GOP RESPONSE TO AGRICULTURAL STRIKE! PROMISES,

UNCLAS SECTION 01 OF 02 LIMA 002565

SIPDIS

SENSITIVE

USDA/FAS/ITP/BGRUNENFELDER/CBERTSCH
USDA/FAS/CMP/GFD/REIMENSCHNEIDER
USDA/FAS/CMP/COTS/PACKNETT
USDA/FAS/CMP/HTP/DEATON
USTR/MLATIMER/RVARGO

E.O. 12958: N/A
TAGS: OTRA EAGR EC
SUBJECT: GOP RESPONSE TO AGRICULTURAL STRIKE! PROMISES,
PROMISES, PROMISES!

REF: LIMA 002335


1. (SBU) SUMMARY: In a four-day strike, that ended May 27,
agricultural producers in ten departments put up roadblocks
demanding import controls and price supports and
concessions/protections for agriculture in the FTA negotiations.
However, in some areas only a 15-day pause was agreed upon,
hinging on GOP follow-through of some infrastructure
improvements. The strike was led by rice producers and joined
mainly by potato and cotton farmers. The Government of Peru
(GOP) reacted quickly, promising a number of support programs,
which do little to address the inherent oversupply problems of
rice production. The GOP promised to purchase small quantities
for feeding programs, to set up a credit scheme aimed at
regulating prices, and to raise direct subsidies to cotton
producers. These minor concessions will do little to resolve the
agriculture sector's difficulties or to discourage future
protests. END SUMMARY



2. (SBU) AGRICULTURAL STRIKE:

On May 23, agricultural producers throughout Peru began a strike
with road blockades. Three groups mainly supported the strike:
rice, cotton and potato producers, each of which faces different
challenges and are requesting different things from the
government.

-- Rice: Rice production was about 15 percent lower than usual
in 2004 due to drought. Most of this reduction was in the
northern coast (Lambayeque production went from 500,000 MT to
85,000 MT). To prevent shortage, millers and the government
encouraged production in new areas such as San Martin and
Amazonas. In 2005, northern coast rice production is expected
resume normal production levels, but the new rice-producing areas
will also continue producing resulting in an oversupply. Rice
imports from January to May 2005(100,000 MT) nearly doubled from
what Peru imported during the entire previous year. Most of the
imports were from Uruguay, but the U.S. share increased
significantly. Fear of lower prices due to increased supply,
combined with the FTA negotiations, triggered the protests.
Producers demanded import controls and support prices.

-- Potato: Potato prices in Peru are on a roller coaster. If
there is a good year price-wise, then the next year increased
production floods the market, causing prices to plummet. Due to
lack of standardization and quality control in the sector, Peru
is not a potato exporter. However, producers, encouraged by NGOs
(mainly OXFAM) and CONVEAGRO (the National Agricultural Producers
Organization) oppose an FTA fearing that wheat imports will
replace domestic potato consumption.

-- Cotton: Peru requires about 100,000 MT of cotton per year, of
which it imports about 40,000 MT, mostly from the U.S. Nearly a
year ago (September 2004),the GOP announced an 8 soles (US$2.45)
per hundredweight domestic support payment. The GOP has had
problems implementing the program with few cotton producers
receiving the promised support. Cotton producers have been
demanding the government compensate them for U.S. subsidized
cotton. Cotton producers' opposition to the FTA has become
stronger over the past year given the lack of government support
and the result of the WTO cotton ruling against the U.S.


3. (SBU) GOP RESPONSE:

Minister of Agriculture Manuel Manrique reacted quickly to the
producers' demands, calling for the following measures:

- Purchase of 18,000 MT of rice and 4,000 MT of potatoes to be
used in the government's feeding program. In addition, the GOP
announced that it plans to setup a government purchase program to
respond to over-supply situations. However, the program does not
have any funding as yet.

- Increased compensation to cotton producers from U.S.$2.45 to
U.S.$4.3 per hundredweight. In the recent past, the government
has failed to fully fund this program and pay the promised
support.

- Authorize Agrobanco (the state agricultural development bank to
QUOTE warrant UNQUOTE rice. A QUOTE warrant UNQUOTE is a bank
loan with product used as collateral. The product is stored
under the bank's control until the loan is paid. Theoretically,
if prices fall, producers could ask for a loan of up to 70
percent of the value of the product being warranted and store the
product until prices improve. The warrant is a mechanism of
moving product out of the market and regulating supply. Private
traders and banks use the warrant system in Peru.


4. (SBU) FIFTEEN-DAY PAUSE:

The agricultural strike in San Martin (a large rice producing
area) turned into a regional strike with one single demand: the
construction of a road between Juan Guerra and Tocache which
would reduce the transport distance to market from 1500 to 900
kilometers. The strike was temporarily lifted on May 29 for
fifteen days. The farmers in the area have threatened to produce
more coca if the government does not build the road they want.


5. (SBU) COMMENT: KEEPING PROMISES?

The promises made to the producers by the GOP are a stopgap
measure at best. Lack of long range-integrated planning,
combined with the absence of financial support for the programs,
appears to doom their efficacy, even before they begin. There is
no long-term benefit for farmers in buying an insignificant part
of the crop for one time under the government-feeding program.
The GOP needs to provide technical assistance to improve yields
and efficiency, improve communications and infrastructure, and to
provide timely information about planting and prices so that
producers can make educated decisions as to what to plant and how
much.


6. (SBU) It remains to be seen how effective the warrant program
will be. Lack of economies of scale, high administrative costs,
and the lack of credit worthiness of many small producers put the
workability of the program into question. It is doubtful that in
case of non-payment by the small producers, banks would actually
take ownership of the rice as it would precipitate rural unrest
and future strikes.


7. (SBU) Agricultural strikes are not unusual and the
government's solution to these frequent strikes has been to make
minor concessions and suggest longer-term assistance, which is
unsustainable due to budget constraints, setting the stage for
more strikes and a likely increase in opposition to the FTA from
the traditional agriculture sector.

STRUBLE