TAKING STEPS TO UPROOT THE STATIST LEGACY IN BABIL'S

UNCLAS SECTION 01 OF 05 HILLAH 000023

SENSITIVE
SIPDIS

USDA/FAS/OCBD/CURTIS, BENSON, WOLF
USDA/FAS/OCRA/ALLEN

E.O. 12958: N/A
TAGS: EAGR ECON EINV IZ
SUBJECT: TAKING STEPS TO UPROOT THE STATIST LEGACY IN BABIL'S
AGRICULTURE

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1. (SBU) SUMMARY: Although agriculture is almost certainly the
largest employer in Babil Province, a long history of central
planning has undermined its competitiveness and long-term
sustainability. As the owner of around 70 percent agricultural
land in the province, the government micromanages what farmers
produce, guarantees the purchase of key crops, and, to a lesser
extent, subsidizes agricultural inputs. These statist policies
and other factors, from inadequate credit to the distortionary
Public Distribution System (PDS),have restricted private sector
development in agriculture. Having come to rely on government
largesse, it is little surprise that Babil farmers look to
intervention and protection rather than open markets for their
livelihoods. Taking heed of these deep-rooted structural
impediments, Babil PRT has promoted the establishment of an
Iraqi-led agricultural advisory committee comprised of public
and private sector stakeholders invested in the long-term
agricultural viability of the province, once the breadbasket of
Iraq. The council has begun working to prioritize projects and
troubleshoot problems at the local level. Consistent with a
recent USAID assessment of Iraq's overall agricultural
trajectory, production of vegetables and fish -- areas in which
government intervention has been limited -- offer the greatest
hope for future success in Babil. END SUMMARY.



FROM BREADBASKET TO BASKET CASE

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2. (SBU) Agriculture is almost certainly the largest employer in
Babil Province, although there are no consistent official hard
data. The Ministry of Agriculture's Director for Babil
Province, Hussein Hassoni Ahmed, told PRT officers March 18 that
farming accounted for "over fifty percent" of the province's
employment; he said his database contained the names of 38,000
farmer heads of household. A December 2007 food security survey
by the World Food Program found that roughly 30 percent of Babil
households owned farm animals, a farm plot, and had the head of
household engaged in farming as a primary occupation. In
comparison, these percentages were 23%, 18%, and 12%,
respectively, for Iraq as a whole. Estimates of agriculture's
role in Babil's GDP have ranged from as low as six to as high as
90 percent, although PRT agriculture advisors assess that
estimates on both ends of this spectrum are implausible, in part
since between one half and one third of the province is
urbanized. From all of this data noise, the PRT concludes that
approximately one third of the population is engaged in
agricultural production, accounting for a much smaller
proportion of provincial GDP, probably 15 to 20 percent.




3. (SBU) According to the al-Rafidain Center, a government
research center affiliated with the Provincial Council, the
government owns approximately 170,000 acres of agricultural land
in Babil Province. USDA estimates this is around 70 percent of
the total. Of the government-owned lands, the average sized
farm is 4.7 acres. Babil is Iraq's top producer of dates and
fish; its other main crops are wheat, barley, maize, and
vegetables. In addition to field crops, 11,000 farmers in Babil
Province manage some 33,000 privately held acres of orchards
growing oranges, lemons, apples, and apricots, according to
al-Rafidain.




4. (SBU) Babil consumers rely on imports and their government
ration baskets for much of their consumption rather than locally
produced crops. The PDS ration basket supplies much of the
public's basic foodstuffs including powdered milk, rice, wheat,
and oil. When a PRT locally employed staff member recently
visited one Babil vegetable wholesaler looking for locally grown
products, the vendor reported that nothing he sold was Iraqi;
the PRT has observed a similar preponderance of imported
foodstuffs in other markets. Locally grown items are
consistently more expensive than their imported competitors.
Babil farmers, for their part, complain about the flood of
foreign vegetables from Iran, Syria, and Jordan as undercutting
the competitiveness of their own production.



WIDESPREAD GOI MARKET INTERVENTION


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5. (SBU) The GOI maintains a tight grip on the supply of
agricultural inputs, relying on an often corrupt and inefficient
supply chain and limiting the freedom of Iraqi farmers to choose
what they grow on state-owned lands. Agriculture Director Ahmed
said nearly one third of agricultural inputs, ranging from
fertilizer to seeds to tractors, are provided by state-run
entities at subsidized prices. For Babil farmers to receive
inputs for use on GOI-owned land, they must plant crops as
directed by the Ministry of Agriculture. The state-run
fertilizer distributor, whose mandate is to sell inputs at
around one third of their cost to local producers, sets prices
artificially high to dissuade farmers from buying government
products. Many farmers then opt for cheaper and lower-quality
Iranian fertilizer imports, as employees at the state-run
distributor sell their supplies on local markets and pocket the
profits, according to PRT discussions with local farmers. An
American businessman interested in investing in feedlots,
slaughterhouses, and enhanced genetic inputs in Babil told the
PRT in early March that payment of bribes was "expected" to
wrest control of any part of the input supply chain from what he
perceived was the government's virtual monopoly.




