VZCZCXRO9334
RR RUEHROV
DE RUEHDS #2645/01 2671159
ZNR UUUUU ZZH
R 231159Z SEP 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 2140
INFO RUCNIAD/IGAD COLLECTIVE
RUEPADJ/CJTF HOA
RUEAIIA/CIA WASHINGTON DC
RUEKDIA/DIA WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RUEWMFD/HQ USAFRICOM STUTTGART GE
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0125
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 ADDIS ABABA 002645 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EAGR ETRD PGOV ET
SUBJECT: GOVERNMENT FOOD SUBSIDIES INEFFECTIVE 
 
REF: A) ADDIS 2262 
     B) ADDIS 2569 
 
ADDIS ABAB 00002645  001.2 OF 002 
 
 
SUMMARY 
------- 
 
¶1. (U) Since 2005, the Ethiopian Grain Trade Enterprise (EGTE) has 
provided over 500,000 metric tons of subsidized grain to the 
country's urban centers.  While the initiative is nominally intended 
to cushion the landless urban poor from the mounting food inflation, 
urban food prices still remain well above import parity prices.  By 
diverting over 200,000 MT of food from the Emergency Food Security 
Reserve Agency (EFSRA) over the past two years (Ref A) and importing 
300,000 MT of grain since July 2008, the EGTE effort has succeeded 
in diverting contingency food away from drought affected populations 
and removing critically needed foreign exchange from an already 
hurting economy (Ref B).  By providing most of the subsidized grain 
to grain traders, bakeries, and pasta factories and not monitoring 
their re-sale prices, the EGTE effectively has subsidized a portion 
of Ethiopia's business class and middlemen without notably impacting 
the urban poor.  As EGTE expects to purchase several hundred 
thousand tons of food in December when the likely-poor domestic 
harvest reaches the market, it will likely succeed in driving up 
prices and taking away supply of grains setting the stage for dire 
times in the mid-2009 hungry season.  End Summary. 
 
THE AGRICULTURAL MARKETING BOARD LIVES 
-------------------------------------- 
 
¶2. (U) In an August 26 meeting with Pol/Econ Chief, EGTE General 
Manager Berhane Hailu said that the EGTE is the current name of the 
60 year old Grain Board (as it was known under the emperor's time) 
and Agricultural Marketing Corporation (as it was known under the 
Derg).  Despite the name changes, its mandate remains intact: to 
create markets for Ethiopian farmers, to stock and redistribute 
grain from surplus to deficit areas and to create export markets for 
agricultural outputs.  While EGTE no longer requires farmers to sell 
their output to it, it does continue to purchase grain throughout 
the country.  Although most such purchases are at the prevailing 
price, Berhane confirmed that EGTE does purchase grains at Ethiopian 
Government (GoE) set prices if it determines that the prevailing 
price is less than the cost of production. 
 
FEEDING THE URBAN POOR 
---------------------- 
 
¶3. (U) According to Berhane, in late 2005, the GoE sought to 
increase the supply of grain to the Addis Ababa market to counteract 
the then-emergent domestic grain price inflation.  Berhane argued 
that urban centers lacked adequate grain supplies due to increased 
demand by factories and bakeries, farmers shifting production to 
other crops (such as oil seeds), and farmers holding on to their 
produce until prices rise rather than selling immediately upon 
harvesting.  According to Berhane, EGTE's initial infusion of 53,000 
MT, sold at a subsidized price to grain processors, produced an 
"inadequate effect" by April 2006.  As such, EGTE continued to 
supply an additional 165,000 MT from EFSRA stocks over the course of 
the next two years.  In May and August 2008, EGTE decided to import 
two tranches of 150,000 MT of wheat each to sustain this effort. 
 
¶4. (U) Although the GoE asserted that its objective was to mitigate 
the inflationary pressure on the landless urban poor, Berhane 
reported that the majority of this wheat is being sold at 350 Birr 
per quintal (roughly $360 per ton) to grain traders, bakeries, and 
pasta factories for onward sale to the urban public.  The remainder 
is being sold to consumer associations and individual households 
identified by local (kebele) administration representatives by 77 
retail sites in the capital and an additional 55 sites in other 
urban centers.  Berhane noted that despite a 550 Birr per quintal 
import (c.i.f.) price, the GoE had established the 350 Birr per 
quintal local sale price because "that is the farm gate price of 
wheat in Europe and the government believes that it is a good 
price."  Despite extensive reports of prevailing wheat prices in 
Addis Ababa remaining over 750 Birr per quintal, even from EGTE 
sales points, Berhane was emphatic that special high quality hard 
wheat was selling at most at 650 Birr per quintal with the 
EGTE-provided wheat selling at a much lower 450 Birr per quintal. 
Berhane confirmed that EGTE does not monitor the prices at which 
grain traders, bakeries, or factories sell their products made from 
the subsidized wheat. 
 
REPAYING THE FOOD SECURITY RESERVE 
 
ADDIS ABAB 00002645  002.2 OF 002 
 
 
---------------------------------- 
 
¶5. (U) Pol/Econ Chief pressed Berhane on when EGTE would repay the 
over 200,000 MT it still owes the EFSRA.  Berhane argued that EGTE 
would buy up grains in November and December when the meher season 
harvest reaches the market, or from the already ordered foreign 
purchase if domestic prices stabilize before the grain arrives, but 
noted that the GoE will then decide whether actually to repay the 
EFSRA or to put the purchased grains back into an urban or food 
production deficit market in country.  Despite Berhane's own 
argument that farmers are holding onto grain rather than selling 
immediately upon harvesting -- and hence restricting supply in the 
market and driving up prices -- he was emphatic that EGTE's huge 
additional demand for grains would not drive up domestic prices. 
 
COMMENT 
------- 
 
¶6. (SBU) The EGTE exemplifies the GoE's continued commitment to 
intervene in even the most fundamental of markets.  Its 
ineffectiveness, however, also highlights why so many other 
governments have handed over the setting of prices and direct sales 
to the private sector.  The EGTE's urban grain market interventions 
have not alleviated the inflationary pressure on the poor, but 
subsidized the profits of grain traders, bakeries, and factories. 
Still, rather than acknowledge the fault, the GoE appears to have 
reached the conclusion that EGTE's response has to be redoubled.  As 
the country moves toward elections in 2010, pressure on the GoE to 
buffer the politically-restive, pro-opposition urbanites from the 
172 percent grain price inflation will likely continue.  If the GoE 
does continue the urban food subsidization program, its minimal hard 
currency reserves will force additional food to be locally sourced. 
By taking a significant portion of available food from local 
supplies, the GoE risks dampening the grain price reducing effects 
of the already diminished expected harvest and potentially 
restricting supplies available to sustain vulnerable populations 
through the mid-2009 hungry season.  Post will continue to engage 
GoE officials to liberalize its policies toward trade, foreign 
exchange, and domestic market interventions to reign in statist 
tendencies.  End Comment. 
 
YAMAMOTO