VZCZCXRO2137
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHLI #1234/01 1441615
ZNR UUUUU ZZH
R 231615Z MAY 08
FM AMEMBASSY LISBON
TO RUEHC/SECSTATE WASHDC 6844
INFO RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 LISBON 001234 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ETRD ECON PGOV PREL
SUBJECT: PORTUGAL:  IMPACT OF RISING FOOD/COMMODITY PRICES 
 
REF: STATE 39410 
 
¶1.  SUMMARY:  When it comes to rising cost of food and 
agricultural commodities, Portugal is one of the most 
vulnerable member-states in the European Union (EU). In fact, 
the average Portuguese family will spend 620 euros (974 USD) 
more for food in 2008 - a 38% increase over 2007.  This 
vulnerability is largely due to Portugal's heavy dependence 
on agricultural imports and high import duties.  Portugal 
hopes that by increasing the land available for cultivation, 
it will be able to boost domestic production.  Temporary EU 
measures to lift certain duties should also ease the burden 
somewhat.  However, current economic conditions suggest that 
Portugal will need to look at more long-term shifts in policy 
and technology in order to alleviate continuing price 
pressures on agricultural commodities. 
 
----------------- 
THE VULNERABILITY OF IMPORT DEPENDENCE 
----------------- 
 
¶2.  Portuguese households spend over 19% of their income on 
food, a relatively high proportion compared to the 15% 
average among EU member states.  The only category of 
expenditure that is higher is transportation, at 20.6% of the 
average family's budget.  Nearly every single staple of the 
Portuguese diet increased in price over the past 12 months, 
as reflected below by the Portuguese National Institute for 
Statistics (INE).  A recent Portuguese study predicts that 
food costs will increase 620 euros (974 USD) per family in 
2008 -- a 38% increase over 2007. 
 
Price Change in Staples in 2007 (over 2006) 
-------------- 
 
Dairy (Milk, Cheese)               14.0% 
 
Eggs                               14.0% 
 
Bread                               9.0% 
 
Wheat                               2.1% 
 
Vegetables                        -15.0% 
 
 
Note: The exception to the inflationary trend is a 15% drop 
in the price of vegetables, explained by the Portuguese 
Ministry of Agricuture as largely due to the competitive 
trade between Portugal, and nearby producers such as Spain, 
and North African countries such as Morocco. End Note. 
 
¶3.  Portugal's gradual but steady decline in the agricultural 
sector drives its deepening dependence on imports and growing 
sensitivity to world commodity markets.  Portugal's 
agricultural imports comprise 14% of total imports.  Cereals 
and grains is an area of particular vulnerability, with 
imports increasing by an average of 44% in 2007, detailed 
below by INE.  The Confederation of Portuguese Farmers (CAP) 
estimates that Portuguese farmers produce only 8% of the 
cereals and grains required for domestic consumption. 
 
¶4.  Portugal imports many of its cereals and grains from 
within the EU.  South American countries such as Brazil and 
Argentina represent a second source of cereals and grains 
into Portugal.  For example, Portugal imports more soybeans 
from Brazil than any other country -- nearly four times the 
volume of soybeans that it imports from the United States. 
South American countries also dominate the corn market in 
Portugal, a traditionally strong export crop for the United 
States. 
 
Increases in Select Cereal and Grain Imports, 2007 (over 2006) 
---------------- 
 
Soy                               87% 
 
Rice                              74% 
 
Corn                              31% 
 
Wheat                            131% 
 
 
¶5.  The Portuguese feed industry is particularly sensitive to 
pricing pressures on cereals and grains.  The approach of the 
livestock industry to this upward price trajectory is to 
embrace biotechnology and push the EU for the timely approval 
of biotech events for import.  It is the vocal position of 
the Portuguese Association of Feed Producers (IACA) that 
European livestock producers will be unable to compete in the 
long-term with countries where biotech crops are more readily 
available for use as feed. 
 
LISBON 00001234  002 OF 002 
 
 
 
----------------- 
SHARP INFLATION AND THE "NEW POOR" 
----------------- 
 
¶6.  The annualized inflation rate of 3.1% as of March 2008 
continues to stoke deep concerns that the economy will 
continue to underperform.  Rising commodity prices constitute 
23% of total inflation in Portugal.  The vulnerability of the 
Portuguese economy to "agro-flation" is heightened by the 
heavy dependence of Portugal on imports in food and beverages 
-- standing at a full 4% of the GDP.  The pressure continues 
to mount in ways one would expect.  For example, government 
employees recently requested that their cost of living 
adjustment reflect the actual inflation rate and not the more 
modest 2.1% that had been predicted. 
 
¶7.  The head of the NGO Banco Alimentar Contra A Fome (Food 
Bank Against Hunger) states that rising commodity prices are 
giving rise to a "new poor."  In contrast to certain sectors 
of the society that have traditionally felt the effects of 
poverty, such as the elderly or very young, this category of 
"new poor" includes employed people who struggle to pay for 
basic foodstuffs, transportation, and housing. INE's most 
recent statistics calculate that nearly two million people in 
Portugal, a full 20% of the population, fall below the 
poverty line. 
 
------------------------- 
TWEAKING POLICY NOT LONG TERM SOLUTION 
------------------------- 
¶8.  The Government of Portugal (GOP), as an EU member state, 
hopes to see benefits from two measures taken at the EU level 
by the end of 2007.  First, the EU decided to temporarily 
suspend customs duties for cereals.  It also decided to 
abolish the compulsory set-aside regime for cereals and other 
products, under which certain tracts of land must remain 
fallow.  This suspension is for an initial period of one year 
and will be reviewed under the French EU Presidency later 
this year.  Furthermore, Portugal is hoping that the higher 
price of cereals within the EU will prompt farmers to produce 
more domestically. 
 
¶9.  The GOP continues to be a leader in the EU in advocating 
biotechnology as a way to address agricultural shortages.  It 
is pushing for a quicker and more predictable approval 
process in Brussels, as well as for greater acceptance of 
scientific oversight of the European Food Safety Authority 
(EFSA).  The Ministry of Environment continues to express its 
reservations about increased cultivation of biotech crops in 
Portugal, though recent monitoring studies by the Ministry of 
Agriculture go far in documenting the safety of biotech 
cultivation. 
 
------ 
COMMENT 
------ 
 
¶10.  As the 2009 national elections approach, the Portuguese 
government will grow increasingly nervous about the political 
implications of rising food costs unless the EU measures 
designed to stimulate domestic production and stabilize 
prices, described in paragraph 8, begin to yield concrete 
results in the near-term.  While Portugal may experience some 
short-term relief from the temporary lifting of import taxes 
and of the set-aside regime, Post believes that leaps in 
agricultural productive capability will come from new 
biotechnologies.  A more efficient, transparent, and 
predictable process for approving the cultivation and import 
of biotech crops into the EU is absolutely essential for 
sustainable long-term agriculture, and Post continues to 
encourage Portugal in its pro-biotechnology stance. 
Stephenson