PANAMA: KEY AGRICULTURAL ISSUES FOR THE UPCOMING

UNCLAS SECTION 01 OF 06 PANAMA 000798

SIPDIS


USTR FOR RVARGO, JWOLFE
STATE/EB FOR RMANOGUE
SAN JOSE FOR AHRAPSKY
USDOC4332/ITA/MAC/WH/OLAC/MGAISFORD/VDEES
USDA FOR BRIAN GRUNENFELDER, CHARLES MARSTON, BRENDA
FREEMAN, ROGER MIRELES


E.O. 12958: N/A
TAGS: ETRD EAGR PM ECONOMIC AFFAIRS
SUBJECT: PANAMA: KEY AGRICULTURAL ISSUES FOR THE UPCOMING
U.S.-PANAMA FTA NEGOTIATIONS, APRIL 26-30, PANAMA CITY



1. This message is sensitive but unclassified. Please treat
accordingly.



2. Summary: This cable provides an overview of Panama's
agricultural sector and Post's assessment of key issues in
preparation for the upcoming bilateral negotiations (Round
One will be held April 26-30, 2004 in Panama City). Paras 1-4
provide an overview of the sector; paras 5-9 provide a
summary of key barriers to increased U.S. market access;
paras 10-11 provide a summary of Panama's agricultural
incentives; and paras 12-22 provide background and basic
trade and production data for sub-sectors (e.g. beef, dairy,
rice, etc) identified as sensitive by local agricultural
groups. Like elsewhere, Agriculture represents a largely
defensive interest for Panama (with the clear exception of
improved sugar access under the US-administered TRQ). (Note:
While the Ag sector represents only 6 percent of Panama's
GDP, it represents 53.3 percent of the rural labor force and
14.6 percent of the total force. End note.) The GOP has
reviewed the CAFTA Ag chapter and understands US
expectations. End Summary.



3. According to 2003 official statistics from the GOP
Comptroller General's office, the ag sectors contribution to
Panama's total GDP (approximately USD 12 billion) fell 0.1
percent to USD 557.4 million. Total agricultural imports for
2002 were USD 417 million while agricultural exports were USD
603 million. (Note: Detailed GOP agricultural statistics for
2003 are still pending. End note.) According to USDA
statistics, Panama imported a total of USD 191 million from
the US in agricultural products in 2003 and exported USD 151
million to the United States. (Note: This figure includes
both raw and processed ag products. End note.) This
represented a 3.1 percent increase in imports from 2002 and
continued a traditional upward trend, interrupted only by
greater increases in 1998 and 1999 when El Nino forced Panama
to increase food imports from the US. In 2002, 46 percent of
Panama's total imports of food products came from the United
States and 23 percent of Panama's total food exports went to
the US.



4. Following Panama's accession to the WTO in 1997, Panama
lowered all duties to 15 percent or less, becoming the most
open market in the area. However, at the end of 1999, the
incoming Moscoso Administration reversed this and raised
duties for sensitive products. Sensitive products include
beef, dairy, rice, poultry, pork, corn, tomatoes, potatoes,
onions, and cooking oil. In addition to increased duties and
Tariff Rate Quotas (TRQs),Panama does not/not recognize the
US sanitary meat inspection system and has never accepted
fresh or chilled US chicken, citing high phytosanitary risk.
Nevertheless, Panama imports frozen turkeys and turkey meat
for the meat processing industry. Particularly troublesome
has been the lack of transparency by the Ministry of
Agricultural Development (MIDA) when deciding whether to
issue or deny phytosanitary permits -- in effect, at times,
seemingly using this authority to administer a de facto quota
system. Like elsewhere, many agricultural groups complain
that their U.S. counterparts enjoy an unfair advantage
through subsidies/domestic support. To date, three sectors
-- beef, dairy, rice -- have expressed a strong desire to be
excluded from the agreement. Aside from the above-mentioned
sensitive products, market access is generally good for US ag
products. The average tariff for non-sensitive ag products
is 15 percent.


--------------
Key Barriers to Increased US Market Access
--------------



5. The GOP has increased protection for sensitive sub-sectors
primarily by raising duties and creating Tariff Rate Quotas
(TRQs). The GOP has limited its protection for potatoes,
onions, cooking oil, beef, and sugar to duty increases. It
maintains TRQs for poultry, pork, corn, rice, dairy, and
tomato products. (Note: Para 6 contains detailed TRQ data.
End note.) TRQs are entirely filled every year for pork,
corn, rice, dairy, and tomato products. The yearly quota for
poultry products has never been filled because of
phytosanitary concerns about US poultry, which have led to
delays in the issuance or denial of phytosanitary import
permits. This lack of procedural transparency in the
issuance of these permits and the lack of recognition of US
plant inspection are the two key barriers to increased US
market access.



