JAMAICA RESPONSE: IMPACT OF RISING FOOD AND COMMODITY

UNCLAS SECTION 01 OF 06 KINGSTON 000366

SIPDIS

DEPT OF TREASURY WASHDC
DEPT OF AGRICULTURE WASHDC

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (JTILGHMAN) (VDEPIRRO)
STATE FOR EEB/TPP/ABT/ATP (JANET SPECK)
USDA/FAS FOR (BGRUNENFELDER)
USDA/FAS FOR FAA AREA OFFICER (JBAILEY)

SANTO DOMINGO FOR FCS AND FAS

E.O. 12958: N/A
TAGS: EAGR SENV ECON ETRD SOCI PREL AGR EAID ENRG
JM, XL
SUBJECT: JAMAICA RESPONSE: IMPACT OF RISING FOOD AND COMMODITY
PRICES

REF: STATE 39410
KINGSTON 354
KINGSTON 111

SUMMARY
--------------


1. (SBU) Jamaica does not currently face a chronic shortage in
aggregate food supplies, but soaring prices over the last two years
have led to a growing nutritional deficit among the most vulnerable
citizens. Food substitution has also been on the rise as consumers
search for cheaper alternatives amidst declining real wages. In
particular, consumers are switching from fresh meats and vegetables
to cheaper canned substitutes. Government officials and policy
makers have expressed concerns about the health implications of the
changing consumption patterns and the unavailability of key stables
like dairy products and rice. Against this background, the
Government of Jamaica (GOJ) has embarked on an effort to restore the
ailing domestic agricultural sector and improve the country's food
security. The rising food prices are expected to feed inflationary
expectations as workers demand higher wages to maintain their
purchasing power. A significant amount of food items are imported;
thus, any rise in international prices will have a direct pass
through effect. Making matters worse is the weakening Jamaican
currency, which further reduces the average Jamaican's purchasing
power. End Summary.

Food For Thought
--------------


2. (SBU) Despite numerous attempts dating to the 1930s to pursue
food security measures, Jamaica still remains a net importer of
food. The most noted attempt at self reliance came during the 1970s
socialist experiment, when Prime Minster Michael Manley popularized
the self reliance slogan. This philosophy has gone through various
mutations and has resurfaced in the present slogan from Prime
Minister Bruce Golding, "eat what you grow and grow what you eat."
However, the irony about the current situation is that the
traditionally neo-liberal Jamaica Labor Party and its western
educated Agriculture Minister Christopher Tufton is at the forefront
of this emerging paradigm. This position appears to be gaining
traction among the populace. Increasing dependency on imported food
coupled with soaring world prices have provided Tufton with the
perfect platform to resuscitate the moribund agricultural sector.
The Minister's inward-looking agricultural stimulus policies are
therefore seen as a direct response to the perceived mismanagement
of the liberalization process under the previous government.

The Raw Numbers
--------------


3. (SBU) Jamaica recorded its highest level of inflation in over a
decade, 16.8 percent, during 2007 (see reftels). For the most part,
the inflationary impulses emanated from food, which accounts for
almost half of the basket of goods and services. Prospects for the
current year look grim, as inflation for the first three months of
2008 was 5.2 percent. Even worse, food-related inflation is hovering
near 8 percent. The GOJ removed a temporary subsidy on basic food
items at the end of March, which caused a spike in inflation which
is likely to continue in the coming months. The main staples of
wheat flour and rice have jumped by 30 percent in April. If
international commodity prices continue their upward trend the
situation could become bleak for the 75 percent of Jamaicans (2
million) who spend up to 50 percent of their disposable income on
food and a further 15 percent on rising energy costs. Of these two
million citizens, almost 400,000 are living on less than USD 3 per
day.

How Did We Get Here?
--------------


4. (SBU) As the country seeks answers to its current predicament,
Tufton has been forced to come up with explanations. It appears
that rapid market liberalization may become the scapegoat. The
mismanagement of market liberalization, which began in the early
1990s, is worth examining as a cause of the decline in agricultural
production, Tufton told Parliament on April 19. He said stamp
duties on agricultural goods were reduced in 1992 as a condition for
accessing a World Bank Agricultural Sector Adjustment Loan, leading
to a significant increase in imports of fruits, vegetables, meats,

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and poultry parts. Although Tufton said the GOJ is not opposed to
liberalization, he maintained that the previous government had
pursued a policy that liberalized the economy too quickly. Tufton
said this course of action had the direct effect of allowing in
relatively cheaper imports which quickly replaced local production.
As a reference, Tufton reminded Parliament that no other sub-sector
has been more affected by the mismanaged liberalization than the
diary industry. According to Tufton, the lure of cheaper milk from
Europe, which was heavily subsidized for its own food security, led
to the demise of Jamaica's diary sector. This anecdote has
resonated with the public due to the unavailability of milk on the
international market. "The issue now is not just one of access to
cheap foods, but of food security to society and the economy,"
stated Tufton.

