MACEDONIA: IMPACT OF RISING FOOD/AGRICULTURAL COMMODITY

UNCLAS SECTION 01 OF 02 SKOPJE 000317

SIPDIS

DEPT PLS PASS TO USAID,
DEPT FOR EUR/SCA P.PFEUFFER AND Y.IVANOVA

E.O. 12958: N/A
TAGS: EAGR ETRD PREL PGOV MK
SUBJECT: MACEDONIA: IMPACT OF RISING FOOD/AGRICULTURAL COMMODITY
PRICES

REF: A. STATE 39410

B. SKOPJE 265

Summary
--------------

1. Food prices in Macedonia have increased significantly over the
past year, especially for grains, dairy products, meats, cooking oil
and eggs. Rapidly increasing prices for these products have led to
a significantly higher overall inflation rate of 10 percent. So
far, however, these price increases have had limited political and
environmental impact, and have not led to a significant increase in
domestic production. The GOM's response has been limited to
relatively unsuccessful public calls on food producers and retailers
to restrain the increase in prices for key staples. End summary.

Demand
--------------

2. For Macedonia, the increase in the prices of wheat and animal
feed has had the most significant impact. Domestic production
satisfies about 60 to 70 percent of the country's total wheat
consumption, and less than 60 percent of animal feed consumption.
Feed prices increased 48 percent for the period October 2007 to
February 2008, compared to the same period the previous year. This
has led to higher prices of flour, bread, dairy products and meat.
There is anecdotal evidence that lower income consumers have reduced
their consumption of these products, but no reliable statistics are
available.


3. Macedonia produces sufficient vegetables and non-tropical fruit
to meet most domestic demand, and exports some of these products.
Higher production costs, primarily for fuel, and greater export
demand has led to higher domestic prices for fruits and vegetables.

Supply
--------------

4. So far, there is no evidence of significant increases in
domestic agricultural production in response to the higher prices.
There is no significant foreign investment in agricultural
production in Macedonia, with the exception of dairy production.
Over 200,000 hectares of arable land, almost one fifth of the total
agricultural land, remains un-used. Macedonia currently does not
produce any bio-fuel products, though there have been discussions of
the possibility of growing crops for bio-diesel production.


5. In 2007, Macedonia imported $438 million worth of
food/agricultural commodities, and exported $385 million worth of
these products. Macedonia's most significant agricultural exports
are tobacco, lamb meat, dairy products, and fruits and vegetables.
Macedonia's primary agricultural imports are meat (beef, pork and
poultry),wheat, dairy products and sugar.

Political Impact
--------------

6. There have been no reports of public protests or other such
incidents related to the increase in food prices. Macedonia will
hold parliamentary elections on June 1, but so far rising food
prices have not been a major campaign issue, and public opinion
polls have shown the main governing party with an imposing lead over
the opposition.

Economic Impact
--------------

7. Inflation, as measured by the consumer price index (CPI),has
risen dramatically in Macedonia over the past year, from about two
to three percent year-over-year for 2003-2007, to over ten percent
in February and March 2008. Rising food and fuel prices have
contributed the most to the accelerating inflation rate (ref B).
According to GOM statistics, food prices were 21 percent higher in
March compared to the previous year. The largest contributors were
dairy products (up 15.6 percent from one year ago); bread (up 18.8
percent); cooking oil (up 26.8 percent); and vegetables (up 40.5
percent, but from a relatively low base price). Because food
products make up a relatively large proportion of the consumer
products used to calculate the consumer price index in Macedonia,
rising food prices have had a greater impact on CPI inflation rates
than in more developed countries.


8. Those most affected by higher food prices are the 29.8 percent of

SKOPJE 00000317 002 OF 002


the population who, according to the State Statistics Office, live
under the poverty line. The GOM estimates that approximately 17
percent of workers are employed in agriculture and therefore might
benefit from the increase in agricultural prices. There is no
estimate available for what percentage of the poorest households are
also food producers who could benefit from higher prices.

Environmental Impact
--------------

9. Because rising food prices have not yet led to a significant
increase in agricultural production in Macedonia, there has been no
identifiable environmental impact.

Government Policy Response
--------------

10. The GOM has not implemented any export restrictions, nor
changed tariffs or quotas in response to rising food/agricultural
commodity prices. The GOM called on local food producers,
processors and retailers to limit the increase in food prices for
key staples, such as milk and cooking oil. For a few weeks, the
major supermarkets advertised lower prices on some food products,
crediting a partnership with producers and the government. However,
that advertising campaign has ended and prices on these products
have again increased.


11. The GOM has increased agricultural subsidies significantly, but
from a very low base, and this policy was formulated before food
prices jumped. Agricultural subsidies increased to 27 million euros
in 2007 from 17 million euros in 2006, and are slated to increase to
45 million euros in 2008. In May 2008 the GOM will start payment of
subsidies for production of wheat, cooking oil, wine grapes and
fruit, milk and cattle, and poultry.

Impact on Post's Programs
--------------

12. Post currently supports two agricultural assistance programs: a
USAID project to increase agricultural competitiveness of private
producers, and a USDA project to help the GOM implement an
agriculture market information system (MIS). For the USAID
agriculture project, higher regional food prices may provide a
competitive opportunity to market Macedonian agricultural products,
but it is still too early to determine how higher food prices will
affect the project's objectives. USDA's MIS project will improve
the GOM's collection and distribution of information on agricultural
prices in Macedonia, and should enhance agricultural producers'
ability to respond effectively to domestic market prices.


NAVRATIL