GOE TO FIGHT BREAD PRICE INCREASES WITH LOWER

C O N F I D E N T I A L QUITO 002114 SIPDIS SIPDIS AGRICULTURE FOR FAS TREASURY FOR MMALLOY AND MEWENS E.O. 12958: DECL: 09/13/2017 TAGS: ECON ETRD EAGR EC SUBJECT: GOE TO FIGHT BREAD PRICE INCREASES WITH LOWER FLOUR TARIFFS, SUBSIDIES REF: A. QUITO 1794 ¶B. QUITO 2019 Classified By: DCM Jefferson Brown, Reasons 1.4 (b&d) ¶1. (SBU) Summary: The GOE is pursuing a mixed-bag of interventionist strategies to prevent bread prices from increasing before the September 30 Constituent Assembly elections: pressing producers to cap prices, lowering tariffs on wheat and wheat flour, and subsidizing the price of flour for millers. End Summary. ¶2. (SBU) On July 23, millers reached an agreement with the GOE to control wheat flour prices, limiting upward pressure on bread prices (reftel a). Under pressure from the GOE, they agreed to a price of $27 per 50 kilogram sack of flour, to be maintained until the September 30 Constituent Assembly. They noted that the price could not be held beyond that, as international wheat prices would likely be substantially higher when they negotiated new purchase contracts with suppliers (most wheat in Ecuador is imported). ¶3. (SBU) On August 21, the GOE announced that tariffs on wheat and wheat flour would drop from 10 and 20 percent to zero for six months as part of a broader program to reduce tariffs on key inputs (reftel b). However, according to millers, this was largely a political gesture, since both products are subject to the Andean price band system and, due to high international prices, have already fallen to 0 (wheat) and 5% (wheat flour). ¶4. (U) In addition to tariff cuts, the GOE investigated whether it could buy wheat flour from Argentina in order to limit price increases. However, millers expressed concerns about the quality of Argentine wheat, and the GOE apparently concluded that there would not be significant price benefits if it imported the flour. Furthermore, any shipment from Argentina would probably not arrive in time to be utilized before the Constituent Assembly. ¶5. (C) On September 11, President Correa signed an executive decree to subsidize millers by buying flour from them at $25.50 per 50 kilogram sack (less than the market price) and selling it to bakers at $22. The Banco Nacional de Fomento (the GOE's bank for the "productive sector") will buy the flour (paying cash up front) and resell it to bakers. The $3.50 per sack subsidy will reportedly be absorbed by the general budget. The measure is supposed to be short term and reviewed/revised every month based on international market conditions. In a meeting with the GOE September 3, millers had expressed concern with the proposal. However, Gonzalo Correa, General Manager of Moderna (one of the four largest millers in Ecuador) reported that industry was left little choice when the GOE took a very tough stance in negotiations and basically forced the subsidization and its price. COMMENT: -------------- ¶6. (C) This package of measures highlights that at least parts of the Correa administration believe in government intervention in the economy. This tendency has been accentuated by jittery political nerves as the GOE approaches the September 30 Constituent Assembly elections. Interestingly, in this case Minister of the Coast (and former Minister of Economy) Ricardo Patino negotiated the flour subsidy. This led Gonzalo Correa to quip that Patino is the Correa administration's "election minister." Although some of the measures are supposed to be dropped after the election, several Ecuadorian and U.S. companies have told us they are concerned about the signals that the GOE has sent, and fear that it might seek to impose price controls in the future. Some millers fear that if international prices continue to rise, the price differential for subsidized flour could become large enough that it will be smuggled to Colombia and Peru, already a costly problem for highly subsidized Ecuadorian petroleum products. JEWELL