6. (SBU) Just as it subsidizes inputs, the GOI guarantees the
purchase of "strategic crops" (wheat, barley, dates, maize, and
rice). Agriculture Director Ahmed said that the government was
committed to buying up these types of agricultural output in the
province at subsidized prices. Apologizing for only being able
to provide a third of the necessary inputs to meet demand, he
explained that the GOI seeks to "make it up to the farmers" by
paying high prices for Babil's agricultural output. Whereas the
government paid 450,000 ID per ton for wheat last year, for
example, this year it would pay 855,000 ID per ton (about double
world market prices). The Director said the only farmers in
Babil who did not sell their output directly to the government
were a handful of very poor farmers living hand-to-mouth who
needed "fast cash" and could therefore not wait for the
administrative processing delays in selling to the government.
Ahmed said that even by buying up all of the output, the
relatively low yield of Iraqi agriculture meant Iraq was still
reliant on imports to meet the demand of the Ministry of Trade's
Public Distribution System (PDS) of food rations.




7. (SBU) Government price supports have inculcated in the Babil
public the idea of government interventionism as a fix to the
region's agricultural woes. The Babil business community and
public have frequently voiced to us their belief that high
tariffs should be added to the mix of government intervention;
they are apparently unaware that tariffs carry costs. In a
February 26 business environment conference sponsored by Babil
PRT (reported septel),two independent working groups of local
business and government leaders identified tariff protection as
one of their top solutions to enhancing Iraqi production,
including agriculture. There is also a near-universal
perception that all neighboring countries are "dumping" their
produce into Iraqi markets. Farmers and agribusiness owners
tell us frequently that many of their problems would be solved
if the GOI just sealed the borders from competitive imports.




8. (SBU) Macroeconomic conditions driven by national-level
policies also undercut the potential for greater agricultural
production in Babil. Lack of capital and the poor banking
system prevent farmers from buying inputs or arranging letters
of credit for exports, thus perpetuating their reliance on the
state to provide inputs and purchase output. While the
state-run Agriculture Bank claims to offer zero percent loans to
farmers, it has consistently refused to share any of its lending
statitistics with us; this treatment of lending practices as a
state secret has made us question the extent to which is it
lending to farmers at all. CHF International, the largest
microcredit provider in Iraq, has eschewed the agricultural
sector because of low repayment rates. Another national level
distortion is the PDS, which provides sustenance to Iraqi
families from predominantly imported goods, but which undercuts
demand for locally grown crops such as wheat, barley, and maize.
Farmers of these products are better off selling their
production to government warehouses. Another constraint is the
slow pace of land reform. An aspiring Iraqi investor in

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slaughterhouses told PRT officers March 19 that confusion over
zoning and the absence of land reform deters Iraqis from
pursuing capital improvements to their plots. Finally,
unreliable utilities and infrastructure are a detriment to Babil
farmers and agribusinesses. The NuNu Dairy in North Babil, for
example, told us that largely because of inadequate electricity
supplies, it is operating at 25 percent of its capacity,
compared to 90 percent in 2003.



THE DATING GAME

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9. (SBU) The case of the al-Furat Date Company illustrates the
negative effects on private investors of Iraqi government price
supports. Yasin Kadhum Alabid, manager/owner of Al-Furat Date
Processing Company, told the PRT in March that the GOI's October
2008 decision to buy raw dates at a fixed price to use in the
monthly PDS ration had raised the price of raw dates 30-90
percent, depending on the quality. These government purchases
reduced date supply, driving up the price and driving Alabid out
of incipient export markets in the Gulf. He hypothesized that
the government's intervention had also impacted the supply of
dates, as producers were now substituting production of the
high-quality dates al-Furat processes for low-quality dates
purchased in bulk by the government. According to Alabid,
Al-Furat started operations three years ago with USD 2.5 million
in start-up costs; he said that the company has not made
significant profits and that if business did not improve soon,
the plant must close. Although Alabid reached out to European
and U.S. buyers, he said he cannot compete with cheaper Saudi
and Tunisian dates at the current high price of Iraqi raw dates,
which he blames on the GOI. Alabid said that if the GOI does
not stop purchasing dates at fixed prices, then the only way the
business will survive is if the GOI starts buying his processed
dates.



IF YOU BUILD IT, (HOPE) THEY WILL COME

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10. The jury remains out on the extent to which big ticket
construction projects have supported Babil's agricultural
output. Some $3.2 million of CERP funds and full-time coalition
staffing have gone into the Central Euphrates Market, but since
the market is not yet online it remains to be seen whether it
will supplant the ad hoc but relatively well functioning markets
in Hillah that currently serve to effectively supply Babil
consumers with an abundance and variety of reasonably priced,
mostly imported goods. Because the government purchases almost
all the province's agricultural output, it will be hard for the
market to serve as a trading depot for locally produced goods,
despite assurances from local shaykhs that the new market will
do so. The project's organizers hope the market will repeat the
success of the Karbala vegetable market, where demand for
products is so strong that vendors tell us they must pay USD
100,000 annually to lease a stall. In another example, the
state-owned Hillah Cold Storage Project, which is currently
being refurbished, is primarily used to store PDS rice rations,
although the Ministry of Trade's representative for the province
told us the GOI's intent is to eventually lease parts of it to
private sector suppliers.



