RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - LATVIA

1. Per reftel, the following is Post's summary of the impact of
rising food and commodity prices in Latvia, related to the seven
topics identified:



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DEMAND


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2. According to the Latvian Institute for Agricultural Economy, the
most essential food staples and basic food commodities consumed in
Latvia are milk, rye, wheat, barley, oats, poultry, pork, beef,
tomatoes and cucumbers. Of these commodities, Latvia is only a net
exporter of milk. In terms of meat, Latvia produces 50% of its
demand for poultry, 90% percent for beef and 40-60% for pork.
Roughly 95% of grain consumption is satisfied by domestic production
-- Latvia imports rye and barley, but domestic production of wheat
exceeds demand by approximately 50%. However, due to more favorable
payment terms abroad, Latvian farmers tend to export most their
wheat yields in the fall, and, consequently, wheat is imported
throughout the rest of the year. Domestic production accounts for
40% tomato and 60% of cucumber consumption.



3. Food demand has generally been inelastic in Latvia, however
current conditions are forcing many social groups to make
adjustments to their food consumption patterns. Consumers are
beginning to give up certain foods and/or shifting consumption to
cheaper alternative or substitute goods. The social group most
vulnerable to food price inflation is retirees, which account for
over 20% percent of the population. The impact is more severe in
urban areas where retirees have little means of growing food
themselves. There appears not be a difference between the effects
of food price inflation on various ethnic groups.



4. Close to home, our local FSN community has also been hurt by
rising food costs. Many FSNs are giving up variety in outside eating
establishments and are limited to a small number of dining
locations; some have even excluded certain foods, such as meat,
dairy products and more expensive vegetables, from their diets.
FSNs report making hard choices as to the frequency of meals.



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SUPPLY


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5. There have not been any major changes in land use and crop yield
identified in response to increasing food prices. There has also
not been a noted surge in agricultural investment. On the supply
side, the principal reasons for price inflation have included the
soaring costs of production, especially energy costs, and the lack
of competition among retailers. The latter is often quoted as a
significant contributor to inflation, since retailers are believed
to have extreme market power. Other issues in the supply chain
include weak producer cooperation, fragmented production of basic
goods, long payment delays, an inadequately developed and
concentrated processing market, and weak farmer market power.



6. Domestically, production of biofuels is not believed to be
correlated with increasing food prices. However, the number of new
biofuel enterprises is expected to continue to increase.



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POLITICAL IMPACT


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7. Although there have not been any public protests or violence
associated with increasing food prices, the growing dissatisfaction
with the deteriorating economic conditions is linked to other
non-violent, but politically significant, events. The rising cost
of food appears to be having a stimulating effect on public support
for a signature drive to increase retirement pensions. Similarly,
the increasing cost of living and the associated discontent with the
government may be motivating Latvians to support a constitutional
amendment which would allow the public to dissolve the parliament.



8. There have not been any incidents of violence or any other type
of friction between classes or social/ethnic groups resulting from
increasing food costs. Frustration over the situation is mostly
directed towards the authorities.



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ECONOMIC IMPACT


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9. Food is having a significant effect on Latvia's consumer price
inflation. Inflation reached 16.8% in March, annualized, of which
dairy accounted for 1.55%; bread and other grain products 1.32% and
meat and meat products 0.93%. The increase of the cost of food from
March 2007 to March 2008 was 20.8%.


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ENVIRONMENTAL IMPACT


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10. There are no reports of environmental damage linked to, or
caused exclusively by, rising food prices. Issues such as
eutrophication caused by the use of fertilizers and pollution
related to the use of pesticides continue to be a cause of concern;
however, they are not directly linked to the increasing prices.
Water availability has not been an issue either, since Latvia has an
adequate supply of surface and groundwater.



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GOVERNMENT POLICY RESPONSE


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11. The GOL has not introduced any new import or export
quotas/restrictions and no types of land/property redistribution
actions have been taken. The GOL has adopted numerous general
anti-inflation measures, such as limiting government spending,
adopting a surplus budget and mandating a down payment for consumer
lending. Some of these measures are planned to be revoked in
response to fears of excessive cooling of the economy. One of the
measures most pertaining to food inflation is an effort to adopt
amendments to the Law on Competition which seek to limit the market
power of large retail chains.



12. Relations with other countries have not been affected. However,
representatives of local dairy companies have claimed that milk
exports to Lithuania, where producers tend to offer higher prices,
are causing milk shortages in Latvia.



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POLICY PROPOSALS


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13. Latvia has an official anti-inflation plan and post would
recommend that the GOL continue to make serious efforts to adhere
the plan's goals, while noting that some adjustments to the plan may
be necessary as the extent of the economy's slowing become
apparent.



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IMPACT ON POST PROGRAMS


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14. Post has no outward-focused programs that would be affected,
though as noted above, FSN wages have not been keeping pace with
Latvia's accelerating inflation, causing hardship for our local
employees and creating staff retention problems for Post.