GOVERNMENT PRESSURE LEADS TO VOLUNTARY PRICE RESTRAINTS

UNCLAS QUITO 001794 SIPDIS SENSITIVE SIPDIS TREASURY FOR MMALLOY AND MEWENS E.O. 12958: N/A TAGS: ECON EFIN EAGR PGOV EC SUBJECT: GOVERNMENT PRESSURE LEADS TO VOLUNTARY PRICE RESTRAINTS Reftel: Quito 1655 ¶1. (SBU) Summary: With rising food prices, the GOE warned the private sector to lower prices or face mandatory controls. The private sector agreed to voluntarily fix prices for rice, flour, and sugar, while other sectors are seeking ways to reduce prices through cheaper packaging and lower quality. The price increases appeared to be largely due to increases in international commodity prices. End summary. PRIVATE SECTOR AGREES TO VOLUNTARY PRICE FIXING -------------- -- ¶2. (U) Prices have been increasing in Ecuador for basic consumption products such as rice, milk, vegetable oil, flour, and fruit and vegetables. The GOE has alleged speculators were raising prices as a plot against the state and warned the private sector to lower prices or it would impose price controls. The GOE's threat was to fix prices by publishing an official price list in the media and penalizing those that did not abide by it. ¶3. (U) The private sector strongly opposed the imposition of mandatory price controls, and conceded to negotiate with the GOE and lower prices voluntarily. On July 23, the GOE and private sector agreed on fixed prices for an unspecified period (but with no GOE enforcement) on rice, sugar and flour. For flour, the fixed price is actually higher than the previous market price - it increased from $20 up to $26 per 50 kilogram sack. The GOE and private sector were not able to reach agreement on fixed prices for other basic products such as milk and vegetable oil, although vegetable oil producers agreed to implement a plan to cut costs and keep retail prices low by selling cooking oil in plastic bags (bagged "popular oil" is now being sold in open air markets). ¶4. (SBU) Rice, flour, and sugar producers appeared relieved that formal price controls were avoided. Edison Romero, Financial Manager of the California Bakery chain, believes his chain can abide by the fixed flour price for now, but is afraid that if wheat prices continue to rise his company will have to increase its bread prices by 13%. Jose Malo, President of the National Association of Producers of Fats and Oils, hopes that selling consumable oil in bags will allow the industry to reduce or maintain prices. He noted that the industry anticipates that 200,000 liters of consumable "popular oil" will be produced monthly. Other industries hope to follow this lead and find ways to cut packaging costs rather than fixing prices. Galo Izurieta, Deputy General Manager of Quito Pasteurizers, and member of the National Dairy Production Association, told us that his group is seeking agreement with the GOE on cheaper packaging, lower quality (less pasteurized than the popular "ultra pasteurized" milk) and other strategies to cut costs and keep prices low, in lieu of price controls. Former Minister of Economy Ricardo Patino suggested developing very basic communal stores called "solidariatos", which would offer lower prices on most basic consumption products by offering unpackaged bulk items and possibly slightly lower quality products. RISING INTERNATIONAL COMMODITY PRICES LARGELY RESPONSIBLE -------------- -------------- ¶5. (U) Commodity prices are rising worldwide. In Ecuador's case, its heavy reliance on imported inputs leads to highly volatile input prices for basic consumption goods. For example, in Ecuador, 85% of the cost of flour is attributable to the international price of wheat. The cost of a ton of wheat rose from $239 to $310 over the last year, significantly affecting Ecuador's flour prices. Similarly, domestic vegetable oil prices responded to international price increases in raw materials for oils, such as soybean, corn, and sunflower, which have been increasing since 2006. Domestic meat and dairy producers have also been affected by rising international agricultural prices, since the majority of feed products are based on imported corn and soybean. ¶6. (U) On the other hand, domestic fruit and vegetable prices are largely independent from international prices, and mainly respond to climate changes or seasonal factors. Only out of season fruit and vegetables should be experiencing price increases, so the rapid increase in fruit and vegetable prices might be influenced by speculation or inflationary expectations. ¶7. (U) Over the past year producer prices (7% increase) have increased faster than consumer prices (2.2% increase),so some of the producer price inflation could be putting pressure on consumer prices. PAST ATTEMPTS AT PRICE CONTROLS FAILED -------------- ¶8. (U) Enrique Ampuero, Director of the National Institute of Agricultural Research in the 1970s, commented that price control schemes had not worked in the past as they had created scarcity of various agricultural products as producers exited unprofitable sectors. The Febres Cordero government (1984-1988) published an official price list mandating fixed prices, with high fines for producers who charged prices above list. Those price controls resulted in shortages of certain goods, low quality products, black markets and contraband. In 1993, Ecuador introduced a price band system for major commodities to dampen swings in international commodity prices. The World Bank estimated that Ecuador's price stabilization policies resulted in price variability that was 10 times world price variability. COMMENT -------------- ¶9. (SBU) Although overall price inflation remains low, given the September Constituent Assembly election the GOE evidently felt compelled to take some sort of action to moderate food prices. Indeed, some producers claim the GOE asked them to maintain lower prices until the elections. The GOE's strategy of negotiating voluntary fixed prices with producers is more practical than mandatory price controls (as it essentially attempted to do with the banking sector - reftel). Hopefully it will not attempt to maintain the voluntary controls for an extended period of time or seek to impose mandatory controls down the road. To date, the Ecuadorian media have provided little coverage of the supply disruption caused by price controls in Venezuela, but if the GOE shows additional inclination to pursue price restrictions, we could expect the Ecuadorian media to give more play to the consequences of price controls. BROWN