AG SECTOR UNCERTAINTY BREEDS PESSIMISM

C O N F I D E N T I A L ASUNCION 000869

SIPDIS

STATE PASS DEPT OF AGRICULTURE
STATE FOR WHA/BSC MDRUCKER, BFRIEDMAN AND MDASCHBACH

E.O. 12958: DECL: 12/18/2028
TAGS: EFIN PGOV EIND ECON EINV ETRD PREL PA
SUBJECT: AG SECTOR UNCERTAINTY BREEDS PESSIMISM

REF: ASUNCION 722

Classified By: CDA, a.i. Michael J. Fitzpatrick; reasons 1.4 (b) and (d
).


1. (C) SUMMARY: Major Paraguayan soy producers are skeptical
of President Lugo's economic plans, particularly agriculture
policy. Recent declines of 30 to 40 percent in commodity
prices are a serious but manageable concern. The government's
intention to tax production, however, generates a strong
reaction from soy producers, who feel they will be targets of
an "ideological" tax plan. They expect soybean cultivation to
remain stable despite economic uncertainty, but many may
reduce investment. The grain traders shared these concerns,
and tightened their credit terms to reflect higher risk rate
spreads. The Agriculture Minister feels caught between the
private sector and his President. Given rising levels of
uncertainty and risk in the agricultural sector -- the most
important in Paraguay's economy -- the private investment
necessary to boost Lugo's poverty reduction and employment
priorities is increasingly unlikely to materialize at the
expected levels. The sector's 2009 outlook is less than
positive. END SUMMARY.

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UNCERTAINTY REIGNS: THE PRODUCERS' VIEWS
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2. (C) Medium-and-large scale soy producers in the Department
of Itaipua, Alto Parana, and San Pedro are skeptical about
President Lugo's ambiguous economic plans, and particularly
his government's agriculture policy. For them, the main issue
is security from land invasions. In a series of recent
conversation with Econoff, they described social groups that
act with impunity under a "self-righteous, I am entitled"
ideology, generating violence and disrupting production. They
complained about the lack of an official declaration from
President Lugo protecting their rights to private property,
and indicated that the silence exacerbates a negative
perception as to what the new administration's "real"
policies are.


3. (C) Similar views were echoed by Claudia Ruser, President
of the Soy Producers Association (APS),who told Ambassador
in mid-November that the security situation in the Department
of San Pedro is unbearable; "President Lugo needs to speak-up
and condemn the private property attacks". (NOTE: The
Departments of Alto Parana and Itaipua represent more than
two-thirds of Paraguay's soy production. The number of
reported land invasions in those departments, however,
represents only about 30 percent of the total. The epicenter
of land invasions is the Department of San Pedro. END NOTE.)
Producers also felt attacked by President Lugo's September
speech at UNGA which lumped soy producers in with terrorists
for their use of "agrotoxins." (NOTE: Interior Minister
Filizzola has been a welcome surprise to many agriculture
producers, given his repeated and strong statements in
support of private property. However, President Lugo, in
this as in many other issues, has not been very vocal one way
or another. This is troubling for those in a culture steeped
in a tradition of being dictated to by the Chief Executive.
END NOTE.)


4. (SBU) Producers described recent 30 to 40 percent declines
in commodity prices as a serious but manageable concern. The
government's intention to tax production, however, generates
a strong reaction from soy producers, who feel they will be
targets of an "ideological" tax plan that shifts an
inequitable burden to the most productive sector of
Paraguay's economy. They argued that as international
economic conditions deteriorate, they will lose operational
and financial flexibility, which will be exacerbated by a
production tax. They emphasized the tightening of terms for
working capital financing as a critical constraint for
medium-term growth.


5. (SBU) Noting a volatile environment in which violence
could escalate and conditions deteriorate, agricultural
producers in Alto Parana, Itaipua, and San Pedro project a
small decline in soybean production volumes. (NOTE: In 2007,
soybean cultivation totaled 2,640,000 hectares, and
production volumes increased 79.4 percent to 6.5 million
tons. END NOTE.) Producers complained about increasing
investment risks, and highlighted plans to reduce the
inventory of inputs, postpone purchases of new equipment, and
halt infrastructure upgrades.

