RESPONSE: IMPACT OF RISING FOOD AND AGRICULTURAL COMMODITY

UNCLAS SECTION 01 OF 07 NAIROBI 001122 SIPDIS STATE FOR EEB/TPP/ABT/ATP JANET SPECK AND EEB/IFD/OMA STATE ALSO FOR AF/E AND AF/EPS STATE PLEASE PASS USTR BILL JACKSON AND USAID/EA TREASURY FOR VIRGINIA BRANDON COMMERCE FOR BECKY ERKUL AND USITC RALPH WATKINS STATE PLEASE PASS DEPARTMENT OF LABOR FOR BOB SHEPARD, SUDHA HALEY, AND MICHAEL MURPHY AGRICULTURE FOR USDA/FAS/OFSO FRANK LEE, USDA/FAS/OCBD PATRICIA SHEIKH, USDA/FAS/OCRA CHUCK ALEXANDER, AND USDA/FAA RON VERDONK LONDON, PARIS, ROME FOR AFRICA WATCHERS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EAGR ECON EAGR EFIN ELAB PGOV KE SUBJECT: RESPONSE: IMPACT OF RISING FOOD AND AGRICULTURAL COMMODITY PRICES - KENYA REFS: (A) STATE 39410 (B) FAS NAIROBI GAIN REPORT KE8012 (C) NAIROBI 1100 (D) NAIROBI 1044 (E) NAIROBI 0970 (F) NAIROBI 0521 (G) NAIROBI 0681 (H) NAIROBI 0405 (I) NAIROBI 0358 (J) NAIROBI 0353 (K) NAIROBI 0352 (L) NAIROBI 0336 (M) NAIROBI 0192 NAIROBI 00001122 001.4 OF 007 SENSITIVE BUT UNCLASSIFIED. PLEASE PROTECT ACCORDINGLY. FOR INTERNAL USG DISTRIBUTION ONLY. ¶1. (U) This message responds to ref A request for Mission Kenya's analysis on how rising food and agricultural commodity prices are affecting Kenyan society. As instructed, it also lists post's recent cables on this matter. -------------- CONTEXT OF KENYA'S FOOD CRISIS -------------- ¶2. (U) Kenya's agricultural sector enjoyed robust 7% growth in 2007 and 6.1% growth in 2006, with leading export sectors, notably horticulture, earning millions of dollars in foreign exchange. However, as described in previous post reporting (refs B-M),two months of ethnically-charged political violence, following a hotly disputed December 27, 2007 presidential election, disrupted transportation links and farm and business operations in Kenya. Worst hit was the country's bread basket in the upper Rift Valley, where thousands of predominantly Kikuyu farmers and dairymen had their properties ransacked before being expelled. A January 21-24 assessment conducted by the World Food Program (WFP),Food and Agriculture Organization (FAO),and Ministry of Agriculture concluded that as many as 52,500 farm families in the Rift Valley were displaced. In Western Province 40% of farmers were displaced. According to a Ministry of Agriculture preliminary report, 98,000 farmers and their families were thrown off their land. The Kenya National Federation of Agricultural Producers (KENFAP),an umbrella organization for 1.4 million farmers, estimates that 80% of Kenya's 1.5 million farmers were affected by the violence in some way. As a consequence, Kenya will require increased food imports and food assistance at a time when global food prices are rising and its foreign exchange earnings are falling due to a major drop-off in tourists. According to the Kenya Tourist Board, there were approximately 134,000 tourist arrivals in 1Q 2008, a figure far less than half the projected 315,000. Earnings are expected to dip 23% in 2008 to $811 million. -------------- Staple Shortages Imminent in Kenya -------------- ¶3. (U) Because of the displacements and disruptions in the agricultural sector, KENFAP agricultural analysts worry that Kenya may suffer a food shortage in late 2008/early 2009. They predict a significant shortfall in this year's corn harvest. In their estimation, government stockpiles of maize held by the National Cereals and Produce Board (NCPB) and an expected 2007-2008 harvest of three million tons are only sufficient to meet domestic demand for the next seven months. Agriculture Minister William Ruto assured the public on April 23 that food stocks of 3.8 million bags of cornmeal would suffice through August 2008. (Normally around 5 million tons, NCPB stocks fell to 2.07 million tons by April 1, depleted by provisions given to Kenya's 350,000 displaced persons.) NAIROBI 00001122 002.2 OF 007 However, because of the instability, many farmers in the upper Rift Valley were unable to work their fields ahead of this year's "late rains." Ministry of Agriculture Permanent Secretary Dr. Romano Kiome said April 23 that less than 50% of the arable land in the north Rift Valley had been prepared for planting. Some 100,000 hectares might not be tilled this planting season. General insecurity is making farmers leery of working their fields or letting their harvested corn dry out. Upwards to one million bags (90,000 tons) of corn are believed to be left on fields, inaccessible to farmers, buyers, and millers. Another 300,000 tons of corn ready for harvesting went unpicked. According to the Rift Valley Province Director of Agriculture Leonard Ochieng Nambuya, some 1.9 million bags of maize were destroyed just in his province. One unconfirmed estimate claims 2.3 million bags were destroyed during the post-election chaos. ¶4. (U) Kenya Cereal