KENYA EMOP RESOURCES - WHEAT SWAP WITH KENYAN

UNCLAS SECTION 01 OF 03 NAIROBI 000067 SIPDIS AIDAC USAID/DCHA FOR MHESS, WGARVELINK, LROGERS DCHA/OFDA FOR KISAACS, GGOTTLIEB, MMARX, IMACNAIRN, KCHANNELL, LPOWERS, CABLA DCHA/FFP FOR JDWORKEN, DNELSON, SBRADLEY AFR/EA FOR JESCALONA, JBORNS ROME FOR FODAG GENEVA FOR NKYLOH BRUSSELS FOR PLERNER STATE FOR JGAFFNEY, NGAREY NAIROBI FOR ABEO NSC FOR JMELINE E.O. 12958: N/A TAGS: EAID KE EAGR ECON ETRD SUBJECT: KENYA EMOP RESOURCES - WHEAT SWAP WITH KENYAN MAIZE REF: NAIROBI 7342 AND PREVIOUS -------------- SUMMARY -------------- ¶1. This is an action request. See paragraph 12. ¶2. To address the immediate food needs of an estimated 2.5 million drought victims throughout Kenya, particularly in eastern and northeastern pastoralist areas, while also supporting Kenya?s oversupplied maize market, post recommends USAID/FFP/DCHA approval of the World Food Program (WFP) request for shipment of wheat grain to Kenya to be swapped for locally-produced maize for distribution to Kenyan drought victims. -------------- Background of Problem -------------- ¶3. Emergency food assistance has been a regular feature of Kenya's Arid and Semi-Arid (ASAL) areas for the last 20 years. USAID has been major contributor to the WFP/GOK Joint Emergency Operation (EMOP) in support of drought victims. Maize grain/meal has been the primary commodity provided, supplemented by pulses, vegetable oil and corn- soy blend. At present, 1.2 million drought-affected persons are being provided relief assistance through the ongoing EMOP. ¶4. However, early assessments of current short-rains indicate a severe and prolonged dry spell in the arid and semi arid areas, particularly in eastern and northeastern pastoralist areas, leaving millions more victims of drought. The dry spell has reportedly prompted 5-15 percent livestock mortalities and acute malnutrition in pastoralist areas, and significant loss of crops in marginal agricultural areas. As a result, over 2.5 million people are estimated to face severe food shortages in these areas. Multi-agency emergency needs assessments begin on January 9 and more definitive estimates of food and non- food needs should be available by mid-February. ¶5. While food deficits continue to afflict many people in marginal agricultural and pastoral areas of the North and Northeast, Western and Central Kenya received a large surplus of marketable maize during the long-rains harvest period (July/August)earlier this year. This has resulted in current low maize prices in the market. In a bid to reduce the negative impacts of low maize prices on farmers? earnings and future production, the National Cereals and Produce Board (NCPB) has procured significant maize stocks for its strategic and relief reserves. Other donors have also contributed cash towards local cereal purchases to meet EMOP requirements while avoiding local market disruption. ¶6. While the strategy of encouraging local maize purchases for meeting EMOP needs has worked up to now, the cereals pipeline is now virtually depleted. Furthermore, increased food insecurity due to the failure of short-rains has now resulted in additional requirements of emergency food resources to meet the immediate needs of over 2.5 million drought-affected people. Given that USAID/DCHA/FFP is only able to provide food in-kind, we face a dilemma. Providing additional non-domestic maize in-kind risks undermining the market (or at least being perceived as doing so). On the other hand, failing to provide additional maize will certainly lead to rupture of the pipeline and inability to meet food needs of households facing an immediate food crisis. ¶7. It is post's understanding that USAID/DCHA/FFP has allocated funds to provide a new contribution of 12,000 MT of maize to the Kenya EMOP. -------------- Recommended Solution for the Maize Dilemma -------------- ¶8. USAID and WFP Nairobi offices discussed strategies to solve this dilemma. One approach discussed would be to provide wheat instead of maize. This could address the dual needs of meeting immediate emergency food requirements while avoiding negative impacts on the maize market. Providing wheat has at least two significant disadvantages, however. One is that wheat is not suitable to meet