VZCZCXRO6043
OO RUEHLN RUEHVK RUEHYG
DE RUEHTA #0869/01 1270645
ZNR UUUUU ZZH
O 060645Z MAY 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 2341
INFO RUCNCIS/CIS COLLECTIVE 0497

UNCLAS SECTION 01 OF 02 ASTANA 000869 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EEB/TPP/ABT/ATP JANET SPECK 
 
E.O. 12958: N/A 
TAGS: EAGR ETRD PGOV KZ
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - 
KAZAKHSTAN 
 
REF: STATE 39410 
 
¶1. (SBU) This cable constitutes post's response to reftel, 
which requested specific information regarding the impact in 
host country of rising food and agricultural commodity 
prices. 
 
¶2. (SBU) DEMAND:  The most important foods and agricultural 
commodities consumed in Kazakhstan include flour, bread, meat 
(beef, pork, horsemeat, and mutton), chicken, butter, 
sunflower oil, milk, eggs, potatoes, rice and sugar. 
According to Kazakhstan's National Statistics Agency, prices 
on these products rose by 26.6 percent during the second half 
of 2007.  Prices on fruits and vegetables, a large portion of 
which are imported from neighboring countries, rose 
significantly as well: apples by 42 percent, cabbage by 45 
percent, tomatoes by 29 percent.   The reasons for food price 
rises in Kazakhstan are multifold.  A high economic growth 
rate over the past several years has pushed up consumer 
purchasing power, thus generating an increased demand for 
specific food products.  Increased demand for meat and daily 
products has led to increased demand for grain to feed 
livestock. 
 
¶3. (SBU) SUPPLY:  Increased agricultural commodity demand and 
higher prices have led to increased domestic investment in 
agriculture, more government support for the sector, and 
utilization of additional farmland to expand crop production. 
 In April 2008, the government imposed a temporary ban on the 
export of wheat (though not of flour) effective through 
September 1, at which time the government will decide whether 
to lift the ban, taking into account the summer wheat 
harvest.  The temporary export ban was motivated by the 
government's desire to ensure adequate domestic wheat supply 
and to keep domestic prices down on wheat and wheat products. 
  Kazakhstan must ultimately return to exporting, as annual 
wheat production far exceeds consumption.  In fact, 
Kazakhstan is the world's fifth largest wheat exporter.   In 
general, agricultural commodity supply in Kazakhstan is 
impacted by ineffective land use, state subsidies for 
inefficient large farms at the expense of smaller family 
farms, and bottlenecks in food supply chains such as 
shortages of storage facilities that contribute to crop 
losses.  There are also high transportation costs and 
administrative barriers that make food production expensive. 
 Grain production in Kazakhstan is highly dependent on 
weather conditions. 
 
¶4. (SBU) POLITICAL IMPACT:  There have been small protests 
against rising bread prices in Kazakhstan's largest city, 
Almaty, but no major demonstrations.  There has been no 
measurable affect on the stability of the government, nor has 
there been a meaningful impact on relations between classes, 
ethnic groups, or urban vs. rural dwellers. 
 
¶5. (SBU) ECONOMIC IMPACT:  Kazakhstan faces a double 
challenge with regard to the current food inflation as high 
levels of natural resource-fueled growth since 2000 have lead 
to a steady rise in overall inflation from 6.7 percent in 
2004 to 18.8 percent in 2007.  The 2007 figure was well above 
the initial 7 percent inflation projection of the National 
Bank of Kazakhstan.   There has been no significant impact of 
agricultural price increases on Kazakhstan's trade balance, 
as agricultural products make up only 10 percent of overall 
external trade turnover.  As Kazakhstan is a major energy 
exporter, its private sector development and medium-term 
economic growth prospects are principally influenced by oil 
and gas prices, though the global financial crisis has had an 
important impact on shorter-term growth. Kazakhstan's 
agricultural sector had a growth rate of 8.4 percent during 
¶2007.  Further increases in agricultural production can make 
an important contribution to the country's economic 
diversification strategy. 
 
¶6. (SBU) ENVIRONMENTAL IMPACT: Thus far, there has been no 
direct environmental impact apart from utilization of 
additional farmland to expand crop production in response to 
rising demand and rising prices.  It remains unclear whether 
plans to manufacture biofuels from wheat and corn will be 
reconsidered. 
 
¶7. (SBU) GOVERNMENT POLICY RESPONSE:  In response to rising 
agricultural commodity and food prices, the government 
announced national food security to be a priority in 2008 and 
increased budget allocations for agricultural production. 
Kazakhstan's Kazyna National Development Fund has provided a 
$200 million a credit line for agricultural producers.  The 
government has also increased subsidies for the production of 
oil-bearing crops, sugar beet, and corn, and has subsidized 
 
ASTANA 00000869  002 OF 002 
 
 
purchase of seeds and fuel.  In addition, Prime Minister 
Masimov proposed a new law on food security in order to 
prevent food shortages and the creation of a special reserve 
for major food products. The government has also created 
so-called "stabilization funds" to store up basic food 
products (bread, flour, sugar, oil) in case of shortages or 
speculation.  Some regional government administrations have 
signed MOU's with large food producers to stabilize prices 
and have provided discounts and targeted cash transfers to 
vulnerable groups.  In October 2007, the government imposed a 
ban on the export of oil-bearing seeds in response to a 
shortage of sunflower seeds; this ban has been extended to 
October 1, 2008.  As noted in para 3, in April 2008, the 
government imposed a temporary ban on the export of wheat 
(though not of flour) effective through September 1, at which 
time government will decide whether to lift the ban, taking 
into account the summer wheat harvest. 
 
¶8. (SBU) IMPACT ON POST PROGRAMS:  USAID has one regional 
technical assistance program in the agricultural sector --the 
"Regional Agricultural Linkages Project" -- which attempts to 
strengthen supply chain linkages among the five Central Asian 
countries.  The focus is on wholesalers, packagers, and 
distributors of agricultural products.  Thus far, the food 
price rises have not affected this assistance program. 
 
¶9. (SBU) POLICY PROPOSALS:  Based on a policy study completed 
last year to which the USG contributed and which provides 
guidance consistent with USG assistance, the World Bank 
recently made a presentation to the Kazakhstani government 
which reviewed and assessed policy options with respect to 
controlling agricultural prices, increasing supply, reducing 
demand, protecting consumers, and reducing marketing margins. 
 The policy choices Kazakhstan faces will determine whether 
it will pursue an outward-looking approach to food security 
-- increasing agricultural exports to generate the income 
needed to contribute to imports -- or will turn inward to 
regulate prices in its domestic market, which will undermine 
its long-term competitiveness and sector productivity.  While 
all of the choices available to the Kazakhstani government 
have both pros and cons, broadly speaking, we would advise 
the Kazakhstanis to avoid market-distorting interventions, 
such as price controls and export bans.  The most efficient 
and least market distorting option would be focusing on 
social support programs which directly assist the most 
vulnerable parts of the population.  These can include direct 
cash transfers to the needy, food stamps, and food-for-work 
programs.  The World Bank's report also recommends scaling 
down input subsidies and instead strengthening research and 
development, training and education, and rural 
infrastructure, including irrigation and transportation to 
improve farm efficiency.  Furthermore, the report recommends 
improving the economic enabling environment for an efficient 
agricultural sector by not skewing subsidies towards large 
farms and avoiding discretionary powers of local governments 
to control prices in local bazaars.  The report further 
recommends improving the functioning of the land market by 
redistributing agricultural land for a nominal fee while 
gradually raising the land tax, which would create incentives 
to increase efficiency. 
ORDWAY