Demand Factors
--------------


5. (SBU) Given that Jamaica's agriculture base has declined and it
has become so dependent on imports, there will be no immediate
relief in sight. The country provides only 39 percent of its basic
food requirements, which is composed mostly of starchy foods and
some animal protein. The additional 61 percent or USD 762 million
is sourced from imports, with the U.S accounting for roughly 50
percent of the total. The main staples in the typical Jamaican diet
are wheat flour, rice, legumes, vegetables, local starchy foods
(roots and tubers),and poultry. A large part of the diet of
children under twelve years consists of milk and cheese. While the
prices of locally produced food items have been influenced by
international market conditions, all imported products have recorded
high double digit increases over the last two to three years, and
especially during the last six to twelve months. The most severely
affected items are wheat flour, rice, animal protein and dairy
products. In fact, there is a chronic shortage of milk and eggs,
making the price effect almost irrelevant. The major increases
during 2007 are:
a) bread and cereal - 31 percent;
b) meats - 24 percent;
c) fish and seafood - 17 percent;
d) dairy - 21 percent;
e) oils - 21 percent;
f) fruits - 23 percent;
g) vegetables - 36 percent and:
h) starchy foods (rice and wheat flour) - 40 percent.

Tin Is In, Meat Is Out!
--------------


6. (SBU) Currently, there are no chronic shortages in aggregate
supplies, although at current prices most consumers face a serious
challenge in achieving adequate nutritional requirements. The
difficulties increase as consumers have to allocate a larger portion
of their decreasing real incomes to other competing necessities,
which also are registering price hikes. According to Ministry of
Health (MOH) officials, this is leading to a growing nutritional
deficit, with preliminary data already showing increases in starch
consumption versus protein and vegetables among poorer Jamaicans.
There has also been a noticeable increase in the consumption of
canned (tinned) food as consumers switch away from fresh meats and
vegetables. Additionally, health professionals in rural Jamaica are
reporting increased nutritional-deficiency diseases among these
poorer groups.


7. (SBU) MOH officials are also concerned that malnutrition diseases
such as kwashiorkor and marasmus could escalate, especially among
children and the elderly. The national school feeding program,
which is vital to child nutrition, is being hindered by rising food
prices. Among middle income groups, consumers are replacing higher
priced meats and seafood with lower priced substitutes such as trout
from Guyana. The current food situation is having a greater impact
on the urban poor, who unlike their rural counterparts lack
immediate access to land for subsistence farming. Incomes also have
lagged overall inflation for both public and private sector workers.
If wages continue to rise at a rate below the rate of inflation, it
could lead to labor disputes.

Supply Bottlenecks
--------------


8. (SBU) Although demand and prices for agriculture products are on

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the rise, investors in the sector have not yet reacted. The delayed
response is due to the rudimentary state of the sector and
uncertainty surrounding the long term availability of
markets--especially for investors who have to build up capacity in
areas such as dairy and beef farming. In any event, there will be
at least a six to twelve month lag time for the production of fruits
and vegetables and three to five year lag for dairy, beef and
orchard crops. And this scenario assumes favorable weather
conditions, which are uncertain, given Jamaica's vulnerability to
extreme weather, such as hurricanes, drought, and flooding. In the
last three years alone, the country has been affected by four major
hurricanes, with the last causing an estimated USD 300 million in
damages. Roughly half of this damage was to the agriculture sector.
Rising input cost, particularly fertilizers, also has restricted
the ability of existing farmers to increase supply in response to
higher prices.


9. (SBU) With the possible exception of poultry, Jamaica does not
have the capacity to hold food inventory, thus leading to even
greater price volatility and exposure to rising prices of imports.
This is compounded by the fact that competing imports of non-CARICOM
origin have to face a common external tariff (CET) of up to 25
percent, with rice from Guyana being a major case in point. Guyana
is diverting most of its rice supplies to Europe from Jamaica to
benefit from the windfall prices. Guyana has been unwilling to
support a suspension of the CET to allow Jamaica to access cheaper
imports from the United States. In response, the GOJ has been
making a concerted effort to fast track the adoption of new
technologies such as greenhouse production and improved animal
genetics.

