IMPACT OF RISING FOOD PRICES IN COSTA RICA

UNCLAS SAN JOSE 000347 SENSITIVE SIPDIS DEPT FOR EEB/TPP/ABT/ATP JANET SPECK; PLEASE PASS TO USDA E.O. 12958: N/A TAGS: EAGR EAID ETRD ECON PGOV PREL CS SUBJECT: IMPACT OF RISING FOOD PRICES IN COSTA RICA REF: STATE 39410 -------------- SUMMARY -------------- ¶1. (U) Costa Rica has experienced rising food prices which have had minimal political impact to date. There have been no food shortages, although local price increases have been high as Costa Rica imports 100 percent of its wheat, yellow corn, and soybean consumption; 50 percent of its rice consumption; and 66 percent of it bean (pulse) consumption. The regulated price of rice in Costa Rica has been high by international standards in recent years, so the impact of the recent rise in world prices has been muted. In spite of food price increases, substitution by consumers has not occurred thanks to wage gains, although wages generally have not kept pace with the recent rise in prices. Most producers have not abandoned planting of higher margin, non-staple goods. In political terms, reports of shortages and sharp price increases in other countries attract the most media attention, and President Arias's May 1 State of the Nation address mentioned the global food and energy concerns. Media focus on the pinch on the Costa Rican pocketbook and domestic food security concerns is gaining strength, however. ¶2. (U) As for policy changes, the leading opposition party has suggested a more interventionist governmental response, but we do not expect a drastic change in the GOCR's relatively market-oriented approach any time soon. The GOCR is planning to play an indirect role in increasing the share of profits received by producers. In the mid-term, the GOCR has announced 2010 production target goals for rice, white corn, and beans. For the longer term, the GOCR wants to improve efficiencies through research, technology transfer, and infrastructure in an effort to improve productivity and raise production levels of rice and bean crops. Note: This cable reflects the combined efforts of our Economic section, FAS office and Regional Environmental Hub. END SUMMARY. -------------- FOOD PRICE TRENDS IN COSTA RICA -------------- ¶3. (U) In accordance with reftel, Post prepared the following report: Begin Report DEMAND: Costa Rica's food consumption pattern is that of a moderately affluent nation generally open to international markets. The nation has posted progressive gains on the FAO consumption measure of grams per person per day relative to its Central American (CentAm) neighbors since the late 1960's. For the most recent period of data reporting, Costa Ricans consumed over thirty percent more food per day than their neighbors, see below: Food Consumption: Grams per Person per Day Costa Cent Year Rica Am Index -------------- -------------- -------------- -------------- 1969-1971 1259 1169 1.08 1979-1981 1411 1267 1.11 1990-1992 1735 1352 1.28 1995-1997 1732 1333 1.30 2001-2003 1914 1452 1.32 Source: FAO Rice and beans are dietary staples, but, when compared to the region, the Costa Rican diet is notably different. Costa Ricans consume relatively more fruits, dairy products, and vegetable oil and consume relatively less grains and beans than their neighbors (see table below): Food Consumption: Percentage of Grams per Person per Day By Food Group, 2001-2003 Costa Cent Food Group Rica Am Index -------------- -------------- -------------- -------------- Alcohol 2.9% 4.5% 0.65 (-) Animal fats & prods 0.6% 0.7% 0.83 Cereals & products 15.9% 23.0% 0.69 (-) Dairy products 25.4% 18.5% 1.38 (+) Fish, seafood & prod. 0.9% 1.2% 0.76 Fruits, Nuts, Spices 24.9% 21.4% 1.16 (+) Meat & prod. 6.1% 6.3% 0.97 Offals edible 0.3% 0.3% 0.95 Oilcrops, excl. prod. 0.6% 1.0% 0.65 (-) Pulses & products 1.5% 2.3% 0.65 (-) Starchy roots & prods 3.8% 3.5% 1.07 Sugar & Beverage Crops 8.8% 8.6% 1.03 Vegetable oils & prod. 1.8% 1.5% 1.17 (+) Vegetables & products 6.5% 7.3% 0.89 Total 100.0% 100.0% Source: FAO (+) denotes Costa Rican is significantly higher than the region (-) denotes Costa Rican is significantly lower than the region As measured in the local currency, the rise in price of the basic "market basket" of foodstuffs paralleled minimum wage increases from March 2006 to March 2007, with food prices rising 13.2 percent while the minimum wage increased 12.7 percent. However, the rise in food prices outstripped the rise in wages from March 2007 to March 2008, 23.9 percent versus 10.5 percent. Rice is the only agricultural commodity under government price controls. A two kilogram bag of 80 percent whole grain/20 percent broken grain rice costs CR colones 888 (USD 1.79) at retail and the March 2007-2008 12 month price increase was 14 percent, or barely more than wage increases. (Prices of other grades of rice are not controlled.) Price increases in sugar products averaged less than wage increases in 2007-2008. Sugar demand is met by local production. Most locally consumed animal products are produced in the country. To date, the population has not changed its consumption pattern of the main staples, even though some prices have increased sharply. SUPPLY: There is no shortage of food in the country at this time. Costa Rica imports all the wheat, yellow corn, and soybeans it consumes. It also imports roughly 50 percent of the rice it consumes. Beans, another important staple, are locally produced but roughly two-thirds of total consumption is imported. Almost all imports of wheat, corn, soybeans, and rice originate in the U.S. Black bean imports come primarily from Nicaragua (which reportedly has imposed export restrictions) and China. Over the years, many farmers shifted production from staple crops with lower relative productivity such as corn and beans to more profitable crops such as citrus, melons, or even beef cattle production. Most of these farmers are not likely to go back to corn or bean production, unless the long-term market outlook suggests that these crops will generate greater profits. Despite strong world prices, Costa Rican rice production has not experienced a significant change so far. Current official rice prices are as follows: - farmers sell rice in the hull for $407 per ton; - processors sell hulled rice for $790 per ton; - wholesalers sell hulled rice for $814 per ton; and - retailers sell 80/20 grade rice in kilogram packaging based on $895 per ton. Since these prices are set by the GOCR, are supposedly based upon the cost of local production, are also influenced by consumer considerations, and do not change frequently, producers making planting decisions now are somewhat sheltered from the price signals world markets are