Growers Association CEO David Nyameino warns that a food shortage is imminent, thus Kenya will likely have to import substantially more corn and wheat in 2009 to satisfy demand. According to the Eastern Africa Grain Council, Kenya already imports of 60% of its wheat requirement, 75% of its rice requirement, and, depending on the size of its corn crop, as much four million bags of cornmeal. Nyameino announced in late March 2008 that Kenya will likely mill 21 or 22 million 90-kilo bags of maize this year, down sharply from a typical 34 to 36 million bags, against an average yearly consumption of 32 million bags. (In 2007, Kenya harvested 34 million bags.) Prices are rapidly reflecting the shortfall in supply. In December 2007, a bag sold for KSh1,000 ($16.15); by late March that same bag was going for KSh1,400 ($22.60). As the country's staple food, maize is a telling barometer for food security and affordability. Before the crisis, a two-kilogram bag of milled maize flour cost KSh50 ($0.80). In Nairobi, it now goes for KSh80 - nearly $1.30; in Kisumu and other western cities it costs KSh120 or $1.95. Most analysts concur with Nyameino that Kenya will become a net importer of corn meal in 2009, forecasting that corn production will dip between 20%-30% in 2008-2009. ¶5. (U) Representatives of the Regional Agricultural Trade and Intelligence Network (RATIN) also predict Kenya will become a net importer of maize in 2009. RATIN forecasts a 50% decline in agricultural production. The network doubts that NCPB stocks will sustain the nation until the next harvest. Even then, production will be down considering the dismal purchase of corn seeds by farmers in Kenya's corn belt. Given this scenario, maize is fast becoming expensive. The most recent FAO survey shows that prices of cereals such as maize have been increasing mainly due to inadequate rains and the displacement of farmers in key growing areas of Kenya during the recent violence. The survey reported that the price of a ton of maize maintained a relatively stable price between $199 and $202 within the period of May to September 2007 but began to rise gradually between October-December to an average of $211. There was a further rise to $219 a ton in January. ¶6. (U) The wheat harvest is also expected to experience a big downturn. Key grain-producing districts, namely Uasin Gishu Trans-Nzoia, and Lugari, will witness a serious decline in crop production. The Agriculture and Rural Development Group (ARDG) predicts grain production in 2008 will fall as much as 40% below average. An estimated 207,000 tons of grain in the fertile Rift Valley were destroyed during the violence. Kenya requires about three million tons of grain per year. Production is expected to NAIROBI 00001122 003.2 OF 007 fall short by about 930,000 tons. Kenya's total wheat requirement for milling into flour is around 900,000 tons per year, but Kenya farmers produce only 300,000 tons. About two-thirds of Kenya's wheat requirement is imported. Thus the increase in the price of wheat is having a significant negative impact on price. Making matters worse there is a 60% duty on imported wheat flour and a 35% duty on wheat grain. The tax charged per ton of flour is $178. -------------- Fears of Famine -------------- ¶7. (SBU) Analysts with USAID's Famine Early Warning System Information Network (FEWS NET) and the Government of Kenya's Arid Lands Resource Management Project (ALRMP) during a February 12 Kenya Food Security Meeting reported a "bleak food security situation throughout the country," especially in the Maasai rangelands. Only the eastern pastoralists' area is in good shape. Conversely, there is evidence of high malnutrition in the northwest pastoralists' area. In what was their most worrisome appraisal, the analysts estimate that less than 10% of the land in Kenya's grain basket, the Rift Valley, has been prepared for planting. By now, 60% of the land would have normally been tilled. With respect to conditions in northern and northeastern Kenya, they blame severe water shortages for rapid loss of pasture. In the coastal and southeastern lowlands, they calculate that 60% of the maize crop has been lost with food insecurity exacerbated by rising food and commodities prices. ¶8. (SBU) In mid-February, KENFAP declared that Kenya's food security is set to worsen. Fifty-seven members from various agricultural sub-sectors from the country's eight provinces warned in an advertisement that food prices are soaring because of the political impasse. Expressing their concerns according to regions, the agricultural reps said Nairobi is experiencing spiraling milk, maize flour and vegetable prices, which have increased 50% to 100%. Those from Western Province complained about the displacement of about 40% of farmers from their farms and the burning of food in stores. Nyanza