BULGARIA: IMPACT OF RISING GOODS/COMMODITY PRICES

UNCLAS SOFIA 000276 SIPDIS SENSITIVE SIPDIS STATE PASS EEB/TPP/ABT/ JANET SPECK E.O. 12958: N/A TAGS: EAGR EAID ETRD ECON PGOV BU SUBJECT: BULGARIA: IMPACT OF RISING GOODS/COMMODITY PRICES REF: STATE 39410 ¶1. (SBU) SUMMARY: This cable is a response to REFTEL. In 2007 - 2008, the Bulgarian economy and consumers witnessed the highest inflation and consumer price increases in the last 10 years. In 2007, Bulgaria -- a traditional exporter of grains -- became a net importer. In the last year, March-March, food prices rose 23.7 percent. As energy and other input costs have also risen, agriculture's share of GDP, along with rural net incomes, has declined, although large farmers are faring better than smaller farmers. No new government programs have been created to offset rising prices, although small additional subsidies recently were given to dairy farmers after several months of demonstrations. END SUMMARY. -------------- Why Prices Have Risen So Fast -------------- ¶2. (SBU) When Bulgaria joined the EU on January 1, 2007, it had the lowest consumer price and income levels in the EU. Due to a severe regional spring/summer drought in 2007, Bulgaria produced record low grains and oilseeds, as well as reduced volumes of products of animal origin (meat and milk), fruits and vegetables. Agricultural imports increased significantly and for the first time in 20 years, the traditionally net-exporting agricultural sector became a net importer. In addition, Bulgaria increased its consumption of imported energy (oil) which affected all sectors in the economy including agriculture and food production. Consumer prices in Bulgaria rose steadily between January and August ¶2007. After the poor grain harvest in August, the prices of grains, oilseeds, vegetable oils and related products skyrocketed. ¶3. (SBU) Record high grain and oilseed prices were favorable for large efficient farms but were devastating for smaller farms, and for semi-subsistence producers. Many smaller farmers suffered losses due to poor crops and were only partially compensated by the government. Overall, average farmer incomes declined, their debt burdens rose, and many small and inefficient producers went bankrupt. Livestock farmers, especially dairy cattle farms were the most severely affected by rising prices. Dairy farmers responded by over-slaughtering -- which led to a decline in livestock numbers. ¶4. (SBU) Higher prices for most field crops led to rising 
demand for land, increased land rents, and land prices. Higher land rents, along with increased prices of fuel and fertilizers, are likely to affect production costs of all agricultural commodities produced after August 2007. The first EU subsidies paid to farmers under the single area payment scheme (SAPS) in February 2008 were reported to be used massively for paying old debts, mainly rents. -------------- Effects on Consumers -------------- ¶5. (SBU) Although the average Bulgarian spent 37.5 percent of disposable income on food in 2007, according to official statistics, a significant part of the population spends more than 50 percent. Rising food prices led to shrinking consumption of many higher-value food products. Consumers switched to lower value/priced products from the same category or purchased less. In the past, many were able to generate income from home gardens, but this practice has decreased. Higher prices for transportation, heating, electricity and other energy-intensive goods and services costs combined with stagnating incomes, have resulted in less income to buy foods and other consumer products. Rising food prices have been painful for social institutions -- schools, hospitals, orphanages -- which have had to increase outlays for food purchases within the limits of restricted budgets. Additional humanitarian aid to make up for rising prices has been practically absent. -------------- Policy Response -------------- ¶6. (SBU) As an EU member state, Bulgaria may not restrict exports or impose non-tariff barriers on trade, but there were demands along those lines from industry in the summer of ¶2007. The Ministry of Agriculture has not enacted any specific policies to soften the rising food price trends. The only new policy was to meet dairy farmers' strike demands and to provide slightly higher support to dairy farms. Although there was an idea to establish an indemnity fund or an insurance fund for grain farmers -- which could compensate losses in dry years -- this has not been established. No new policies have been initiated for more efficient land use, and/or for adoption of new technologies. There are no stocks and/or national reserve facilities for emergency food relief. -------------- Post Response -------------- ¶7. (SBU) Post continues to support a small local NGO which is working with USDA experts, a U.S. partner NGO, and local stakeholders to develop a food bank concept in Bulgaria after the U.S. model. The project is well thought of by local political and industry players, although legislative and technical impediments are hindering the food bank's implementation. Beyrle