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