VZCZCXRO9186
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHKL #0357/01 1292346
ZNR UUUUU ZZH
R 082346Z MAY 08 ZDK
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 0940
INFO RUEHRC/USDA FAS WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 05 KUALA LUMPUR 000357 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EEB/TPP/ABT/ATP - JANET SPECK 
STATE ALSO FOR EAP/MTS, EAP/EP AND OES 
TREASURY FOR OASIA 
STATE FOR USTR - WEISEL AND BELL 
STATE FOR FEDERAL RESERVE AND EXIMBANK 
STATE FOR FEDERAL RESERVE SAN FRANCISCO TCURRAN 
USDOC FOR 4430/MAC/EAP/BOYD 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ECON ETRD PGOV PREL SENV MY
SUBJECT: IMPACT OF RISING FOOD/COMMODITY PRICES - MALAYSIA 
 
REF: STATE 39410 
 
KUALA LUMP 00000357  001.11 OF 005 
 
 
Summary and Introduction 
------------------------ 
 
¶1. (U) Rising global prices for major food commodities so far are 
having limited impact on their availability to Malaysian consumers. 
Long-standing price controls on many food staples have kept such 
items affordable, but have also contributed to some spot shortages. 
While it is only about 65% self-sufficient in rice production, the 
country's major sources of imported rice (Thailand and Vietnam) as 
well as other food crops have remained reliable.  However, Malaysia 
produces neither wheat nor soybeans, and imports about 87% of its 
corn demand. The government is increasingly treating the issue as a 
critical problem at the cabinet level, and is devoting significant 
additional resources to mitigate its potential impact.  The 
government has responded to recent global price increases by 
announcing an expensive new program to increase domestic rice 
production (along with fruit and vegetable cultivation), primarily 
in the East Malaysia states of Sabah and Sarawak. The government 
claims that new paddy cultivation in those states will not adversely 
impact remaining rain forest on Borneo. 
 
¶2. (SBU) The government's new plans followed its electoral drubbing 
in the March 8 national elections.  Malaysia's increasing inflation 
rate, and widespread concern that the government would be decreasing 
subsidies (particularly for fuel, but also for food commodities), 
contributed to the ruling coalition's poor showing.  The money being 
allocated to East Malaysia reflects the large amount of uncultivated 
land available there to increase food production; it also rewards 
two states that were crucial to maintaining the government's 
parliamentary majority.   The government is likely to maintain and 
even increase its support levels to keep a lid on prices, and its 
relatively strong financial situation should allow it to continue 
doing so for some time.  However, long term subsidies will probably 
not be sustainable, especially if the government budget deficit 
persists.  Malaysia's newly-energized political opposition will keep 
the focus on government action to address rising prices.  However, 
we do not believe rising food prices will result in social 
instability or unrest. Although the opposition may try to exploit 
the issue, food price inflation will not likely play a major role in 
the post election political drama playing out in Kuala Lumpur. 
 
Demand 
------ 
 
¶3. (U) Rice, wheat, corn and soybeans are the principal agricultural 
commodities consumed in Malaysia.  Corn is used mostly for feed, and 
soybeans are used for both feed and food.  Malaysia is a net 
importer of these commodities; of the four commodities, only rice is 
produced domestically to a significant extent.  Malaysia is about 
65-70% self-sufficient in rice and about 13% self-sufficient in 
corn; neither wheat nor soybeans are grown domestically. There has 
been no recent discernable change in consumption patterns in 
Malaysia for these commodity crops. 
 
¶4. (U) Each Malaysian adult consumes an average of 77 kg of rice a 
year.  Malaysia has long controlled the retail price of standard 
grade rice, which currently ranges between RM1.60 (US$0.50) and 
RM1.80 (US$0.56) per kilogram.  This policy largely shields lower 
income Malaysians from the effects of rising global rice prices; the 
consumption of this grade of rice is estimated to be around 30% of 
the total national consumption.  Prices of uncontrolled rice 
varieties, consumed by middle and higher income Malaysians, have 
risen over the past two years.  For example, the price of "Fragrant" 
rice rose about 5% in 2007 and another 5% in the first quarter of 
2008 and "Basmati" rice rose in price by 15.2% in 2007 and by 11.7% 
in the first quarter of 2008.  Malaysia has a relatively high per 
capita income (USD 6721 in 2007), a result of strong economic growth 
over several decades; steadily rising income has not significantly 
affected short term food consumption patterns. 
 
