RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES -

UNCLAS SECTION 01 OF 04 MANAGUA 000664 SENSITIVE SIPDIS STATE FOR WHA/CEN, WHA/EPSC AND EEB/TPP/ABT/ATP STATE PASS TO USAID USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR USDA FOR OFSO - FLEE AND FOR OCRA - YWEDDERBUN AND JSLETTE USUN ROME FOR AMB. VASQUEZ AND LDEVALCOURT E.O. 12958: N/A TAGS: EAGR EAID ETRD ECON PGOV PREL NU SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - NICARAGUA REF: A) MANAGUA 610, B) STATE 39410, C) MANAGUA350, D) 07 MANAGUA 2375 Summary -------------- ¶1. (U) As an agricultural country, in which more that the half of population lives in poverty, Nicaragua is both helped and hurt by the current rise in food commodity prices. The most important food commodities for human consumption are rice, beans, white corn, and wheat. Three quarters of Nicaraguans are net food consumers; on average, they spend two thirds or more of their incomes on food. The country is self-sufficient in beans and white corn, but must import some or all of its rice, wheat and yellow feed corn. Nicaragua's basic grain production sector is made up of approximately 400,000 small producers, working plots of 2-9 acres, with low yields. Food commodity brokers and processors are exploring ways to finance investment in agricultural production to take advantage of rising prices, but government rhetoric critical of free markets has complicated that decision. ¶2. (SBU) As a result of the current government's direct links to many groups that traditionally lead protests in Nicaragua, criticism of high food prices has been limited to public statements calling for price controls. In response to the rise in food prices, the GON has announced an array of policies and programs. Some, such as the reduction of tariffs, are market-based, but most are re-distribution programs with uncertain funding sources. From a USG program perspective, financial and technical support for small farmers would boost productivity and lead to lower consumer prices for agricultural goods. Any program should include a nutrition component, given that rising food prices will lead to a rise in malnutrition. An essential ingredient of any work in Nicaragua would be to provide producers with support outside of GON state controlled mechanisms. Demand -------------- ¶3. (U) The most important food commodities for human consumption in Nicaragua are rice, beans, white corn, and wheat. Three quarters of Nicaraguans are net food consumers; on average, they spend two thirds or more of their incomes on food. According to a local agricultural commodity broker, domestic food prices increased 60-70% from August 2007 to April 2008. From January 2007 to January 2008, purchasers for major hotels in Managua report a 90% increase in the cost of food. Anecdotal evidence indicates that consumers are reducing their intake of animal based proteins, such as beef and chicken, in order to afford sufficient rice and beans. Many families are cutting back on serving sizes, while the poorest may skip some meals. ¶4. (U) Yellow corn, sorghum, and soy meal are used as poultry feed. (Note: Most cattle in Nicaragua are grass fed. End note.) In response to high yellow corn prices, poultry farmers are buying more sorghum, the price of which is also rising. These higher costs, and falling demand for animal proteins, have trimmed profit margins and forced several small scale poultry producers out of business. Supply -------------- ¶5. (U) In addition to several very large sugarcane and coffee estates, Nicaragua's agricultural sector is comprised of approximately 400,000 small producers, working plots of 2-9 acres. Although arable land is abundant, productivity is relatively low. A lack of financing, a scarcity of seeds, and the high costs of fertilizer, pesticides, and herbicides may limit small producers' ability to increase production to take advantage of price increases. Farmers sow crops in mid-May with the return of the rainy season; a second planting follows in August and a third, in some areas, in December. Harvest forecasts are unavailable, however, given difficulties in aggregating data for the sector. ¶6. (SBU) Food commodity brokers and processors are exploring ways to finance investment in agricultural production to take advantage of rising prices, but government rhetoric critical of free markets has made the decision to do so more difficult. Unions and human rights organizations controlled by the ruling FSLN party are pushing hard for price controls, which would clearly create a serious disincentive for investment. ¶7. (U) Nicaragua also suffers from a lack of physical infrastructure. A low percentage of the country's roads