Province's major problem, they said, remains blocked roads and destroyed bridges, leaving it cut off from the rest of the country. In Rift Valley Province, farmers are faced with high costs in production inputs. Coast Province is dealing with hotel closures and the lack of horticultural produce due to supply interruptions. Eastern and Northeastern Provinces are confronted with decreasing food stocks; there are fears that the two provinces might not receive enough rainfall, threatening the fragile food security which characterizes both. Livestock marketing has been hampered by insecurity and high transportation costs. ¶9. (SBU) In contrast to the dire RATIN report, an April 17 "Kenya Food Security Update" by FEWS NET, ALRMP, and the World Food Program (WFP) concluded that there would likely be only a 15% reduction in 2008-2009 maize production because of the unrest and below average rainfall in some areas of Kenya. A December 2007 "short rains" assessment revealed that some areas of the country received less than 75% of normal rainfall, thereby placing at risk an estimated 840,000 pastoralists in the arid and semi-arid lands of northern Kenya. In its April 14, 2008 revised emergency appeal for Kenya, the UN warned that if food assistance is not rendered to these needy people, severe malnutrition, particularly among children under five years of age and among pregnant and lactating mothers, could occur. NAIROBI 00001122 004.2 OF 007 -------------- Costly Cultivation -------------- ¶10. (U) In the wake of the political upheaval, Kenyan staple crop farmers are struggling to purchase higher priced fertilizers, herbicides, insecticides, and diesel fuel. The cost of land preparation by tractors has skyrocketed 95% from $53/hectare to $103/hectare. A 50-kg bag of di-ammonium phosphate fertilizer has more than doubled in price from KSh1,650 ($26.50) to KSh3,800 ($61.30). In some locales, it now goes for KSh4,000 ($64.50). According to an early April 2008 FAO review, the average cost of grain production per hectare has risen by 49% since January from $196 to $293. The Kenya Cereals Growers Association estimates that the high cost of farm inputs will result in reduced grain production of between 30% and 40% in 2008. (Note: Kenya imports between 450,000 to 500,000 tons of fertilizer every year. Kenya's fertilizer bill in 2008 is expected to hit KSh12 billion/$193.6 million, significantly more than its usual KSh8 billion/$129 million annual tab. End Note.) ¶11. (SBU) Dairy farmers, too, have suffered. Last winter, Kenya's dairy industry appeared on the verge of becoming a significant foreign exchange earner, with prospects of lucrative sales of powdered milk and other dairy products to South Africa, Egypt, the Arab Gulf states, and Malaysia in the offing. In 2007 Kenya exported 13.9 million liters of milk, mostly to neighboring Uganda and Tanzania. Now, officials from Land O'Lakes, Brookside Dairy, Spin Knit Dairy, New Kenya Cooperative Creameries (KCC),and other milk producers bemoan the loss of Rift Valley dairy farms and creameries, destroyed by looters. ¶12. (SBU) As a result of the mayhem and theft of dairy cows, milk production is down over 20%, according to the Kenya Dairy Board (KDB). Two major milk processors have closed. Unable to get their raw milk processed, farmers have had to dump milk. The Minister of Livestock Development Mohammed Kuti reported in mid-April that Kenya dairymen lost an estimated 140,000 high quality dairy cattle and suffered additional damages approaching KSh1.1 billion ($17.75 million). The industry lost an estimated KSh1 billion (over $16 million) just in January 2008, when production fell from 36.4 million liters in December 2007 to 28.4 million liters. KCC Chairman Matu Wamae reports his company faces a deficit of over 200,000 liters per day and is unable to meet both local and international demand. ¶13. (SBU) KCC director Kipkorir Menjo acknowledged February 13 that low milk deliveries "threaten the future of external markets for our products." According to the KDB, annual production in 2007 was 3.74 billion liters, up 4.2% from 2006. Because of the violence, the daily milk intake in the formal sector shrank from 1.2 million liters in December 2007 to 850,000 liters in January 2008, a drop of over 29%. (Note: There are an estimated one million smallholder dairy farmers in Kenya. The dairy cattle industry with an estimated cattle population of 3.5 million head accounted for about 4% GDP in ¶2007. End Note.) ¶14. (SBU) Kenya Dairy Board Chairman Reuben Cheshire commented to the press in early February that the violence had even interfered with breeding programs and access to animal feeds, which could NAIROBI 00001122 005.2 OF 007 result in a long-term decline of milk production. He said protracted violence would jeopardize the livelihoods of Kenya's almost one