all the consumption requirements for all of the drought-affected populations. Another is that a wheat pledge would not arrive for a few months (and could not be borrowed against in order to make use of maize stocks already in-country), too late to meet immediate pipeline needs. ¶9. The WFP and GOK have, therefore, proposed a better solution. They are requesting a PL 480 Title II wheat grain pledge which could be swapped with local maize purchased by the NCPB. WFP, NCPB, GOK, USAID/KENYA and REDSO/FFP have held several meetings to discuss this possibility, and have agreed on the modalities of such a swap, pending approval of USAID/DCHA/FFP. The details of how such a swap would work are as follows: A) Timing and Location: The NCPB would release maize stocks immediately to the WFP from warehouses in appropriate locations in the country. The WFP would release PL 480 Title II wheat to the NCPB in Mombassa port at time of arrival (March/April 2006). B) Bags and Markings: NCPB would provide maize in bags, and WFP would use stencils to mark bags as USG donations. PL 480 Title II wheat would arrive in bulk and be bagged by the WFP. C)Specifications and Quality: USAID/FFP/DCHA would provide ?hard red winter wheat grade 2 or better?. The NCPB would provide maize meeting the WFP standard requirements. D)Swap Rate: The rate of exchange of wheat for maize would be 1:1.2 that was determined based on current maize market prices and estimated future wheat prices, as well as other important considerations(i.e., wheat would arrive later, in bulk, and not be transported beyond the port). The actual amount of the exchange will also depend on the exact quantity of wheat that USAID/DCHA/FFP provides. Post assumes the donation would be approximately 12,000 MT. E) Duty: This swap rate was calculated on the assumption that the GOK will not impose the usual 35 percent import duty on the wheat. This is standard practice for commodities donated for humanitarian purposes. F)Written Agreement: A Memorandum of Understanding would be signed between the GOK and the WFP including agreement on all the conditions described above. -------------- Expected Benefits -------------- ¶10. Benefits of this arrangement would include: (a) ) uninterrupted provision of food aid to meet immediate needs of drought victims and support their recovery from the drought; (b) avoidance of negative impacts on Kenyan maize market and ensuring that farmers gain fair earnings on their produce. -------------- Bellmon Considerations -------------- ¶11. Post confirms that sufficient storage capacity exists in country and that a donation of USAID/DCHA/FFP wheat of up to 12,000 MT would not have a detrimental effect on local wheat production or marketing. In normal years local wheat production accounts for only about one-third of consumption requirements, leaving an import requirement of roughly 200,000 MT on average. According to a Bellmon analysis conducted in 2005 for Title II monetization program, estimates for imports of wheat and wheat flour are about 544,000 MT while local production hovers around 300,000 MT. Wheat and wheat flour exports are estimated at 56,000 MT while consumption needs are about 788,000 MT. Thus, local production is expected to cover only about 38 percent of overall domestic consumption needs(including production for export) while imports represent about 69 percent of requirements. The proposed amount (12,000 MT of wheat) to be swapped is only about 1.5 percent of total consumption and about 2.2 percent of imports. Hence, post confirms that this donation would not negatively impact Title II food aid monetization plans, and that the total of both donations combined would not exceed the usual marketing requirement (UMR). WFP will reasonably comply with Bellmon storage requirements. Secure and appropriate storage of WFP?s Title II commodities will be verified again by USAID and REDSO/ESA/FFP personnel making periodic monitoring visits to the field. -------------- Action Requested -------------- ¶12. Post requests positive consideration by USAID/DCHA/FFP of a requested donation of PL 480 Title II wheat of up to 12,000 MT for the Kenya drought EMOP to be swapped for locally-produced maize under the conditions detailed in paragraph 9 above. BELLAMY