Cablegate: Press Says Farmers Suffering Because Gvn Guessed Wrong On

VZCZCXRO7709
OO RUEHDT RUEHPB
DE RUEHHM #0940/01 2910526
ZNR UUUUU ZZH
O P 170526Z OCT 08
FM AMCONSUL HO CHI MINH CITY
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5040
INFO RUEHHI/AMEMBASSY HANOI PRIORITY 3377
RUCPDOC/USDOC WASHDC PRIORITY 0083
RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHHM/AMCONSUL HO CHI MINH CITY 5269

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000940

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, USAID/ANE, EEB/TPP/BTA/ANA
USAID/ANE/EAA FOR FRANK DONOVAN
STATE PASS USTR FOR BISBEE
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO

E.O. 12958: N/A
TAGS: EAGR ETRD ECON PGOV SOCI VM
SUBJECT: PRESS SAYS FARMERS SUFFERING BECAUSE GVN GUESSED WRONG ON
RICE

REF: HANOI 605; HANOI 498

HO CHI MIN 00000940 001.2 OF 003

1. (SBU) Vietnamese farmers and newspapers are now openly
critical of the Government of Vietnam (GVN's), accusing it of
mismanaging the country's rice market. The GVN sets export
targets and rice prices, seemingly to the advantage of the
state-owned companies. Earlier this year central planners
predicted that rice harvests would be poor and global rice
prices would climb through the end of the year, thereby
justifying restrictions on rice export. When both predictions
proved off target, rice farmers in the Mekong Delta saw prices
drop; now newspapers say that 1.5 million metric tons of rice is
in danger of spoiling in local storage. Vietnam's press has
begun to take the government to task over this "mismanagement"
-- the popular newspaper Thanh Nien published the headline
"Government ineptitude sending farmers to the poorhouse" --
offering a clear example of the need for continued economic
reform of the GVN's management of agricultural commodities. End
summary.

Government Lines up its Targets
-------------------------------
2. (SBU) Agriculture, rice in particular, is one of Vietnam's
most heavily regulated economic sectors. Each year the GVN sets
export targets. State-owned enterprises (SOE), most notably the
Vietnam Food Corporation (VinaFoods), get exclusive rights to
export more than half of this "export quota"; much of which goes
to meeting Vietnam's commitments to countries like the
Philippines and Cuba. Private distribution and export companies
compete for the remaining export quota. In all cases, however,
export rights as well as the price and quantity for rice export
contracts must be approved by the Vietnam Food Association
(VFA). One of VinaFood's General Directors Truong Thanh Phong
also happens to be the Chairman of the VFA.

Planning Foibles Set the Stage
------------------------------
3. (SBU) Early this year the Ministry of Agriculture and Rural
Development (MARD) predicted a poor domestic rice harvest and
steadily increasing global rice prices. Due to poor
winter-spring crops in the northern region, MARD initially
projected a national annual production of just 36 million metric
tons of paddy rice (18 metric tons of milled rice), the same
level of production as in 2007. These domestic supply concerns,
combined with global food supply issues (reftels), led the GVN
to predict rice prices would rise steadily from USD 370 at the
start of the year to well over USD 1,000 by year's end. At the
same time, the GVN also estimated higher domestic demand and
announced plans to increase the volume of rice in the country's
strategic reserve to nearly 1.5 million metric tons, including
additional seed stock for the next planting season.

SOEs Reap Early Profits
-----------------------
4. (U) Vietnamese rice export prices did surge from USD 370 per
ton in February to USD 1,200 per ton in late April, prompting
the Ministry of Industry and Trade (MoIT) to suspend rice
exports, ostensibly to tamp down fears of a domestic rice
shortage. In May, Vietnamese Prime Minister Nguyen Tan Dung
ordered Vietnam's food export regulator, VFA, not to approve new
rice export contracts for the remainder of the year, effectively
cutting rice export targets from 4.5 million metric tons (in
2007) to just 4 million in 2008. This export ban was justified
as a move to ensure domestic food security, but the GVN policy
contributed to fears of a world-wide rice shortage and thus
further increased the price that exporters lucky enough to have
export quota could command.

5. (SBU) According to the Vietnam Food Association, Vietnam
exported approximately 3.6 million metric tons of rice over the
first nine months of this year. Of the 3.6 million metric tons,
industry contacts estimate that SOEs exported close to 3 million
metric tons. Private exporters think this is because regulators
rig the system in favor of the SOEs. All exporters must apply
to VFA for approval to export, and private exporters contend VFA
adjudicated the opaque approval state-owned rice export
contracts while rejecting private rice export contracts.

