Identifier
Created
Classification
Origin
08LUSAKA479
2008-04-30 12:46:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Lusaka
Cable title:  

RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -

Tags:  EAGR EAID ECON ETRD PGOV PREL KMCA ZA 
pdf how-to read a cable
VZCZCXRO2004
PP RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLS #0479/01 1211246
ZNR UUUUU ZZH
P 301246Z APR 08
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC PRIORITY 5757
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHNR/AMEMBASSY NAIROBI 3733
RUEHRO/AMEMBASSY ROME 0458
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/USDA FAS WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP 0069
UNCLAS SECTION 01 OF 04 LUSAKA 000479 

SIPDIS

DEPARTMENT FOR EEB/TPP/ABT/ATP (JANET SPECK)

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: EAGR EAID ECON ETRD PGOV PREL KMCA ZA
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -
ZAMBIA

REF: STATE 39410

LUSAKA 00000479 001.2 OF 004


UNCLAS SECTION 01 OF 04 LUSAKA 000479

SIPDIS

DEPARTMENT FOR EEB/TPP/ABT/ATP (JANET SPECK)

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: EAGR EAID ECON ETRD PGOV PREL KMCA ZA
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -
ZAMBIA

REF: STATE 39410

LUSAKA 00000479 001.2 OF 004



1. (U) Summary. This cable responds to questions in reftel
regarding the impact of rising food/agricultural commodity prices in
Zambia. Although Zambia is experiencing food price inflation, at
rates exceeding overall inflation, its prices are not directly tied
to global market prices, and therefore somewhat shielded from
international price volatility. Although the Government of Zambia
has export restrictions in place on Zambia's staple commodity,
maize, and in late 2007 had politically-motivated import
restrictions on wheat, it has not introduced additional measures to
mitigate against world price increases. Post has not submitted
prior reporting on the impact of the recent price increases. End
Summary.

--------------
Impact on Demand
--------------


2. (U) Because in most years Zambia is not a net importer of food
and agricultural commodities, Zambian food and agricultural
commodity prices are not directly tied to, or affected by, global
market prices. Domestic food and agricultural demand is also
relatively independent of global market developments. Much of
Zambia's production is consumed locally and most of what Zambia
consumes is produced in the region. An estimated 50 percent of
rural Zambians are net buyers of food, compared to 28 percent who
are net sellers. Government of Zambia (GRZ) market interventions
keep domestic prices low for maize, Zambia's staple food, which
constitutes 56 percent of Zambia's total dietary energy supply.
Rural poverty is linked more to low agricultural productivity,
droughts, floods, and poor distribution, than it is to high
international prices.


3. (U) Nevertheless, nominal basic food prices in Lusaka have
increased by as much as 33 percent in the past twelve months.
(Zambia's year-on-year annual inflation rate, as of March 2008, is
approximately 9.8 percent.) According to retail price survey data

provided by a local NGO/think-tank, the Jesuit Center for
Theological Reflection, between October 2007 and March 2008, Lusaka
prices for maize meal increased by 17 percent. During the same
period, prices for beans increased by 66 percent, cooking oil by 69
percent, and bread by 36 percent.


4. (U) Maize price increases, which may be even higher in rural
areas, are customary in February and March during the peak lean
season, prior to the April harvest. Nevertheless, the year-on-year
maize meal nominal price increase (May 2007 to May 2008) is almost
19 percent, suggesting that the price increases are not entirely
seasonal. The increases appear to be due primarily to higher
transportation and production costs, as well as output levels in
2007/2008 that were significantly lower than those of 2006/2007,
when Zambia enjoyed a bumper harvest.


5. (U) In the 2007/2008 harvest year, domestic production is
expected to come very close to satisfying domestic consumption. In
years of severe drought, such as 2002 and 2003, Zambia's
agricultural trade balance was negative, due to large imports of
maize and wheat. However, commercial wheat production will soon
meet domestic demand, and Zambia could become a net exporter within
two to three years. Rising prices have not affected consumption
patterns or resulted in shifts to other commodities.

--------------
Impact on Supply
--------------


6. (U) Given recent production, domestic supply has mostly satisfied
local demand and global prices have not had a significant impact on
supply. Rapid price increases, if combined with reductions in
international food aid and low agricultural output, could adversely
affect the poorest segments of the population. Despite Zambia's
ample food production levels, there are pockets of food insecurity.
Remote areas that are vulnerable to flooding experience severe food
shortages almost annually. As many as 275,000 people will require
food assistance in the first half of 2008, due to rainfall levels,
flood-induced damages to infrastructure, and displacement of people.
Zambia's poor internal distribution and transportation network,
makes it difficult to properly distribute food from producers to
consumers and to provide aid to affected areas.


