BRV CONSUMED WITH NORMALIZING VENEZUELAN FOOD

C O N F I D E N T I A L CARACAS 000086 SIPDIS SIPDIS SECSTATE PASS TO AGRICULTURE ELECTRONICALLY E.O. 12958: DECL: 01/23/2019 TAGS: ECON PGOV EAGR VE SUBJECT: BRV CONSUMED WITH NORMALIZING VENEZUELAN FOOD SUPPLY REF: A. 2007 CARACAS 2381 ¶B. 2007 CARACAS 1681 ¶C. 2007 CARACAS 2074 ¶D. BOGOTA 277 ¶E. 2007 CARACAS 944 Classified By: Economic Counselor Andrew N. Bowen, for reasons 1.4 (b). ¶1. (C) Summary: During January 21 - 22, a somewhat manic Chavez announced a laundry list of agricultural and food distribution "reforms," including increasing the controlled price of milk, closing the Colombian border to food smugglers, threatening to expropriate land and facilities from milk producers who refuse to comply with BRV price controls, announcing more subsidies for small farmers, removing some barriers to food imports, and setting up a PDVSA food distribution subsidiary. These half-measures and schemes will likely increase graft, imports, and producer and consumer dependency on the BRV, while likely only providing short-term relief to rolling food shortages. The BRV's actions do not address fundamentally flawed agriculture policies, inflexible price controls, and an uncertain investment climate in which 18-months is considered the long-term. End Summary -------------- Chavez Increases Controlled Price on Milk -------------- ¶2. (SBU) As reported in ref A, milk shortages have hit Venezuelans especially hard, and the BRV has been under increasing pressure to restore production. During his January 20 "Alo Presidente" television program, filmed from a newly inaugurated socialist dairy plant in Zulia state, Chavez announced a 37 percent increase in the controlled price of raw milk, increasing the price from Bs.F 1.1 per liter (USD 0.51) to Bs.F 1.5 (USD 0.7). Chavez also increased the regulated price on powdered milk, a product consumed by approximately 80 percent of the population, from USD 5.12 a kilo to USD 7.46, a 46 percent increase. (Note: the BRV completely removed the price control of UHT milk in December. End Note.) Milk producers have argued in the local press that the price increases will not improve the situation, considering producers were only recently selling raw milk for Bs.F 2.1 per liter. They have also said that increased prices for raw milk takes significant time to result in increased output. -------------- More Expropriation Threats -------------- ¶3. (SBU) After announcing the increase in the controlled price of raw milk, an angry Chavez argued that producers selling milk above the regulated prices, diverting milk to produce products not subject to price controls such as cheese and pasteurized milk, or sending milk illegally to Colombia "have sold out the country" and labeled these producers, "traitors." Chavez directed his interior minister to expropriate, occupy, and use the army if necessary against producers or other industries selling or offering to buy milk above controlled prices. -------------- Easy Money and Threats to Banks -------------- ¶4. (SBU) Over the January 21 - 22 weekend, Chavez also threatened private banks with severe sanctions and possible intervention for not complying with the Agriculture Credit Law, a law that requires private banks to allocate 20 percent of their loan portfolio for low interest loans to the agriculture sector. Chavez argued that the interest rate given by banks for agriculture credit should not be greater than 18 percent and that the loans should be given for a period of 20 years instead of three. He promised more easy BRV money to small producers, offering loans with 4 percent interest rates and two year grace periods from the Agricultural Development Fund (FONDAFA). (Note: Official inflation in Venezuela was 22.5 in 2007. End Note.) Chavez also announced the creation of a fund to hand out additional agricultural subsidies to rice, bean, meat, and milk producers. State enterprises like the National Telecommunications Company (CANTV) would finance the fund, and Chavez estimated that Bs.F 300 to 400 million (USD 140 - 186 million) would end up being sent to these small producers. Chavez also directed his newly appointed planning minister to create agro-industrial districts. The central government would establish development plans and funds for these arbitrarily created "areas" rather than work through Venezuelan state governments. -------------- Reducing Barriers to Import Food -------------- ¶5. (SBU) In another effort to restock the shelves with increasingly essential imported food, Chavez pushed through a January 21 decree via his Enabling Law authority, reducing food import barriers. To obtain dollars from the Foreign Exchange Commission (CADIVI),companies importing, producing, or marketing food, no longer need "certificates of non-production or insufficient product" nor to provide labor and social security certificates. These certificates were a significant bureaucratic hurdle to import products (Reftel B). Scheduled to be in effect for six months, this decree also requires the HEALTH and agriculture ministries to grant sanitary/phytosanitary permits within seven days. -------------- PDVSA, Venezuela's new 7-11 -------------- ¶6. (SBU) To grant more immediate relief from the rolling shortages, on January 21 the BRV launched PDVSA's new food distribution wing, PDVSA Food (PDVAL). Rafael Ramirez, the Minister of People's Power for Energy and Petroleum, told the local press that PDVSA would distribute its first shipment of 74,000 tons of meat chicken, black beans, sugar, infant formula, and milk through PDVAL distribution centers. PDVAL will target middle class Venezuelans, selling its goods at controlled prices and using many of the same suppliers as Mercal, the BRV's subsidized supermarkets. All of PDVAL's food comes from imports, and pictures of PDVAL food posted on opposition blog "Noticiero Digital" show products with American flag labels. Although details on PDVAL operations are still vague, supposedly PDVAL will use 800 of the 960 PDVSA gas stations throughout Venezuela to distribute 100,000 tons of food a month; this is on top of the 150,000 tons of food the BRV has planned for Mercal to distribute per month. Ramirez also said PDVSA Agriculture, ONE of the seven PDVSA holding companies created in 2007, will receive USD 1.2 billion in repatriated dividends to invest in agriculture production. -------------- Closing Down the Border -------------- ¶7. (C) In an effort to prevent food such as rice, milk, and corn being smuggled across the border to Colombia, the BRV has sent 2,200 National Guard soldiers to the Venezuelan border states. Colombia has neither price controls nor foreign exchange controls, which allow smugglers to make substantial profits selling subsidized Venezuelan food on the other side of the border and bringing back dollars to Venezuela (Reftel C). On January 21, Brigadier General Gabriel Oviedo told BRV controlled Venezuela Television (VTV) that the National Guard confiscated 18 cargo trucks carrying 500 tons of food being smuggled to Colombia. Venezuela imported nearly USD 1 billion in food from Colombia in 2007, which it has relied on to help alleviate the rolling shortages. Embassy Bogota has reported that Venezuelan border patrols have not disturbed cross-border commerce (Reftel D). -------------- Comment -------------- ¶8. (C) After nearly a year of scarcities of basic food items, Chavez and the BRV are finally reacting to the food situation with a flurry of activity, but barely addressing the fundamental cause of the shortages: rigid price controls that have only been periodically adjusted since 2003 (Reftel E). Two factors appear to mitigate against a substantive revision of the price control policy. On the ONE hand, the BRV does not want to give further impetus to inflation. At the same time, price controls seem to have become a point of pride for the Chavez administration and the BRV is already willing to spend an unlimited amount of money (through loans and subsidies) to keep these controls in place. Notwithstanding rumors that the BRV will further revise or ultimately remove more price controls, Chavez threatened to expropriate land and facilities from milk producers who worked to circumvent the price control regime. Overall, the BRV's actions should increase the amount of food on the shelves in the short-term. However, this will likely only serve to increase Venezuela's reliance on agriculture imports, easy money, and subsidized food. DUDDY