Political Impact
--------------


10. (SBU) Despite the soaring prices, there has been no attendant
social instability, suggesting that Jamaicans remain resilient even
under trying circumstances. This could be partly explained by the
continued growth in remittances as well as a responsible approach by
opinion makers and political leadership. Additionally, while there
is growing public concern and debate, it has not transcended into
friction between social classes or ethnic groups. And with the
public relatively exposed to the international media which has been
presenting the causes of the price hikes, most of the blame has been
attributed to external factors. For his part, Prime Minister Bruce
Golding, in his maiden address to Parliament, attributed part of the
blame to rapid demand from fast growing China and India (reftel B).
However, he also noted that as the price of oil climbs, crops
normally grown for food are being used to make fuel, putting further
pressure on the dwindling supplies of food. "The world is now
facing the worst global food crisis in more than 50 years. In the
last few weeks, food riots have broken out in 33 countries. The UN
has warned that more countries are likely to erupt", concluded
Golding.

Economic and Environmental Factors
--------------


11. (SBU) The impact of the food crisis has not been limited to
inflation. The country's trade deficit also has come in for some
pressure, with food imports alone increasing by USD 100 million in
2007, adding to the country's burgeoning trade deficit, which stands
at over 15 percent of GDP. The increased inflation also has had an
impact on the monetary and fiscal side, with the central bank forced
to ratchet up rates to compensate for rising prices in an effort to
discourage people from switching from domestic to foreign assets,
thereby putting pressure on the local currency. This is
particularly important, as any depreciation in the local currency
only adds to inflation of imports. But the rate hike has had
negative consequences for fiscal policy, with the GOJ being forced
to allocate even more funds to service its exorbitant debt. The
increased rates will also have serious implications for the private
sector, which is expected to provide the much needed push for
economic growth. As such, the GOJ might be hard pressed to meet its
medium term economic targets (reftels). Latest figures suggest that
there are 197,000 registered farmers in Jamaica, with the
overwhelming majority being subsistence farmers. As such, there are
only a handful of net producers of food in Jamaica benefiting from
rising food prices. To date, there have been no reports of
significant environmental degradation. However, as food and fuel
prices continue to escalate, there is expected to be an increase in

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deforestation to produce charcoal.

Government Response
--------------


12. (SBU) The GOJ has yet to react to the rising prices by reducing
tariffs. However, the GOJ has applied to the CARICOM Secretariat
for the removal of the CET on rice. Most of Jamaica's food export
is traditional (like sugar and bananas),and as such there will be
no need to restrict exports. There have been no incidents of
nationalizations and/or redistributions of private firms or
industries, and given the country's strong property rights and legal
system, there is not expected to be any movement in this direction.
To contain cost push inflation influenced by rising prices, the GOJ
has been forced to institute tight monetary policy to manage core
inflation. Most of the GOJ support has been in the form of
subsidies and transfer payments to the poor. The first response
from the GOJ took the form of a three month price support subsidy at
a cost of USD 7 million. When the program expired at the end of
March, the government announced a more targeted program, which is
expected to last for twelve months at a cost of about USD 11
million. This program is aimed at the almost 400,000 Jamaicans
living below the poverty line.

Let Them Eat Cassava!
--------------


13. (SBU) In a direct response to soaring prices and the
unavailability of items such as rice, Tufton outlined a medium to
long-term plan geared at partial import substitution. Central to
this strategy is the production and domestic consumption of cassava
(yucca). The strategy also includes a partial displacement of
imported starch based animal feed ingredients. So impassioned was
the Minister in selling this idea to the populace that it earned him
the title, Dr. Cassava. But, the pending crisis has also forced the
Minister to focus on building up a platform to ensure future food
security by outlining plans to transform the agricultural sector.
And unlike the past initiatives which were largely built on
protectionism, Tufton was quick to point out that the current
transformation would be based on research and development. Chief
among the new initiatives are green house technology, orchard crop
expansion, small ruminant (goats and sheep) expansion, reviving
major cattle breeds, and the demonstration of more productive and
mechanized farming practices. Already the GOJ has provided USD 1
million in fertilizer subsidies and USD 1 million to encourage
farmers to grow more yams and sweet potatoes.


14. (SBU) In order to drive the adoption of new agriculture
technology, the GOJ is establishing a center for excellence in
advanced technology in agriculture. The facility will benefit from
a USD 3 million grant from the Spanish government over three years.
The GOJ has also negotiated a number of bilateral technical
cooperation programs involving the Governments of Canada, the United
States, Brazil, Costa Rica, and Cuba. In particular, the GOJ is
negotiating a USD 5 million grant through the Canadian International
Development Agency, of which USD 2 million will be allocated to
support the development of greenhouse clusters. The GOJ also has
signed an agreement with Costa Rica and Cuba for technology transfer
in greenhouse operations. Negotiations also are advanced with the
Venezuelan government to procure cheaper ingredients for fertilizer
production. The GOJ has targeted policies to revive the livestock
industry and has allocated over USD 4 million to acquire breeding
stock for the dairy and small ruminants industries.

