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Viewing cable 06CARACAS444, VENEZUELA WAKES UP AND SMELLS THE COFFEE

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Reference ID Created Released Classification Origin
06CARACAS444 2006-02-16 20:56 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Caracas
VZCZCXRO0169
RR RUEHAO
DE RUEHCV #0444/01 0472056
ZNR UUUUU ZZH
R 162056Z FEB 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 3239
INFO RUEHBO/AMEMBASSY BOGOTA 5999
RUEHLP/AMEMBASSY LA PAZ 1659
RUEHPE/AMEMBASSY LIMA 9864
RUEHQT/AMEMBASSY QUITO 1731
RUEHAO/AMCONSUL CURACAO 0598
RUEHGL/AMCONSUL GUAYAQUIL 0292
RHEHNSC/NSC WASHDC
RUCPDOC/DEPT OF COMMERCE
RUEHC/SECSTATE WASHDC 3240
RUEHRC/DEPT OF AGRICULTURE USD FAS
UNCLAS SECTION 01 OF 03 CARACAS 000444 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
E.O. 12958: DECL: 02/09/2016 
TAGS: ECON EAGR VE
SUBJECT: VENEZUELA WAKES UP AND SMELLS THE COFFEE 
 
This message is sensitive but unclassified, please treat 
accordingly. 
 
------- 
SUMMARY 
------- 
 
1. (U)  After the BRV doubled the price roasters had to pay 
farmers for raw coffee beans, and fixed the price of ground 
coffee below cost, a nationwide shortage of ground coffee 
took effect in late December 2005.  Roasters refused to sell 
their product at a loss and hoarded it in an attempt to 
pressure the government into raising the fixed price. 
President Chavez responded by ordering the seizure of ground 
coffee and threatening roasters with expropriation of their 
plants.  On Jan 17, after one month of empty shelves, the BRV 
finally buckled and raised the price of ground coffee 
roasters were permitted to charge by 60 percent.  Other 
price-controlled products, such as powdered milk, sugar, and 
corn flour, have undergone similar disruptions.  BRV 
retrograde pricing policies, incompetence, and concerns about 
increasing prices this political year have led to price 
distortions and shortages of staple products.  End Summary. 
 
------------------------------- 
BACKGROUND: COFFEE IN VENEZUELA 
------------------------------- 
 
2. (U)  The Venezuelan coffee market is largely domestic ) 
there have been no imports since 2004, and an export ban was 
in place until that same year, though exports today are 
minimal.  Ground coffee has been price-controlled since 2003. 
 Seven years ago, Venezuela had a total of 83 roasting 
companies, 73 of which were small and medium companies 
covering 40 percent of the market.  Today there are only 23 
companies, two of which cover 83 percent of the market.  This 
concentration of ownership has, according to ASICAF, the 
coffee producers' association, resulted in over 80 percent of 
coffee growers living in poverty.  Small growers are 
dependent on large companies to sell their harvests. 
 
3. (U)  Since Chavez came to power, the BRV has attempted to 
control the coffee market and production.  In Nov 2005, the 
government established a state-owned processing plant, "Cafe 
Venezuela," to supply Mercal, the state-owned food chain with 
over 30 percent of market share for food sales.  A year 
earlier, the government launched Plan Cafe, a program aimed 
at providing financial assistance to small growers and 
regulating distribution.  The lack of clear objectives or 
definition caused the plan to fall short of expected results, 
so the BRV unveiled a Socialist Coffee Plan in late 2005 -- 
an "endogenous development model" promising to bring social 
and economic benefits to growers, reduce prices, and 
guarantee production.  The Minister of Agriculture also 
announced the creation of a Venezuelan Agrarian Coffee 
Corporation intended to cut out middlemen and facilitate 
market access. 
 
