BURMA'S PRIVATE RICE EXPORTS: A FAILED EXPERIMENT

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000625 SIPDIS STATE FOR EAP/BCLTV, EB BANGKOK FOR FAS COMMERCE FOR ITA JEAN KELLY TREASURY FOR OASIA JEFF NEIL USPACOM FOR FPA E.O. 12958: DECL: 05/17/2014 TAGS: EAGR PGOV ECON BM SUBJECT: BURMA'S PRIVATE RICE EXPORTS: A FAILED EXPERIMENT REF: A. RANGOON 223 ¶B. RANGOON 34 AND PREVIOUS Classified By: COM CARMEN MARTINEZ FOR REASONS 1.4 (B,D) ¶1. (C) Summary: Burma's military and its economic tentacles are apparently benefiting from the GOB's January freeze on private sector rice exports, buying up thousands of tons at discount prices. Though the purchases are good for farmers who were stuck with massive surpluses when private exporters stopped buying, the freeze and the evident return of government participation in the rice markets may be the death knell for the short-lived policy that freed the rice trade in 2003 from 40 years of government control. End summary. "Temporary" Ban: Day 163 ¶2. (C) Private sector exports of rice, liberalized after 40 years with much fanfare in March 2003, were abruptly "suspended" in January 2004 (ref B) leaving in the lurch many exporters -- some with contracts already signed. Though the GOB announced at the time the ban was only "temporary," to date there has been silence as to when the restrictions might be lifted. ¶3. (C) The ostensible justification for the export freeze was a fear that domestic supply would dwindle below demand. Publicly the government cited a possible spike in demand following the January announcement that rice subsidies to civil servants would be replaced with a 5,000 kyat monthly stipend (ref A). Privately, rice traders and economists told us the government was fearful because its poor statistics and controls meant there were no reliable accounts of how much rice was in GOB warehouses or what domestic consumption really was. In either event, the already low domestic price for paddy in early 2004 -- about US$117 per 100 baskets (about 2.5 tons) -- remained stable, and even sank slightly in the aftermath of the export ban and the civil servant compensation reform. ¶4. (C) With domestic prices cheap and stable, the GOB, always in need of foreign exchange, should have been comfortable to lift the ban. However, the private sector remains frozen out. There have been no legal exports of rice since January -- not even for barter trade deals. According to reliable sources with firsthand knowledge of rice exports, in FY 2003-04 (April-March),only 80,000 metric tons of rice were legally exported. For comparison, in FY 2002-03 roughly 700,000 metric tons of rice were legally exported. Transportation of rice domestically toward the border areas is outlawed, though much is smuggled out across the borders to Bangladesh and China anyway. Recent sales to World Food Programme projects have come from the GOB's stocks, set aside in theory to meet its ASEAN buffer requirement. Military Feasts While Exporters Starve ¶5. (C) According to several rice industry sources, the GOB has not re-opened exports in order to give the military a chance to fill its granaries while domestic prices are cheap and also to allow the military's two "private" companies (Myanmar Economic Holdings, Ltd. (MEHL) and Myanmar Economic Corporation (MEC)) to build up stockpiles that can later be exported for a large profit. According to one knowledgeable commodities broker, the military has purchased more than 35 million baskets of paddy (about 800,000 tons) from local rice traders -- far more than is needed to feed the troops. Production and Prices Unclear ¶6. (C) In the short term, this massive military purchasing has had a beneficial impact for farmers, driving domestic prices up nearly 20 percent to around US$140 per 100 baskets of paddy (around 2.5 tons). This is still far lower than it has been in recent years, but is considered the break-even point for most producers. However, the chaos and insecurity caused by the GOB's gyrating rice policies will likely lead to reduced supply next season as farmers err on the side of caution. The dry season area under cultivation was smaller than usual, and agriculture insiders are predicting a sharp year-on-year drop in plantings for the larger monsoon crop. This combined with too much or too little rain could squeeze supply when the main harvest occurs at the end of the year. Fortunately any supply problems will be mitigated somewhat by the domestic surpluses remaining from the 2003 monsoon harvest due to unmet expectations of exporter demand. Comment: Burma's New Private Sector ¶7. (C) The direction of the GOB's ever evolving rice policy is troubling. The regime, getting cold feet at the prospect of losing control of the politically sensitive rice market, is apparently swapping the old monopoly exporter Myanmar Agricultural Products Trading (MAPT) for new monopolists MEC and MEHL. More insidious, however, is the fact the SPDC will claim these two firms are private (they are owned in part by individual military shareholders) and thus the policy of private rice exports has not changed. Given their good head start, MEC and MEHL will destroy genuine private sector competitors when the export market is finally re-opened to "free" trade. End comment. Martinez