IMPACT OF RISING FOOD/COMMODITY PRICES - ESTONIA

UNCLAS SECTION 01 OF 02 TALLINN 000153 SIPDIS DEPARTMENT FOR EEB/TPP/ABT/ATP JANET SPECK WARSAW FOR REGIONAL AG OFFICE SIPDIS E.O. 12958: N/A TAGS: EAGR EAID ETRD ECON PGOV PREL EN SUBJECT: IMPACT OF RISING FOOD/COMMODITY PRICES - ESTONIA REF: STATE 39410 ¶1. As requested reftel, below is a readout on the Impact of Rising of Food/Commodity Prices on Estonia. Demand and prices -------------- ¶2. In Estonia, the most essential foods/agricultural commodities are dairy products, meat, grain, potatoes, and fodder crops for animal feed. In 2007, overall food prices in Estonia rose approximately 16 percent. According to the Estonian Institute of Economic Research (EIER),the Estonian food market immediately reflected world food price increases that began in June/July 2007. The total food price increase was three times higher than in other European countries. Dairy products saw the most severe price increases. While locally produced dairy products comprise 66 percent of market share, and only one-third of Estonian dairy products are exported (cheese, butter and milk powder) they also account for the increase of prices on the local market. From March 2007 to March 2008, some selected price increases were as follows: -- butter up 38.4 percent -- milk in cartons up 52.3 percent -- milk in plastic packages up 71.7 percent -- domestic cheese up 38.5 percent -- cream up 32.8 percent -- sour cream up 40 percent -- bread up 30 percent -- pork 9.1 percent -- beef 13.3 percent A few commodities saw decreases in prices, including imported salmon and trout (34.5 percent and 15.8 percent respectively). The prices of vegetables, mainly imported, have remained stable or decreased slightly. One exception has been potatoes, which decreased 21.3 percent in the past year. Consumer behavior -------------- ¶3. A recent EIER survey demonstrated that Estonians prefer locally produced, less-processed products. (Note: Only 26 percent of those surveyed said they trust food from the United States. Eighty-four percent trusted neighboring Latvia as a source of food. End note.) Price still ranks only fourth in importance when Estonians buy food (outranked by food quality, tidiness of the store and good service). Consumers typically shop every 1-2 days for fresh meat, bread and produce, rather than shopping once a week. As evidence of this, EIER Director Marje Josing noted that long-life, ultra high temperature (UHT) �0A;processed milk - though widely available in Estonia - has only 2 percent market share, while in much of the rest of Europe UHT milk is 80 percent of the market. Despite the recent severe price increases, EIER has not seen marked shifts in consumption towards alternative food commodities. Director Josing said that while some substitution is occurring, roughly half of those surveyed had wage increases in the past year sufficient to off-set the rising share of their monthly budget that goes to food. The other half have cut back on entertainment, hobbies, and other discretionary expenses. Overall, food makes up 25 percent of a typical Estonian household budget, or roughly double the share of U.S. household budgets spent on food. While lower income families will be hit harder by these price increases, Josing did not anticipate any major social disruption. Supply and Producers -------------- ¶4. Severe food price increases from March 2007 to March 2008 were also due to increases in local purchase-in prices as follows: -- wheat up 56 percent -- rye up 59 percent -- barley up 61 percent -- oats up 46 percent -- milk (purchase-in price) up 36 percent -- pork (purchase-in price) up 54 percent -- beef (purchase-in price) up 3.5 percent ¶5. Political Impact. Post does not anticipate any significant negative impact on the stability of the host TALLINN 00000153 002 OF 002 government caused by rising food prices. In the assessment of EIER's Josing, the Government of Estonia (GOE) has little control over the forces driving these increases. She laid blame primarily on well-known global macro forces such as rising demand in SE Asia, global climate change such as Australian drought, and the unforeseen impact that promotion of biofuels is having on corn prices. She attributes EU reform of the Common Agricultural Policy (CAP) for eliminating intervention stocks that might otherwise have been available to cushion supply-driven price shocks. Still, she said, there will be no hunger or social problems in Estonia. Economic Impact -------------- ¶6. Since re-independence in 1992, Estonia has established one of the most liberal economies in the world. In the late 1990s, Estonia's trade regime was so liberal that adoption of EU and World Trade Organization norms actually forced Estonia to impose tariffs in agriculture, which had previously been tariff-free. According to the Bank of Estonia, the convergence of Estonian income and price levels towards the EU average is accelerating inflation in Estonia. Estonia meets all criteria for the adoption of the EU single currency, except for inflation. While Maastricht criteria for Euro adoption stipulate no more than 2.5 - 3 percent inflation, the 2007 inflation rate, was 6.6 percent. Inflation of food prices contributed heavily to this. As a result, Estonia's accession to the Euro zone will be delayed until at least 2011. ¶7. Environmental Impact: The rising prices have not had any significant impact on environmental issues. ¶8. Government Policy Response: As Estonia has a free market economy, the GOE has not imposed any additional tariffs, quotas, import or export restrictions on agricultural products. The GOE does not provide subsidies to farmers or to the food industry. The amount of EU subsidies that Estonian farmers can apply for is equal to only 25 percent of the support that farmers in 'old' EU member states receive. There are no police efforts to promote food production, as it is fully market-driven. ¶9. Impact of Post programs: N/A ¶10. Policy proposals: N/A PHILLIPS