GOVERNMENT FOOD SUBSIDIES INEFFECTIVE

UNCLAS SECTION 01 OF 02 ADDIS ABABA 002645 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EAGR ETRD PGOV ET SUBJECT: GOVERNMENT FOOD SUBSIDIES INEFFECTIVE REF: A) ADDIS 2262 B) ADDIS 2569 ADDIS ABAB 00002645 001.2 OF 002 SUMMARY -------------- ¶1. (U) Since 2005, the Ethiopian Grain Trade Enterprise (EGTE) has provided over 500,000 metric tons of subsidized grain to the country's urban centers. While the initiative is nominally intended to cushion the landless urban poor from the mounting food inflation, urban food prices still remain well above import parity prices. By diverting over 200,000 MT of food from the Emergency Food Security Reserve Agency (EFSRA) over the past two years (Ref A) and importing 300,000 MT of grain since July 2008, the EGTE effort has succeeded in diverting contingency food away from drought affected populations and removing critically needed foreign exchange from an already hurting economy (Ref B). By providing most of the subsidized grain to grain traders, bakeries, and pasta factories and not monitoring their re-sale prices, the EGTE effectively has subsidized a portion of Ethiopia's business class and middlemen without notably impacting the urban poor. As EGTE expects to purchase several hundred thousand tons of food in December when the likely-poor domestic harvest reaches the market, it will likely succeed in driving up prices and taking away supply of grains setting the stage for dire times in the mid-2009 hungry season. End Summary. THE AGRICULTURAL MARKETING BOARD LIVES -------------- ¶2. (U) In an August 26 meeting with Pol/Econ Chief, EGTE General Manager Berhane Hailu said that the EGTE is the current name of the 60 year old Grain Board (as it was known under the emperor's time) and Agricultural Marketing Corporation (as it was known under the Derg). Despite the name changes, its mandate remains intact: to create markets for Ethiopian farmers, to stock and redistribute grain from surplus to deficit areas and to create export markets for agricultural outputs. While EGTE no longer requires farmers to sell their output to it, it does continue to purchase grain throughout the country. Although most such purchases are at the prevailing price, Berhane confirmed that EGTE does purchase grains at Ethiopian Government (GoE) set prices if it determines that the prevailing price is less than the cost of production. FEEDING THE URBAN POOR -------------- ¶3. (U) According to Berhane, in late 2005, the GoE sought to increase the supply of grain to the Addis Ababa market to counteract the then-emergent domestic grain price inflation. Berhane argued that urban centers lacked adequate grain supplies due to increased demand by factories and bakeries, farmers shifting production to other crops (such as oil seeds),and farmers holding on to their produce until prices rise rather than selling immediately upon harvesting. According to Berhane, EGTE's initial infusion of 53,000 MT, sold at a subsidized price to grain processors, produced an "inadequate effect" by April 2006. As such, EGTE continued to supply an additional 165,000 MT from EFSRA stocks over the course of the next two years. In May and August 2008, EGTE decided to import two tranches of 150,000 MT of wheat each to sustain this effort. ¶4. (U) Although the GoE asserted that its objective was to mitigate the inflationary pressure on the landless urban poor, Berhane reported that the majority of this wheat is being sold at 350 Birr per quintal (roughly $360 per ton) to grain traders, bakeries, and pasta factories for onward sale to the urban public. The remainder is being sold to consumer associations and individual households identified by local (kebele) administration representatives by 77 retail sites in the capital and an additional 55 sites in other urban centers. Berhane noted that despite a 550 Birr per quintal import (c.i.f.) price, the GoE had established the 350 Birr per quintal local sale price because "that is the farm gate price of wheat in Europe and the government believes that it is a good price." Despite extensive reports of prevailing wheat prices in Addis Ababa remaining over 750 Birr per quintal, even from EGTE sales points, Berhane was emphatic that special high quality hard wheat was selling at most at 650 Birr per quintal with the EGTE-provided wheat selling at a much lower 450 Birr per quintal. Berhane confirmed that EGTE does not monitor the prices at which grain traders, bakeries, or factories sell their products made from the subsidized wheat. REPAYING THE FOOD SECURITY RESERVE ADDIS ABAB 00002645 002.2 OF 002 -------------- ¶5. (U) Pol/Econ Chief pressed Berhane on when EGTE would repay the over 200,000 MT it still owes the EFSRA. Berhane argued that EGTE would buy up grains in November and December when the meher season harvest reaches the market, or from the already ordered foreign purchase if domestic prices stabilize before the grain arrives, but noted that the GoE will then decide whether actually to repay the EFSRA or to put the purchased grains back into an urban or food production deficit market in country. Despite Berhane's own argument that farmers are holding onto grain rather than selling immediately upon harvesting -- and hence restricting supply in the market and driving up prices -- he was emphatic that EGTE's huge additional demand for grains would not drive up domestic prices. COMMENT -------------- ¶6. (SBU) The EGTE exemplifies the GoE's continued commitment to intervene in even the most fundamental of markets. Its ineffectiveness, however, also highlights why so many other governments have handed over the setting of prices and direct sales to the private sector. The EGTE's urban grain market interventions have not alleviated the inflationary pressure on the poor, but subsidized the profits of grain traders, bakeries, and factories. Still, rather than acknowledge the fault, the GoE appears to have reached the conclusion that EGTE's response has to be redoubled. As the country moves toward elections in 2010, pressure on the GoE to buffer the politically-restive, pro-opposition urbanites from the 172 percent grain price inflation will likely continue. If the GoE does continue the urban food subsidization program, its minimal hard currency reserves will force additional food to be locally sourced. By taking a significant portion of available food from local supplies, the GoE risks dampening the grain price reducing effects of the already diminished expected harvest and potentially restricting supplies available to sustain vulnerable populations through the mid-2009 hungry season. Post will continue to engage GoE officials to liberalize its policies toward trade, foreign exchange, and domestic market interventions to reign in statist tendencies. End Comment. YAMAMOTO