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)
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