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DIFFICULT BUT MANAGEABLE: THE GRAIN TRADERS' VIEWS
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6. (C) The two most important grain traders in Paraguay,
U.S.-based Cargill and ADM, report that conditions on the
production side continue to deteriorate but that risks are
manageable for now. They cautioned about increasing
operational risks in San Pedro, and expressed serious
concerns about a perceived lack of state support to
producers, especially to the Brazilian-Paraguayan
("Brasiguayo") producers (reftel).


7. (SBU) Contrary to what some producers claim, the companies
have not stopped offering short-term financing. Cargill and
ADM tightened their terms to reflect increasing interest rate
risk-spreads, and decided to limit the offer of credit to
existing clients. According to the companies, some local
banks refused to extend financing to producers because of
higher perceived risks and tightening credit requirements.


8. (SBU) The companies said they will continue with their
current investment plans, though with increased monitoring to
continuously reassess volatile market conditions. Cargill is
investing over 100 million USD in a grain crushing port, and
ADM will invest roughly USD 20 million in a fertilizer plant.

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WORRIED ABOUT HANGING ON: AG MINISTER VIEWS
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9. (C) Agriculture Minister Candido Vera-Berajano serves as
Lugo's minister of agriculture because he is a long-time
friend of the president; however, he said to the Ambassador
in mid-October that he is not sure how much longer he can
withstand the pressures of the office. Though Vera-Berajano
did not directly address the issue of land invasions and
violence, he expressed concern about radical actors
surrounding the President. He worried about Venezuelan
President Hugo Chavez' presence in rural areas, and predicted
an increase in illicit activity where the Paraguayan state
has a weak presence. (NOTE: Producers shared similar concerns
about a "chavista" influence in rural areas, and the growth
of marihuana plantations by peasants from some of the same
social groups demanding land. END NOTE.)


10. (C) Vera-Berajano complained about inheriting incompetent
people in his ministry. He said that many, including Vice
President Franco, had tried to pressure him into hiring
Liberal Party officials, but he had made his hiring decisions
based on merit (in fact, the Liberal Vera-Berajano hired more
Colorados than persons from any other party). Vera-Berajano
said he and others in Lugo's cabinet want to redefine the
rules of the game; others, including Liberals, want to play
by the old rules. He called Lugo a "good man" but said "I am
getting tired of fighting this fight." (NOTE: Vera-Berajano's
original designation was criticized in the press, which
questioned his qualifications and experience to lead the
ministry. END NOTE.)


11. (SBU) Minister Vera-Berajano's priorities are to increase
the productivity and market access of small producers. He
argued that small producers cannot succeed with traditionally
rustic farming techniques, poor genetic material, and limited
access to markets and capital. He emphasized the need to
invest in extension research to adapt new higher yielding
species.


12. (SBU) With regard to alternative development and crop
substitution, Vera-Berajano indicated that he would consider
"green helmets" rangers from the military to boost security
in areas where marijuana is grown and the state presence is
limited. He highlighted the potential of the natural
sweetener stevia as a labor intensive crop to substitute
marijuana production. (NOTE: The Director of the
Anti-Narcotics Secretariat (SENAD) also expressed interest in
the "green helmets" to guarantee security in areas where
alternative development programs could be implemented. END
NOTE.)

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COMMENT
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13. (C) The agriculture sector's 2009 outlook is less than
positive. The private sector consensus is that President
Lugo needs to clearly address security and private property
issues. The shared concern is that Lugo's relative silence
-- leaving most public statements to his ministers --
implicitly fosters land invasions, which hurt agricultural
production. The implied concern is that problems at home are
exacerbated by deteriorating international market conditions,
making it more difficult to manage the current situation, and
increasing the probabilities of a serious downturn.
Historically the agriculture sector has been the engine of
Paraguay's growth, but increasing risks and uncertainty could
drag it down, and Paraguay's growth rates along with it.
Lugo's poverty eradication and job creation priorities need a
healthy, growing productive sector to attract investment.
However, with rising levels of uncertainty and risk in the
agricultural sector -- the most important sector of
Paraguay's economy -- this will become increasingly unlikely.
END COMMENT.

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FITZPATRICK