6. TRQ detailed information: (Note: Out-of-quota tariff rates
are as of 01/01/04. End note.)


Poultry TRQ: 626 MT
In-quota tariff: 15 percent
Out-of-quota tariff: 273 percent


Pork TRQ: 772 MT
In-quota tariff: 3 percent
Out-of-quota tariff: varies
Hams, picnics, parts: 74 percent
Deboned, other buts with bone: 30 percent


Corn TRQ: 141,450 MT
In-quota tariff: 3 percent
Out-of-quota tariff: Not Available


Rice TRQ: 8,297 MT
In-quota tariff: 15 percent
Out-of-quota tariff: 50 percent


Dairy TRQ: 11,018 MT
In-quota tariff: 3 percent
Out-of-quota tariff: varies
Skim, whole, other milk: 66 percent
Powder milk: 63 percent
Evaporated milk: 159 percent (including goat evaporated milk)


Tomato TRQ: 1,439.5 MT
In-quota tariff: 3 percent
Out-of-quota tariff: varies
Tomato puree: 83 percent
Tomato pulp crude: 83 percent
Remaining: 83 percent
Ketchup: 50 percent
Tomato paste: 50 percent
Remaining: 50 percent



7. Panama's application of standards and certification
requirements generally conforms to WTO standards. However,
restrictions have been applied from time to time in response
to pressure to protect local producers. Particularly of
concern has been the lack of procedural transparency by
relevant Panamanian authorities when deciding whether to
issue or deny phytosanitary import permits. The Ministry of
Agricultural Development (MIDA) has, most recently, failed to
act upon the issuance of import permits for frozen french
fries but has also stalled issuance of imports for onions,
corn, and dairy products. The permits were partially issued
after the Embassy intervened.



8. Panama also requires certification by Panamanian health
and agricultural officials of individual US processing plants
as a condition for the import of poultry, pork, and beef
products. US exporters have assisted Panamanian officials in
making inspection visits to US plants. There have been no
instances of a US plant failing to be certified, but
inspections have been delayed many times for various reasons,
including lack of personnel and budgetary constraints in the
responsible Panamanian ministries.



9. In September 2003, Executive Decree No. 352 was signed by
President Moscoso requiring Panamanian officials certify
international plants as a condition for the import of
consumer-ready products. While this decree has not been
implemented fully, the Ministry of Health is requiring this
certification for sanitary registrations. Sanitary
registration certificates allow products to be marketed and
sold within Panama and must be renewed every 5 years. This
decree does not/not comply with the requirements of Chapter
III of Law 23 of 1997 that requires Panamanian acceptance of
free sale certificates from exporting countries. This law
was implemented as a result of Panama's WTO accession.


--------------
GOP Ag Incentives
--------------



10. While total domestic supports to the ag sector are low
(less than USD 9 million annually prior to WTO accession),
aid consists of preferential tariffs, income tax deductions,
and tax deductions. Preferential tariffs (30 percent
reduction from the market rate) are given for the
installation and consumption of electricity used in farming
activities. A 30 percent income tax deduction is allowed for
investments in livestock, fisheries, and agro-industrial
activities (a maximum deduction of 40 percent of taxable
income in the tax period prior to the investment is
required). The following tax exemptions are permitted: (1)
profits derived from timber plantations planted within the
last 7 years, (2) income of less than USD 100,000 per annum
derived from ag or livestock production, and (3) property tax
on farming estates with a land registry value of less than
USD 100,000. A deduction of a percentage of capital invested
in farming activities (where farm incomes exceed USD 100,000
annually) is also available; the deduction is limited to the
average rate of interest for fixed term deposits plus 3
percent of that average.



11. The GOP has also granted special contracts to certain
investors whose activities required the use of large areas of
land; the land areas had ordinarily been granted under a
concession system. Mineral resources exploration has
benefited from such contracts. Agricultural exports of
Panama are also exempted from income tax on the income
derived from the exported goods, and Tax Credit Certificates
(Spanish acronym: CAT or certificado de ahorro tributario)
have been granted for non-traditional ag products. CATs are
administered by MICI and pay 15 percent of value added to
exports of non-traditional ag products. CATs will be
eliminated in 2005. Panama recently enacted an Industrial
Law that is WTO consistent and will replace CAT-lost income
through various incentives and subsidies. Panama also
maintains Laws 24 and 25 which provide support money to
farmers and are administered by MIDA. Law 24 provides money
to farmers that suffer losses due to natural disasters
whereas Law 25 provides money to farmers that convert from
traditional to non-traditional crops for export.