LUSAKA 00000479 002.2 OF 004



7. (U) Zambia's Food Reserve Agency (FRA) makes large-scale maize
purchases annually to maintain a five-month stock of maize,
amounting to approximately 250,000 tons. However, in 2007, the
government purchased over 400,000 tons, approximately 70 percent of
marketable maize. One-third of government stocks are estimated to
be spoiled, ue to inadequate storage technology and controls, nd
inability to transport stocks to those who ned or want it.
According to some reports, the FRA loses about USD 110 on eah ton
of maize tat it purchases. In 2008, the FRA has sold 200,000 tons
of maize to neighboring countries as well as local vendors.


8. (U) To date there is no evidence that production has responded to
price increases. Nor are there reports of increased domestic or
foreign investment in food production. In the event of sustained,
high global food and agricultural commodity prices, Zambian
commercial farmers may seize export opportunities and increase
production.


9. (U) Expanding Zambia's production capacity will require
considerable public and private sector investment. Currently, less
than 15 percent of Zambia's arable land is utilized for farming.
Commercial farming is encumbered by lack of transportation
infrastructure, market access, technology, irrigation, storage
facilities, and financing. Traditional leaders' control of most
rural lands also lends difficulties to commercial development. An
incomplete agricultural supply chain, caused by a deficit of
well-run cooperatives, stunts sectoral growth. Lacking resources or
capacity to market their products, small-scale Zambian farmers rely
upon intermediary brokers who offer well-below market prices.

--------------
Domestic Politics
--------------


10. (SBU) Food and agricultural commodity price increases have not
caused public protests or other forms of civil unrest as yet.
Nevertheless, maize price increases in 1986 and 1991 resulted in
violent riots, numerous deaths, and an eventual change in
government. There are no indications at this moment that this might
repeat itself, perhaps due to the availability of alternative food
products, and Zambians' familiarity with double-digit inflation.
However, the situation could change rapidly, for example, if the
harvest falls far short of domestic needs. Food supply and price
levels therefore bear close watching in Zambia.


11. (SBU) Given the small size of Zambia's biofuels projects, the
public is mostly indifferent to the issue of biofuels. Although the
National Energy Policy includes biofuels promotion, the GRZ has done
very little to this end. Despite considerable commercial interest
in cultivating the oil-rich jatropha plant, President Mwanawasa has
warned that jatropha production will be banned if specialists
conclude that jatropha farming is bad for the soil. Zambians are
also indifferent to biotechnology and Genetically Modified Organisms
(GMOs),despite GRZ opposition. In recent years, opposition parties
and labor unions have criticized the infusion of Chinese investment,
alleging that Chinese companies engage in corrupt practices and do
not abide by environmental and labor laws. Chinese investment in
the retail (including food) sector has intensified this resentment.


--------------
Domestic Economy
--------------


12. (SBU) Fuel, food and agricultural commodity price increases are
sure to make it difficult for the GRZ to maintain its target of
single-digit inflation. Price increases are unlikely to have an
impact on Zambia's fiscal situation or external debt outlook.
External debt sustainability, which improved substantially thanks to
HIPC debt relief in 2005, is unlikely to be affected, unless the GRZ
seeks large loans to alleviate hunger, develop infrastructure, and
support agricultural growth. The GRZ has so far been cautious about
taking on new external debts in the post-HIPC timeframe.


13. (U) Since 2003, Zambia has had a positive agricultural trade
balance. If Zambia develops its agricultural sector to increase
export earnings, it is likely to have a favorable impact on the
country's balance of payments and trade balance. Until then, the
effect of rising prices on the balance of payments and trade balance
will vary from year to year, but generally be negligible, due to
mining sector growth and agriculture's comparably modest share of

LUSAKA 00000479 003.2 OF 004


export earnings (less than three percent in 2006).

--------------
Environmental Impact
--------------


14. (U) Recent price increases have had no reported environmental
impact. Sustained high fuel prices may contribute to deforestation
and soil erosion, as low-income, rural households increase their use
of timber and charcoal for heating and cooking.

--------------
Government Policies
--------------


15. (U) The GRZ utilizes import and export restrictions, which
dampen prices, to ensure adequate domestic supplies. It also
intervenes in the market by making large, price-distorting stock
purchases of maize for the FRA. If prices rise further, however,
some analysts anticipate price controls on maize and other key
commodities. GRZ representatives have been slow to address the
price increases, and there is little public debate on the topic, nor
indication that the GRZ will interfere in the market. The GRZ has
not proposed changes to trade, environment, biotechnology, SPS, or
other policies.

