RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -

UNCLAS DAMASCUS 000311

SENSITIVE
SIPDIS

STATE FOR NEA/ELA, EEB/TPP/ABT/ATP JANET SPECK; CAIRO FOR
FAS/PETER KURZ

E.O. 12958: N/A
TAGS: EAGR ECON EINF PGOV SY
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -
SYRIA

REF: A. STATE 39410

B. DAMASCUS 307

C. DAMASCUS 234

D. DAMASCUS 132

E. DAMASCUS 55

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SUMMARY
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1. (SBU) This cable responds to ref A. Although rising food
prices do not portend an economic catastrophe in Syria, they
are contributing to substantial economic and political
pressure on the Asad regime. In the midst of a three-year
drought, Syria's 2008 domestic wheat production is projected
to be 60 percent less than average, with Syria's strategic
wheat reserves estimated to drop by 80 percent over the next
year. In response, the SARG has used a menu of standard
Ba'athist options -- despite a track record of failure to
contain economic problems -- to try to control prices,
threaten (and placate) farmers, increase salaries and
reassure the public. Syrian consumers have reacted by
decreasing consumption and seeking cheaper food alternatives.
Thus far, only one public protest relating to food prices
has been observed. If Syria requires imported wheat in
2008-2009, U.S. wheat exporters may enter the Syrian market
for the first time. Post notes the presence in Syria of
ICARDA, a prominent international agricultural research
center. We understand that USAID proposes to indirectly cut
funding for ICARDA this year, and strongly advocate for a
reconsideration of this policy (see paras 14-15). End summary.

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DEMAND
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2. (SBU) The major agricultural commodities consumed in Syria
are wheat, corn, barley, rice, soybeans, fava beans,
chickpeas and lentils, with poultry being the main source of
animal protein. Self-sufficient in wheat production since
the mid-1990s, Syria may become a net importer of wheat in

2008. As green pasture has also declined with insufficient
rainfall, Syria will need to import 1.5 to 2 million tons of
barley (probably from Russia or Ukraine) in order to feed its
estimated 20 million sheep and cattle. Syria produces less
than five percent of its corn requirement for its expanding
poultry, starch and glucose industries, and does not produce
soybeans or rice. U.S. corn accounts for some 80 percent of
Syrian imports, with Argentina and Eastern Europe providing
the remaining 15 percent. The U.S. and Argentina each
provide about 50 percent of Syria's soybean requirement for
both whole beans and mash. Egypt usually provides between
80-85 percent of Syrian rice imports, although Syrians are
concerned that Egypt may not meet its export obligation this
year.


3. (SBU) The SARG sets fixed prices for some of its
domestically produced commodities, including wheat, corn,
barley and sugarbeets. On April 15, 2008, the SARG announced
a 40 percent increase in the fixed price of wheat, a 30
percent increase in the price of sugarbeets, and nearly a 100
percent increase in the prices of both corn and barley.
However, many Syrian farmers contend that the new set prices
will not cover their production costs, particularly since the
SARG increased the price of diesel fuel by 357 percent during
peak irrigation season (ref B).


4. (SBU) While Syria's urban elites have not curbed their
spending habits, middle class and poor citizens appear to
have changed their consumption patterns. Embassy staff
recently observed normally busy grocery stores in
middle-class Damascene neighborhoods nearly empty of shoppers
during peak shopping hours, with some grocers claiming a 75
percent drop in sales compared with April 2007. Some
middle-class Syrians accustomed to buying "tourist" (sliced,
loaf) bread say they have returned to standing in line at
government bakeries with poorer people to buy subsidized flat
bread. In the face of 100 percent increases in poultry and
dairy products, poorer Syrians have already turned to fava
beans and chickpeas as less expensive sources of protein.

