VZCZCXRO8407
RR RUEHROV
DE RUEHDS #1228/01 1291103
ZNR UUUUU ZZH
R 081103Z MAY 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 0502
INFO RUCNIAD/IGAD COLLECTIVE

UNCLAS SECTION 01 OF 03 ADDIS ABABA 001228 
 
DEPT FOR EEB/TPP/ABT/ATP JANET SPECK AND AF/EPS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAGR EAID ET
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES- ETHIOPIA 
 
Ref: State 39410 
 
¶1. SUMMARY: Ethiopia is witnessing significant food inflation. 
However, this inflation appears to be caused primarily by internal 
forces rather than global market forces.  An expected poor upcoming 
Belg season harvest is likely to exacerbate further the 
already-tenuous food situation.  The U.S. Agency for International 
Development (USAID) and other donors are providing significant 
programmed food assistance with an anticipated need for more this 
year due to drought and rising prices.  END SUMMARY. 
 
¶2. DEMAND: Ethiopia's essential foods are cereals (maize, wheat, 
sorghum, and the indigenous teff), oilseeds, and pulses (lentils, 
chickpeas and horse beans). Prices of key commodities have risen 
significantly, with food inflation in excess of 70% in the last 
three years.  Food inflation rose by 39.4%, on an annualized basis, 
in March alone.  In commercial terms, Ethiopia is not a significant 
importer or exporter of cereals.  Its dependence on domestic food 
production and humanitarian food aid essentially insulate it from 
world food price fluctuations.  The country continues to suffer from 
food deficits, and a significant amount of wheat is imported each 
year mostly in the form of food aid with some small commercial 
purchases.  The Government of Ethiopia (GoE) has banned the export 
of cereals, but the impact on prices from that ban is minimal as the 
level of exports was small. The GoE has also banned the local 
purchase of food for food aid programs. Ethiopia is a net exporter 
of oilseeds, mainly sesame seed and niger. While oilseeds themselves 
are not imported, the country's local edible oil industry is 
moribund due to the high price of inputs and large amounts of edible 
oils, especially palm oil, that are imported. The country exports 
certain legumes, particularly white beans. 
 
¶3. Maize is the main cereal consumed by rural populations.  Teff is 
primarily consumed by urban dwellers with higher incomes.  There is 
evidence of an overall shift to wheat from teff and maize with price 
increases in the latter two coupled with growing urbanization. 
Recently, increased demand for milled flour and bread along with 
better information available to farmers and fears of a poor upcoming 
harvest has shifted the price of wheat even higher. The rising cost 
of wheat is having a particular impact on the urban poor. 
 
¶4. A number of factors have increased market demand.  Double-digit 
GDP growth and aid programs including the productive safety net 
program (PSNP), which provides food and/or cash assistance to the 
most vulnerable population, have increased rural incomes from 592 
birr per capita in 2004/5 to 691 birr per capita in 2006/7.  The 
National Bank of Ethiopia suggests that rural consumption patterns 
now more closely resemble urban consumption, thus boosting demand 
and raising prices.  Rapid population growth (2.7% per year) puts 
additional stress on the market from the demand side. 
 
¶5. SUPPLY:  Agricultural production in Ethiopia can be described as 
"sticky" and slow in its ability to respond to market forces. 
According to an economic analysis (Bellmon Analysis) performed in 
early 2008, cereals production has increased 43% in the last three 
years due largely to good rains and an expansion of the area under 
cultivation.  Consumption of pulses has risen over the last four 
years partly due to substitution away from meat and partly due to 
increased purchasing power; production has risen to address this. 
In the Bellmon Analysis, farmers reported increased cultivation of 
grains and pulses, but the associated field visits did not find 
evidence of the increase.  In general, Ethiopian agriculture is 
based on small-holdings and obtaining additional land - controlled 
and allocated by the state - to respond to price increases is very 
difficult.  Additionally, state control of inputs (seed and 
fertilizer) along with inefficient distribution, hampers the ability 
to respond. 
 
¶6. The Prime Minister of Ethiopia has cited concern that farmers and 
merchants are hoarding staples in order to "enrich themselves 
illegally."  A Bellmon Analysis update performed in April 2008 found 
that farmers were holding, on average, the equivalent of three 
months household consumption for a family of five. As rural incomes 
rise, farmers are no longer dependent on selling upon harvest, when 
prices are at their lowest, and instead are able to delay sales to 
take advantage of higher prices later in the season. Farmers 
indicated that they do plan to sell much of this stockpile. The 
update also discovered that, rather than hoarding, traders were 
actually unable to obtain the stocks of grain they anticipated.  The 
traders attributed this to the rise of independent Isuzu truck 
drivers who are scouring the countryside for 5-10 metric ton loads 
of grains and selling them to individual contacts at prices set via 
mobile phone. 
 
¶7. The expansion of mobile telephone coverage now allows rural 
farmers and traders greater access to market information.  Thus, the 
traditional pattern of a "fire sale" immediately after harvest is 
further being replaced by selling commodities over time in response 
to market fluctuations.  While this does have the effect of raising 
overall prices, it must be viewed as a positive sign of market 
development in the agricultural sector and a reduction on rural 
 
ADDIS ABAB 00001228  002 OF 003 
 
 
poverty.  Ethiopia has inaugurated a commodities exchange, but due 
to concerns over speculation the exchange will not allow the sale of 
futures. 
 