-------------- --------------
Beef, Dairy, and Rice: "We don't want to be a part of the FTA"
-------------- --------------



12. Panama's leading industry groups for beef, dairy, and
rice have publicly spoken against inclusion of their sectors
in the FTA. However, while they prefer their industries be
excluded from the discussions, they have also begun to lobby
the Moscoso Administration to change current laws to ensure a
more protected agricultural sector. This lobbying has not
yet produced tangible results but the GOP has also not shut
the door on their requests. (Note: Panama has FTAs with
Taiwan and El Salvador. Only rice was excluded from both
agreements whereas beef products are tariff and quota free
and some dairy products are tariff free while others have
quotas. End note.) A common argument used by these
organizations against an FTA is that U.S. subsidies create an
uneven playing field.


--------------
Sub-sector: Beef
--------------



13. Panama's livestock industry is traditionally operated as
family-owned with extensive low-tech ranches. These depend
primarily upon low quality grassland and rain water. The
growth of the industry is small. Between 1991 and 2001, when
the agricultural census was taken, cattle production grew
only 9.1 percent (less than 1 percent a year). The GOP has
set a duty of 27.5 percent for beef and 10 to 15 percent for
offal. There is no/no TRQ for beef. The consumption per
capita of beef and offal in 2002 was 91.3 pounds. The
following statistics refer to 2002.


Overall beef imports: 160 tons for a total value of USD
573,000


Countries of origin: USD 573,000 from US (Note: Panama did
not/not import beef from any other country. End note.)


Overall offal imports: 451 tons for a total value of USD
333,000


Countries of origin:
USD 91,000 from US
USD 186,000 from Canada
USD 46,000 from Nicaragua
USD 10,000 from other countries


Exports: 3,997 tons for a total value of USD 14,607 million


Countries of destination:
USD 5,883 million to Mexico
USD 2,065 million to Guatemala
USD 1,481 million to Venezuela
USD 1,368 million to Taiwan
USD 3,810 million to other countries
(Note: There were no/no beef exports from Panama to the US.
End note.)



14. The National Association of Cattle Raisers (ANAGAN) has
solicited the GOP to approve two changes in Panamanian law
that would diversify and strengthen the domestic beef
industry. ANAGAN has requested a law that would include a
meat grading system on par with other leading beef-producing
countries; this law has been returned to its drafters for
corrections and may go before the Assembly in September 2004.
(Note: Reportedly, a motivation for this measure is to keep
out Nicaraguan beef. End Note.) The second law proposed by
ANAGAN requests that a percentage of profits from the cattle
quota go to ANAGAN to strengthen its commercial structure.


--------------
Sub-sector: Dairy
--------------



15. Panama's dairy farmers produced 150 million liters of raw
milk in 2002. Of this, 4 million liters were utilized as ice
cream, 47 million liters as evaporated/powdered milk, 56
million liters as pasteurized milk, and 43 million liters as
cheese and other dairy products. The following statistics
refer to CY 2002.


Overall dairy imports: 9,819 metric tons (MT) with a total
value of USD 18.8 million


The most important imported products and country of origin
were:
Powder Skim Milk: 1,081 MT (97 percent from New Zealand)
Powder Whole Milk: 2,069 MT (100 percent from New Zealand)
Butter oil: 1,031 MT (93 percent from New Zealand)
Cheddar cheese/industrial: 2,934 MT (99 percent from New
Zealand)
Consumer ready cheese: 437 MT (55 percent from the US)


Overall dairy exports: 7,634 MT with a total value of USD
10.9 million


The most important exported products and countries of
destination were:
Condensed milk: 4,205 MT (94 percent to Central America)
Evaporated milk: 2,404 MT (83 percent to Central America)



16. The Association of Dairy Producers (APROGALPA) claim that
the importation of milk has negatively affected domestic
production. The cost of production in Panama and elsewhere
in Central America is higher than more developed countries
because of the slow transfer of technology. APROGALPA
advocates the creation of a national plan developed by the
GOP and milk producers to improve quality and efficiency.
While the Panamanian dairy industry is competitive in Central
America, the industry claims it cannot compete with subsidies
provided to US dairy farmers.


