RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - ECUADOR

UNCLAS QUITO 000416 SENSITIVE SIPDIS EEB/TPP/ABT/ATP FOR JANET SPECK TREASURY FOR MEWENS USDA/FAS FOR JEANNE BAILEY, DOROTHY ADAMS USDA/FAS LIMA FOR AGRICULTURAL COUNSELOR E.O. 12958: N/A TAGS: EAGR ETRD ECON PREL EC SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - ECUADOR REF A: State 39410 B: FAS Quito Price Report, Apr 22 2008 C: Quito 267 D: Quito 225 E: FAS Quito Briefing on Commodity Prices, 2008 F: 07 Quito 1794 G: 07 Quito 2019 H: 07 Quito 2095 I: 07 Quito 2114 J: Quito 36 K: Quito 374 L: Quito 315 M: Guayaquil 88 ¶1. (U) This is a response cable to State 39410 (ref A),detailing the impact of rising food and agricultural commodity prices in Ecuador. ¶2. Summary: Price increases in food products contributed to 62% of 2007 inflation in Ecuador, due to increasing global prices for commodities and Ecuador's reliance on imported inputs. In 2008, mass flooding that hit the country in February caused a dramatic increase in agricultural product prices. Floods harmed agricultural production, especially in coastal regions, and closed many transportation routes, hindering distribution. Since summer 2007, the government of Ecuador has responded to food and commodity price increases with a mix of interventions including price controls, tariff cuts/increases, subsidies, and export bans. Although we have not seen a significant impact yet, price control measures, particularly for milk, could distort supply in the long term. Most recently, the GOE has begun working more collaboratively with the private sector and implementing targeted assistance programs to help respond to increasing food prices. End Summary. DEMAND ¶3. (U) Rice, milk, flour and wheat, corn, soybean meal, and cooking oil (mostly palm oil) are the most important food and agricultural commodities in Ecuador. Prices have increased for all of these products (ref B). From February 2007-February 2008, prices increased as follows: wheat 112%, palm oil 100%, soybean meal 82%, rice 52%, and corn 24%. Milk and bread prices have also increased significantly, leading to government interventions in an attempt to control prices. Post FAS staff report they have seen a shift in consumption from higher priced bread to lower priced potatoes and plantains. SUPPLY ¶4. (U) Domestic agricultural production is responding to the changes in prices in the sector. Higher input costs have affected food prices, particularly due to an increase in the cost of imported fertilizers. Increases in soy prices have affected the cost of animal feed. Dairy processors have said they would prefer producing cheese to liquid milk because a price control on milk makes it less profitable (in many cases unprofitable). There has not been a significant increase in investment in food production, nor a shift in production from food to non-food crops. However, exports of palm oil have increased, possibly due to international demand for this input for biofuels. POLITICAL IMPACTS ¶5. (U) There have not been any protests or violence over the increases in prices, although there have been public complaints, particularly over increases in bread prices. ECONOMIC IMPACTS ¶6. (U) The most significant reason for recent price increases for agricultural products in Ecuador is mass flooding that hit the country in early 2008 (ref C). The floods harmed agricultural production, especially in coastal regions, and closed many transportation routes, hindering distribution (ref D). The Ministry of Agriculture estimates that the flooding caused damage or loss to over 100,000 hectares of crops, including rice, corn, bananas/plantain, coffee, sugar cane, soy and cacao. The economic impact is estimated to surpass $125 million. The largest inflationary spikes were seen in food products and non-alcoholic drinks. ¶7. (U) Increasing global prices for commodities and Ecuador's reliance on imported inputs also contributed to inflationary pressure on both consumer and producer prices. In 2007, 62% of Ecuador's inflation corresponded to higher food prices (ref E). The categories showing the largest variation were vegetable oils, edible animal fats, meats, rice and bread. Producer inflation reached nine percent, rising faster than consumer inflation and putting pressure on prices. However, Ecuador's medium- to long-term inflation outlook appears stable. Rising prices have not had an impact on issues such as deforestation, water availability, or soil conservation. GOVERNMENT POLICY RESPONSES ¶8. (U) The government of Ecuador responded to food and commodity price increases with a mix of interventions including price controls, tariff cuts/increases, subsidies, and export bans. In July 2007, the private sector agreed to voluntarily fix prices for rice, sugar, and flour rather than face mandatory price controls (ref F). In September 2007, the GOE reduced tariffs on inputs, raw materials and capital goods to increase production and control rising prices (ref G). Tariffs on 1,957 products, including agricultural inputs, were reduced from 5 to 20 percent to 0 to 5 percent. This measure was accompanied by increased tariffs on imported manufactured goods including food products, beverages and white goods. Also in September 2007, due to increased rice prices because of higher demand from Colombia and Peru, the GOE instituted a ban on rice exports (ref H). ¶9. (U) In October 2007, the GOE tackled rising bread prices by lowering tariffs on wheat and providing subsidies to millers (ref I). In January 2008, the GOE instituted a price control on milk to combat rising milk prices (ref J). Most farmers are concerned with the measure as they claim the fixed price is not sufficient to cover their increased input costs. In April 2008 the GOE adjusted its price control on milk (ref K) to attempt to combat scarcity in the sector, as producers shift away from production of lower priced milk where profit margins are small. In March 2008, the GOE introduced a number of market-based programs aimed at increasing assistance to the poor in meeting higher food costs (ref L). Notably, this includes a discount card for low-cost grocery stores that will provide poor consumers with discounts on basic food products. IMPACT ON POST PROGRAMS ¶10. (U) Post's Foreign Agricultural Service has made a number of changes to its PL-480 food aid program in response to rising food prices. The program has been considering new proposals to finance community projects focused on increasing production of staple foods. In response to the recent flooding in Ecuador, the program will focus special attention on existing projects in areas that have been affected by the floods. For example, it plans to provide additional funding for projects where crops have been ruined and the farmers may not be able to pay back their loans. COMMENT: ¶11. (SBU) Since summer 2007, the GOE has instituted a number of market controls to try to stem price increases, although thus far the range and depth of interventions have been relatively limited. Increases in food prices continue to drive up the inflation rate, which will increase political pressure on the government. Even so, it is not clear if the GOE will respond with additional heavy-handed interventions, such as price controls or export bans (ref M),or will pursue more moderate measures such as negotiated price limits, subsidies, or income transfers. The GOE now appears to be working more closely with the private sector, which could help in crafting more effective programs going forward. In the long run, measures such as the price control on milk could end up distorting the market by causing shortages and shifts in production, although to date we have not seen such distortion. JEWELL