VZCZCXRO1935
RR RUEHAG RUEHAST RUEHBW RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHVJ #0790/01 1211213
ZNR UUUUU ZZH
R 301213Z APR 08
FM AMEMBASSY SARAJEVO
TO RUEHC/SECSTATE WASHDC 8280
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 SARAJEVO 000790 
 
SIPDIS 
 
SIPDIS 
 
EBB/TPP/ABT/ATP (SPECK), EUR/SCE (IVANOVA) 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ECON ETRD PGOV PREL BK
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/AGRICULTURAL 
COMMODITY PRICES - BOSNIA 
 
REF: A. STATE 39410 
 
     ¶B. 07 SARAJEVO 1820 
     ¶C. 07 SARAJEVO 2528 
 
¶1. Summary.  Rising food prices in Bosnia and Herzegovina 
(BiH) contributed to the overall 4.9% inflation rate in 2007 
(Central Bank figures).  As a net food importer, BiH 
experienced across the board food price increases, but 
particularly troublesome was the effect on the price of 
bread, a staple among poorer families.  There has been no 
civil unrest in response to food prices, although there were 
rumors of hoarding back in December, most likely caused by a 
combination of rising prices and fear of unrelated political 
turmoil.  The amount of land under cultivation did not 
increase in response to higher prices, mainly because the 
price of inputs rose significantly as well, but also due to 
unresolved landmine and land tenure issues remaining from the 
war.  Government response has been varied, due to the 
fragmentation of responsibility between the state (national) 
and entity (sub-national) levels.  Responsibility for 
agriculture rests at the entity level, and the two entity 
governments of the Republika Srpska (RS) and the Federation 
of Bosnia and Herzegovina (FBiH) have increased their 
agricultural support to farmers.  They have also set varying 
price ceilings and/or maximum retail margins to try and keep 
prices under control.  End Summary. 
 
Supply and Demand 
----------------- 
 
¶2. Bosnia imports two-thirds of its food supply. Global price 
increases therefore had an impact on inflation in 2007, and 
this was exacerbated by severe drought last summer which 
affected wheat, corn, fruit and vegetable production 
regionally.  Bread is an important staple in Bosnia, 
particularly in poorer households, and the country imports 
60-70% (between 350-400k tons) of its wheat each year. 
Although its domestic supply was harvested prior to the 
drought last summer (around 150k tons), BiH had trouble 
meeting the rest of its needs as global wheat prices 
continued to rise and neighboring wheat exporting countries 
faced shortages of their own. 
 
¶3. The most essential food/agricultural products in Bosnia 
experienced varying degrees of price increases over the past 
year: in addition to wheat (up 40%), corn and barley were up 
10%, fruits and vegetables up 40%, beef and eggs 10-15%, 
chicken 5%, milk 20%, cheese 40%, vegetable oil 90%, and 
butter 100%.  The only consumption shift seen so far is a 
substitution of chicken for beef, and a general increase in 
the purchase of cheaper and lower-quality items. 
 
¶4. There has been little increase in land usage for food 
production, partly because of landmine and land tenure issues 
left over from the 1991-1995 war.  In fact, land under winter 
wheat cultivation in 2007-2008 was 10% lower than the 
previous season because of the increase in the price of 
inputs (seeds up 10-30%, fertilizer 50-100%.)  Corn 
production is stable, and land under corn cultivation is 
projected to rise by 5% this season due to increased 
agricultural support.  Still, it is likely that producers 
will reduce the application of fertilizer and agricultural 
chemicals because of their increased prices, so yields may 
decrease. 
 
¶5. Food inventories are sensitive issues in Bosnia, as they 
are maintained at the sub-national entity level (Note: there 
are two entities in Bosnia: the Republika Srpska (RS) and the 
Federation of Bosnia and Herzegovina (FBiH). End note.).  It 
is assumed that commodity reserves are low because the RS is 
already negotiating with neighboring Serbia for the second 
time to borrow wheat until the next harvest, and the 
Federation Directorate for Commodity Reserves is under 
investigation for reporting higher stocks in their books than 
are available.  There has been no biofuel production in 
Bosnia yet, although the first such factory is currently 
under construction in the RS to use rapeseed and soy. 
 
Economic Impact/Policy Response 
------------------------------- 
 
¶6. According to poverty reduction studies in Bosnia, 20% of 
the population is below the poverty line.  They are the most 
affected by these food increases.  The two entities have 
responded in different ways.  The FBiH has tried several 
unsuccessful policies - from concluding informal agreements 
setting price ceilings to releasing commodities from the 
reserves - all of which have had little impact.  The RS 
borrowed corn from Serbia last year and imposed rigorous 
penalties on companies and individuals breaking the law on 
 
SARAJEVO 00000790  002 OF 002 
 
 
maximum retail margins.  Social assistance for the most 
vulnerable groups is more likely what is needed, but much of 
the country's social assistance funding is spent on groups 
with stronger lobbies (such as war veterans). 
 
Policy Proposals 
---------------- 
 
¶7. The 2007 increase in food prices follows 2006's 6.5% 
inflation, which was brought on by the introduction of a 
Value-Added Tax (VAT).  Part of the increase in revenue from 
the VAT was intended for use on social protections for 
vulnerable populations.  This never happened, making rising 
food prices in 2007 particularly difficult for the poor.  A 
social policy response is needed to address the needs of 
Bosnia's poorest families.  In addition, the responsibility 
for agriculture in Bosnia is relegated to the entity-level 
governments.  A state (national)-level agricultural strategy 
is needed to strengthen the agriculture sector, with support 
to improved food quality and safety, rural development and 
agricultural-environmental measures. 
ENGLISH