CALDERON ANNOUNCES PLAN TO ADDRESS RISING FOOD

UNCLAS SECTION 01 OF 03 MEXICO 001671 SENSITIVE SIPDIS SIPRNET STATE FOR A/S SHANNON STATE FOR EEB/TPP/MTA/VOLTMER, EEB/TPP/ABT/CLEMENTS, EEB/TPP/LURIE, WHA/MEX/WOLFSON, WHA/EPSC/SALAZAR STATE PASS USTR FOR EISSENSTAT/MELLE/SHIGETOMI USDOC FOR 4320/ITA/MAC/ONAFTA/WORD TREASURY FOR IA (LUYEN TRAN, RACHEL JARPE) STATE PASS FEDERAL RESERVE (ANDREA RAFFO) NSC FOR RICHARD MILES, DAN FISK E.O. 12958: N/A TAGS: EAGR ETRD ECON ENRG PGOV MX SUBJECT: CALDERON ANNOUNCES PLAN TO ADDRESS RISING FOOD PRICES, AG MINISTER HANGS ON REF: (A) SECSTATE 52628 (B) MEXICO 146 (C) MAY 19 E-MAIL FROM FRITZ TO VOLTMER ¶1. (U) The Embassy Foreign Agricultural Service Section contributed to this report, which responds to questions posed in REF A. Summary -------------- ¶2. (SBU) The rising cost of food in Mexico is provoking concerns of another possible outbreak of the sort of political unrest caused by last year's spike in tortilla prices. In response, President Calderon announced in a nationally televised address a package of measures to offset high food prices by reducing import barriers, encouraging increased agricultural production, and ensuring access to affordable basic foods for poor families by means of consumer subsidies and price restraint agreements with producers. He also pledged further austerity on the part of the federal government and zero tolerance for hoarding and speculation of sensitive food products. Some farm groups and members of the congressional opposition have criticized the plan for being tardy and further undermining Mexico's ability to feed itself. Though Mexican Agriculture Secretary Alberto Cardenas continues to be unpopular, his role as a lightning rod for the Administration and the fact that he is the only prominent member of Calderon's cabinet from the more conservative wing of the ruling National Action Party (PAN) may explain his surprising longevity. End summary. Food Prices in Mexico Feeling Global Impact -------------- ¶3. (U) In his May 25 address, Calderon blamed high food prices on global factors, including rising energy prices, soaring food demand in China and India, and the use of corn for ethanol production. Mexico's overall consumer prices rose 4.55 percent in the twelve months ending April 30, with food items like tomatoes, chicken, bread, avocadoes, bananas, and cooking oil registering much higher levels of inflation. Given that food constitutes a relatively larger share of total expenditures by poor families, the effective rate of inflation has been even greater for them. The cost of grain imports during the first three months of 2008 is up 75 percent from the same period last year. Mexico imports the majority of the wheat and rice it consumes. Calderon's Plan -- Actions in Support of the Family -------------- -------------- ¶4. (U) Calderon's plan -- named "Actions in Support of the Family Economy" -- is comprised of three principal areas of action: facilitating access to food at the lowest international prices; encouraging increased domestic agricultural production; and safeguarding the economic and nutritional well-being of Mexican families. The key actions under each area are listed below. -- Access to Lowest International Prices: 1) elimination of import duties on rice, white and yellow corn, and wheat, 2) additional import licenses for duty-free bean imports, 3) duty exemption on imports of soy paste and sorghum in order to reduce costs in the livestock sector, 4) reduction by half of import tariffs on milk powder, and 5) negotiations with supermarkets to create an accessibly-priced basic food basket and take actions to avoid any sudden surge in food prices. -- Encouraging Increased Production: 1) elimination of import duties on nitrogen-based fertilizer, 2) direct financing to around 500,000 small farmers for purchase of fertilizer, 3) sales of fertilizer at accessible prices in marginal rural areas through the federal government's parastatal discount agency DICONSA, 4) support for the development and expanded use of irrigation, 5) US$ 1.9 billion of funding for purchases of tractors and other agricultural machinery and equipment, 6) strengthening of current federal support MEXICO 00001671 002 OF 003 programs for agricultural production, and 7) renewed support for specific projects aimed at raising agricultural productivity. -- Safeguarding Families: 1) DICONSA will continue to sell food at accessible prices (e.g., corn flour for 50 cents per kilo) in marginal areas, 2) LICONSA, another parastatal discount retail chain for milk, will maintain the price of milk at 40 cents per liter, 3) creation of a strategic corn reserve to safeguard