TEACH A MAN TO FISH...

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11. A February USAID report on Iraq's overall agriculture
prospects identified vegetables and meat/fish production as the
two areas of Iraqi agriculture that have managed to remain free
of government intervention and therefore offer the greatest hope
for sustainability. Locally produced meat in Babil Province,
however, remains almost three times as expensive as imported red
meats. This may reflect Iraqi preference for fresh meat over
frozen imports, or stem from government restrictions on growing

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alfalfa and other crops that could be used in feedlots. Fish
production, on the other hand, is thriving in the province. The
Central Euphrates Fish Farm (CEFF),a private sector enterprise
with start-up support from USAID, has provided six million high
quality fingerlings to 472 small farmers in south/central Iraq.
Khudair Abbas al-Emara, the farm's owner and general manager,
told PRT officers March 31 that the farm produced 1,200 tons of
fish per year, accounting for about 8 percent of Iraq's fish
production. Demand greatly outstripped supply, he estimated,
because of Iraqis' preference for live fish. Although al-Emara
said his business was profitable and had remained relatively
unencumbered by government interference, he suffered indirectly
from the Trade Ministry's agriculture pricing policies. Barley
accounts for about 20 percent of al-Furat's fishfeed formula,
but the Ministry of Trade had set the price of barley paid to
Babil farmers at the artificially high price of 700,000 Iraqi
Dinars/ton. Imported barley was available in limited quantities
for 500,000 ID/ton, but the government controlled the amount of
imports to discourage traders from arbitrage (selling imported
barley back to the government as if it had been locally grown).
Therefore CEFF buys the remainder of its barley at relatively
high prices, around 550-600,000 ID/ton, from local farmers who
are unwilling to wait the several months it takes the government
to make payments. Fortunately for CEFF, much of the composition
of its fish feed consists of inputs not grown in Iraq at all,
including soybeans and concentrated proteins, which it is able
to import without difficulty.



PRT LOOKS TO ESTABLISH SUSTAINABLE AG COMMITTEE

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12. (SBU) Looking beyond the legacies of brick and mortar
projects and indefinite price supports, Babil PRT helped
establish a public-private Provincial Agricultural Advisory
Committee (PACC) with the goal of increasing Babil's
agricultural competitiveness and productivity. The members
include Provincial Council Agricultural Committee members, the
Agriculture Director Ahmed, and prominent private-sector
business figures in the local agricultural community. With the
help of the PRT, the PACC has used a "value chain analysis" to
identify elements of the agricultural supply chain that add
value to multiple types of agricultural output. The
determination of shared "nodes" provides a template for applying
resources to those areas of the Babil supply chain most likely
to have the broadest impact. In addition to targeting areas
with the largest bang-for-the-buck, the identification of
"nodes" that impact multiple value chains establishes shared
equities among otherwise disparate producers. The key value
chains reviewed by the PACC were fish, livestock, poultry, feed
grains, forage crops, vegetables, dates, bees. These reviews
determined the key shared nodes as: access to capital; training;
inputs (fertilizer, seeds, plants, feed mills); soil analysis;
processing and delivery (slaughterhouses, harvesting equipment,
cold storage); infrastructure (water pumps, transportation);
utilities (electricity, water); and marketing. The
identification of key "nodes" has been a useful tool in focusing
the energies of the nascent PACC. Babil PRT has taught this
methodology to other PRTs and it has become a FRAGO (military
command directive) for all south/central Iraq.



WAY FORWARD

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13. (SBU) Prospects for private-sector led agricultural
development in Babil Province amid the influx of imported goods
and PDS rations will be dim as long as the Ministry of
Agriculture continues to focus its energies on subsidizing
inputs, micromanaging production, and buying up output.
Director of Agriculture Ahmed, to his credit, seems to recognize
the deleterious impact of Baghdad's policies on the province's
production but is hard-pressed to do anything about them.
Future support, in forms such as expanded extension services or
other technical assistance, to such relatively distortion-free
areas of production as vegetables and fish production is likely
to have a greater impact at lower cost than massive buy-back
schemes or big ticket brick and mortar projects. The PACC
offers hope as a forum to troubleshoot provincial problems and

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to transparently prioritize local agriculture projects. The
PACC can also work to establish a consensus on problems outside
the scope of local actors, such as zoning and access to credit,
and work together to raise the Babil agricultural community's
concerns to policymakers at the national level. Without
addressing some of these national structural constraints, the
best efforts of local institutions to band together to improve
the province's long-term agricultural prospects may be in vain.
HILLAS