VZCZCXYZ0020
RR RUEHWEB

DE RUEHYN #1753/01 2551238
ZNR UUUUU ZZH
R 121238Z SEP 07
FM AMEMBASSY SANAA
TO RUEHC/SECSTATE WASHDC 8019
INFO RUEHEG/AMEMBASSY CAIRO 0811

UNCLAS SANAA 001753 
 
SIPDIS 
 
SIPDIS 
 
AMEMBASSY CAIRO PASS TO FAS CAIRO 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ECON YM
SUBJECT: YEMEN'S WHEAT NIGHTMARE 
 
¶1.  SUMMARY:  The ROYG has penned a plan to increase its 
control and regulation of the wheat sector in Yemen while 
simultaneously creating a company owned in part by the ROYG 
with the objective of importing 50 percent of Yemen's wheat 
needs. The US Wheat Associates, Inc. advised ROYG against the 
plan and told them to wake up and smell the market.  END 
SUMMARY 
 
 
YEMEN'S WORST NIGHTMARE ? 
------------------------- 
 
¶2.  On September 3, 2007 Hesham Hassanein, Special Projects 
Manager, Middle East and East Africa for U.S. Wheat 
Associates Inc., met with the ROYG Minister of Industry and 
Trade, Yahya al-Mutawakil, to discuss the price of wheat. 
The Minister told him that the ROYG's worst nightmare is not 
high prices but that one day they will "wake up and have no 
wheat and no bread in Yemen."  He said that the ROYG is 
looking at all options and that they have very little trust 
in the private sector to maintain an adequate supply of wheat 
for the nation. NOTE:  Hassanein told ComOff that earlier in 
the week, private wheat traders told him that they have no 
trust in the ROYG and that they are worried that the 
government will try to set prices or "take" their wheat 
supplies. END NOTE. For that reason, Minister al-Mutawakil 
told Hassanein that the government is considering a plan to 
enter the market and buy wheat, approximately 500K Metric 
Tons (MT). Hassanein warned that this might only serve to 
drive prices higher in the market.  He explained that news in 
the market of a government buying large amounts of wheat 
usually moves the market up. 
 
 
¶3.  Hassanein told the Minister that the U.S. Wheat 
Associates is impressed by the skill and savvy of the wheat 
traders in Yemen.  Hassanein told the Minister that in his 
professional opinion the traders are not hoarding supplies or 
gouging prices.  He explained that the price rise is a 
reflection of the replacement cost of wheat as supplies 
purchased at earlier lower costs move to market.  He also 
explained that the traders' supply contracts were adequate 
and well placed.  NOTE.  The Hayl Saeed Anam Group recently 
set a contract for 250K MT over the next three months. 
Spacing the contracts out over time increases the likelihood 
that a trader is not locked into a long term contract at high 
prices.  By ordering in quarterly increments, the chances are 
improved that wheat may be purchased later when the prices go 
down, thereby decreasing the cost of movement to market.  END 
NOTE.  Hassanein suggested that the ROYG seek to work with 
the traders and not attempt to compete with them.  He 
explained that the current prices should attract more 
production which will in turn bring the prices down in the 
future.  The Minister told him that the Ministry of Planning 
and International Cooperation (MOPIC) has a plan to present 
to the U.S. Wheat Associates Regional Office in Cairo. 
Hassanein told ComOff that there may soon be "too many chefs 
in the kitchen", fighting over wheat. NOTE:  The power point 
presentation that Hassanein gave to the Minister may be found 
at www.USWheat.org. END NOTE. 
 
