VZCZCXYZ0000
RR RUEHWEB

DE RUEHAM #1034/01 1001126
ZNR UUUUU ZZH
R 091126Z APR 08
FM AMEMBASSY AMMAN
TO RUEHC/SECSTATE WASHDC 2197
INFO RUEHRC/USDA FAS WASHDC
RUEHAD/AMEMBASSY ABU DHABI 1211
RUEHGB/AMEMBASSY BAGHDAD 5920
RUEHEG/AMEMBASSY CAIRO 3598
RUEHDM/AMEMBASSY DAMASCUS 3853
RUEHTV/AMEMBASSY TEL AVIV 1118
RUEHJM/AMCONSUL JERUSALEM 4955

UNCLAS AMMAN 001034 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EEB/TTP/ABT AND NEA/ELA 
FAS FOR OFFICE OF TRADE PROGRAMS 
FAS FOR OFFICE OF GLOBAL ANALYSIS 
FAS FOR GRAIN & FEED DIVISION 
CAIRO FOR FAS AGMINCOUNS PKURZ 
 
E.O. 12958: N/A 
TAGS: EAGR ETRD TBIO ECON JO
SUBJECT: JORDAN'S GRAIN SUBSIDY PROGRAM: INSIDERS CALL FOR CASH 
PAYMENTS TO THE NEEDY TO REPLACE MARKET DISTORTING SUBSIDIES 
 
REF:  A) AMMAN 816 
       B) AMMAN 815 
       C) AMMAN 407 
  C) AMMAN 51 
  D) 07 AMMAN 4622 
  E) 07 AMMAN 3661 
 
Sensitive but unclassified.  Not for internet distribution. 
 
¶1.  (SBU) SUMMARY: As part of the Government of Jordan's broader 
economic reform program, plans exist to completely liberalize the 
grain and feed trade, but public opposition has thwarted attempts to 
eliminate subsidies.  A partial lift of the barley subsidy in the 
fall of 2007 led farmers to feed their herds wheat.  To counter this 
action, the Ministry of Industry and Trade (MoIT) switched from a 
wheat subsidy to a subsidy for certain types of flour.  Consumers 
responded by buying products made from subsidized flour, further 
driving up wheat costs and government expenditures and also creating 
a black market for flour.  A series of attempts to manage the flour 
subsidy program has failed; MoIT technocrats as well as millers are 
now calling for an immediate end to the subsidy program and for the 
establishment of a focused cash payment program in its place to 
assist the neediest Jordanians.  END SUMMARY. 
 
ROYAL DECREE MAINTAINS FEED SUBSIDIES 
------------------------------------- 
 
¶2.  (U) BACKGROUND: King Abdullah directed the GOJ on March 16 to 
delay the planned price hike for subsidized feed, marking the second 
setback to recent efforts to liberalize fully the feed and grain 
market.  The GOJ's previous attempt to lift fodder subsidies was in 
August 2007, but the government in place at that time rescinded its 
decision due to political unrest and demonstrations by farmers who 
blocked the main road to the airport (ref E).  The March royal 
decree, which also delayed the expected price increase for canisters 
of LGP used for cooking and heating, was an attempt to deflect 
public criticism resulting from the continuing rise in the cost of 
basic food items, increasing fuel prices, and growing inflation. 
The decree came two months after the liberalization of prices for 
most petroleum products and one day after the rise of electricity 
prices (ref B).  END BACKGROUND. 
 
Black Market Flour 
------------------ 
 
¶3.  (SBU) Liberalization of the grain market is a stated goal of 
MoIT, which both buys and sells animal feed (primarily barley) and 
wheat, average monthly consumption of which is 60,000 MT.  Following 
the fall 2007 partial lift of the barley subsidy, its price in the 
open market jumped from $130/ton to $456/ton; subsidized barley, 
available only to farmers with small herds, sold at $213/ton.  This 
price increase prompted farmers and millers to use cheaper, 
subsidized wheat ($134/ton) as a supplement to animal feed, thereby 
increasing wheat consumption to 85,000 MT.  In response, MoIT 
introduced a mechanism to try to control the seepage of wheat into 
the feed business.  The initiative also sought to cut the $70 
million in new costs due to increased wheat consumption by charging 
mills the actual price of wheat, including transportation costs, and 
shifting the subsidy to flour.  MoIT further contracted a private 
distributor to limit the development of a black market for flour. 
Despite these efforts, according to one miller, "The government in 
its attempts to close a leak created many other holes," among them a 
huge price discrepancy for two similar products. 
 