million dairy farmers. Even with the reconciliation deal, a Land O'Lakes representative foresees a long-term reduction in milk production because of the number of dairy cattle stolen or slaughtered and disruptions in the provision of artificial insemination services. Worst hit dairymen will likely default on their loans since they are unable to deliver milk. Some may elect to start slaughtering their cattle to raise money. -------------- Additional Agricultural Agonies -------------- ¶15. (U) Adding to Kenya's agricultural woes are setbacks in rice production and meat exports. In mid-April the UN Office of Humanitarian Affairs (OCHA) reported that a fungus known as "Rice Blast" had destroyed 5,600 hectares of rice in Central province - equivalent to 20% of annual output. As a result, Kenya will have to increase its rice imports at a time when producing countries are restricting exports. According to an OCHA spokesperson, "This risks worsening Kenya's food insecurity and makes import of additional quantities even more expensive. It is a fresh blow for this country." Before the chaos, a 2-kg bag of rice sold for KSh245 or $4; it now costs KSh325 or $5.25. ¶16. (U) More bad news came on April 21 when Livestock Minister Kuti announced that the EU had cancelled Kenya's annual meat quota of 4,000 metric tons following confirmed reports that PPR (peste des petits ruminants) had infested and killed thousands of goats and sheep. In Samburu District alone, 50,000 sheep and goats succumbed to PPR. Dr. Kuti said nearly three million sheep and goats were at risk if proper vaccination is not done. In a statement the press, the chairman of the Kenya Veterinary Association, Dr. Christopher Wanga, said "if nothing is done soon, the losses will be enormous." He called for disease control measures to be undertaken in 80% of the country. In late April, Kenya Veterinary Department disease control deputy director Dr. Bernard Mugenyo acknowledged to stave off PPR his department would need to vaccinate about 7.3 million animals at a cost of KSh800 million ($13 million). End Context. -------------- (U) SURVEY RESPONSES -------------- ¶A. DEMAND: In the wake of the January-February violence, consumption patterns have definitely been affected, but we expect middle and upper class Kenyans (who can afford to do so) to continue purchasing favorite staples like corn meal and corn oil. However, with nearly 50% of the Kenyan population living on less than $1 per day, most Kenyans will find it increasingly difficult to put food on the table. Kenya will need food assistance to feed large numbers of people in its arid and semi-arid northern and northeastern regions. Our OFDA/DART team expects that the country's 350,000 IDPs will be dependent on food assistance for some time. Kenya may hence become more receptive to biotechnological ways of boosting crop yields and improving food security. ¶B. SUPPLY: As explained above, the post-election turmoil impinged NAIROBI 00001122 006.2 OF 007 significantly on this year's growing season. Agriculture Minister William Ruto admitted April 23 that the political unrest had more to do with food price hikes and shortages than escalating fuel costs. The government's stockpile of emergency maize reserves will suffice for 2008. Thereafter, to feed its people, Kenya will be compelled to import corn and a greater amount of wheat. There is no likelihood that Kenya will use food crops for non-food purposes, such as bio-fuels; but jatropa cultivation in arid areas has been proposed for bio-fuel production. ¶C. ECONOMIC IMPACT: Kenyan consumers are now confronted with higher prices for virtually everything off the farm. In March 2008, prices for food, which is weighted at 50% of household expenses, were almost 30% higher than in March 2007 (YOY). Kenya's consumer price index (CPI) jumped 8.8% in January 2008, with seasonally adjusted average annual inflation up to 10.5%. Annual inflation hit 19.1% in February and then set another record (21.8%) in March. Kenya's CPI rose 14.5% since the end of December, amounting to the biggest quarterly jump since the severe drought of 2006. In the Lake Victoria city of Kisumu, where the worst looting and destruction took place, prices for eggs, potatoes, onions, and other staple foods have doubled or even tripled since the election. Sugar, which retailed for KSh65 a kilo at the beginning of the year, went up to KSh90 before stabilizing at KSh80. ¶D. POLITICAL IMPACT: Kenyans appear to be so preoccupied with simply making ends meet while pleading that their political leaders resolve their differences, they do not have the time or energy to protest rising commodity prices. (In the 1990s, Kenyans endured rapid inflation in food prices without rioting, and they remain peaceful this time, too.) Farmer associations have appealed to the new Minister of