VZCZCXRO4453
RR RUEHLMC
DE RUEHSN #0530/01 1232144
ZNR UUUUU ZZH
R 022144Z MAY 08
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 9422
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 03 SAN SALVADOR 000530 
 
SIPDIS 
 
STATE PASS USAID/LAC 
STATE ALSO PASS USTR 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/PKESHISHIAN/BARTHUR 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV ES
SUBJECT: El SALVADOR: IMPACT OF RISING FOOD/AGRICULTURAL COMMODITY 
PRICES 
 
REF: A) STATE 39410 
     B) SAN SALVADOR 479 
 
¶1. (U) Per reftel A tasker, Post's responses on the impact of rising 
food prices are categorized below. 
 
 
Demand 
------ 
 
¶2. (U) The main staples of the population are small red kidney 
beans, white corn tortillas, and, to a lesser extent, rice.  Wheat 
is used in the production of artisan bread consumed in urban areas, 
but it has a more elastic demand. 
 
 
¶3. (U) El Salvador is a net food importer.  It is self-sufficient in 
white corn production but sources most of its grains from other 
Central American countries and the United States.  El Salvador 
imports annually around 80,000 metrics tons of rice, mostly from the 
United States, and 350,000 quintals of beans, mostly from Nicaragua. 
 There have been shortages of red kidney beans in the past few 
months when Nicaragua suspended exports to El Salvador, and there 
are projections of a smaller crop of red kidney beans in Nicaragua 
for August 2008, which would decrease Nicaraguan exports to El 
Salvador.  The smaller red kidney beans that Salvadorans demand are 
supposedly grown only in El Salvador, Nicaragua and Honduras. 
 
 
¶4. (U) Over the last year (March 2007- March 2008), local wholesale 
prices of white corn have increased by 19.4% (to $17 per quintal), 
local wholesale prices of red kidney beans increased by 82%, local 
wholesale prices of rice grew by 64.6%, and local wholesale prices 
of sorghum increased 47.2%.  According to the Ministry of 
Agriculture, the price of white corn could reach $20 per quintal 
within a couple weeks.  Higher input costs are also affecting prices 
of dairy and poultry products.  Retail prices of poultry increased 
by 13%, eggs (per 30-unit container) increased by 12%, fluid milk 
increased by 25%, and artisan cheese (per pound) increased by 18.4%. 
 
 
 
¶5. (U) There has not been a shift in consumption towards alternative 
commodities, only a reduction in the consumption of basic goods. 
The World Food Program reports that, as a result of higher food 
prices, the caloric intake of an average meal in rural El Salvador 
is roughly 60% of what it was in May 2006.  Rural poor involved in 
subsistence agriculture are buffered against higher prices; the 
non-agricultural rural poor are hardest hit, followed by the urban 
poor. 
 
Supply 
------ 
¶6. (U) The Ministry of Agriculture (MAG) projects an increase in the 
production of basic grains for 2008. Over the last three years, 
domestic production of beans, sorghum, white and yellow corn has 
increased but it has not been enough to meet internal demand.  The 
government of El Salvador does not keep high food inventories and 
does not currently have a strategic reserve program.  The MAG 
estimates that the post-harvest losses due to a lack of storage 
facilities range between 7 and 25 percent of the total crop.  At 
present, local officials report no problem with the availability of 
food. 
 
¶7. (U) Higher fertilizer prices are negatively affecting production, 
especially by small producers.  The price of ammonium sulphate (100 
kilos) grew by 82.3%, while the price of urea 46 (150 pounds) grew 
by 34% from March 2007-March 2008. 
 
¶8. (U) El Salvador plans to introduce an Ethanol Law that will 
establish a mandatory mixture of at least 10 percent ethanol.  This 
is not expected to affect national food production, since the 
current production of molasses and sugar is more than enough to 
cover future ethanol production.  Even if the law mandates a 20 
percent mixture, idle land suitable primarily for sugar or cotton, 
not food land, would be used for new production. 
 
Political Impact 
---------------- 
¶9. (U) There have already been several protests this year by small 
bakery owners because of the high cost of wheat flour.  Spurred by 
high energy prices, bus companies are seeking more subsidies and/or 
 
SAN SALVAD 00000530  002 OF 003 
 
 
tariff increases and they too have threatened to strike.  As in the 
case of food prices, it is the poor who will suffer the most from an 
increase in bus fares.  Combined with fears of the impact of a U.S. 
recession on El Salvador, President Saca and others have described 
the situation as a perfect storm, prompting Saca to address the 
nation on April 28 on the state of the Salvadoran economy.  Higher 
prices and the resulting economic impact are also expected to be 
significant issues the January/March 2009 Legislative and 
Presidential elections (ref B). 
Economic Impact 
--------------- 
¶10. (U) Food (and energy) prices are affecting both inflation and 
growth forecasts.  The annual inflation rate in March reached 6%, 
the highest figure reported in March since 1998.  Food prices showed 
an annual inflation rate of 9.2%. The International Monetary Fund 
(IMF) has dropped its GDP growth forecast for El Salvador to 3% GDP 
for 2008, while the government lowered the official growth 
projection from 4.5% to 4%. 
 
¶11. (U) The greatest effect will be felt by the poor, who commit 
around 50 percent of their income to food, and by households in 
extreme poverty.  Approximately 165,000 households living in extreme 
poverty will not being able to satisfy their food basic needs. 
 
