in reduced agricultural employment and higher meat and
poultry prices. Significant demand exists for imported corn,
soybeans, and other feed components. However, the Ministry of
Agriculture maintains a thicket of procedural import barriers and
seasonal import bans that make Iraqi feed prices the region's
highest. We do not believe that the Ministry of Agriculture is
aware of the MoT plans yet.

6. (SBU) Comment: The wheat plan would significantly reduce the
"crowding out" effect of the PDS, and could re-establish a private
milling sector, while concurrently reducing one of the main avenues
for corruption in the PDS structure. If handled correctly, it could
Qfor corruption in the PDS structure. If handled correctly, it could
also greatly improve the range and quality of flour available to the
Iraqi baking industry. Newly privatized domestic millers could
recapture the market niche now filled by state-supported imports of
flour from Turkey. We estimate that one-third of the PDS flour is
now illicitly resold into the private market. The plan would reduce
this "leakage," eliminating a huge and expensive inefficiency
inherent in the current PDS design. Regarding the use of MoT
handling facilities for private feed imports, Iraq's livestock
sector would reap huge benefits from bulk feed grain imports,
through much lower feed cost. Increasing the feed supply has been
an ongoing objective for a range of U.S. policy and development
initiatives. This may create an opportunity for USDA-sponsored
initiatives in the areas of private/public sector procurement
strategies and milling science. End Comment.

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