BURMA: IMPACT OF RISING FOOD/COMMODITY PRICES

UNCLAS SECTION 01 OF 05 RANGOON 000303 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/MLS, EEB/TPP/ABT/ATP - JANET SPECK BANGKOK FOR USDA/FAS, ECON OFFICE, USAID DEPT PLEASE PASS TO USAID - CHERYL JENNINGS PACOM FOR FPA TREASURY FOR OASIA:SCHUN E.O. 12958:N/A TAGS: EAGR EAID ETRD ECON PGOV PREL BM SUBJECT: BURMA: IMPACT OF RISING FOOD/COMMODITY PRICES REF: A) STATE 39410 B) RANGOON 285 C) RANGOON 075 RANGOON 00000303 001.2 OF 005 ¶1. (SBU) Summary. Although food and agricultural commodity prices are rising worldwide at unprecedented rates, Burma has not experienced the same rise in prices. Aggregate prices of rice, Burma's most important food staple, have remained relatively stable - the nationwide average price per kilo is 25 percent lower than in August 2007, when prices skyrocketed after the government raised fuel prices 400 percent. In specific regions, including Rangoon, parts of Rakhine State, and Mandalay, rice prices have increased 20-30 percent due to higher transportation costs and increased demand. Prices of other commodities, such as onions, potatoes, and edible oil, have increased due to higher fuel and fertilizer prices and high inflation, currently at 30 percent. The GOB technically maintains no price controls on locally-produced agricultural commodities, but closely monitors local price levels to ensure that they do not significantly increase and cause another political crisis. End Summary. Snapshot of Burma's Economy -------------- ¶2. (SBU) Burma is a poor, underdeveloped country with a population of 55 million. According to the UN, 5.2 million people live under the food poverty line and an additional 16.6 million people live under the poverty line. Burmese spend approximately 75 percent of their salaries on food, and most Burmese struggle to survive on an average income of $1 a day. The military regime's mismanagement of the economy for 46 years has resulted in steady economic decline. The military dominates Burma's economy, controlling prices, manipulating production, and selling off natural resources to the highest bidder for personal gain. In terms of agriculture, the Burmese Government has no specific price control policies, although limits on the movement of rice between States and Divisions act as a de facto price control, keeping prices lower in areas with a rice surplus. Additionally, the GOB sets the price it will pay to farmers when it purchases surplus rice to resell to exporters, usually below domestic market prices so it can pocket the profits. Because of the low quality of Burmese rice, this price is often far below the international world rice price. ¶3. (SBU) The Burmese kyat continues to appreciate against the U.S. dollar, with the market rate up 19 percent against the dollar in the past six months. While the appreciation of the kyat has resulted in lower inflation, down from 53 percent in September to 30 percent in March, many Burmese find that their purchasing power has not increased. Low salaries, coupled with high production and transportation costs, continue to push up prices, making it difficult for the majority of Burmese to survive on $1 a day. Demand -------------- ¶4. (SBU) In Burma, rice is the most important agricultural commodity, consumed by a majority of Burmese daily. Other important agricultural/food commodities include onions, potatoes, and edible oil. Local production of rice, onions, and other vegetables meet 100 percent of local demand, and the GOB allows private companies to export any surplus of these products for profit. Burma is a net importer of edible oil products. Although the prices of food commodities have increased substantially in the world market, prices in Burma have not followed this general trend. In August 2007, the Burmese Government, without prior warning, cut subsidies on fuel, raising gasoline prices by 67 percent, diesel prices by 100 percent, and compressed natural gas prices by 400 percent. This action led to an immediate increase in prices across the board, particularly RANGOON 00000303 002.2 OF 005 for rice and other basic food commodities. Since the initial price jumps in August, the nationwide aggregate price of rice has declined by 25 percent for ehmata rice (25 percent broken rice - what Burma exports) and 19 percent for superior rice. -------------- -------------- Burma: Aggregate Domestic Rice Prices, per Kilo In Kyat -------------- -------------- Month Ehmata Percent Superior Percent Rice Change Rice Change -------------- -------------- August 2007 383 -- 517 -- Dec. 2007 332 -13.32 472 - 8.71 Jan. 2008 289 -12.95 420 -11.02 Feb. 2008 295 2.08 412 - 1.91 March 2008 287 - 2.71 419 1.70 -------------- -------------- Source: Foreign Agricultural Service, March 2008 ¶5. (SBU) While the nationwide aggregate price of rice has decreased, rice prices in select areas, including Rangoon, parts of