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.
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