FOOD VULNERABILITIES: BRV POLICY RESPONSES CRACK

C O N F I D E N T I A L SECTION 01 OF 04 CARACAS 002381

SIPDIS

SIPDIS

SECSTATE PASS AGRICULTURE ELECTRONICALLY

E.O. 12958: DECL: 12/13/2017
TAGS: ECON EAGR VE
SUBJECT: FOOD VULNERABILITIES: BRV POLICY RESPONSES CRACK
UNDER ROLLING SHORTAGES

REF: A. 2006 CARACAS 1897


B. CARACAS 470

C. CARACAS 994

D. CARACAS 2074

E. CARACAS 2143

Classified By: Economic Counselor Andrew N. Bowen for reasons 1.4 (b).


1. (SBU) Summary: Thanks to growing demand, inflation, strict
price controls and other retrograde BRV economic policies,
rolling shortages of basic food staples persist. To try to
cope the BRV has rolled out massive open-air markets known as
MegaMercals (frequented primarily by poor Venezuelans),
increased imports, threatened the private sector, and, in an
unprecedented move, announced on December 18 that price
controls on some basic staples would be loosened, while
providing no details. The December 18 announcement was a
clear acknowledgment that current policies are not working
and the political price being paid is high and growing.
Distortions created by the BRV's policies have begun to
overwhelm the food supply system, and the strain has begun to
show in four to eight hour MegaMercal lines, empty shelves,
and frustrated, and occasionally, desperate shoppers. End
Summary.

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Shortages Persist
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2. (SBU) Per ref C, D, and E, rolling shortages of staple
goods such as milk, black beans, eggs, cooking oil, sugar,
flour, meat, rice, toilet paper, etc. have continued unabated
despite the BRV's desire to fill the shelves for the December
2 referendum and the holidays. Strict price controls
combined with increases in world prices and domestic
consumption have caused staples to slowly disappear from
supermarket shelves. Although supplies periodically arrive
in grocery stores and the Mercals (government-supported
discount supermarkets),there is no regularity or
predictability to deliveries. The frequency of supermarket
visits to see if a particular good is available has gone up
substantially during this year. The unpredictability of the
market has also created a hoarding mentality, which has only
intensified the shortages, as people want to buy as much of a
product as they can before it disappears from the shelves.



3. (C) Price controls have further aggravated the shortages
by rendering domestic production unprofitable (Reftel D),
particularly given that inflation is running at approximately
20 percent per annum. Rather than sell their products at a
loss, contacts in the agriculture industry have told us that
many producers have simply shifted production to goods
without price controls, sold raw materials at higher prices
to processed food producers, mixed controlled goods with
non-controlled goods, or their food has "disappeared" across
the border to Colombia. Most domestic milk producers, for
example, have been selling their raw milk to cheese and
yogurt producers who use the milk to produce non-price
controlled products. This has led to a paradoxical situation
where one can find just about any expensive cheese in
Venezuela, but no milk.

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White Gold
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4. (U) Milk shortages have hit Venezuelans especially hard
and provide an excellent insight into how the shortages have
affected the country. Historically, milk has been the most
consumed product in Venezuela and the average Venezuelan
views it as an essential product to keep children healthy.
However, after four years of price controls, the supply of
milk has reached dangerously low levels. According to a
Datanalisis poll, 72 percent of supermarkets in Venezuela
reported not having any milk to sell in September. Rodrigo
Cabezas, the Minister of People's Power for Finance, also
told the local press on December 18 that the available milk
supply only met 10 percent of domestic demand. (Note:
Industry sources believe Venezuelans consume approximately 77
liters of milk per year. The FAO recommends 120 liters per
year, roughly the same amount of milk Venezuelans were
consuming in 1988. End Note.) An industry expert told
EconOff that milk lasts for an average of two hours on
Venezuelan supermarket shelves.


5. (U) Due to the desperation for milk, some supermarkets
have had to virtually shut down when shipments of milk arrive

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in stores as rowdy customers, often alerted via text message,
mob the dwindling milk supplies. One contact told EconOff
that she was at the salon getting her hair done when someone
received a text message that there was milk available in a
local grocery store. The owner closed the salon, and all the
employees and customers, some with curlers and dye still in
their hair, rushed out to buy the milk. There are also
numerous stories of women coming to blows over the last case
of milk or milk men being attacked as they unload the
product.

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Inflation Prices Out the Poor
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6. (SBU) Persistent inflation, especially on food and
non-alcoholic beverages has worsened shortages and increased
the appeal of Mercals to the average poor Venezuelan. Even
with the highest inflation in Latin America, the BRV only
periodically revises price controls, making it consistently
less profitable to sell these goods. When Venezuelans cannot
find price controlled goods in the supermarkets or Mercals,
they have been forced to substitute them with more expensive
non-controlled items. According to the Venezuela's Central
Bank (BCV) and the analytical firm Santander Investment, the
prices for non-regulated food items have increased by 30.2
percent from January to November, while the prices of
controlled goods have only increased by 10.2 percent.


