VZCZCXRO2791
RR RUEHAO
DE RUEHCV #3500/01 3341521
ZNR UUUUU ZZH
R 301521Z NOV 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7145
INFO RUEHBO/AMEMBASSY BOGOTA 7132
RUEHLP/AMEMBASSY LA PAZ 2411
RUEHPE/AMEMBASSY LIMA 0666
RUEHQT/AMEMBASSY QUITO 2497
RUEHAO/AMCONSUL CURACAO 1070
RUEHGL/AMCONSUL GUAYAQUIL 0716
RHEHNSC/NSC WASHDC
RUEHRC/DEPT OF AGRICULTURE USD FAS
RUCPDOC/DEPT OF COMMERCE

UNCLAS SECTION 01 OF 02 CARACAS 003500 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR KLINGENSMITH AND NGRANT 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
NSC FOR DTOMLINSON 
HQ SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: ECON EAGR VE
SUBJECT: STOCKING UP FOR THE HOLIDAYS 
 
REF: A. CARACAS 2831 
 
     ¶B. CARACAS 0444 
     ¶C. CARACAS 3412 
 
¶1. (U)  SUMMARY: Economic inefficiencies, coupled with 
retrograde government policies, future uncertainty, and 
record-high consumer spending are making shortages an 
increasing part of life in the Bolivarian Republic of 
Venezuela.  Recent weeks have seen recurring shortages of 
sugar and milk and many goods disappear and reappear with 
frustrating frequency.  These disappearances seem only likely 
to increase as stockpiling in response to shortages creates 
more demand and shortages.  END SUMMARY. 
 
¶2.  (SBU) Sugar disappeared from store shelves throughout 
Venezuela in August of 2006 as Venezuela does not produce 
sufficient sugar for domestic consumption, and production 
this year was affected by a series of unfortunate events. 
Sugar cane must be cut within a short time period after it is 
ready for harvest, and this year the cutters went on strike 
and prevented farmers from harvesting their produce during 
the optimal period.  Historically, refineries have exchanged 
raw sugar based on refining capacity, but this year many of 
the BRV-owned refineries were mired in corruption scandals, 
shutdowns and other inefficiencies, resulting in production 
problems throughout the whole sector.  (Note: Four of the 
fourteen refineries in Venezuela are government-owned.  End 
Note.)  In addition, the price of sugar is controlled by the 
BRV and at present the fixed price is below the cost of 
production or importation (reftel A).  The BRV resolved the 
August sugar crisis through massive importation from Brazil, 
though in the past week sugar has again disappeared. 
(Comment: The structural causes remain the same as 
previously, though it remains to be seen how the BRV intends 
to resolve the situation this time.  End Comment.) 
 
------------------------------------- 
PRICE CONTROLS EXPLAIN MOST SHORTAGES 
------------------------------------- 
 
¶3.  (U) In addition to sugar, milk shortages have also been 
an on-going problem (reftel B).  Fresh milk is virtually 
non-existent now and even boxed and powdered milk are in 
short supply.  As with sugar and some other goods suffering 
shortages, the cost of production for milk now exceeds the 
controlled price.  In a similar vein, a bout earlier this 
year between coffee producers and the government led to 
large-scale shortages, government seizures and an eventual 
renegotiation of the fixed price (reftel B). 
 
¶4. (SBU) In a recent meeting with the Agriculture Chamber 
(Fedeagro), econoffs were shown a 250-page study of the costs 
of production for Venezuela's major agricultural goods. 
Fedeagro is trying to convince the BRV to raise controlled 
prices for many goods, but admitted that this was unlikely 
given BRV concerns about inflation and food prices.  They 
were more optimistic that they could convince the BRV to 
subsidize production.  (Comment:  Both price controls and 
subsidies distort the market and while the subsidies could 
prevent farmers and producers from being forced to sell their 
products at a loss, they would not solve the problems of 
underdevelopment of the agricultural sector.  End Comment.) 
 
¶5.  (SBU) Additional shortages are expected as the Holiday 
season swings into full gear.  Approximately 60-70 percent of 
Venezuela's foodstuffs are imported or are produced from 
imported sources, as are most toys and Christmas items. 
(Note:  As an example, Venezuelans have the second highest 
per capita consumption of pasta in the world--much of it is 
produced here--but from imported wheat.  End Note.)  At a 
recent Venezuelan-American Chamber of Commerce (VenAmCham) 
event, many businessmen noted that due to the historically 
high consumption levels, they have not been able to build up 
inventories in advance of the Christmas shopping season.  In 
addition, delays in obtaining dollars through Commission for 
the Administration of Foreign Exchange (CADIVI) has meant 
that importers were unable to purchase their goods 
sufficiently far enough in advance to have them here in time 
 
CARACAS 00003500  002 OF 002 
 
 
for the shopping season. 
 
¶6. (SBU) Port infrastructure is at its breaking point due to 
huge volumes and transportation problems from La Guaira to 
Caracas.  While notoriously inefficient, customs officials 
appear to have gotten worse of late; one contact told econoff 
that it took 30-45 days to get their foodstuffs through 
customs at the port of entry.  Another contact said that the 
average time was 14-17 days, though that was up from 4-5 days 
only last year.  (Note:  The head of the BRV Customs and Tax 
Agency (SENIAT), Jose Vielma Mora, has been visiting ports 
and making many public statements about his intention to 
improve processing times as he tries to avoid being labeled 
the Grinch in the run-up to Christmas.  End Note.) 
 
¶7.  (SBU) There is a lot of money on the street in Venezuela. 
 Ever-increasing liquidity is fed by government fiscal 
policies, such as issuing the "aguinaldo," or additional 3 
months salary for government workers in November, and 
negative real interest rates that discourage saving. 
Additionally, commercial banks have been heavily pushing 
credit cards with easy credit terms, and consumer debt is 
rising.  Central Government spending has also spiked, with 
the BRV spending close to USD 6.8 billion in the past three 
weeks, according to the Central Bank (as opposed to the 
average USD 3.9 billion per month during 2006).  This all has 
led to increasing demand and caused scarcity due to the 
aforementioned limits on supply. 
 
¶8. (SBU) On top of all of the structural and seasonal 
problems, the approaching elections on December 3 have led to 
stockpiling by consumers anticipating a possible repeat of 
the demonstrations and violence that followed the recall 
referendum in 2004. The government has fed this cycle of 
uncertainty, circulating a variety of rumors of 
destabilization in recent weeks (see reftel C).  (Note: Spot 
visits to local grocery stores in recent weeks have found 
customers fighting over shopping carts and shelves emptied by 
mid-afternoon.  Econoff spent 50 minutes in line trying to 
check out this past weekend.  The President of the 
Association of National Supermarkets (ANSA) recently noted 
that while sales are up 13 percent this month (over already 
high amounts), they have two months of supply and no 
shortages are expected during the holiday season.  End Note.) 
 
¶9.  (SBU) COMMENT: The structural problems of the Venezuelan 
economy are perhaps most evident in the shortages felt by 
every day consumers.  Anecdotal reports add to the growing 
list of consumer products and raw materials missing in 
Venezuela (last week there was a shortage of concrete in 
Barinas state and a Brazilian contact noted that many of the 
major infrastructure projects planned are delayed due to lack 
of raw materials).  The shortages are a result of BRV 
economic meddling, but also of record high demand and 
structural inefficiencies in the Venezuelan economy, none of 
which are likely to change any time soon.  END COMMENT. 
BROWNFIELD