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SUPPLY
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5. (SBU) Normally, Syria produces 4.7 to 4.9 million tons per
year (mt/yr) of wheat, while domestic demand averages four
mt/yr. The latest estimate of the 2008 crop projects a yield
of only two million tons -- a decline of 60 percent. Syria
also maintains a strategic reserve of wheat, thought to be
the equivalent of one year's supply, or around five million
tons (based on known storage capacity),although this
information is not publicly available. Syria also has trade
agreements to export 1.2 million tons of surplus wheat to
Egypt, Jordan and Yemen. As domestic production has declined
over the last three years, Syria has drawn upon its strategic
reserve to fulfill its export obligations. Consequently,
industry experts estimate Syria's strategic reserve has
diminished to between 2.5 and 2.75 million tons, although the
state-run wheat management company disputes this figure as
low. The same experts predict that, should current weather
and economic trends continue, Syria's strategic reserve could
decline to below one million tons by June 2009.


6. (SBU) Three factors are contributing to a significant
decrease in Syria's supply of domestically-produced wheat and
barley this year: the weather, the price of feed, and the
price of diesel fuel. As mentioned above, a continuing
three-year drought coupled with a late spring frost has
lowered the water table and damaged crops. In response to
the weather, Syrian farmers have planted less acreage with
wheat and barley. Further diminishing supplies this year,
many Syrian farmers have begun to sell irrigated crops for
grazing sheep. Even with the April 15 increase in commodity
prices, barley remains 38 percent more expensive than wheat.
Consequently, wheat farmers can demand a higher price for
grazing their unharvested crops (as a substitute for barley)
than they could earn from selling their produce at fixed
government prices -- especially when faced with higher diesel
prices for irrigation, harvesting and transportation.


7. (SBU) Facing rising irrigation costs, many small farms in
suburban Damascus have recently been converted (usually
illegally) for sale as residential real estate. Emboffs have
also observed shepherds offering young lambs for sale weeks
earlier than usual in the hopes of bringing a decent price
before malnutrition affects the animals' health. In one
recently publicized incident near Idlib, a shepherd
reportedly killed himself in despair after watching his flock
starve. In another example, police raided a suburban
Damascus warehouse that was illegally selling beef and lamb
meat from unhealthy culled stock to area restaurants for use
in minced dishes.

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POLITICAL IMPACT
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8. (SBU) Inflated food prices are a contributor to the
substantial economic and political pressure weighing on the
regime of President Bashar Asad. A minority-run police state
with heavy-handed internal security services, the SARG keeps
a close watch on any civil unrest that could pose a threat to
the regime. Thus, it was unusual when some 400-500 tomato
farmers gathered in Tartous on April 16 to protest the
previous day's decision by the Ministry of Economy to ban the
export of tomatoes for 45 days and offer 20 SYP/kg (USD
0.42/kg) for the spring tomato crop. The Ministry of Economy
had taken the decision after market forces had driven tomato
prices to 55 SYP/kg (USD 1.16/kg). Internet media photos
indicated that police used high-pressure water hoses to
disperse the crowd. Shortly thereafter, President Asad made
an unpublicized visit to a Damascus vegetable market, and the
Minister of Agriculture was dispatched to Tartous to reassure
the angry greenhouse owners. While stopping short of calling
it a mistake, the Ag Minister characterized the Ministry of
Economy's ban on tomato exports as "not thoroughly studied."
As a further concession, he promised that his ministry would
purchase the entire coastal Syrian tomato crop at a
"reasonable" price, which local experts infer as guaranteeing
the farmers a 20 percent profit margin. Ba'ath Party
officials have recently used local media to issue assurances
that the SARG will take measures to counteract rising food
prices and ensure food security for Syria's majority poor.

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ECONOMIC IMPACT
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9. (SBU) As reported in ref C, agricultural produce led a
wave of inflation, popularly described in local media as a
"tsunami of prices," that hit Syrian consumers hard over the
past four years. The Syrian public sector, which employs
approximately 35 percent of all workers, had not received a
raise in over two years until May 3 when President Asad
announced a 25 percent salary and pension increase for all
civilian and military employees (ref B). According to an
early April op-ed in the government daily Al Thawra, minimum
wage employees in the Syrian public sector had earned an
average of USD 175/month. Our estimates indicate that the
majority of Syrians who comprise the lower class spend some
70-75 percent of their monthly income on food, while for
middle class citizens food expenses account for about 20
percent of their monthly budget.