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Mercal's Not up to the Task
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7. (SBU) Since the BRV subsidizes Mercal prices, most goods
are sold below the controlled prices and are on average 150
to 300 percent less than prices at regular grocery stores or
the black market. For example, purchasing powdered milk in a
Mercal can mean a windfall savings for the average
Venezuelan. One can now find a kilo of powdered milk for Bs.
4,700 (USD 2.19) in a Mercal, while the same item costs
between Bs. 30,000 (USD 13.95) to Bs. 40,000 (USD 18.60) on
the black market. While this is only one product, a similar
calculation can be made on nearly all of Mercal's staple
products, especially for products used to make traditional
Christmas dishes.


8. (SBU) With the average Venezuelan unable to find price
controlled staple products in supermarkets and rapid
inflation pricing many poor Venezuelans out of the black
market, Mercal, the former flagship of Chavez' social
programs, has come under increased pressure to meet the
soaring consumer demand for government subsidized food.
According to the Minister of the People's Power for Food
(MINAL),Gen. Rafael Oropeza, the BRV, through Mercal,
distributes 14.4 percent of the food in Venezuela. He also
claimed that it distributed 130 thousand tons of food in
November, up from 110 thousand tons in October and 60
thousand tons in January. However, after denying the
existence of shortages in Mercals for months, Felix Osorio,
the president of Mercal, acknowledged that the BRV was
incapable of consistently stocking the 15,625 Mercals with
staple goods, explaining, "you can't keep Mercals supplied
with meat, chicken, milk, eggs, and sugar for the whole day,
nor week, because at the point of sale they consume in seven
days what should be consumed in a month." Oropeza has fended
off criticism, arguing, "Mercal wasn't designed to meet the
demand of the whole population, only the popular classes.
Mercal's operations are already at maximum velocity." (Note:
According to Oropeza MINAL's funding only allows him to
purchase a maximum of 130 thousand tons of food per month.
End Note.)

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Econoff's Shopping Experience at Chavez' Mercal
-------------- --


9. (SBU) As the pressure on the Mercals increases, service
and product availability continue to deteriorate. Econoff
recently visited six Mercals for a firsthand look in low and
low-middle income areas of Caracas. Of the six Mercals
visited, three were closed (one had been robbed and the other
two were being remodeled),and the three that were open had
prohibitively long lines. Econoff waited in line for an hour
in one Mercal before giving up after realizing the line was
not moving and entered a different Mercal after an hour and
half in line. Although Mercal supposedly only sells "first
need" food products such as milk, black beans, cornmeal,

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rice, etc., EconOff observed shelve space, where there used
to be essential goods, filled with imported products such as
granola, canned ham, soy sauce, among other less essential
products. There were also limits on the quantity of items
you could purchase; one only could purchase one kilo of
powered milk, the most coveted product. The quantity
restrictions have become a new and unwelcome feature in
Mercals, and people waiting in line told EconOff that they
planned on visiting another Mercal afterwards to buy more
products. Since EconOff last visited Mercal, workers have
started to mark customers' hands with markers to prevent them
from visiting other stores.

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Not-So MegaMercal
--------------


10. (SBU) Given logistical difficulties of supplying all the
smaller Mercal stores, the BRV has begun to hold more
high-profile open-air markets known as MegaMercals. The
bi-weekly MegaMercals usually take place on Sundays in the
main avenues of the ten largest Venezuelan cities and often
have a street-fair like atmosphere. Besides making it easier
to stock goods, MegaMercals are used to generate good press
and help create the impression that the BRV is working to
feed the population. People can also apply for a driver
license, passport, and information card, something that
normally can take up to three months to accomplish. Many of
the employees selling the goods in MegaMercals also happen to
belong to the military forces or nationalized companies like
CANTV.


11. (SBU) Even with the carnival like atmosphere and
temporary availability of scarce goods, the lines at the
MegaMercals have increasingly become prohibitively long.
During the BRV's recent December 8 MegaMercal, (initially
scheduled for the day before the referendum),customers
waited in long lines that wrapped around the military parade
ground for an average wait time of five to six hours. The
Venezuelan daily, "El Nacional," reported some customers
queuing up at 3 AM, only to leave at 11 AM, and others waited
in lines for up to 11 hours in Los Teques, a large sprawling
suburb of Caracas. Due to the Christmas buying frenzy, the
BRV has begun to hold MegaMercals more frequently, and on the
weekend of December 15, the BRV held MegaMercals in 8 to 10
states for three consecutive days, where lines again
reportedly were five to six hours long on average.