are paved. Ports are inadequate. Electric power generation barely covers current demand. More agricultural distribution and processing centers are needed. Nicaragua is particularly vulnerable to rising oil prices because gasoline and diesel prices are not widely subsidized and 80% of all electricity is produced using fossil fuels. Two companies produce ethanol for export using sugarcane. The companies use prevailing prices to determine the rates of sugar vs. ethanol production. All ethanol is exported. At least two companies on the Atlantic coast are cultivating African Palm to produce biodiesel. At this point, production of biofuels has not reduced the supply of local food (or sugar) for consumption. ¶8. (U) Nicaragua is a net exporter of plantains, honey, beef, beans (red and black),cheese, and tubers. While Nicaragua's domestic production of beans and white corn covers local demand, the country is a net importer of rice (producing only 60% of its domestic consumption needs),imports all of its wheat, vegetable oil, and yellow corn for feed. Nicaragua production and trade numbers for basic food commodities for CY 2007 Commodity Production Consumption Imports Exports -------------- -------------- -------------- -------------- -------------- Beans (MT) 129.9 79.2 2.7 53.4 Rice (MT) 176.3 292.5 118.2 1.9 White corn (MT) 372.7 367.5 0.9 6.2 Sorghum (MT) 87.3 87.4 0.3 0.2 Beef (M Lbs) 202.1 71.8 0.4 130.7 Chicken (M Lbs) 195.6 197.3 2.2 0.6 Pork (M Lbs) 15.1 16.4 1.3 0.0 Milk (M Liters) 591.5 306.0 56.8 342.4 Eggs (dozens) 29.5 29.5 0.0 0.0 Veg. Oil (M Lts) 0.0 61.9 72.2 10.2 (Note: Consumption numbers include human and animal consumption. End Note) Political Impact -------------- ¶9. (U) Banners protesting food prices appeared during May Day parades and some labor leaders (mostly the Sandinista National Workers' Federation- FNT) and human rights groups have made public statements protesting food prices. These statements demonized producers and asked the government to implement price controls on food items to benefit consumers. However, the rural poor are mostly food producers who stand to benefit from the price increases; efforts to control prices would likely be opposed by them. ¶10. (SBU) Food prices have not destabilized the GON because the current government is linked to most of the groups that have traditionally led public protests over the past 18 years. The Sandinista administration has managed to keep a tight rein on broader-based protests. Economic Impact -------------- ¶11. (U) As an agricultural country, a rise in commodity prices could benefit Nicaragua, stimulating greater production, increasing exports and raising GDP. The immediate effect on the economy, however, has been inflationary. Nicaragua's inflation has been the highest in the region since the fall of 2007. 2007 inflation was 16.8% and is running at over 20% for 2008. The IMF estimates that food and fuel prices account for about 30% of domestic inflation. Off-budget Venezuelan support and a 33% increase in the minimum wage have also driven inflation. GON officials have yet to introduce policy measures that would address inflation, as promised to the IMF. ¶12. (U) For three-fourths of Nicaraguans, food purchases account for 60% of income. Overall, 41.8% of the domestic consumption basket is food and nonalcoholic beverages. The value of the basic basket of goods has risen 21.3% in the last six months, so even the higher minimum wage only covers about 23% of the basket. Environmental Impact -------------- ¶13. (U) With inputs such as fertilizer and improved seeds too expensive to afford, many small farmers will likely seek to increase production by increasing planted area without these important inputs. This expansion could contribute to deforestation and soil erosion as marginal land is put into production. Total area planted in basic grains increased by 16.6% from 2004-2006. Government Policy Response -------------- ¶13. (U) The GON has announced various programs to address the food price increase, but funding sources are unclear, raising doubts about implementation. These proposals are as follows: - In response to short-term bean shortages in the fall of 2007, the GON eliminated the tariff on imported beans for six months (Ref D). The government extended duty-free imports of beans for all of 2008 and also eliminated tariffs for oat and barley based cereals, certain noodles and pastas, wheat flour, and soy based foods. It also established TRQs for wheat flour or wheat-rye mix, corn syrup, and butter, and issued a rice TRQ of 35,000 MT in addition to the CAFTA-DR rice TRQ. - The GON has charged The National Enterprise for Basic Grains (ENABAS) -- in coordination