6. (SBU) Industry insiders assert that SOEs bought significant
stocks of rice early in the year, anticipating that export
prices would rise significantly. As a result, it was rice
traders rather than farmers who reaped the majority of the
benefit from rising export prices. According to market surveys,
the reference price that buyers paid Vietnamese farmers for rice

HO CHI MIN 00000940 002.2 OF 003

varied from US 403.18 for one ton of rice in March, US 470.37
per ton in April, US 592.55 per ton in May, US 549.79 per ton in
June, US 537.57 per ton in July, US 488.70 per ton in August, to
US 458.16 per ton in September. During this same period, export
prices shot to US 1,200 per ton. Farmers also missed out
because some of the price volatility was a function of traders
and distributors building inventories early in the year in
anticipation of rising prices -- little rice was actually
purchased from farmers when prices were at their peak.

Then the Tide Turned
--------------------
7. (U) By mid-summer Vietnam's rice harvest was proving
significantly better than expected, increasing by over 1.5
million metric tons over the same period of last year. One top
rice processor and exporter estimated that Vietnam will harvest
37.5-38 million metric tons of paddy rice (19 million metric
tons of milled rice) in 2008. At roughly the same time,
rice-importing countries had secured adequate rice supplies and
producers were already beginning to expand production. The GVN
authorized VFA to resume approving rice export contracts in
July. When Vietnamese newspapers reported that Thailand would
sell 4.4 million metric tons by September 30 to avoid spoilage,
domestic Vietnamese prices fell below USD 500 per ton, less than
half of the price in early May. Popular newspapers (e.g., Thanh
Nien) began to publish stories focusing on the collapse in price
of rice and inventories "rotting in the bins" in the Mekong
delta. At the same time the price paid for harvested rice was
dropping, the cost of inputs like fertilizer and pesticides
surged due to rapid inflation.

The Press Points the Finger at the GVN
--------------------------------------
8. (SBU) "Government ineptitude sending farmers to the
poorhouse," a front page article in Thanh Nien (Youth)
proclaimed on October 6. Newspapers like Thoi Bao Kinh Te Sai
Gon (Saigon Economic News) argue that the government must ensure
national food security, but the GVN is choosing a strategy that
hurts farmers. They assert that against this backdrop of
falling prices and rising costs (ref B), farmers will be tempted
to grow less rice, making the task of ensuring national food
security more challenging. The press points out that the best
way to ensure national food security is to implement transparent
and predictable policies that encourage rice cultivation; what
farmers need most is a stable market offering a reasonable price
for their products.

Private Exporters Blame the SOEs, Call for Transparency
--------------------------------------------- ----------
9. (SBU) One private rice exporter in the Mekong Delta further
blames Vietnam's opaque rice export mechanism for distorting
pricing. Private exporters must obtain regulatory approval from
the VFA for every rice export contract (with a maximum term of
two months), including the volume and price of each contract the
private exporter plans to sign. Planning is difficult for
private sector exporters because the GVN fixes rice export
quotas each quarter without ever making public the quota fill
rates. If exporters think they want to negotiate a rice export
contract, they must ask the VFA if there is export quota
available, and "the answer is usually no", one private rice
exporter explained.

10. (SBU) Private sector rice exporters believe the GVN
manipulates rice exports to the benefit of state-owned Vinafood
and its affiliated companies. As the state regulator for export
volume and price, the VFA often mandates export prices for
private rice export contracts above market price so that
international buyers shy away. VFA argues that the approval
process ensures that naive exporters are not taken advantage of,
but exporters contend the GVN should instead apply a uniform
minimum export price. Private exporters also suggest more
transparency would solve the problem: by publishing annual rice
export targets and the percentage reserved for SOEs, the GVN
would allow private sector exporters to make plans. Private
traders also point out that the prices for SOE export contracts
are not published, creating an atmosphere of general suspicion
in the industry.

Comment:
--------
11. (SBU) Vietnamese farmers are understandably disappointed
since they had visions of selling new crop rice at high prices.
These hopes were dashed as prices fell, though only after

HO CHI MIN 00000940 003.2 OF 003

state-owned companies like Vinafood I and II made money off
their privileged position as exporter and one-step removed
regulator of exports. As the media blames the GVN for
mismanaging the rice industry, the unspoken subtext is that SOE
profit is coming at the expense of farmers. While the rice
example is particularly egregious, the government's bias toward
state-owned enterprises is one the biggest challenges
confronting the private sector in Vietnam. End comment.

12. (U) This cable was coordinated with Embassy Hanoi.
FAIRFAX

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