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

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SUMMARY
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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.

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Background of Problem
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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.

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Recommended Solution for the Maize Dilemma
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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.


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Expected Benefits
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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.

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Bellmon Considerations
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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.



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Action Requested
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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