10. (SBU) While Syrian consumers are suffering from food
sticker-shock, the SARG is struggling to control a burgeoning
budget deficit (ref D). In 2007, Syria transitioned from a
net exporter to a net importer of oil, while the SARG
continued to sell heavily subsidized gasoline, diesel and
other fuels. As oil prices rose, fuel subsidies accounted
for the largest portion of an expanding budget deficit. For
the last five years, Asad's economic advisors have advocated
eliminating fuel subsidies as part of a gradual shift to a
"social market economy." On May 3, the SARG finally took the
politically unpopular, but economically overdue, step of
reducing subsidies on diesel (ref B). Although the new price
of 25 SYP (USD 0.55)/liter is still some 50 percent below the
global market value for diesel, it amounted to an overnight
increase of 357 percent. The higher diesel prices are
already being reflected in local food prices, thus further
compounding the global crisis facing the Syrian consumer.


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ENVIRONMENTAL IMPACT
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11. (SBU) There has been no obvious immediate environmental
impact in Syria attributable to rising food prices. As noted
in para (6),rising fuel prices have resulted in some
suburban farm land being converted for sale as residential
real estate.

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GOVERNMENT POLICY RESPONSE
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12. (SBU) In early March, the Ministry of Economy banned the
export of surplus soybean mash in an attempt to control feed
prices for local poultry farmers. On April 15, the Ministry
also banned the export of tomatoes, wheat flour, and other
staples for 45 days in an effort to lower domestic prices.
In an attempt to coerce farmers to harvest their crops this
year rather than sell them as feed, the SARG announced in
late April that it would fine farmers 5000 SYP (USD 105) per
dunam for any crop sold for grazing. Shortly thereafter, the
SARG took the unusual step of prohibiting farmers from
transporting wheat from one province to another -- ostensibly
to dissuade smuggling of Syrian wheat to the black market --
under penalty of confiscation of the farmer's entire crop.
On May 5, President Asad issued Decree 29 establishing the
Agricultural Support Fund. Although details of the decree
remain vague, the fund's announced purpose is to "support"
the increase in prices of Syria's strategic crops.

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IMPACT ON POST PROGRAMS
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13. (SBU) As documented in ref E, the economic conditions
contributing to agricultural inflation resulted in a 60
percent increase in the value of U.S. corn and soybean
exports to Syria in 2007 -- a trend that is likely to
continue. U.S. trade sanctions under the Syria
Accountability Act permit the export of food to Syria, and
the weak dollar has made U.S. grain more attractive to Syrian
importers. Although Syria has never imported American wheat,
local experts assert that if the prices were comparable,
Syrian importers would prefer lower-humidity, higher quality
U.S. wheat to high humidity Black Sea wheat, which is prone
to fungus and insect infestation.


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POLICY PROPOSALS
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14. (SBU) Against a backdrop of a worldwide food crisis, the
Aleppo-based International Center for Agricultural Research
in Dry Areas (ICARDA) recently communicated to Post that
USAID has proposed to cut USD 22.5 million in 2008 from the
core budgets -- and also significantly cut the project
budgets -- of 15 international agricultural research centers
(including ICARDA) under the umbrella of the Consultative
Group on International Agricultural Research (CGIAR).
According to ICARDA staff, this decision would result in a 10
percent decrease (about USD 1.2 million) in ICARDA's core
funding, as well as additional losses from its project
budget.


15. (SBU) Embassy Damascus feels strongly that ICARDA is a
vital platform for supporting USG interests in the region and
plays a key role in responding to regional and global
agricultural issues. Since ICARDA's establishment in 1977,
the USG has been the largest donor, contributing over USD 110
million total to both core and project budgets, or an average
of USD 3.67 million annually. Presently, ICARDA trains
agricultural researchers from around Africa and the Arab
world (including from Iraq) and is a premier research
institute developing wheat strains that are resistant to the
Ug99 wheat rust disease. Additionally, ICARDA offers a
politically acceptable forum to support civil society near
Aleppo, a major population center that is difficult for Post
to access. Consequently, we advocate for maintaining and
even increasing USG assistance levels for ICARDA.
CORBIN