Rakhine State, and Mandalay, have increased 20-30 percent, World Food Programme Manager Chris Kaye told us. In March, WFP purchased rice from the Burmese Government at a rate of $340 per ton, up from $260 a ton in November. (Note: this reflects the Rangoon price of rice. End Note.) While there is no one reason why rice prices in select markets are higher, agricultural analysts note that GOB limitations on rice shipments between States and Divisions often drive up prices, as shippers must obtain expensive permits from Regional Commanders before they can ship rice to high demand locations. These costs, along with high transportation and shipping costs, get passed to the consumer in the form of higher prices per kilo. Additionally, many people living in urban areas, with higher disposable incomes, demand and eat higher-quality rice (Burma produces a limited amount of superior rice each year). This could be another reason why rice is more expensive in Rangoon and Mandalay, they explained. ¶6. (SBU) Agricultural specialists note that prices of other agricultural commodities increased during 2007 and 2008, due primarily to higher fuel and transportation costs, as well as the increasing cost of imported fertilizer. The chart below shows how key commodities in Rangoon were affected by the August 2007 fuel price hike. While average prices have decreased somewhat, in most cases, they remain above pre-August levels. Prices of these products have remained stable to date, although aggregate 2008 price data is not available. In the case of onions, the GOB in January 2007 allowed private companies to export surplus supply, which immediately lead to an increase in price. The next month, the GOB, which closely monitored onion prices, cancelled all onion export permits, and the market price slowly dropped. -------------- -------------- 2007 Prices of Key Commodities* In Kyat -------------- -------------- Month Maize Palm Sesame Onions Potatoes Oil Oil -------------- -------------- Jan 197 1223 1226 1072 348 Feb 233 1186 1454 355 242 March 244 1237 1531 364 169 April 243 1365 1574 294 250 May 240 1565 1543 297 248 June 247 1539 1472 291 161 RANGOON 00000303 003.2 OF 005 July 295 1569 1515 306 93 Aug 295 1678 1651 501 181 Sept 255 1687 1549 531 143 Oct 221 1858 1583 549 185 Nov 227 1804 2028 746 200 Dec 226 1223 2122 525 212 -------------- -------------- Average 243 1494 1607 485 202 -------------- -------------- Source: Foreign Agricultural Service, April 2008 *Prices reflect Rangoon Prices **Food prices are per kilo ¶7. (SBU) The higher prices of food and agricultural products did not cause the Burmese to shift consumption toward alterative food commodities, primarily because many people lacked enough money to consume other products. Salaries have not increased to offset Burma's high inflation rates, so many Burmese, who already spent 75 percent of their salaries on food, have opted to do without. Supply -------------- ¶8. (SBU) Domestic production of food and agricultural commodities has remained relatively stable. During the 2007 monsoon season, heavy rains flooded rice fields in Central Burma, reducing crop yields. Despite the floods, overall production of rice and onions has increased in recent years because the GOB allows private companies with permits to export any surplus (Refs B and C). However, there has been no noticeable increase in investment, either domestic or foreign, in food production. In certain areas of Burma, particularly in Irrawaddy and Bago Divisions, farmers have developed creative ways to increase rice production without spending more on fuel (Ref B). ¶9. (SBU) In Burma, higher input costs, particularly fuel and imported fertilizer costs, have led to an overall increase in food prices, particularly in vegetables and fruits. Despite higher prices, stocks of food have remained relatively unchanged, as farmers find they can often export any surplus either through legal trade or illegal border trade. In Burma, there are no shortages of storage or food processing facilities, nor are there any real bottlenecks in the supply chain. ¶10. (SBU) The military regime launched a concerted effort to plant castor beans (jatropha) as a biofuel crop in 2006. Although the GOB is interested in producing biofuels, it has yet to begin production on a large scale because it lacks the necessary technology and knowledge to do so. Several private companies produce biofuels on a limited scale, but these fuels are not available for commercial purchase. The rising food prices worldwide have had little affect on public attitudes toward biotechnology or biofuels. Political Impact of Rising Prices -------------- ¶11. (SBU) The higher fuel prices, which led to higher food and transportation prices, acted as a catalyst for peaceful demonstrations against the regime in August 2007. These protests spiraled into the larger September protests, which the