Environmental Impact 
-------------------- 
¶12. (U) Thus far, there has not been a noticeable environmental 
impact.  Higher fuel prices, however, have started to affect the 
price of propane (cooking) gas.  Propane gas has been subsidized by 
the government since 1996, and it is about half of the average gas 
price in the rest of Central America.  While the government 
announced a 23 percent price increase earlier this month, Saca said 
in his April 28 speech that propane gas subsidies will continue. 
Higher gas prices could lead to a higher consumption of firewood for 
cooking, with a corresponding negative effect on deforestation, 
erosion, and water availability. 
 
Government Policy Response 
-------------------------- 
¶13. (U) Because of the current crisis, the Ministry of Agriculture 
plans to start building food silos, and will invest around $15 
million this year to build between 37 and 50 thousand 1-metric ton 
silos.  These silos will be used small producers that own less than 
one hectare, and MAG will hire between 250 and 4000 students to 
teach small producers to make efficient use of the silos.  MAG 
expects the silos to be completed by August or September 2008, in 
time for the next grain harvest. 
 
¶14. (U) MAG has also announced a series of assistance programs. 
Under the main program, MAG is offering small farmers a supply of 
higher yield certified seeds and fertilizer to increase local 
production of white corn, sorghum, beans, rice, pasture, and 
vegetables.  In the 2008 General Budget, the government has 
allocated an additional $10 million to MAG's budget to cover this 
seed/fertilizer giveaway program.  The program will cover 243,000 
hectares (including 189,000 hectares of corn and 24,000 hectares of 
beans) and 420,300 small producers.  MAG is promoting increased rice 
production through the use of hybrid seed.  MAG is also providing 
certified pasture seed to offset the higher costs of feed mixes for 
livestock producers.  MAG, together with the Environmental Ministry, 
will send a special regulation on genetically modified organisms to 
the Presidency for its approval.  This regulation will allow the use 
of higher yield and more resistant seeds in order to increase food 
productivity. 
 
¶15. (U) Last year, the GOES negotiated a minimum wage increase with 
the private sector, to be carried out in two tranches (November 2007 
and November 2008). Because of higher prices, the GOES proposed the 
private sector accelerate the second tranche. The Maquila sector 
already approved the increase for May 2008, and the rest of the 
private sector is likely to follow by May or June 2008. 
 
¶16. (U) The GOES eliminated the 10 percent tariff for wheat flour 
and is investigating whether the two flour distributer companies 
have agreements that limit competition in the market.  The Ministry 
of Economy also launched a special credit line for small artisan 
bread producers with a 10% interest rate for loans up to $400,000 
with a six month grace period for capital payment if the loan is 
used to purchase equipment.  The government is also promoting the 
approval of a Leasing Law that will encourage a greater use of land 
for basic grains production.  This Leasing Law has been at the 
Legislative Assembly since July 2005, but it only now has enough 
 
SAN SALVAD 00000530  003 OF 003 
 
 
support to pass. 
 
¶17. (U) The Minister of Economy announced a series of measures aimed 
to protect the most vulnerable groups. They include adding between 
10 and 23 additional municipalities ahead of schedule to the 
anti-poverty program "Red Solidaria," which supports poor rural 
households with conditional cash subsidies, improved social 
services, and access to micro-credit.  The Minister also announced 
an enlargement of the program "Escuela Saludable" (Healthy School) 
which provides free lunches to school kids. They will expand 
coverage from preschool and primary school to up to ninth grade in 
240 municipalities in the country. They also want to include the 
urban areas of San Salvador and add milk to the food supplied by the 
program. 
 
¶18. (U) At the GOES's request, President of Colombia Alvaro Uribe 
stated that he will negotiate with Colombian producers the provision 
of 6,000 tons of red kidney beans for the Salvadoran market.  The 
GOES has also begun searching for land outside of the country for 
growing red kidney beans, white and yellow corn, and rice.  They 
have had talks with Belize and Panama, and President Saca stated 
that Guatemala, Honduras and Nicaragua have also offered their land 
as part of a regional plan to guarantee the supply of basic grains. 
 
Impact on Post Programs 
----------------------- 
¶19. (U) Post does not anticipate any effect on post programs at this 
time.  Though, the Saca administration has requested assistance from 
the Inter-American Development Bank on its debt service payments to 
put towards food assistance programs.  In addition, concerns 
(realistic or not) about crops going to ethanol production instead 
of food production might cause the GOES to postpone its biofuels 
initiatives.  El Salvador is one of the pilot countries in the 
U.S.-Brazil Alternative Energy Initiative. 
 
Policy Proposals 
---------------- 
¶20. (SBU) For the GOES, Post would encourage programs aimed at 
increasing post-harvest storage capacity, which would help reduce 
post-harvest crop loss and related temporary food shortages.  Other 
measures the government could take to lower prices are reducing 
tariffs and raising tariff-rate quotas on agricultural goods and 
eliminating or reducing the value-added tax (IVA) on basic foods. 
Implementing a property tax would also encourage more productive use 
of land. 
 
¶21. (SBU) At the same time, the GOES must be careful not to develop 
agriculture too much in response to current prices.  When commodity 
prices eventually drop, El Salvador could have too many resources 
invested in agriculture to adapt.  Similarly, the GOES should avoid 
implementing politically expedient populist policies (e.g., price 
controls) that would damage economic growth and reform in the longer 
term. 
 
¶22. (SBU) The experience of El Salvador shows the damage that 
agricultural trade barriers can cause, like price spikes when other 
countries prohibit/inhibit exports.  Post would encourage USG 
policies that promote increased free trade in agricultural products. 
 
 
Glazer