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OO RUEHCHI RUEHCN RUEHHM
DE RUEHDT #0128/01 1230935
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O 020935Z MAY 08
FM AMEMBASSY DILI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3982
INFO RHMFIUU/CDR USPACOM HONOLULU HI
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBY/AMEMBASSY CANBERRA IMMEDIATE 1181
RUEHWL/AMEMBASSY WELLINGTON IMMEDIATE 0949
RUEHKO/AMEMBASSY TOKYO IMMEDIATE 0866
RUEHUL/AMEMBASSY SEOUL IMMEDIATE 0037
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHDT/AMEMBASSY DILI 3424

UNCLAS SECTION 01 OF 03 DILI 000128 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ETRD ECON TT
SUBJECT: IMPACT OF RISING FOOD/COMMODITY PRICES ON TIMOR-LESTE 
 
REF: STATE 39410 
 
DILI 00000128  001.2 OF 003 
 
 
¶1.  Summary.  While an estimated two-thirds of Timor-Leste's 
population is food insecure or vulnerable to food insecurity, 
the worldwide increase in food and commodity prices has not yet 
led to social or political unrest in Timor-Leste.  The increase 
in the price of food in the first quarter of 2008 was 3.2 
percent, higher than the overall inflation rate of 2.6 percent. 
Timor-Leste's rural population relies on domestically-grown 
staples of maize and tubers.  However, the price of rice - an 
important urban staple - is 40 percent higher than the historic 
norm, due to increased reliance on imported rice.  While rice is 
grown in Timor-Leste, recent poor growing conditions and 
inefficient agricultural practices mean that the country is now 
dependent on imports for over half its rice supply.  The GOTL's 
current official policy is to stabilize the rice market by 
providing 20 percent of the supply, but its uncoordinated, 
erratic, and opaque approach to the problem appear to deter 
private suppliers from responding to demand.  Post believes that 
a more rational approach on the part of the GOTL, together with 
promotion of better agricultural techniques, would significantly 
alleviate these conditions.  End summary. 
 
DEMAND 
 
¶2.  Eighty-five percent of Timor-Leste's labor force makes its 
living from agriculture, and maize is the most important food 
crop for 83 percent of these.  However, while rice is the most 
important food crop for just 13 percent of the farming 
population, it is the commodity most affected by the worldwide 
increase in food prices.  The reason is that, to date, 
Timor-Leste has maintained a practice of not importing maize - 
it only imports rice.  Normally, Timor-Leste produces somewhat 
more than half of the approximately 100 thousand metric tons of 
rice it consumes annually.  However, production has been lower 
the last two years owing to a combination of drought and 
flooding, high winds, and locust outbreaks in the western part 
of the country.  As a result, imports now account for a majority 
of Timor-Leste's rice consumption, and the retail price of 
imported rice in Dili has risen by more than 40 percent over the 
historical level of about $0.35 per kilogram.  Cassava and other 
tubers are also important staples and are typically substituted 
for maize and rice when stocks are depleted. 
 
SUPPLY 
 
¶3.  Agricultural productivity in Timor-Leste is extremely low. 
While 85 percent of the labor force makes its living from 
agriculture, the sector only accounts for about 30 percent of 
non-oil GDP.  Basic agricultural techniques, such as the use of 
compost, are not widely applied, irrigation systems are poorly 
maintained where they exist, the lack of threshing and drying 
facilities results in a high proportion of broken rice, and 
adequate storage facilities are generally lacking.  In addition, 
road networks are in grave disrepair, making it difficult for 
farmers to get products to markets.  As a result of such 
structural problems, domestic agricultural production is not 
expected to respond to the worldwide increase in food prices. 
Rising food prices have, however, affected the availability of 
food assistance, most of which is provided by the World Food 
Program (WFP).  As of April 2008, WFP stopped providing blanket 
food assistance to 70 thousand internally displaced persons 
(IDPs) - a welcome development - but is still contemplating the 
closure of its office in the enclave of Oecusse due to a 
resource shortage. 
 
¶4.  Other factors affecting supply include the above-mentioned 
weather and locust outbreaks in recent years.  In addition, some 
humanitarian assistance provided to persons displaced by the 
2006 crisis no doubt leaked on to the market at below-market 
prices once the situation became more stable, as has a civil 
servant rice subsidy that came into effect in mid-2007 and is 
expected to last until a civil service reform program is 
enacted, perhaps in mid-2008.  These programs no doubt hurt the 
profitability of private traders.  More importantly, however, 
following a shortage in February/March 2007, the Government 
became extremely sensitive to rice price increases and 
periodically leaked rice onto the market in an effort to 
maintain price stability.  As a result, private traders stopped 
placing international orders and began acting only as 
distributors of Government-procured rice, most of which is 
sourced from Vietnam.  Official Government policy has since 
changed, but the general inconsistency and opacity of Government 
rice policy has dampened the private traders' interest in 
reengaging in the market.  Finally, any sign of instability - as 
 
DILI 00000128  002.2 OF 003 
 
 
occurred with the recent assassination attempts on the President 
and Prime Minister - discourages shipping companies from 
traveling to Timor-Leste and results in higher shipping 
insurance premiums. 
 