Agriculture William Ruto to do something about the cost of farm inputs. In response, Ruto announced in mid-April that the government would subsidize the cost of fertilizers. In an effort to jawbone down prices, Ruto also declared that it was unconscionable for fertilizer producers to charge raise charges over 100% more for a 50-kg bag of fertilizer. The Cereal Growers Association and the Cerel Millers Association have asked the Finance Ministry to waive the duty on wheat as part of an effort to reduce bread prices, which since January 2008 have increased 13% largely in reaction to the dramatic increase in the cost of imported standard milling wheat from $234 per ton in January 2007 to $430 in January 2008. At the 12th annual meeting of the Cereal Growers Association, growers said they could live with a $50 per ton duty. CGA Chairman Hugo Wood told the press this duty would suffice to protect Kenyan wheat farmers. To date, efforts to zero rate the high duties on corn (50%),wheat (35%),and rice (75%) have been futile. ¶E. ENVIRONMENTAL IMPACT: Hungry Kenyans, among them IDPS, have not hesitated to defy authority and illegally chop timber for firewood and charcoal, cultivate crops, and herd cattle on public lands. Displaced persons and impoverished internal migrants have foraged on protected forest reserves in the Mau Forest and on Mt. Elgon. Over the past year, there have been serious clashes between landless peasants and the authorities (Kenya Armed Forces, Forest Service, and Kenya Wildlife Service). ¶F. GOVERNMENT POLICY RESPONSE: The government is providing food to 350,000 IDPs and nearly 2 million Kenyans in the country's arid and NAIROBI 00001122 007.2 OF 007 semi-arid regions. By April 24, the GOK and World Food Program (WFP) had distributed 8,566 metric tons of food through the Kenya Red Cross Society. Of this amount, USAID provided 4,834 metric tons. The Kenyan government vows to subsidize the price of fertilizer, specifically calcium ammonium nitrate (CAN),to ensure that crop yields to do not decline. The government has earmarked KSh1.5 billion ($24.2 million) to purchase fertilizer in bulk to ensure its availability. It has also obtained grants totaling KSh4.6 billion ($74.2 million) from the World Bank and the International Fund for Agriculture Development (IFAD) to help rebuild the dairy sector. Agriculture Ministry Ruto announced April 23 that he would form an inter-ministerial task force to review the food situation and come up with mitigation strategies before the NCPB stocks are exhausted. On April 23 Ruto appealed to the USG for 1.5 million bags (or 135,000 metric tons) of white corn to supplement Kenya's national grain reserves through August 2008. (Note: To date, in order to avoid any GMO controversy, the USG has provided only cornmeal. End Note.) In addition, Ruto said he would press the Kenya Seed Company to reduce the cost of seeds by 30% to 40% as a way of easing the cost of farm inputs. According to the Tegemo Institute, a branch of Kenya's Egerton University engaged in agricultural economic research, the government is working on plans to harmonize tariffs on staple foods in line with those of other East African Community members. For instance, Kenya's current import duty on wheat is 35% compared to 10% for Uganda and Tanzania. If realized, this reduction would make it easier for importers to bring in wheat and other commodities to meet local demand. The government also plans to make certified seeds more accessible by putting more emphasis on affordability rather than profitability. Thus, the Kenya Seed Company will no longer operate as a commercial enterprise but as a service deliverer, according to Agriculture Minister Ruto. To date the government has distributed 1,200 metric tons of seed and 100 metric tons of fertilizer in advance of the long rains season. Through Kenya's development plan entitled "Vision 2030," the government plans to invest more in agriculture - especially large- and medium-scale irrigation projects in the Tana and Athi River basins. In the short term, though, there are immediate plans to resettle IDPs, most of whom are farmers so they can get back to their farms and take advantage of the August short rains to improve food production. To ease their transition back into farm life, the government will provide farmer IDPs with free fertilizer and seeds. ¶G. POST PROGRAMS AND POLICY PROPOSALS: FAS has repeatedly approached the government recommending that it lower and eventually abolish its tariffs on imported grains as a way to reduce bread prices dramatically. USAID/KENYA and USAID/OFDA has joined with WFP in providing food assistance to needy Kenyans. To date, as the largest donor to WFP Kenya, USAID's Office of Food for Peace has provided 4,834 metric tons of cornmeal to Kenyans adversely affected by the post-election turmoil. Ranneberger