------------------------ 
DIARY OF A COFFEE CRISIS 
------------------------ 
 
4. (U)  On December 1, the government provoked a coffee 
crisis by raising the price of all ground coffee varieties by 
66 percent.  Two weeks later, on Dec 16, the BRV raised the 
price of raw coffee beans by 102 percent, after eight years 
without price increases for this commodity.  Before these 
actions, regular ground coffee was selling in supermarkets 
well above the fixed price set in 2004, as roasters evaded 
price controls by re-labeling their products as non-regulated 
varieties.  However, since the BRV made a show of enforcing 
fixed prices by fining and temporarily closing over 75 
businesses in early December, roasters took heed of the new 
price and complained. 
 
5. (SBU/F)  According to the head of purchasing for Fama d 
America (a large coffee company), Eduardo Margaet, on Dec 8 
the ministers of Agriculture and Lans, Light Industry, and 
Food agreed to a meeting ith roasters.  Plant owners 
explained that the nw ground coffee rate was well below 
their costs;nonetheless the BRV a week later published the 
nw higher raw bean price.  Within days, roasters stoped 
 
CARACAS 00000444  002 OF 003 
 
 
distributing their product and street vendors were selling 
ground coffee on the black market at a 170 percent markup. 
According to Margaret, the inability of top-level officials 
to determine a timely, adequate price change directly caused 
the shortage.  Despite BRV public statements to the contrary, 
even Mercal stores reported shortages, as the state-owned 
Caf Venezuela held out for ground coffee price increases 
just like private roasting companies. 
 
6. (U)  In his weekly address on Jan 8, Chavez sternly warned 
roasters not to "hide" coffee as it "belonged to the people 
of Venezuela," and threatened to expropriate roasting plants 
and seize existing supplies.  By Jan 11, the National Guard 
and the Institute for Consumer's Rights (INDECU) seized 1,929 
tons of coffee for distribution in the Mercal network. 
According to Fama De America, authorities "negotiated" a sale 
at near or below the fixed price for the seizure.  Attempts 
to artificially keep basic food basket prices low are part of 
Chavez' overall political agenda, which caters to his largely 
low-income voter base.  By week four of the crisis, and only 
after loud public outcry on the issue, the Ministry of Light 
Industry and Commerce caved and raised the price of ground 
coffee by 60 percent.  INDECU reported on Jan 26 that the 
market was back to normal, but industry said it would take a 
month due to delays in new pricing margins and pending 
disagreements over transport costs and grain classification. 
By early February, the product started slowly reappearing on 
shelves. 
 
----------------------- 
THE FOOD BASKET EMPTIES 
----------------------- 
 
7. (U)  Coffee isn't the only product that has experienced 
shortages, thanks to bumbling of BRV efforts to control 
prices.  CAVIDEA, the Venezuelan Chamber of Food Industries, 
noted that in 2005 the volume of price-controlled product 
sales dropped every month.  The industries that produce these 
products identified low profit margins, high raw material 
prices and lack of domestic availability of raw materials as 
their biggest problems over the last year.  Fedeagro, the 
Federation of Agricultural Producers, has been so unhappy 
with government pricing that they staged a large protest in 
front of the Presidential Palace on Feb 9. 
 
8. (U)  Powdered milk and sugar are also in short supply. 
Venezuela imports nearly the same amount of milk as it 
produces even though this industry grew seven percent last 
year.  According to the president of Chamber of Dairy 
Industries (CAVILAC), import licenses are a bureaucratic 
nightmare to obtain.  As of Jan 12, in response to shortages, 
INDECU had seized 189 tons of powdered milk from various 
warehouses.  According to press reports, Venazucar, a sugar 
producers' and refiners' association, as well as INDECU, 
believe the refined sugar shortage is due to truckers 
choosing other products after the BRV suspended a 
transportation subsidy on Dec 1.  However, the sugar cane 
farmers' federation (FESOCA), reports that shortages are due 
to a rainy winter and farmers failin to buy high-priced 
imported raw materials. 
 