sending. As a result, area planted to rice may not expand as much would be expected in a less regulated environment. CONARROZ, the corporation made up of rice producers and millers, has asked the GOCR for a 20 percent price increase to be implemented in coming months. Whether the GOCR will approve the full increase remains to be seen. In general, the price increase of commodities such as soybeans, yellow corn, and wheat are transferred to the consumer. The degree to which this is happening depends on the cost structure of each particular value-added industry, and the degree of protection from import competition that each enjoys. For example, imported grains constitute up to 85 percent of the cost of pork production, but processors are reportedly not paying significantly higher prices to producers who tend to be small and lack pricing power. Other sectors such as poultry or dairy are vertically integrated, with the larger and stronger companies directly importing grains, processing them, and supplying their own feed production. Moreover, tariffs on poultry and dairy products run as high as 150+ percent. Thus, these producers can better manage rising costs and ultimately pass significant cost increases to the consumer. POLITICAL IMPACT: To date, the Costa Rican discussion regarding food prices and quantities has been framed primarily by reports of shortages and sharp price increases in other countries. The profile of the issue has risen in the media since the World Bank, United Nations, and other multilateral institutions highlighted the issue at the recent IFI meetings in early April. The recent announcement by Sam's Club (Wal-Mart) and COSTCO that they are limiting retail sales of rice in the U.S. received considerable attention in the local media. Post knows of no public protests or violence resulting from food price increases. However, popular awareness of events is starting to catch up with the rest of the world. The developing story line in the media has emboldened some in the agricultural sector (most notably rice growers) and in the political classes (most notably the leading opposition party -- Partido de Accion Ciudadana, PAC) to pressure for a more interventionist governmental response that goes beyond the Arias Administration's relatively market-oriented approach. ECONOMIC IMPACT: The impact of rising food prices is lessened by Costa Rica's relative prosperity. The National Statistics Institute found that unemployment in July 2007 had dropped to 4.6 percent, the lowest in over a decade. The economy has remained strong since then; for example, the number of tourists visiting Costa Rica in the first quarter of 2008 was 17 percent higher than the previous year. Home survey data from 2004 shows that for the poorest 20 percent of the Costa Rican population, 46 percent of consumer spending is on food, as contrasted with 21 percent spent on food for the wealthiest 20 percent of the population. For the population as a whole, 30 percent of consumer spending is on food. Food prices have not had a noticeable effect on macroeconomic variables. ENVIRONMENTAL IMPACT: Adviser to the Minister of Environment Ana Luisa Leiva noted that rising food prices have not had a noticeable environmental impact to date. Furthermore, Ministry of Agriculture representatives stress that any increases in area cultivated for the principal crops of interest would not come at the expense of forests or protected areas. GOVERNMENT POLICY RESPONSE: Most staple crops already enjoy low import duties: one percent on wheat, corn, soybeans, and rice imported by CONARROZ to meet the gap between production and consumption. (Note: other rice importers must pay a 35 percent duty.) Therefore, the cost of imports is determined by the international market and the cost of transport. So far, the government has not imposed export restrictions on any agricultural product. The broader trends of food prices are not lost on the head of state as President Arias mentioned global food and energy concerns in his May 1 State of the Nation address. From the perspective of Ministry of Agriculture officials, the GOCR is planning to play an indirect role to try to facilitate relations between producers and industrials or producers and middlemen with the goal of increasing the share of the profits received by producers. In the medium term, the GOCR announced at the end of April the outline of a program that would achieve certain production targets within two years: local production would meet 80 percent of the demand for rice and 70 percent of the demand for white corn and beans. However, the mechanics of such a plan remain unclear. For the longer term, the government wants to improve research, technology transfer, seed quality, and infrastructure, in an effort to improve productivity and higher production levels. In addition, the GOCR is also evaluating options to reduce transportation costs between the main grain port (Caldera on the Pacific) and processing facilities, many of which are located in the Central Valley. The GOCR has not undertaken any new initiatives to assist segments of the population that are vulnerable to food price increases. End Report. -------------- COMMENT -------------- ¶4. (SBU) Rising international agricultural commodity prices increasingly impact the Costa Rican pocketbook directly and indirectly. The PAC's use of food prices as a bargaining chip and rhetorical aid could prove to be politically volatile, although their oratory is mostly posturing at the moment. Rising food prices could bolster the popularity of the notion of food "security" defined as self-sufficiency, or production meeting 100 percent of consumption. This definition, which has been refuted by GOCR officials and some economists in the media, has great emotional appeal and could strengthen the hand of those who oppose trade liberalization, including CAFTA, and those who seek greater government intervention in theQgricultural sector. If Qe global food challenges reach crisis level, especially if other Central American countries are hard hit, and if the domestic debate continues heating up as the CAFTA-DR legislative agenda progresses toward a critical juncture between July and September, food price issues could complicate CAFTA implementation. ¶5. (U) From the broader economic perspective, the rise in food prices will likely continue to fuel overall inflation. Those hit hardest will be individuals already near or below the poverty line who are not experiencing strong wage gains (and are not likely to). Consumers in this segment will have to make tough purchasing decisions about how to feed their families when they visit their local "pulperia" or "super." BRENNAN