--------------
Sub-sector: Rice
--------------



17. Panama had a total of 51,040 rice farms in 2002; of
these, 1,767 were mechanized and 49,273 were non-mechanized.
(Note: Non-mechanized farms include poor farmers and Indians
that plant rice for self-consumption. End note.) Mechanized
farmers were paid between USD 9.50 and USD 11.00/qq paddy.
Consumers paid USD 0.36/lb for a 5-lb bag of white rice 95/5.
(Note: "qq paddy" refers to 100 lbs of paddy rice and 95/5
signifies for every 100 grains of rice, 95 grains are perfect
and 5 grains may be defective. End Note.) Panama has the
highest consumption of rice in the region at 179.7 lbs/year.
The following statistics refer to 2002.


Overall rice imports: 30,108 MT (27,432 MT of paddy rice and
2,676 MT of white rice)


Countries of origin: 100 percent from the US


(Note: Panama did not/not export rice in 2002. MIDA
constantly monitors stocks, which are traditionally kept at
the minimum level of a two-months supply. If stocks fall
below this point, MIDA either approves the TRQ product or an
"extraordinary" TRQ, if needed. Typically, during and
immediately after local harvests, the market is closed to
imports. End note.)



18. The Federation of Farmers' organization (UNPAP),the main
organization for rice farmers, asserts subsidies of developed
countries must be eliminated before their products are
discussed within FTA negotiations. Following the abolition
of subsidies, UNPAP wants a 60-year protectionist period of
declining tariffs on sensitive products. UNPAP presented its
proposal to then Vice Minister of Trade Meliton Arrocha in
December 2003.


--------------
Other Sensitive Ag Sub-sectors
--------------



19. Turkey. The following information refers to CY 2002.


Production: -0-


Imports: 3,773 MT with a total value of USD 5,552,136
(Note: Of this, 2,780 MT was turkey meat used by the meat
processing industry. End note.)


(Note: Panama exported no/no turkey or turkey products in

2002. End note.)



20. Pork. In 2003, Panama slaughtered 302,641 heads of pork,
an increase of approximately 10 percent from 2002. The
following figures refer to 2003.


Chilled/Frozen Pork Imports: 2,041 MT with a total value of
USD 3,229,421
(Note: Of this, 1.095 MT were shoulder imports. End note.)


Countries of Origin: 1,581 MT from the US
460 MT from Canada


Pork Offal Imports: 3,791 MT with a total value of USD
2,015,392
(Note: Of this, 3,171 MT were pig feet and pig tails. End
note.)


Countries of Origin:
1,469 MT from the US
2,298 MT from Canada
24 MT from China


Processed Pork Imports: 2,919 MT with a total value of USD
6,719,000
(Note: Of these, luncheon meat comprised 2,022 MT for a value
of USD 4.9 million. End note.)


Countries of origin:
1,456 MT from Denmark
662 MT from US
68 MT from Canada
733 MT from other countries


(Note: Panama did not/not export any pork products in 2003.
End note.)



21. Corn. Panama had a total of 50,248 corn farmers in 2003;
of these, 540 were mechanized and 49,708 were non-mechanized.
Mechanized farmers planted 10,000 hectares whereas
non-mechanized farmers planted 58,230 hectares for a total of
68,230 hectares of corn planted in CY 2003. The following
statistics refer to CY 2002.


Yellow corn imports: 286,291 MT with a total value of USD
35.6 million
Popcorn imports: 209 MT with a total value of USD 0.15 million
(Note: All imports (286,291 MT) went toward animal feed. End
note.)


Consumption from local, mechanized farmers: 10,000 MT for
human consumption
21,818 MT for animal feeds


Consumption from local, non-mechanized farmers: 454,627 MT
for human consumption


(Note: All figures are for yellow corn. Consumption of white
corn in not/not significant in Panama. End note.)



22. Potatoes. The following information refers to fresh
potatoes for CY 2002.


Production: 16,719 MT


Imports: 1,064 MT with a total value of USD 355,281


Countries of origin:
388 MT from the US
271 MT from Holland
243 MT from Belgium
78 MT from Chile
77 MT from Canada
7 MT from Colombia


The following information refers to processed potato products
for CY 2002.


Production: -0-


Imports: 5,805 MT with a total value of USD 4,360,364
(Note: Of this, 5,254 MT were french fries. End note.)


Countries of origin:
2,343 MT from the US
2,381 MT from Holland
1,056 MT from Canada
25 MT from other countries


(Note: While small, the potato industry continues to be
protected by MIDA. Since December 2003, MIDA initially
refused to grant import licenses for frozen french fries on
two separate occasions. After Embassy intervention, the
permits were issued. The Embassy also notes that the
issuance of such permits for franchises serving frozen french
fries has never been disrupted. The last Embassy
intervention, negative press, and discussions between US and
Panama at the WTO negotiating session on Food Aid in Geneva
have prompted GOP officials and interested parties to seek a
resolution to the problem. End note.)
MCMULLEN