with Citizen Power Councils (CPC) (Ref C),a citizen-based parallel government structure controlled by the First Lady -- with setting up points of sale for reduced price basic grains. In November 2007, ENABAS used assistance from Venezuela and Taiwan to buy beans and sell them at below market rates (50 U.S. cents/pound vs. 90 U.S. cents/pound). ENABAS contends that its action forced the private sellers to return the market rate to 50 U.S. cents/pound). ENABAS is the only agricultural organization with a national presence and holds the largest amount of agricultural infrastructure, much of it remaining from its 1980s heydays - silos, warehouses, storing and drying services. - On April 26, Ortega issued an "Agro-food Alert" that laid out a program to increase food production by 14%, using financing and seed distribution. It will cost USD 20 million, of which the GON has funded only USD 5 million. CPCs are to be charged with seed distribution. - GON has announced the revival of the previous government's "Libra Por Libra" seed distribution program which requires payment for seed with an equal amount of seed. The program distributed improved seeds, fertilizer, and technical assistance which increased yields and helped Nicaragua become a net agricultural exporter in the last few years. The GON has allotted USD 6-7 million and claims it will reach 20% of producers. However, some agricultural cooperatives and councils claim the GON has not informed them of the program and worry that it will be administered by CPCs. - The Ministry of Agriculture has announced a package of USD 52 million for financing for farmers. - The GON announced the expansion of its "Zero Hunger" program to provide 14,577 families with pregnant livestock and seeds. - Ortega announced a plan to make Nicaragua self-sufficient in rice by increasing rice production around Lake Managua. Funds from the Venezuelan-led Bolivarian Alliance for Latin America (ALBA) will finance this short term program. - GON touts its new development bank "Produzcamos" as a source of financing for producers, but the bank has not yet been formed. - President Ortega's has called for ENABAS to broker commodity purchases and sales to ensure that both producers and consumers receive "fair prices." (Note: Ortega has not clarified what a "fair price" would constitute and who would pay for the implicit subsidy. End Note.) Ortega's stated goal is to eliminate all middle-men, "who enrich themselves at the cost of the producers and consumers," and replace them with ENABAS. On April 26, he proposed that all Central American and Caribbean countries only sell grains through government to government deals in order to ensure "fair prices." - In April, Nicaraguan Customs authorities implemented informal, unwritten, uncoordinated export requirements that resulted in long delays in the export of beans. The Minister of Agriculture subsequently intervened to authorize bean exports. - On May 7, the Nicaragua-hosted Food Security and Sovereignty Summit resulted in much anti-U.S. and anti-free market rhetoric and no concrete action plans. (Ref A) Impact on Post Programs -------------- ¶14. (U) USAID's PL-480 food security programs will end in 2008. There are currently no other sources of funding or plans to implement new programs. Peace Corps will shift more of its USAID funded Small Project Assistance to small-scale crop diversification, agro-business, and other food security related activities. Policy Proposals -------------- ¶15. (U) Financial and technical support for small farmers would boost productivity and perhaps lead to lower consumer prices for agricultural goods. Also important are efforts to identify and develop markets for agricultural goods, whether as part of more sophisticated supply chains or directly with consumers. Any program should consider including a nutrition component, given that rising food prices will also result in a rise in malnutrition. The Preliminary Report of the 2007 Demographic Health Survey indicates that 17% of Nicaraguan children below the age of five suffer from chronic malnutrition and the FAO estimates that 27% of all Nicaraguans suffer from some form of malnutrition. The problem is most acute in the rural northern mountain and Atlantic coast regions. The results of currently available demographic surveys would allow any nutrition program to quickly identify pockets of poverty (which match malnutrition patterns) and target feeding and assistance programs that work in conjunction with agricultural stimulus programs. An essential component of any work in Nicaragua would be to quickly provide producers with support outside of GON mechanisms such as ENABAS and CPCs. TRIVELLI