¶5. (U) Rice imports to Malaysia are sourced primarily from Thailand 
and Vietnam, and average between 650,000 and 700,000 tons annually. 
BERNAS, a government-linked corporation, regulates the rice industry 
in Malaysia under authority granted to it by the government. BERNAS 
is the "buyer of last resort" for paddy farmers as well as the sole 
importer of rice for the country.  BERNAS handles about 40 - 50% of 
Malaysia's total rice supply.  The government is considering a 
proposal to give it sole authority to monitor and ensure that paddy 
 
KUALA LUMP 00000357  002.14 OF 005 
 
 
land is used only for planting rice. 
 
Supply 
------ 
 
¶6. (U) Although Malaysia is not experiencing major shortages of 
commodities yet, higher input costs have narrowed profit margins, 
especially for crops like rice that are subject to price controls. 
The government has announced plans to increase the country's rice 
production to meet possible future shortages, however, including a 
RM 4 billion (USD 1.3 billion) plan to plant rice and vegetables in 
East Malaysia. 
 
¶7. (U) Wheat is not produced in Malaysia.  The Malaysian government 
controls certain domestic wheat prices; it last allowed price 
increases for retail general-purpose wheat flour in May 2007 (the 
first increase in a decade).  That price hike, and price increases 
for wheat types not subject to control, has not impacted wheat 
consumption, although millers and commercial bakers have complained 
about narrow margins and losses. 
 
¶8. (U) Malaysia imports about 87% of its corn supply.  Soybean is 
not cultivated in the country.  Malaysia depends heavily on feed 
imports for its livestock sector.  While the cost of feed has risen 
some 20% in the past year, prices of pork and poultry have also 
risen, mitigating the effect of higher feed costs on farmers. 
 
¶9. (U) Products derived from oil palm cultivation constitute 
Malaysia's most significant agricultural export commodity (rubber 
and cocoa also are important export commodities).  Not surprisingly, 
oil palm is the only Malaysian crop that has experienced significant 
growth as a result of increased global prices.  Malaysian palm oil 
exports in the first quarter of 2008 were up 23% from the first 
quarter of 2007. 
 
Political Impact 
---------------- 
 
¶10. (SBU) It is unlikely that higher food process will lead to 
social instability or unrest, but rising food prices come at an 
extremely inconvenient time for the ruling UMNO party, still reeling 
from its shocking setbacks in the March 8 elections.    Although 
opposition sources privately have told us they understand the 
government's no-win situation, we do not doubt that the resurgent 
opposition will try to make political hay by allowing the government 
to take the blame for rising prices.  The GOM may be aware that new 
subsidies are probably not sustainable over the long term, but, with 
public confidence already at a low point, the leadership will be 
anxious to prevent further erosion of support due to perceived 
inaction on the price increases. 
 
Economic Impact 
--------------- 
 
¶11. (U) Prices of food and other commodities are rising in Malaysia. 
 The consumer price index (CPI) rose to a 13-month high of 2.8% 
year-on-year in March from a low of 1.4% in June 2007.  For January 
to March, the CPI increased 2.6% year-on-year.  Food and 
non-alcoholic beverages recorded the most significant increase of 
4.9%.  The index including housing, water, electricity, gas and 
other fuels rose 1.3%, and the transport index rose 0.9%. 
Malaysia's inflation rate remains relatively low compared to some of 
its neighbors, such as Singapore and Vietnam. 
 
¶12. (U) As Malaysia's inflation is cost-pushed, the pass-through of 
global prices into domestic prices was somewhat mitigated by several 
factors including the strengthened ringgit, which has appreciated by 
5.3% to RM 3.15 against the dollar since the beginning of 2008. 
Also, food accounts for 31.4% of the basket of goods for measuring 
price increases in the CPI, which includes price-controlled food 
items such as cooking oil, chicken, bread, flour, sugar, salt, 
preserved fish and locally produced rice.  In 2007, the government 
spent RM 53 billion (USD 17 billion) to subsidize oil and gas, which 
helped to alleviate the cost of production and transportation.  That 
amount ended up being much higher than the preliminary forecast of 
RM 40 billion for 2007, and the figure is believed to be climbing 
still in response to global crude oil price increases (though more 
recent statistics are unavailable).  After its poor showing at the 
polls in March, the government has delayed its plan to cut subsidies 
on domestic fuel, though it is considering a plan to reallocate fuel 
 
KUALA LUMP 00000357  003.17 OF 005 
 
 
distribution so that the subsidies are tilted towards lower income 
consumers. 
 
