RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -

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SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -
GERMANY

REF: SECSTATE 39410


1. (U) Summary: The recent press coverage of rising food prices has
prompted the German Government to review its current policies
affecting food and feed supplies. Domestically, there are a variety
of factors contributing to rising food and feed prices. As
expected, farmers have responded to higher commodity prices and have
or are planning to expand output. Specifically, Germany's biofuels
policy is coming under fire and receiving increased scrutiny.
Germany recently increased its pledges to the World Food Program.
End Summary.

2. (U) Agricultural and Food Demand: The German food and
agricultural industry is in general self-sufficient with net imports
only for protein meals, fruits and vegetables, fish, vegetable oils,
eggs and to a lesser extent pork and poultry. Primary suppliers are
neighboring European countries and to a growing extent countries
such as Brazil, Argentina and Thailand. In general, food prices in
Germany rose in 2007 as a result of increased demand on the world
market and reduced domestic supplies for grains and oilseeds. The
largest food price increases were observed in the dairy sector. For
example, prices for fresh full-cream milk jumped 31 percent.
(However, Aldi, a leading discount retailer which often sets the
trend in milk prices, reduced them last week.) Consumers also paid
more for other products such as fruits (+11 percent) and bread and
cereals (+9 percent). In contrast, prices for pork products have
remained relatively stable due to large market supplies.


3. (U) Despite the overall price increase, it does not appear that
German consumers have significantly altered their food consumption
patterns and have largely accepted the current situation. On
average only about 12.5 percent of Germans disposable income is
spent on food, thus, the issue of rising food prices has not yet
significantly cut into consumers' pocketbooks.


4. (U) The demand impact of biofuels, predominantly biodiesel, on
vegetable oil market has grown in Germany over the past 5 years.
Biodiesel currently accounts for about 50 percent of total vegetable
oil demand (from both domestic and imported sources). This has
increased from about 30 percent five years ago. The viability of
this market is currently under assault from reduced tax breaks,
imported biodiesel, and the relative prices of petroleum and
vegetable oil. There are also growing public sector and NGO
concerns about the impact of this demand on food prices.


5. (U) Supply: Market prices received by farmers have influenced
land and crop allocation in Germany over the past several years.
Given the bright outlook for biodiesel in Germany and surging prices
in 2006, farmers planted a relatively larger area (approximately
110,000 hectares or about 8 percent) of winter rapeseed at the
expense of grains. In making winter planting decisions in 2007,
farmers switched an equivalent amount of area (110,000 hectares)
from oilseed production back into grains. In addition, the
elimination of the set-aside requirement brought about 200,000
hectares of land into production with a majority returning to grain
or silage production. Current weather prospects indicate a
significantly increased grain crop in Germany for 2008. In the
livestock sector, relatively high milk prices in 2007 encouraged
herd expansion and increased milk production. As a result, milk
prices have begun to fall to farmers and to consumers.


6. (U) Germany no longer has sizable public-owned commodity stocks
to buffer the market from price fluctuations. Since reform of the
Common Agricultural Policy, Germany reduced its publicly held stocks
to almost zero. This has resulted in a rise in the market
importance of privately-held stocks and increased price
variability.


7. (U) The high price of petroleum products has impacted the cost
for transportation and the processing of input materials (i.e.
energy and fertilizers). However, reports indicate that farmers
have been maximizing the use of inputs in 2008 in order to increase
yields to the maximum and reap the benefits of higher prices.


8. (U) The EU's agricultural biotech policies have increased animal
feed costs for the German livestock industry. This has been due the
inability to import corn and corn gluten feed from the United States
and increased demand for corn from those suppliers only producing
EU-approved events.


9. (U) POLITICAL IMPACT: During the fall of 2007, increasing food
prices, particularly dairy, caught consumers' eyes and were cited by
some labor unions as an additional reason for wage increases in
contract negotiations, but overall did not result in any noticeable
political impact. However, front page coverage of the global food
market conditions, as well as a growing debate over the negative
environmental impact of some biofuels, has fed a public perception

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that biofuels are a major cause of rising global food prices,
especially in developing countries. German politicians and
government officials are increasingly positioning themselves to
appear responsive to these concerns. Most notably, Environmental
Minister Sigmar Gabriel (Social Democratic Party),recently launched
a review of the current biofuels policy. Others, such as Christian
Democratic Union/Christian Social Union Bundestag faction leader
Volker Kauder, are calling for a re-evaluation of German and EU
policies regarding the use of new technologies in farming.


10. (U) Economic Impact: In 2007, Germany's inflation rate climbed
to 2.2 percent, the highest level in 13 years. Higher costs for
food, fuel and energy largely accounted for this increase. Although
consumers spent more on staple products recently, no dramatic food
substitution has occurred. Rising food prices contribute to the
debate over whether social inequality is rising in Germany. Some
observers argue that past wage moderation has caused a decline in
real incomes, especially among low-wage groups who are
disproportionately affected by food price increases. However, with
only an average 12.5 percent of disposable income spent on food in
Germany, the increases have not yet significantly affected
consumers' pocketbooks.


11. U) Environmental Impact: There have been no reported impacts
from the elimination of set aside requirements for farmers.
However, there has been an increase in the use of farm chemicals in
the past year to take maximum advantage of production potentials.


12. (U) Government Policy Response: On April 21, the German
Government created a "Food Crisis Task Force." The group consists
of high-level members of the ministries of Agriculture,
International Development, and Economy, under the leadership of the
Chancellor's Office. The Task Force is charged with reviewing all
German policies that might be contributing to increased food prices
including biofuels and agricultural biotechnology. The first
outputs from this discussion are expected to be available prior to
the G-8 Summit.


13. (U) During the past year, German agricultural, food and feed
industry representatives have been warning the German Government
that the EU policy on biotechnology may contribute to the rising of
food production costs. German Agriculture Minister Horst Seehofer
has a different view on this issues and has publically stated that
industry statements about the potential market impact of not
addressing the EU agricultural biotechnology regulatory system are
overblown and that German and EU importers should work more closely
with other grain producers such as Ukraine, Russia, and Brazil to
meet import needs.


14. (U) In responding to international calls from additional
resources for the World Food Program, Germany recently pledged an
additional $16 million on top of the estimated $5 million it
contributed in March. Normally, Germany's annual contribution to
the WFP is estimated at $36 million.


15. (U) Impact on Post Programs: Post has significantly increased
attention to coordination efforts associated with international
agricultural organizations including FAO and the Food Aid
Convention. These efforts have paid dividends in creating
consultation opportunities on important initiatives such as upcoming
FAO conferences. Post continues to take advantage of Department
programs such as the biotech outreach fund to share U.S. farmer
experiences with biotechnology at a grass roots level. In FY 2007,
three teams were funded to visit Germany. In FY 2008, two
additional teams are expected.


16. (U) Policy Proposals: The creation of the Food Crisis Task
Force provides an opportunity to establish a closer relationship on
issues of U.S. interests with senior Germany officials on a wide
range of policies that affect the global food/feed situation
including FAO priorities, WFP needs and progress on the
acceptability of agricultural biotechnology.


TIMKEN, JR.







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