VZCZCXYZ0000
RR RUEHWEB

DE RUEHMD #0489/01 1211155
ZNR UUUUU ZZH
R 301155Z APR 08
FM AMEMBASSY MADRID
TO SECSTATE WASHDC 4698

UNCLAS MADRID 000489

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EAGR EAID ETRD ECON PGOV PREL TBIO
SUBJECT: SURVEY: IMPACT OF RISING FOOD/AGRICULTURAL
COMMODITY PRICES

REF: SECSTATE 39410

¶1. Summary: Rising food prices are a sensitive political
issue in Spain. The opposition conservative Popular Party
(PP) criticized the ruling Spanish Socialist Party (socialist
PSOE) party in the run-up to the March 9 elections for double
digit increases in prices of some basic foods. The
conservatives made some headway with this criticism, although
not enough to win the election. Spain is a net importer of
food and feed for livestock so it has an economic interest in
being able to produce and import corn and soy feed from as
many sources as possible. This will likely influence Spain
to continue to be a relatively liberal member of the EU with
respect to agricultural biotechnology. Given Spain's
interest in renewable energy, there may also be scope for
U.S.-Spanish cooperation in biofuels. End Summary

SPANISH AGRICULTURE BACKGROUND
------------------------------

¶2. Spanish agricultural and fishing production amounted to
Euros 27.3 billion in 2007, almost 3 percent of GDP. Spain
exported about Euros 25 billion worth of agricultural and
fish products in 2007 and imported Euros 24 billion. Roughly
900,000 people work in the sector, about 5 percent of the
labor force. Given current prices, Spanish farmers are
interested in expanding their marketing of olives, olive oil,
wine, fruits and vegetables. Agriculture is important in
Spain and farmers are influential, although not as
influential as in, say, France. With respect to Spanish
international agricultural policy priorities, Spain's wine,
cheese, cheese, olive, ham and other producers of high-end
specialty products pressure the government to ask for a
geographical indications regime in the Doha trade round
context. Spain benefits from the EU's common agricultural
policy, although not to the same extent as other countries
such as France. Nonetheless, Spanish farmers approve of the
support and protection they receive as a result of the EU's
common agricultural policy. The GOS would likely only
support EU agricultural market access concessions if the U.S.
agreed to big cuts in farm subsidies and/or the U.S. made
concessions with respect to geographical indications. Within
the Doha context, Spain also wants continued EU protection
for canned tuna imports. (Note: In the Doha round, canned
tuna is treated as an industrial product.)

¶3. In 2007, the U.S. exported to Spain about USD 1.5 billion
worth of agricultural, fish and forestry products to Spain.
Spain exported to the U.S. roughly USD 1.3 billion worth of
agricultural products, fish and forestry products to the U.S.
The U.S.'s most significant market access issue with Spain is
that Spain as an EU member does not import American biotech
corn even though Spain is a biotech corn producer. This is
because U.S. corn exporters cannot guarantee that American
corn shipments do not contain biotech varieties that have not
been approved by the EU. There are approved biotech
varieties in the EU and Spain, but not all the varieties that
have been approved in the U.S. have been approved in Europe.
Spain's main market access issue in the U.S. is gaining
permission to export specialty ham products. The Spaniards
have been successful in meeting U.S. phytosanitary
requirements and over the coming years, more Spanish ham will
be permitted to be sold in the American market.

ANSWERS TO REFTEL QUESTIONS
KEYED TO REFTEL PARA. 7
---------------------------

¶4. DEMAND: Spain is still a big "Mediterranean diet" consumer
of fish, fruit, vegetables, olives, olive oil, rice, beans,
cheese, bread, wine, and, to a more limited extent, meat.
However, there is an increase in consumption of less
expensive American-style pre-packaged foods, something that
concerns the Ministry of Health because there is a rising
obesity rate in Spain. During the last 12 months, consumer
prices for bread, spaghetti, onions, chicken, eggs, milk, and
olive oil have increased in a range from 12 to 34 percent.
Spain is a net exporter of olive oil, olives, wine, and
fruits and vegetables. It is a net importer of fish (Spain
is the second largest per capita consumer of fish in the
world after Japan), meat and wheat. Spain mixes imported
high quality North American (hard winter) wheat with local
wheat to make flour for bread. The Embassy has not seen
significant changes in consumption patterns yet, although in
TV interviews consumers threaten to buy less milk and bread.
This may reflect the fact that Spain's relatively high GDP
per capita allows consumers to go on buying traditional foods
and beverages and perhaps cut back on something else. Over
time though, price increases should have an impact on
consumption patterns, unfortunately perhaps in the direction
of accelerated consumption of pre-packaged foods. Per capita
consumption of wine is down, although this may also reflect
changing attitudes towards alcoholic beverages rather than

price rises. In response to dramatically higher nitrogen
fertilizer prices, Spanish farmers are cutting back on their
use of nitrogen fertilizer.