9.(U)  White corn flour, a staple of the Venezuelan iet, 
has also become an absentee member of the bsic food basket. 
On Dec 1, the BRV raised the prce of raw corn 9 percent 
despite demands from Fedeagro for a larger price increase. 
Processing companies such as Polar Foods are asking for a 41 
percent price increase for corn flour, noting that since 
price controls began, raw corn has risen 107 percent versus 
only 66 percent for corn flour.  (Note: Inflation for 2004 
and 2005 was 19.2 and 14.3 percent, respectively.  End note). 
 The corn flour market is dominated by Proarepa (a 
government-subsidized producer that supplies to Mercal) and 
Polar Foods (a private company), the latter operating at a 
loss using last year's harvest and reportedly only having a 
10 day supply left.  By Jan 17, industries estimated that 50 
percent of the harvest was sitting unprocessed in silos. 
 
10. (U)  The shortage/price distortion pattern caused by BRV 
actions repeats itself in a myriad of other products.  Black 
beans are selling on the black market at 48 percent above the 
fixed price; rice and sorghum prices are fixed below cost; 
bread and pasta are dependent on imported raw materials yet 
 
CARACAS 00000444  003 OF 003 
 
 
have unrealistic fixed prices; chicken and beef each sell on 
the black market at 20 percent above controlled prices. 
Though many of these products can be found at grocery stores 
and in street stalls, prices fluctuate wildly as does 
availability. 
 
------------------------ 
BRV SNUBS PRIVATE SECTOR 
------------------------ 
 
11. (SBU/NF)  According to the president of Fedeagro, Gustavo 
Moreno, the BRV mistrusts the private sector and directly 
caused shortages through "incompetent and incoherent" pricing 
decisions and policies.  (Note: Fundamentally the BRV wants 
to maintain fixed prices on certain staple products without 
taking into account increasing factor costs as stipulated by 
the Agricultural Marketing Law, which requires consensus 
among producers, industry and government for price 
modifications.  Additionally, the BRV is squeezing growers by 
delaying release of harvest prices.  End Note).  Though 
Moreno met with senior BRV officials often and presented 
production and cost figures to support certain price 
increases, he felt his clamoring fell on deaf ears until 
other factors (such as public opinion) prompted eventual 
action.  He also noted that final decision-making seemed to 
be centralized at the highest levels, and that information 
provided by the private sector was considered "suspect" by 
the BRV until it could be corroborated by other sources, if 
at all. 
 
12.  (U)  After prompting by Chavez, the National Assembly 
drafted a law that would penalize hoarding and price 
speculation and has created commissions to study market 
distortions.  The BRV has promised to achieve "food 
sovereignty" in 10-12 years (domestic production to cover 
domestic demand), a plan aimed at reducing import dependency, 
as Venezuela imports roughly 70 percent of food products. 
(Note: Chavez is also looking to import sugar, corn and milk 
processing plants for "endogenous development" projects and 
to put further pressure on private agricultural interests. 
End Note). 
 
------- 
COMMENT 
------- 
 
13. (U)  BRV attempts to hold down prices have produced 
detrimental effects for staple food prices and availability, 
and ironically have made the products needed by the poorest 
sectors a luxury to find and pay for.  These policies appear 
to be driven by populist election year politics of allowing 
only minimal price increases for basic food staples.  Chavez' 
solutions to the problem - imports, confiscations and threats 
of nationalization, threatening the establishment of 
"endogenous" parallel production facilities - are a clear 
attempt to intimidate private sector suppliers into keeping 
prices low, but fail to address the realities of market 
forces.  Though the BRV promises to achieve "food 
sovereignty," that goal seems well out of reach as growers, 
roasters, refiners, and processors who supply 
price-controlled products are finding an increasingly 
difficult operating environment.  While the political damage 
for the Chavez administration is uncertain, and perhaps only 
transitory, these inept pricing policies have resulted in 
highly-visible and unpopular product shortages throughout the 
country.  End comment. 
BROWNFIELD