 
CHEF NUMBER TWO, MOPIC HAS A PLAN 
---------------------------------- 
 
¶4.  On September 6, 2007 CommOff spoke to Dick Prior, 
Regional Vice President, Middle East and East Africa, U.S. 
Wheat Associates, Inc..  Prior told ComOff that Ali Saif 
Hassan, a consultant hired by ROYG MOPIC, had contacted him 
about a proposal by the ROYG entitled "Wheat Importation 
Mechanism."  This is a three point plan in which ROYG appears 
to take control of the private sector via regulation of 
contract terms and surprise inspections of storage facilities 
while forming its own partnership company with private 
investors with the objective of importing at least 50 percent 
of Yemen's wheat needs. Prior replied to Hassan that the U.S. 
Wheat Associates does not see this as a solution because the 
private sector in Yemen is performing well under the 
circumstances in the market and the government-formed company 
will lack the same level of experience.  He added that if the 
government gives this new company special provisions it will 
"break the backs" of the current traders.  Prior stated that 
the privatization process in the wheat sector in Yemen seems 
to be working well and this type of "company" will serve only 
to interfere in that process and create long range problems. 
Prior also explained to Hassan, as Hassanein explained to 
Minister al-Mutawakil, that the problem of prices and 
apparent wheat shortages is likely to be short-lived because 
high prices tend to attract more production.  By the time 
this ROYG "company" is formed the problems may have 
dissipated.  Prior told CommOff that U.S. Wheat Associates 
expects to see "some pressure ease within the next 1-2 months 
but prices moving upward until next May." He added, however, 
that the expected production increase will bring them down 
again. NOTE:  A copy of this ROYG Proposal is available 
through Yemen Desk Officer Natasha Franceschi. END NOTE. 
 
 
AN ALTERNATIVE PLAN FROM US WHEAT 
--------------------------------- 
 
¶5.  In his response to Hassan, Prior suggested that if ROYG 
feels compelled to act in some way, they should work with the 
current traders in Yemen to find a solution.  Prior suggested 
ROYG meet with the traders and agree on some formula 
connected to the market price whereby the government can hold 
prices down and traders will not lose money.  He suggested a 
direct subsidy, tax incentive or other incentive.  He 
suggested as an example a plan in which a Yemeni trader 
brings in a vessel of Wheat at a cost of $380/MT (invoice 
value) and his profit is 10 percent (or whatever is fair). 
The total cost then is $420/MT - but the maximum market price 
set by the ROYG is $250/MT.  The trader can then sell at $250 
but claim a $170 subsidy from the ROYG.  This continues until 
the costs are less than the set acceptable price.  Prior 
believes that such an arrangement would only need to last 
8-10 months and would not interfere in the free market forces 
while ensuring a supply for the country. He added that the 
system could also be organized in such a way that the 
beneficiaries of these subsidized prices are the very poor 
who cannot live without such assistance, creating a sort of 
welfare system that does not interrupt private business or 
the supply of wheat to Yemen. 
 
 
COMMENT: WAKE UP AND GO BACK TO SLEEP 
------------------------------------- 
 
¶6.  While sympathetic to the pressure that the international 
increase in the price of wheat is placing on the ROYG, the 
U.S. Wheat Associates does not believe that the situation is 
likely to continue and may in fact reverse itself as higher 
prices lead to more production.  The real nightmare for Yemen 
will be the Government's ill-conceived and ill-advised foray 
into the business of wheat importation and increased 
regulation and control over the wheat sector.  The wheat 
sector is one of the few well-functioning fairly privatized 
sectors in Yemen's economy. The U.S. Wheat Associates 
alternative suggestion (if in fact ROYG feels compelled to 
intervene) to work with the traders and possibly go to a 
temporary subsidy system is not ideal but it is preferable, 
for the sake of the free market principles currently at work 
in the sector. 
 
¶7.  There is already some indication that ROYG may be taking 
the advice of the U.S. Wheat Associates to heart.  In a 
recent phone call with ADCM Mike Sarhan, Minister 
al-Mutawakil stated that the ROYG is approaching the problem 
as a food security issue.  ROYG is considering the option of 
creating a safety net system by engaging in a one time 
purchase of wheat in an amount adequate to cover the needs of 
the nation for several months.  They understand that 
stockpiling wheat may enable them to reduce or prevent wide 
price fluctuations in the domestic market.  All other 
options, however, are still on the table.  Post will continue 
to monitor the situation. END COMMENT. 
SECHE