RISING WORLD PRICES DRY UP PRIVATE ALGERIAN MILK

UNCLAS ALGIERS 000367 SIPDIS SIPDIS SENSITIVE STATE PLEASE PASS TO USTR RABAT FOR AG ATTACHE E.O. 12958: N/A TAGS: EAGR ECON EINV AG SUBJECT: RISING WORLD PRICES DRY UP PRIVATE ALGERIAN MILK PRODUCTION REF: ALGIERS 00207 ¶1. (U) Recent milk shortages in Algeria are likely to continue in the coming weeks as domestic producers shut down in response to the rising world price of milk powder. The state-run Algerian firm GIPLAIT (Groupe Industriel des Productions Laitieres) controls approximately 38 percent of Algeria's pasteurized milk market, with the rest in the hands of private companies. For decades the Algerian government has managed the price of all fluid pasteurized milk in Algeria. While other milk products -- including store-bought milk powder, cheese, and yogurt -- sell at market prices, the Ministry of Commerce has kept the price of liquid pasteurized milk at USD $0.35 per liter since 2001. In response to the crisis, Commerce Minister Djaaboub announced March 4 the creation of a National Milk Office to maintain the price of fluid pasteurized milk at the current level. One private dairy company told us that the new office will likely fall administratively under Djaaboub and will subsidize both GIPLAIT and private producers. HEAVY RELIANCE ON IMPORTS -------------- ¶2. (U) Algerian Milk Producers Association head Abdelwahab Ziani described to us March 17 Algeria's reliance on foreign milk imports. With an average annual consumption of 140 liters per person, Algeria is one of the world's largest consumers of milk. Although Algerian cows produce around 2 billion liters of milk per year, only 17 percent of this output is processed industrially. Moreover, fresh Algerian milk that is available to industrial customers goes almost entirely into cheese production. With nearly all of its liquid pasteurized milk coming from imported powder -- an estimated 1 billion liters-equivalent per year -- Algeria is the third-largest importer of milk products in the world, after Italy and Mexico. Milk products account for some 20 percent of the country's total food imports. In 2006, Algeria imported over USD 25 million worth of nonfat dry milk powder from the U.S. ¶3. (U) The world price of powdered milk has soared since last year from approximately USD 2,000 per metric ton to over USD 3,900. At the same time, efforts to increase Algeria's domestic milk production have largely fallen flat. Despite importing 8,000 milk cows in 2006, Algerian milk production has not climbed much beyond 1.9 billion liters per year. (Note: The Minister of Agriculture claims that local production has reached 2.2 billion liters per year.) This reliance on foreign imports, Ziani explained, is largely a result of the collapse of Algeria's agricultural capacity during the "lost decade" of terrorism in the 1990s. ¶4. (U) The Algerian press has reported in recent weeks that several private plants that produce milk have closed down at least temporarily as a result of the skyrocketing price of powdered inputs. Others are gearing to switch their production to other dairy products, such as yogurt, which do not have the same price controls as liquid pasteurized milk. This essentially leaves state-run GIPLAIT, with its 20 plants in a broad swath starting near the Moroccan border at Bechar and running the length of the Algerian coast to the Tunisian border, as the most important producer of pasteurized liquid milk in Algeria. COMMENT -------------- ¶5. (SBU) The crisis likely spells the end of any further privatization of GIPLAIT, which in recent years spun off one of its plants in the west to an Algerian investor and is in the process of selling another plant to a French consortium. Just as PM Belkhadem made clear to the Ambassador that he intended to continue to protect certain state-run industries (reftel),his government is not likely to let market reforms and privatization get in the way of one of the three household commodities the Algerian state has refused to cede to market-driven prices. (The other two are bread and flour.) More broadly, the current milk crisis underscores the fragility of the Algerian market and its vulnerability to commodity supply shocks. Outside of hydrocarbons, Algeria produces relatively little on its own. The milk shortage is another example of the near reflex reaction of the Algerian government to look to socialist-era price control mechanisms and subsidies rather than market-based solutions. DAUGHTON