BURMA: IMPACT OF RISING FOOD/COMMODITY PRICES

UNCLAS SECTION 01 OF 05 RANGOON 000303

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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

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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

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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

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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

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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

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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