¶13. (U) Mohamed Ariff, executive director of the Malaysian Institute 
of Economic Research, recently warned that food prices would 
continue rising if recent trends towards cultivation of biofuel 
crops, and conversion of rice fields to other uses, continued. 
However, the Institute recently revised downwards the inflation 
forecast from 3.5% to 3% for 2008 as the government has indicated 
that it will not substantially reduce its oil subsidy.  Bank Negara 
expects inflation to be contained at between 2.5 to 3% this year. 
 
¶14. (U) Bank Negara is expected to keep its policy intervention rate 
unchanged at 3.5%.  Despite the recent upturn in inflation, the 
banking system is flush with excess liquidity as the economy shows 
signs of slowing growth.  Bank Governor Zeti Akhtar Aziz has 
indicated reluctance to increase interest rates to discourage food 
price increases; rather, she has said Malaysia and other countries 
need to increase supply, improve distribution, and improve the 
incentive structure for food producers. 
 
¶15. (U) Malaysia enjoys a strong current account surplus, amounting 
to RM99.4 billion (USD 31.6 billion) in the balance of payments in 
¶2007. The higher costs of importing wheat, rice, sweet corn and soya 
bean, which accounted for 5.3% of total imports in 2007, is not 
likely to have a significant impact on the goods account and the 
balance of payments.  Moreover, increased exports of palm oil due to 
rising prices and a stronger ringgit should offset somewhat the 
higher costs of imports. 
 
Increasing Rice Production in Eastern Malaysia 
--------------------------------------------- - 
 
¶16. (U) To reduce Malaysia's partial dependency on imported rice, 
the government of Malaysia (GOM) recently announced plans to 
identify suitable land for large-scale rice cultivation in the East 
Malaysia states of Sabah and Sarawak.  Sabah Department of 
Agriculture Senior Research Officer Datin Elizabeth Malangkig 
explained to ESTHoff that Sabah will identify for new rice 
production idle land that is already earmarked for agricultural 
production.  Sabah is currently just 35% self-sufficient in rice 
production, but hopes to be 60% self-sufficient by 2010.  In 
addition to encouraging increased acreage under rice cultivation, 
the state government also plans to install irrigation systems in 
existing rice paddies to increase rice yield to two or three 
harvests a year; most such paddies now are cultivated only during 
the rainy season.  For instance, in Sabah's four main rice paddy 
districts  (Kota Belud, Tuaran, Papar and Penampang), 10,000 out of 
13,854 acres only produce rice during the rainy season. 
 
¶17. (U) Though it is Malaysia's largest state, Sarawak is thinly 
populated and has greater agricultural potential in comparison to 
much of peninsular West Malaysia.  Sarawak Land Development Minister 
Datuk Seri Dr. James Masing has emphasized that no trees will be 
felled nor forests cleared for paddy planting.  He claimed that 
forests do not exist on the flat land that has been identified for 
new paddy cultivation.  Sarawak currently has five million hectares 
identified for rice cultivation, located in the coastal areas of 
Paloh in central Sarawak, the Rajang River delta, and in parts of 
Limbang and Lawas in northern Sarawak.  In a recent trip to the 
state, MOA Minister Mustapa Mohamad noted Bintangor as having the 
greatest potential for big farming projects. 
 
¶18. (U) Developing Sarawak into a rice cultivation center poses many 
challenges, as its geography includes a mix of swampy coastal areas, 
narrow and hilly rural areas and a mountainous interior. 
Nevertheless, on April 27 Sarawak Chief Minister Taib Mahmud 
announced plans to combine large parcels of state land with nearby 
private land to create large paddy estates, which will provide 
Malaysia with "total food security in the long-run."  Taib claims 
that the move to estate rice farming would benefit current 
landowners, who would become shareholders in the larger estates, as 
well as corporate investors and the government. 
 
Environmental Impact 
-------------------- 
 
¶19. (U) Both Sarawak and Sabah's rice cultivation plans have raised 
concern among environmentalists.  Increasing rice production in East 
Malaysia could impact the world's second largest rainforest.  In 
 
KUALA LUMP 00000357  004.3 OF 005 
 
 
early April, the governments of Malaysia, Indonesia, and Brunei 
Darussalam agreed to a tri-national Heart of Borneo (HOB) strategic 
plan of action to preserve this fragile ecology from further 
deforestation and fragmentation due to logging and palm oil 
plantations.  A major increase in rice cultivation through large 
paddy estates constitutes another potential threat to the HOB. 
 