¶4.  (SBU) The discrepancy stems from different price structures for 
types of flours that most consumers and vendors use interchangeably. 
 Local millers, after purchasing wheat from MoIT at $398/MT, produce 
a variety of flours -- 78-82 percent extraction for subsidized 
"Baladi" bread, 72 percent extraction for all-purpose "Zahra" flour, 
and 55 percent extraction known as "zero" flour for pastries -- to 
be sold to distributors and bakers at an average government rate of 
$142/MT.  Given the difference between the price of one ton of wheat 
and one ton of flour, MoIT compensated millers $338/MT for the 
production and sale of Baladi flour.  This subsidy lowered the 
consumer price for Baladi bread, and many Jordanians switched from 
non-subsidized bread made from more refined flour and sold at $1/Kg 
to Baladi bread, sold at $0.22/Kg.  Demand for the less refined 
flour increased, and one miller reported that 95 percent of his 
 
production was subsidized flour.  Additionally, as millers were 
contracted to produce a certain amount of flour, they had the right 
to sell excess flour and many sold it on the black market.  Bakers 
did the same; a baker earning $1.40 in profit for baking bread using 
one 50-kg sack of subsidized flour could make $15 or more by selling 
that same sack of flour on the black market.  MoIT Secretary General 
Montaser Okla told EmbOffs that "trading in the flour market is now 
more lucrative than smuggling narcotics." 
 
MoIT Opts for Plan B 
-------------------- 
 
¶5.  (SBU) In an attempt to cut costs and encourage consumers to 
return to non-subsidized bread, MoIT began subsidizing "zero" flour 
at a rate of $112/MT which millers then sold to bakers at $483/MT. 
The Ministry also created a new flour extracted at 75 percent and 
subsidized at $306/MT for sale by millers to bakers at $243/MT. 
With rising world wheat prices and increases in transportation 
costs, this approach was not viable.  Hassoneh Mhilan, MoIT Director 
of Storage, worried that at this rate "we'll end up giving the wheat 
and money to mills to maintain the [low] price of bread."  MoIT has 
since modified the flour subsidy program six times in only four 
months, and the process remains under review.  For the moment, MoIT 
has settled on a program through which it sells wheat to millers at 
$468/MT, and the millers sell subsidized flour to bakers at $91/MT. 
MoIT compensates millers $480/MT for subsidized flour. 
 
Market Liberalization the Only Solution 
--------------------------------------- 
 
¶6.  (SBU) MoIT technocrats and the majority of millers argue current 
practices are not sustainable, and believe the best option is for 
GoJ to provide direct cash payments to the poor just as it is doing 
with fuel.  Using an average individual consumption of 100 kg/flour 
per year and targeting a population of 600,000 families whose per 
capita income is below $1,400, a payment program would cost the GoJ 
$120 million per year instead of the $263 million it is currently 
paying.  Jamal Al Hazaa, CEO of Al Hazza Group (an Iraqi-owned 
family business that dominates the milling industry in Jordan and 
owns some Egyptian mills), foresees the end of the subsidy era and 
recommends that the GoJ focus on investing in increased silo storage 
capacity.  Likewise, Hassan Saudi, General Manager of Jordan Silos & 
Supply General Company (an entity owned by the GoJ and slated for 
privatization), told FAS FSN that the company is hindered by 
government inefficiency and excessive regulation.  He anticipates 
that privatization will eliminate many of the current problems and 
also increase his company's overall wheat storage capacity by 60,000 
MT to 200,000 MT.  Hazaa is also planning to increase his company's 
storage capacity to 165,000 MT.  The GoJ wants to increase its 
strategic wheat reserves, and Hazaa maintains that increased storage 
capacity would result in fewer, but higher volume shipments, and 
make American wheat more competitive against European or Black Sea 
region sources.  Relocation and expansion of the Aqaba Port would 
also allow for the berthing of larger vessels and facilitate 
building this wheat capacity.  Hazaa is looking for a strategic U.S. 
partner to help increase demand for American wheat and create a 
regional storage hub in Jordan.  He asserts that if Jordan does not 
act quickly "the flour industry would be taken over by big Gulf 
players." 
 
Visit Amman's Classified Website at 
http://www.state.sgov.gov/p/nea/amman 
 
Hale