¶8. POLITICAL IMPACT: To date, there have been no public protests or 
violence over food costs, although one small demonstration regarding 
overall inflation was reported.  The ruling party handily won the 
recently-completed local elections and seems to have a firm grasp on 
power.  There have been clashes between the Guji Oromo and Sidama 
clans which have been attributed to competition for land for grazing 
and growing khat, indicating stress in these populations.  There are 
several large biofuel projects underway, but to date they do not 
seem to be taking place on land previously used for growing food 
crops, thus public reaction is generally positive. 
 
¶9. ECONOMIC IMPACT:  The Bellmon Analysis concluded, and other 
experts concur, that Ethiopia is relatively insulated from global 
commodity prices (apart from the associated impacts of global oil 
prices captured in transportation costs), and the fluctuations are 
due to internal macroeconomic factors.  When cereal price movements 
are compared against the non-cereal index, it shows that most of the 
food price increase is associated with overall inflation and not a 
result of supply and demand.  Thus, food is following an overall 
(and recent) rise in inflation.  For February and March 2008, data 
shows that cereal prices are beginning to rise faster than the 
overall rate of inflation.  Reasons cited for the increased overall 
inflation include an expanded money supply, the increased purchasing 
power and market knowledge of the rural population, and the increase 
in import prices (especially petroleum).  IMF ResRep Arnim 
Schwidrowski argues that the additional rate of food inflation may 
be attributable to a particularly high income elasticity of demand 
for food in Ethiopia (i.e. as incomes rise, the people but more and 
better quality food).  Global petroleum prices are also affecting 
Ethiopian food prices by driving up the cost of fertilizer. 
 
¶10. The food price impact is greatest on the urban and rural poor - 
those who cannot produce food for themselves and must purchase it. 
Despite overall GDP growth and the rise in rural incomes, these 
groups area increasingly unable to meet their nutritional needs at 
rising prices.  An estimated 9 million people are currently in need 
of food assistance. There have been press reports relating the 
decrease in the ability of even middle-class Ethiopians to keep up 
with rising prices.  Sources have been quoted as saying they have 
reduced their meals to two per day, have stopped purchasing meat, 
and have cut back on the amounts of pulses and vegetables they 
consume. 
 
¶11. ENVIRONMENTAL IMPACT: There is no current information on the 
environmental impact of rising food prices. 
 
¶12. GOVERNMENT POLICY RESPONSE:  The GoE has responded to food 
inflation by subsidizing wheat and cooking oil to the urban poor, 
banning grain exports, eliminating the value added tax on grains, 
and instituting a task force to root out "illegal traders" who 
speculate in commodities. Cereals traders are now required to post 
prices clearly. All land is owned by the state.  There have been no 
verified reports of farmland being redistributed or any food-related 
industries being nationalized. The National Bank of Ethiopia is 
struggling to control overall inflation that has soared to nearly 
30% on an annualized basis. 
 
¶13. IMPACT ON POST PROGRAMS:  Both local and global inflation have a 
major impact on USAID's projects in Ethiopia, especially the food 
aid program.  With a serious drought this year, the GoE is not 
allowing local purchase, so that donors are buying food regionally 
and internationally.  However, given that inflation is global, cash 
donations procure less food.  Since USAID ships food aid in kind 
from the U.S., global inflation definitely impacts on how much can 
be procured. USAID's Office of Food for Peace reports that commodity 
prices have increased 41% in FY08 and that ocean freight rates have 
increased by 26%. Ethiopia's food aid program is the second largest 
in the world, with $196 million contributed so far in FY08.  Overall 
global inflation will have an impact on the amount of food that can 
be purchased and shipped in upcoming periods.  USAID recently 
received $200 million in relief funds from the Emerson Trust and is 
hoping for additional supplemental allocations to meet worldwide 
emergency food needs.  Ethiopia's food inflation has also 
significantly eroded the purchasing power of Post's Locally Engaged 
Staff (LES).  While the Department has approved an 8.5% cost of 
living salary increase for our LES colleagues, this has done little 
to counter the 70% food inflation rate experienced since 2004. 
 
¶14. POLICY PROPOSALS: Because commodity prices in Ethiopia are 
rising due to indigenous factors, primarily overall inflation, the 
GoE needs to undertake measures to curb rapidly rising inflation. 
Indicators point to excess liquidity in the market, onerous foreign 
exchange regimes and the heavy state role in the agricultural supply 
system as threats to economic stability.  In addition to working to 
stabilize the overall economy, the GoE should continue its efforts 
in conjunction with USAID and other donors to increase the capacity 
of Ethiopian farmers to produce more and better crops.  Further, 
 
ADDIS ABAB 00001228  003 OF 003 
 
 
reforms such as encouraging private sector participation in the 
supply of inputs (fertilizer and seed) and land tenure reform to 
allow farmers to leverage their holdings to improve their land and 
crops could alleviate supply pressure and rigid supply response. 
 
¶15. COMMENT: While food prices in Ethiopia are soaring, they are not 
moving upward primarily due to global shocks. Instead, Ethiopia's 
overall skyrocketing inflation coupled with increased demand and 
relatively stagnant supply are creating the country's own "perfect 
storm" for rising prices.  While rising global prices will have an 
effect on the ability of the U.S. and other donors to provide food 
aid in the quantities needed, Ethiopia's homegrown crisis must be 
addressed internally.  END COMMENT. 
 
YAMAMOTO