GOB violently repressed. After September, scattered political demonstrations have taken place and they did not mention rising food prices. We have not observed any increased friction between classes, ethnic groups, or urban and rural populations as a result of rising food prices. However, popular discontent with deteriorating economic conditions RANGOON 00000303 004.2 OF 005 and high inflation could lead to more protests in the future. Economic Impact -------------- ¶12. (SBU) Rising fuel prices, coupled with Burma's 30 percent inflation rate, affected Burma's food prices in mid-2007. However, Burma's 2007 exports of agricultural commodities increased by 40 percent compared to 2006 levels, from $733.8 million in 2006 to $1.1 billion in 2007. Agricultural analysts confirm that Burma continues to export agricultural products in 2008, although official figures are not yet available. They note that the regime's continued mismanagement of the economy and lack of basic economic understanding, rather than higher food prices, will affect Burma's private sector development and medium-term economic growth. WFP Director Chris Kaye predicts that if food prices in poorer regions do not decrease and incomes do not increase accordingly, another 10 million Burmese could fall under Burma's food poverty line by the end of the year, an increase of 220 percent, meaning close to half the population would lack sufficient food. Environmental Impact -------------- ¶13. (U) There is no information available indicating that rising food and agricultural prices have impacted deforestation, water availability and quality, or soil conservation. Government Policy Response -------------- ¶14. (SBU) While the GOB does not have explicit price controls on locally-produced agricultural products, it closely monitors food prices to ensure that they do not increase too quickly. The GOB has not made any economic policy changes to respond to the recent price shifts, and has continued to export surplus agricultural products, including rice (Ref B). According to agricultural analysts, the GOB allowed private companies to export almost 400,000 metric tons of rice during the first quarter of 2008. Exporters sold rice for an average of $400 per metric ton, far below the world price. Analysts noted that because Burma's rice exports were of lower quality than other countries', it could not command the higher international rice price. We are not aware of any nationalizations or redistributions of private farms or industries for agriculture or food production, although the military regularly buys rice from farmers at below market prices. ¶15. (SBU) WFP officials said that the GOB has not changed its food assistance policy, and still allows NGOs and the UN to promote food security in the poorer areas - Rakhine State, Shan State, Magwe Division, and Kachin State. In general, the GOB does not provide any subsidies or assistance to the population, instead depending on NGOs to assist Burma's needy. However, in September and October 2007, the GOB reacted to higher rice prices by selling inferior quality rice to Burma's poor at below-market prices. Agricultural specialists told us that the quality of rice was so low that most Burmese chose to not eat it, and instead used it to make rice noodles, which they sold for small profit. Impact on Post Programs -------------- ¶16. (SBU) The rising prices of agricultural commodities have had no impact on Embassy Rangoon's programs since we do not now provide any assistance in this area. Embassy Rangoon continues to receive assistance requests from various NGOs that provide food and RANGOON 00000303 005.2 OF 005 nutritional supplements to the poorest populations, including internally displaced persons, stateless people, ethnic minorities, and other vulnerable populations. Comment -------------- ¶17. (SBU) Although Burma is a net exporter of many agricultural products, which accounted for 17 percent of Burma's total exports in 2007, the country has remained relatively insulated from rising world food prices. Paradoxically, the government's restrictions in the movement of certain commodities within the country actually protect consumers from market volatility. Prices of rice and other agricultural products will continue to climb as the costs of fuel and fertilizer increase worldwide. If world food prices remain high, we doubt Burma will remain insulated. It has porous borders and hungry neighbors. At the same time, rising popular discontent with the military in general, combined with higher food prices, could spark more protests. The military is aware of this and will continue to closely monitor food prices, halting exports when it deems necessary. ¶18. (SBU) DFID is organizing a meeting of international donors in Burma the week of June 9 to study food security issues. We recommend appropriate USG experts consider joining this mission. VILLAROSA