VZCZCXYZ0001
OO RUEHWEB
DE RUEHQT #1794/01 2211601
ZNR UUUUU ZZH
O 091601Z AUG 07
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7524
INFO RUEHBO/AMEMBASSY BOGOTA PRIORITY 6804
RUEHCV/AMEMBASSY CARACAS PRIORITY 2627
RUEHLP/AMEMBASSY LA PAZ AUG 0671
RUEHPE/AMEMBASSY LIMA PRIORITY 1825
RUEHGL/AMCONSUL GUAYAQUIL PRIORITY 2634
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
UNCLAS QUITO 001794
SIPDIS
SENSITIVE
SIPDIS
TREASURY FOR MMALLOY AND MEWENS
E.O. 12958: N/A
TAGS: ECON EFIN EAGR PGOV EC
SUBJECT: GOVERNMENT PRESSURE LEADS TO VOLUNTARY PRICE RESTRAINTS
Reftel: Quito 1655
1. (SBU) Summary: With rising food prices, the GOE warned the
private sector to lower prices or face mandatory controls. The
private sector agreed to voluntarily fix prices for rice, flour, and
sugar, while other sectors are seeking ways to reduce prices through
cheaper packaging and lower quality. The price increases appeared
to be largely due to increases in international commodity prices.
End summary.
PRIVATE SECTOR AGREES TO VOLUNTARY PRICE FIXING
--------------------------------------------- --
2. (U) Prices have been increasing in Ecuador for basic consumption
products such as rice, milk, vegetable oil, flour, and fruit and
vegetables. The GOE has alleged speculators were raising prices as
a plot against the state and warned the private sector to lower
prices or it would impose price controls. The GOE's threat was to
fix prices by publishing an official price list in the media and
penalizing those that did not abide by it.
3. (U) The private sector strongly opposed the imposition of
mandatory price controls, and conceded to negotiate with the GOE and
lower prices voluntarily. On July 23, the GOE and private sector
agreed on fixed prices for an unspecified period (but with no GOE
enforcement) on rice, sugar and flour. For flour, the fixed price
is actually higher than the previous market price - it increased
from $20 up to $26 per 50 kilogram sack. The GOE and private sector
were not able to reach agreement on fixed prices for other basic
products such as milk and vegetable oil, although vegetable oil
producers agreed to implement a plan to cut costs and keep retail
prices low by selling cooking oil in plastic bags (bagged "popular
oil" is now being sold in open air markets).
4. (SBU) Rice, flour, and sugar producers appeared relieved that
formal price controls were avoided. Edison Romero, Financial
Manager of the California Bakery chain, believes his chain can abide
by the fixed flour price for now, but is afraid that if wheat prices
continue to rise his company will have to increase its bread prices
by 13%. Jose Malo, President of the National Association of
Producers of Fats and Oils, hopes that selling consumable oil in
bags will allow the industry to reduce or maintain prices. He noted
that the industry anticipates that 200,000 liters of consumable
"popular oil" will be produced monthly. Other industries hope to
follow this lead and find ways to cut packaging costs rather than
fixing prices. Galo Izurieta, Deputy General Manager of Quito
Pasteurizers, and member of the National Dairy Production
Association, told us that his group is seeking agreement with the
GOE on cheaper packaging, lower quality (less pasteurized than the
popular "ultra pasteurized" milk) and other strategies to cut costs
and keep prices low, in lieu of price controls. Former Minister of
Economy Ricardo Patino suggested developing very basic communal
stores called "solidariatos", which would offer lower prices on most
basic consumption products by offering unpackaged bulk items and
possibly slightly lower quality products.
RISING INTERNATIONAL COMMODITY PRICES LARGELY RESPONSIBLE
--------------------------------------------- ---------
5. (U) Commodity prices are rising worldwide. In Ecuador's case,
its heavy reliance on imported inputs leads to highly volatile input
prices for basic consumption goods. For example, in Ecuador, 85% of
the cost of flour is attributable to the international price of
wheat. The cost of a ton of wheat rose from $239 to $310 over the
last year, significantly affecting Ecuador's flour prices.
Similarly, domestic vegetable oil prices responded to international
price increases in raw materials for oils, such as soybean, corn,
and sunflower, which have been increasing since 2006. Domestic meat
and dairy producers have also been affected by rising international
agricultural prices, since the majority of feed products are based
on imported corn and soybean.
6. (U) On the other hand, domestic fruit and vegetable prices are
largely independent from international prices, and mainly respond to
climate changes or seasonal factors. Only out of season fruit and
vegetables should be experiencing price increases, so the rapid
increase in fruit and vegetable prices might be influenced by
speculation or inflationary expectations.
7. (U) Over the past year producer prices (7% increase) have
increased faster than consumer prices (2.2% increase), so some of
the producer price inflation could be putting pressure on consumer
prices.
PAST ATTEMPTS AT PRICE CONTROLS FAILED
--------------------------------------
8. (U) Enrique Ampuero, Director of the National Institute of
Agricultural Research in the 1970s, commented that price control
schemes had not worked in the past as they had created scarcity of
various agricultural products as producers exited unprofitable
sectors. The Febres Cordero government (1984-1988) published an
official price list mandating fixed prices, with high fines for
producers who charged prices above list. Those price controls
resulted in shortages of certain goods, low quality products, black
markets and contraband. In 1993, Ecuador introduced a price band
system for major commodities to dampen swings in international
commodity prices. The World Bank estimated that Ecuador's price
stabilization policies resulted in price variability that was 10
times world price variability.
COMMENT
-------
9. (SBU) Although overall price inflation remains low, given the
September Constituent Assembly election the GOE evidently felt
compelled to take some sort of action to moderate food prices.
Indeed, some producers claim the GOE asked them to maintain lower
prices until the elections. The GOE's strategy of negotiating
voluntary fixed prices with producers is more practical than
mandatory price controls (as it essentially attempted to do with the
banking sector - reftel). Hopefully it will not attempt to maintain
the voluntary controls for an extended period of time or seek to
impose mandatory controls down the road. To date, the Ecuadorian
media have provided little coverage of the supply disruption caused
by price controls in Venezuela, but if the GOE shows additional
inclination to pursue price restrictions, we could expect the
Ecuadorian media to give more play to the consequences of price
controls.
BROWN