Policy/Program Recommendations
--------------


15. (SBU) The best strategy for assisting the most vulnerable
section of the population is: a) the continuation of targeted food
aid program through NGO's such as the program with "Food for the
Poor" with USG assistance if made available and b) re-introduction
of targeted concessionary food program, such as the PL480 Title II.
Minister of Industry, Investment and Commerce Karl Samuda has been
lobbying the Ambassador to immediately access rice under the PL480
program to avert a crisis in the supply of the commodity. This is
important, as Minister Samuda is well aware that any chronic
shortage in this basic staple could lead to social instability. On
April 28 Samuda took the unconventional step of ordering 30,000 tons
of rice from the United States, which is in contravention of CARICOM
rules. Samuda justifies the action saying he is trying to avert a

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potential crisis of a major rice shortage. With Jamaica embarking
on a program to substitute high priced imported starch with cassava
or other lower priced substitutes for use as animal feed, the USG
could also provide technical assistance (nutritionist) in
alternative feed formulation.


16. (SBU) USAID has been providing assistance in green house
technology and protected agriculture and within limited budget is
planning to expand this effort over the coming years. If additional
funds were available, the program could be expanded even further,
given the GOJ's focus on this area. Over the coming 2-3 years, a
large proportion of vegetables could be produced in country, thereby
helping Jamaican farmers and local businesses. The USG also could
provide technical assistance in the form of scientific exchange on
animal husbandry to beef up the ailing industries. While the price
of inorganic fertilizer escalates, there is still a lot of organic
material going to waste in Jamaica, which could be utilized for soil
amendment and fertility improvement. The USG could therefore
provide expertise in organic agriculture, which also creates an
opportunity for Jamaica to tap into the lucrative international
market for organic foods.


17. (SBU) Traditionally, Jamaica has produced relatively large
amounts of fruits, much of which go to waste as the processing
technology is non-existent. This issue was raised by Prime Minister
Bruce Golding during his Parliamentary debate on April 22. Golding
noted that although Jamaica produces some of the highest quality
fruit products, it still imports over USD 113 million in fruit
concentrate to produce juices. This is a relatively easy area for
intervention if support can be provided in food processing
technology. While all of the foregoing is critical, marketing will
be the single major challenge facing the agricultural sector. In
many instances it is not inefficiency of production which afflicts
the sector, but a lack of market intelligence, which eventually
drives many farmers out of business. The single most important
intervention might therefore be the development of a comprehensive
market information system (MIS). In fact, Minister Tufton has
expressed interest in duplicating U.S. Department of Agriculture's
data collection and MIS platforms. In this regard, in a recent
meeting Minister Tufton requested that USAID provide a long term
marketing consultant. In further discussions with the Ministry
USAID agreed to contract with this consultant for three months and
the Ministry would continue the contract for at least a year with
USAID funding, if the consultant is satisfactory. The consultant
will focus initially on protected area and greenhouse vegetable
marketing and cassava and is expected to begin work in early June.


Summary of Key Areas for USG Intervention
--------------


18. (U) A summary of the key areas in which the USG could assist the
GOJ on rising food and commodity prices are:

a. The USG could consider making a targeted food aid program through
NGOs such as the program with "Food for the Poor" available and/or
the re-creation of targeted concessionary food programs such as the
PL480 Title II;

b. Augment USAID funding for providing the USG assistance in green
house technology/protected agriculture to expand domestic
production;

c. The USG could provide technical assistance (nutritionist) in
alternative feed formulation to assist Jamaica in their program to
substitute higher priced imports with lower priced substitutes for
animal feed;

d. Develop a comprehensive market information system (MIS) similar
to the U.S. Department of Agricultures data collection and MIS
platforms with an initial focus on protected area and greenhouse
vegetable marketing.

Comment
--------------


19. (SBU) High food prices are expected to remain for the near term
and will continue to wreak havoc with the most vulnerable groups in
Jamaica. Negative shocks from adverse weather conditions could be
devastating to the country and could provide the trigger for social

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instability. While the GOJ has outlined a plethora of initiatives,
they will not impact prices in the short run, as the sector requires
a recovery period of at least three years. But this raises the even
greater concern of long-term market protection, given the lag effect
of agricultural production cycles. In fact, Tufton is on record as
saying that the factors leading to the current situation will never
be allowed to happen again, the clearest signal yet of the GOJ's
intention to pursue some level of protectionism. On the social
side, MOH officials are particularly worried about the potential
implications on a populace already susceptible to chronic
nutritional related diseases. Rising food prices also are expected
to feed inflationary expectations, exacerbating further price hikes
as workers argue for increased wages to maintain their purchasing
power. Given that almost 70 percent of food is imported, any up
tick in international prices will have a direct pass through effect
on the island. Coupled with the weakening currency, the price
effect magnifies and the risk of serious consequences increases.
End comment.
HEG