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Coping with Mercal's Failure
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12. (C) Having only recently acknowledged the painfully
obvious shortages, the BRV has reacted to its inability to
stock the shelves by massively importing, threatening the
private sector, and finally removing price controls for long
life milk. Oropeza admitted to the local press that 70
percent of the food available in Mercals was imported, up
from 30 percent in March (Reftel D). The BRV's lack of
technical experience in importing products (despite reported
Cuban assistance) has made it difficult for it to
consistently import food, especially with tight world
supplies in most staple goods. Nevertheless, the BRV has
shown that it is willing to take drastic measures to fill the
MegaMercals in time for the holidays, including flying in
milk from Brazil. According to industry sources in Brazil,
the BRV resorted to paying USD 5000 per ton for Brazilian
milk plus an extra USD 3000 per ton in transportation costs
to fly the powdered milk to Venezuela. The executive
director of the National Supermarket Association (ANSA),Luis
Rodriguez, told EconOff that each of these planes can only
transport 70 tons of powdered milk per trip, which would mean
the BRV had to charter more than 140 flights to bring in the
10,000 tons of milk that it planned to supply for the holiday
season.


13. (C) On December 7, in a surprising move, the BRV lifted
the price control on ultra-high temperature processed (UHT)
milk, also know as long life milk. Ironically, just two days
before the BRV released the gazette notice announcing the
removal of price controls on UHT milk, Oropeza told the local
press, "The private sector is responsible for the scarcities
in Venezuela. They note that the demand has increased and
keeps increasing, but they do not take the necessary actions
to satisfy it." Oropeza theorized that this could be part of
a destabilization plan against President Chavez. During a
meeting with the dairy industry, he also warned the private
sector that the BRV would re-implement the price control if

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it witnessed "price speculation." Although agriculture
contacts view this as a step in the right direction, the BRV
left price controls on fresh and powdered milk. Experts
estimate that UHT milk represents only 2.5 - 3 percent of
Venezuela's milk consumption since the vast majority of the
Venezuelan poor consume powdered milk, which allows them to
more precisely control their milk consumption.

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Division in the BRV
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14. (C) During a December 13 meeting, Luis Rodriguez,
Executive Director of the National Supermarket Association
(ANSA),told EconOff that after meeting with both Oropeza and
Maria Cristina Iglesia, the very ideological Minister of
People's Power for Light Industry (MILCO),he believed there
to be a large rift within the BRV on how to handle the
shortages and the failure of the Mercals. Rodriguez believed
the Minister of Food, despite his public statements, was
willing to revise price controls, and authorize more imports
to get food back on the shelves. On the other hand, he saw
Maria Cristina as an ideologue who wanted to use the
shortages as an excuse to attack the private sector. As
price controls cannot be revised without concurrence among
MILCO, MINAL, the Ministry of People's Power for Finance, and
the Ministry of the People's Power for Agriculture and Land,
he believed that Oropeza has been left to take the fall as
the lines in the MegaMercals get longer and the shelves more
empty.

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Loosening Price Controls?
--------------


15. (U) In another possible policy turnaround, on December
18, Rodrigo Cabezas, the Minister of the People's Power for
Finance, without offering more details, told the local press
that the BRV would implement "an extraordinary food supply
plan and will make price regulations more flexible." The BRV
has kept price controls on more than 400 items since February

2003. Cabezas did not specifically say which price controls
it would loosen, but cited the severe milk shortage and a 60
percent incidence of shortages in 10 staple items including
sugar and cooking oil (read: only 40 percent of the demand
for those products was being met). He explained that the
principle reason for changing the price controls was
inflation increasing by 4.4 percent in November. However,
Cabezas denied that the BRV would remove price controls,
explaining, "the neoliberalism in favor of removing all price
controls will not arrive in Venezuela unless the governments
of "Action Democracy," "the Social Christian Party, and all
of the right-wing economists come back to power." Cabezas
added that the government hoped to resolve the scarcity
problem in a "very short period" and "in particular for milk,
sugar and cooking oil" which have been the most scarce.

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Comment
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16. (C) The BRV appears to have realized that the shortages
come with a high political cost, and likely contributed to
the BRV's defeat on the December 2 referendum vote. With
many private producers deciding that it wasn't profitable to
produce selected staples -- or at least not profitable to
sell them at controlled prices and in traditional channels --
and the government's inability to efficiently distribute food
through its Mercals, the shortages have been a concrete
reminder of how life has changed under Chavez. The removal
of the price controls on UHT milk and the apparent decision
to losen price controls on other selected items represet
the first time the BRV has implicitly acknowledged it's price
control policy contributed to the shortages. Most likely,
however, the impetus for the policy change can be summed up
in a graffiti statement that was scrawled under a busy
Caracas overpass, "No hay leche, no hay reforma" (No milk, no
reform).

DUDDY