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 -------------- SUMMARY -------------- ¶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. -------------- DEMAND -------------- ¶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. -------------- SUPPLY -------------- ¶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. -------------- POLITICAL IMPACT -------------- ¶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. -------------- ECONOMIC IMPACT -------------- ¶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. -------------- ENVIRONMENTAL IMPACT -------------- ¶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. -------------- GOVERNMENT POLICY RESPONSE -------------- ¶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. -------------- IMPACT ON POST PROGRAMS -------------- ¶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. -------------- POLICY PROPOSALS -------------- ¶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