--------------
Impact on Mission Programs
--------------


16. (SBU) The efficacy of many USG development programs in Zambia
are likely to be limited by rapid increases in prices, particularly
the President's Emergency Plan for AIDS Relief (PEPFAR) and the
President's Malaria Initiative. Additionally, education programs
will reach fewer audiences if increased rural poverty and hunger
limit levels of school attendance. Food assistance that is
allocated in USD terms, rather than volume (weight),will be diluted
by increased prices (and a depreciated Dollar) and therefore reach
fewer households. For the current fiscal year, Food for Peace
stocks arrived before the price increases. No impact on tonnage
levels is expected until fiscal year 2009. The USG Economic Growth
programs could realize improved income and trade results if Zambia
adapts its trade and agricultural policies to mount a supply
response to the global increases in commodity prices.

--------------
Policy Changes for Zambia
--------------


17. (SBU) Post will continue to urge the GRZ to refrain from all
forms of market intervention. However, given the GRZ's propensity
for--and history of--intervening, the GRZ ought to consider consumer
subsidies in lieu of controls that discourage productivity. These
could include time-limited subsidies, such a reduction on value
added tax (VAT) for more food products (staple foods are already VAT
exempt),or an increase in the exemption threshold for the Pay As
You Earn (PAYE) taxation scheme.


18. (SBU) The GRZ should consider the full range of food security
measures, including not just a sufficient food reserve, but
appropriate agricultural and social policies. Policies could
include lifting the prohibition on Genetically Modified Organisms,
although this is a highly sensitive political issue. Another policy
option includes reducing Food Reserve Agency stock purchases, which
interfere with market prices, usually spoil, and rarely are
delivered to impoverished regions of the country. Perhaps more
importantly, the GRZ should consider phasing out its export
restrictions, in order to allow cross-border trading and the free
movement of goods.


19. (SBU) The GRZ's fertilizer support program consumes the lion's
share of the GRZ's agriculture budget, yet provides benefits to only
a small percentage of the agricultural sector (and usually to
farmers who need it least). The program impedes the development of
a commercial fertilizer industry, perpetuates a culture of
entitlement, and causes delays in planting. Fertilizer support
funds ought to be diverted to infrastructure development, such as
road and railway transport, storage facilities, training,
irrigation, and the overall improvement of competitiveness and
production capacity.


LUSAKA 00000479 004.2 OF 004



20. (SBU) Market-driven agricultural growth and thoughtful, targeted
social safety net policies may be Zambia's only insurance against
rising prices (and possible social unrest),and a solution to
endemic poverty and hunger. Over three-fourths of Zambia's work
force is employed in the agricultural sector (mostly small-scale),
and yet agriculture accounts for less than twenty percent of the
Gross Domestic Product. Increased productivity would generate
wealth in rural areas with side-benefits in other sectors, including
health and education.

--------------
Policy Recommendations for the USG
--------------


21. (SBU) In order to address rising food and agricultural commodity
prices, the USG should continue--and perhaps expand--its assistance
to agricultural development in regions, like Zambia, where
opportunities exist for sectoral growth. Besides helping to
eradicate poverty, increased productivity could contribute to
greater global food security. At the same time, the USG should
continue to monitor food price and supply levels in Zambia closely,
and offer technical assistance to help the GRZ design and implement
proactive policies that will minimize the risk of social unrest
driven by food shortages.


22. (SBU) To accomplish this, U.S. development assistance should
continue to focus on sustainable economic development, particularly
ways to improve farming productivity. U.S. dialogue on food
security with other donors and host countries should also continue
to stress this approach. Absent this focus, other countries'
development activities run the risk of interfering with emerging
small-scale commercial farming, perpetuating market inefficiencies,
and fostering a culture of entitlement.


23. (SBU) Post will continue to advocate for GRZ agricultural policy
reform and will encourage the banking sector to develop
risk-mitigating vehicles for agricultural sector lending and related
infrastructure investments. USAID programs in Zambia will also
continue to address inefficiencies in the agricultural value chain,
by improving market access and increasing the availability of
veterinary services, technology, advice, and financing.


24. (SBU) In the event that Zambia qualifies for a Millennium
Challenge Account compact, the USG could help the GRZ develop a
proposal for agricultural infrastructure development, including
road, rail, and irrigation, in order to unlock the sector's export
potential. This would go a long way in support of the GRZ's poverty
reduction strategy and the United Nations Millennium Development
Goals.

MARTINEZ