¶5. SUPPLY: With respect to what crops to prioritize, Spanish
farmers respond to price signals and EU policy. In 2007, for
instance, Spanish farmers planted as much wheat as they could
to take advantage of higher prices and the European
Commission's elimination of its land set-aside requirement.
Dairy production is also up, although farmers find it
difficult to increase production much more because dairy
replacement heifers and compound feed are very expensive.
Spain's significant production of wheat, barley, and other
cereals takes place on dry land dependent on rainfall for
crop yields. For these products, the weather more than
anything else determines production yields. Corn, fruit and
vegetable production takes place on irrigated fields, and
access to irrigation water is key to production. Spain is a
major promoter of renewable energy sources. The Abengoa
consortium is a major biofuels producer, for instance in the
U.S. However, in Spain there has not been major crop
cultivation for biofuels production because there is no
mixing requirement for gasoline. In addition, wheat prices
are prohibitively expensive. Abengoa has two biofuels
production facilities near Salamanca that have been closed
since late 2007 because current tax incentives and raw
material prices do not currently make it economically
worthwhile to produce biofuels in Spain.

¶6. POLITICAL IMPACT: Spanish consumers definitely notice the
rises in prices, and there has been a flurry of press pieces
on the subject over the past year. The opposition made some
headway in criticizing the government for the price hikes,
although not enough to win the March 9 national elections.
In Spain, the big dividing line on agriculture is not between
urban vs. rural groups or rich versus poor. The important
dividing line goes between those autonomous communities (the
Spanish equivalent of states) that have enough water and
those that do not. This has been a highly contentious
political issue for a long time. Recently, the socialist
central government reversed policy in that it agreed to
divert water from the Ebro River which originates in
socialist-ruled Aragon to Catalonia which has a socialist-led
coalition government. This angered the opposition
party-governed autonomous communities of Valencia and Murcia
that would like more water for agricultural purposes. When
the socialist party took power in 2004, its general policy
was to rely less on water diversion and more on desalination
plants. Since then, there has been a major investment in
Spain in desalination plants, but not enough to meet demand,
and some plants have not yet begun operation, for instance an
important plant in Barcelona. Over the coming years
therefore, water rights and water sharing will continue to be
a controversial political issue in Spain. With respect to
agricultural biotechnology, higher prices for feed will
likely result in the government continuing to have a
relatively liberal policy. Public attitudes have not changed
much, although it is worth noting that on April 18, the
influential pro-government daily, El Pais, ran a fairly
balanced article that provided some arguments for
biotechnology in the context of rising prices. On April 29,
El Pais ran a similar story. Given the possible future
development of biotech varieties capable of resisting drought
and Spain's chronic water shortages, Spain is a country worth
continuing to target in terms of developing greater
acceptance of agricultural biotechnology within the EU.

¶7. ECONOMIC IMPACT: The immediate economic impact is on
inflation. In 2007, inflation in Spain was 4.2 percent,
almost two percentage points higher than the eurozone
average. Inflation is used in determining public pensions
and has an impact on wage bargaining as well. The immediate
challenge, therefore, for the newly reelected socialist
government is to find ways to moderate inflation which will
be difficult given the global increases in food prices and
the increase in the price of oil and fertilizers. The IMF
recommends that Spain liberalize the distribution sector
more, but so far the government has not announced plans to do
so. Besides, Spain already has several competing supermarket
chains. Other than lifting the remaining restrictions on
Sunday shopping, it is not clear how much impact additional
distribution liberalization would have in terms of dampening
price hikes.

¶8. ENVIRONMENTAL IMPACT: The recent price rises in
agricultural commodities have not had a discernible impact on
the environment. Clearly though, to the extent that rising
prices provide incentives for greater agricultural
production, there will be increasing competition for water.
This issue, which many believe is related to global warming,
will over the next twenty to thirty years be the existential
issue for Spanish agriculture. In Spain's dry lands, farmers
will determine which cereals they produce depending on world

prices and rainfall patterns. The same is true with respect
to crops grown on irrigated land. With respect to the
latter, there appears to be a shift away from corn to higher
value fruits and vegetables, but we do not know if this shift
will be permanent. The EU's common agricultural policy is
also hugely influential. For instance, lower EU support for
rice and cotton production has led to lower Spanish
production of these crops. However, if world prices for rice
remain high, Spanish rice production could go up again.

¶9. GOVERNMENT POLICY RESPONSE: Neither the Agricultural
Counselor, nor the Economic Section, are aware of changed
policies as a result of global agricultural prices rises.

¶10. IMPACT ON POST PROGRAMS: There has been no impact so
far, although the Embassy will continue to advocate for a
science-based approach to agricultural biotechnology, and we
will explore what possibilities there may be for biofuels
cooperation.

¶11. POLICY PROPOSALS: Post will continue to point out the
relationship between agricultural biotechnology, higher crop
production, less environmental impact and ultimately lower
prices. On balance, the Spanish government's decision to
merge the Agriculture and Environmental ministries into one
"super ministry" called the Ministry of Environment, Rural
Development (Agriculture) and Marine Affairs is probably
beneficial from the standpoint of promoting greater
acceptance for agricultural biotechnology. Embassy will
therefore continue to engage the GOS on agricultural
biotechnology. Continuing on Ambassador Aguirre's successful
renewable energies mission to the U.S. with high-level
Spanish officials on February 11-14, there may also be an
opportunity to exchange ideas and proposals with respect to
biofuels.
Llorens