POLITICAL IMPACT 
 
¶5.  To date, there have been no protests or instances of 
violence directly related to the most recent rise in the price 
of imported rice, which began in early 2008.  However, the 
February/March 2007 shortage was believed to have exacerbated 
tensions lingering from Timor-Leste's 2006 political and 
security crisis.  As a result, the Government became extremely 
sensitive to rice price increases and, as mentioned above, took 
measures to maintain price stability.  In addition, the 
Government repeatedly postponed deadlines for the 
discontinuation of blanket food assistance to IDPs, even in the 
face of a September 2007 WFP assessment which found that IDPs 
were no more food insecure than the general population of Dili. 
In February 2008, the Government and WFP cut IDP food rations in 
half as an interim measure before complete discontinuation, 
which resulted in a very small number of peaceful protests in 
selected IDP camps but no outbreaks of violence.  While WFP no 
longer provides food to IDPs (except as part of IDP return 
packages), the Government has chosen to extend the distribution 
of half rations through June 2008 using its own resources, an 
indication that there may still be some concern about potential 
violence.  It should also be noted that since the attacks on the 
President and Prime Minister, the country has been under a state 
of emergency that includes a curfew. 
 
ECONOMIC IMPACT 
 
¶6.  Overall, food prices in Timor-Leste have risen by 3.2 
percent in the three months to March 2008, higher than the 
average inflation rate of 2.6 percent for the same period.  In 
the year to March 2008, food prices also rose 3.2 percent, 
though this was lower than the average inflation rate of 3.7 
percent, driven largely by the housing sector.  Within the 
general category of food, prices for cereals, roots, and their 
products (including rice) have risen 14.1 percent in the 3 
months to March 2008.  The price of imported rice in Dili is now 
estimated to be 40 percent higher than the historical price of 
about $0.35 per kilogram, though it is still less than the price 
during the February/March 2007 rice shortage.  According to WFP, 
nearly two-thirds of Timor-Leste's population is food insecure 
or vulnerable to food insecurity: 20 percent of the population 
is chronically food insecure, another 23 percent is highly 
vulnerable to food insecurity, and a further 21 percent is 
moderately vulnerable.  Even though rice is principally an urban 
staple, and food insecurity tends to be more acute in rural 
areas, the rise in prices has likely resulted in increased food 
insecurity, particularly among the vulnerable. 
 
ENVIRONMENTAL IMPACT 
 
¶7.  Shifting cultivation, often utilizing slash-and-burn 
methods, is widely practiced in Timor-Leste.  As a result, the 
country is suffering from numerous environmental problems. 
However, these are structural in nature and cannot be attributed 
to the recent rise in prices for agricultural commodities. 
 
GOVERNMENT POLICY RESPONSE 
 
¶8.  In the face of rising world prices, the Government 
officially abandoned its policy of maintaining rice price 
stability, as it would have cost substantially more than the $5 
million for "food security" included in the 2008 state budget. 
The Government is now seeking to cover only 20 percent of the 
country's import requirement, leaving the remaining 80 percent 
to the private sector.  However, since the private sector has 
not responded to this official change in policy, the Government 
continues to be the principal source of imports, and many 
suspect it still leaks imported rice onto the market at 
subsidized prices. 
 
¶9.  As of mid-April, the Government had approximately 7,200 
metric tons of rice in its stocks, amounting to about 6-7 weeks 
of the country's import requirement.  There is an outstanding 
Government order for 16,000 MT of rice from Vietnam to be 
delivered in April, May, and June.  However, given the 
turbulence of world markets and the policy responses of various 
rice exporters, this is order may not be secure - i.e., it may 
not come to Timor-Leste.  It was reported that the Minister of 
 
DILI 00000128  003.2 OF 003 
 
 
Commerce, Industry, and Trade recently traveled to Thailand to 
try to secure additional orders.  International advisors have 
encouraged Government policy-makers to consider placing 
international orders for maize as a substitute for rice. 
 
¶10.  Since his return to Timor-Leste on April 17, President Josi 
Ramos-Horta has publicly advocated withdrawing more resources 
from the Petroleum Fund to finance additional rice imports 
through the state budget.  However, the size of the Government 
budget has not proven to be a binding constraint to public 
investment to date.  The formula that sets withdrawal limits 
from the Petroleum Fund provides ample room for the Government 
to meet such a need, which can be incorporated into the mid-year 
budget revision currently being prepared. 
 
IMPACT ON POST PROGRAMS 
 
¶12.  USAID supports WFP's operation in Timor-Leste, which is 
being squeezed as a result of rising food prices and the 
increased demands elsewhere. 
 
POLICY PROPOSALS 
 
¶13.  First, intra-governmental coordination on food security 
policy in Timor-Leste, including coordination of rice imports, 
needs to improve dramatically, and policy itself needs to be 
more transparent and consistent.  The national food security 
committee is the appropriate body to lead such efforts and would 
benefit from stronger Ministerial engagement.  Second, the 
Government should end the provision of blanket food assistance 
to IDPs and target all future food assistance according to clear 
and objective vulnerability criteria.  This would imply an 
immediate end to the civil service rice subsidy as well. 
Finally, a system to track price movements of key staple 
commodities should be established, and, over time, policies to 
stimulate domestic food production should be considered. 
RECTOR