¶20. (U) The GOM's call for increased rice production has spurred 
current rice-producing states in West Malaysia to find ways to meet 
this demand.  The Kemubu Agricultural and Development Authority 
(Kada) in the northern state of Kelantan recently requested RM18 
million (USD 5.7 million) from the Ministry of Agriculture (MOA) to 
buy fertilizer and lime to treat the soil and improve yields, which 
the MOA has approved.  In Kota Bharu near the Thai border, paddy 
farmers cultivate rice on land with high soil acidity, which 
prevents high rice yields.  By treating the soil before the next 
planting season, farmers hope to boost their yields by as much as 20 
per cent.  The long-term environmental impact increased 
fertilization will have on the local ecology represents an area for 
environmentalists to monitor in the future. 
 
Government Policy Response 
-------------------------- 
 
¶21. (U) The GOM has announced that the ceiling retail price of 
standard grade rice will remain at current levels in order to ease 
the burden on lower income Malaysians.  Although the government does 
not directly subsidize locally-grown rice, it spends a considerable 
amount on fertilizer and other concessions to rice farmers to help 
control prices. This type of government support for rice farmers 
increased from RM800 (US$250) million in 2006 to RM900 (US$281) 
million in 2007. 
 
¶22. (U) The Cabinet Committee on Inflation, which includes all 
relevant ministries, has been meeting regularly to consider possible 
approaches to mitigating the impact of inflation, in particular 
regarding food (though the committee is also addressing other 
sectors such as steel, where import restrictions are contributing to 
higher prices).  Domestic and Consumer Affairs Minister Shahrir 
Abdul Samad recently stated that the government soon would adopt new 
measures to tackle rising food prices.  Shahrir said the government 
is working on raising production of and narrowing subsidies on 
locally produced basic foodstuffs.  He ruled out for now the 
introduction of a special subsidy on imported rice, which is not 
subject to price controls (though import prices are managed through 
BERNAS' monopoly).  Sharir has also indicated that Malaysia is 
considering a direct subsidy for domestic rice production. Such a 
subsidy would be in addition to the RM 4 billion recently announced 
by the Prime Minister to increase rice production in Sarawak and 
Sabah, which by itself represents a significant increase in 
government funding (though such new production would not have an 
impact in the short term). 
 
¶23. (U) On May 6 Minister of Agriculture Datuk Mustapa Mohamed 
announced that BERNAS had been instructed to raise by 9000 tons (to 
20000 tons) the monthly supply of standard grade rice. He added that 
the price of this rice variety will remain the same.  Mustapa added 
that Malaysia has a stockpile of 550,000 tons of such rice 
(sufficient for three months). To counter the increased temptation 
to smuggle this relatively-low priced rice to Thailand and other 
countries, the Ministry of Domestic Trade and Consumer Affairs is 
stationing more enforcement offers at border crossings. 
 
¶24. (U) Second Finance Minister Nor Mohamed Yakcop has expressed 
concern about the increasing cost to the government of subsidies, 
for both fuel and food.  He has noted that the increased government 
spending on subsidies makes it more difficult to achieve the 
targeted fiscal deficit reduction to 3.1% of GDP, which would be a 
reduction from the 2007 fiscal deficit of 3.2%. 
 
Comment 
------- 
 
¶25. (SBU) Reliable suppliers, the appreciation of the ringgit, and 
Malaysia's relative wealth compared to its neighbors has insulated 
the population somewhat from rising global food prices.  Wealthier 
Malaysians have so far been able to absorb rising prices, while 
lower-income Malaysians have benefited from price controls on staple 
food items.  Much more attention has been focused in Malaysia on 
long-expected changes to government subsidies on fuel, which receive 
 
KUALA LUMP 00000357  005.3 OF 005 
 
 
significantly more funding than food subsidies.   However, the 
government's budget deficit means that large subsidy increases will 
not be sustainable over time. The government's imposition of price 
controls has caused in the past occasional shortages of such 
products as sugar and cooking oil (shortages that were due in part 
to smuggling to Singapore and Thailand).  It is probably only a 
matter of time before rice shortages appear as well.  But given the 
close attention Malaysia's newly-energized opposition is giving to 
the issue, the government will find it difficult to enact more 
fiscally-responsible policies in the near term. 
 
 
KEITH