RESPONSE: IMPACT OF RISING FOOD/AGRICULTURAL COMMODITY

UNCLAS NICOSIA 000264

SIPDIS

SENSITIVE

SIPDIS

DEPT FOR EEB/TPP/ABT/ATP (JANET SPECK) AND EUR/SE

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

REFS: (A) STATE 39410, (B) NICOSIA 224

(U) This cable is sensitive but unclassified. Please protect
accordingly.


1. (SBU) Following is our response on the impact of rising
food/agricultural commodity prices in Cyprus, keyed to Ref A
questions.

DEMAND: Cyprus has an open, prosperous economy and continues to
enjoy an abundance of imported foods and agricultural commodities
sufficient for the needs of both the local population and large
tourism sector, despite rising food prices internationally. Higher
food prices are painful for lower-income groups and the
competitiveness of Cyprus' tourism sector. However, to keep things
in perspective, these price increases will cause no more than a dent
in the country's historically strong growth rates.

Cereals, which have experienced staggering price increases in recent
months, are an important input of the Cypriot economy.
Locally-produced grains satisfy only about 10 percent of demand --
the rest has to be imported. The Cyprus Grain Commission (CGC),
which still maintains a near-monopoly in grain imports, made a good
call last year when it bought large quantities of forward positions
in cereals, at prices substantially below present levels (for
example, it bought wheat at Euros 237 per ton back in August 2007,
compared to the present prices of around Euros 280 per ton). Being
a semi-government organization, the CGC refrained from pocketing the
difference and passed on the benefits to consumers, thereby
shielding them, to some extent, from the price increases seen
elsewhere. However, the end of (relatively) cheap grain is near for
Cyprus too, as those stocks will be depleted in about a month. The
CGC is currently hoping for a reversal of the present rally in
cereal prices. Otherwise, it will be forced, sooner or later, to
pass the burden on to the public.

SUPPLY: Agriculture generates barely 3.1 percent of GDP (2007) and
is steadily shrinking further. The main export crops are potatoes
and oranges. There is little evidence to suggest that domestic
agricultural production is responding to changes in prices, at least
so far. Even the severe water shortage currently facing Cyprus has
made little difference on agricultural production, as water for
agriculture remains heavily subsidized. Farmers are something of a
"sacred cow" in Cyprus, forming a formidable political constituency,
which no administration (least of all, the present one committed to
"social progress") can afford to offend. The strong Euro helps
cushion, to a certain extent, higher energy prices for Cyprus and
the rest of the Eurozone.

POLITICAL IMPACT: The rise in food prices has attracted a lot of
press coverage in recent months and some protests by consumer
organizations, although these have been kept very civilized without
any hint of violence. There is no threat to the stability of the
host government or any friction between social classes over food
prices. Cyprus has always been vehemently opposed to agricultural
biotech, thanks to a very vocal Green party. Similarly, public
sentiment towards biofuels was never positive, while the recent
increases in food prices internationally only help deepen local
resentment of biofuel.

ECONOMIC IMPACT: Over the last decade, Cyprus has enjoyed very low
inflation, usually slightly over 2.0 percent, and only rarely
exceeding 4.0 percent. In 2007, overall inflation remained low: 2.2
percent, only marginally higher than the Eurozone's 2.1 percent.
Inflation rose steadily towards the latter months of 2007.
Additionally, in the sub-category of Food and Non-Alcoholic
Beverages, inflation rose by 5.5 percent -- fully double the overall
increase. These trends have gathered steam in the first quarter of

2008. Inflation in Cyprus reached 4.7 percent by March 2008,
compared with 3.5 percent in the Eurozone. Similarly, inflation in
the Food and Non-Alcoholic Beverages sub-category rose by 7.0
percent in Q1, considerably above the overall average.

Higher inflation in recent months is putting a strain on Cyprus'
Purchasing Power Parity (PPP) vis-`-vis the rest of the EU. In
2007, Cyprus' PPP reached 93.7 percent of the EU 27 average (EU 27 =
100),recording steady gains in recent years. However, this trend
is expected to be reversed in 2008, with Cyprus' PPP declining to
92.8 percent of the EU 27 average by year-end. The brunt of this
burden will be borne by lower-income households, which spend about
31 percent of their income on foodstuffs, compared to 10 percent for
the highest-income households, and an average 15 percent for all
households. So, the impact of higher food prices ranges from
"considerable" to "negligible," depending on each household's income
level.

ENVIRONMENTAL IMPACT: Rising food prices as such have not had any
discernible environmental impact in Cyprus. Instead, Cyprus' main

environmental problem, namely a severe water shortage, is
attributable to a prolonged drought and poor planning (Ref B).

GOVERNMENT POLICY RESPONSE: The recently-elected left-wing
(nominally, Communist) administration appears appropriately
concerned about rising food prices, particularly as they affect
poorer people disproportionately. The administration keeps a close
watch on prices and competition domestically, fending off cartels
and excessive profiteering as best as it can while adhering to free
market principles. In terms of direct assistance to the population,
the administration announced an Easter bonus for pensioners as soon
as it got elected to help lessen the blow from rising food prices.
The previous administration also fought hard, and eventually won
from Brussels, a derogation leaving Value Added Tax (VAT) on
foodstuffs and medicines at zero.

IMPACT ON POST PROGRAMS: Post has serious funding problems but
these are generally unrelated to rising food prices.

POLICY PROPOSALS: So far, rising food prices have not been a focus
of GOC policy planning. We suspect that, over time, this will
become a more serious issue for Cyprus given its high reliance on
imported grain, but it will take its policy lead from decisions made
by the EU as a whole.

SHLICHER