DICONSA's ongoing ability to sell cheap corn to low-income families, 4) strengthened support for modernization of the tortilla production chain, 5) additional cash subsidies for food purchases to families registered in social safety programs such as "Opportunities," which offers direct payments to poor families that send their children to school and get regular health check-ups, and "Live Better," an umbrella for a number of federal anti-poverty programs, and 6) ongoing government subsidization of gasoline, LP gas, and other fuel prices. A Deal on Rice, Targeting Government Waste and Speculation -------------- -------------- ¶5. (U) On May 28, the ministries of agriculture and economy signed an agreement with rice growers and processors under which the productive sector pledges to keep rice prices in the Mexican market 10 percent lower than the international level. Agriculture Secretary Alberto Cardenas touted the agreement as a show of solidarity and support for President Calderon's plan, and added that this year 25,000 hectares of rice farmland will be improved by the application of high-tech advances, which should benefit 1,750 producers and result in a 42 percent increase in Mexican rice production, which he predicted would allow domestic growers to meet half of Mexico's demand. ¶6. (U) In addition to the measures contained in his plan, Calderon has publicly vowed zero tolerance for hoarding and price gouging of scarce food items, and has instructed the federal consumer protection agency to remain vigilant regarding such conduct. He also said that the federal government would tighten its own belt, and that all savings from enhanced austerity measures would be funneled to helping feed poor Mexican families. Cardenas' Staying Power: Lightning Rod and Party Unity -------------- -------------- ¶7. (SBU) A staffer of a PAN legislator involved in agriculture issues told econoff that many people in politics are surprised that Secretary Cardenas remains in office, given continuing illwill on the part of many in Congress and the farm community (REF B). His hypothesis is twofold. First, Cardenas absorbs much of the political heat generated by sensitive agricultural issues such as final NAFTA implementation and rising food prices, providing some degree of insulation to President Calderon and the rest of his administration. Second, the PAN is divided into two camps. Calderon and the great majority of key officials in his administration come from the PAN's more progressive wing. Cardenas is one of the few member's of his cabinet from the PAN's more conservative wing, and Calderon might be keeping him onboard in order to maintain party unity. Comment -------------- ¶8. (SBU) The Calderon Administration is working hard to avoid being caught flat-footed as it was by the January 2007 "tortilla crisis." None of the measures in the recently announced plan will be a panacea for the global phenomenon of increasingly expensive food, but the government is successfully portraying itself as responding to the situation energetically. Given the familiar protests of those who favor "food sovereignty," i.e., greater agricultural protectionism, Calderon has shown courage and good instincts MEXICO 00001671 003 OF 003 by using this situation as an excuse to cut agricultural tariffs. This sets an excellent example, especially in light of the export restrictions being implemented by other Latin American countries. (Note: As reported in REF C, Mexico opposes export restrictions and is proceeding slowly on bio-tech experiments. End note.) If these tariff cuts can be maintained into the future, they will certainly benefit average Mexican consumers. It is doubtful, however, that they will result in significant price savings anytime soon since most of Mexico's agricultural imports come from the U.S. and Canada, which under NAFTA already enjoy duty-free treatment. Similarly, the schemes aimed at ramping up rural productivity are similar to many that have promised more than they have delivered. Direct subsidies to poor families and pressure on producers and sellers to keep prices down stand the best chance of actually easing the pain of Mexico's lower income consumers in the short-term. The rice agreement is one example of the latter. We recently heard of another from a reliable source who told econoffs that the government has on occasion passed money directly to large food processors (like tortilla giant Maseca) with the order to "keep prices down." End comment. Visit Mexico City's Classified Web Site at http://www.state.sgov.gov/p/wha/mexicocity and the North American Partnership Blog at http://www.intelink.gov/communities/state/nap / GARZA