On 10 October Venezuela’s agriculture minister, Carlos Osorio, announced ‘adjustments’ (i.e. increases) for 14 basic foods sold at heavily subsidised rates through the state-run Mercados de Alimentos (Mercal), a nationwide chain of some 16,600 stores selling food and essential goods. The next day (11 October), the vice-president for productive economy, Ricardo Menéndez, flatly refuted such plans.
The government led by President Hugo Chávez first imposed strict price controls on 100 basic foods in 2003. However, according to central bank figures released earlier this year, food prices in Caracas in June 2011 were almost nine times higher than in 2003. In April this year, the government raised the price caps on several foods – including powerdered milk (lifted 48%), corn oil, sunflower oil and mixed vegetable oil . Bread and pasta price caps were lifted by up to 33%. In March 2010 it lifted caps on dairy products and cheese. The following month, inflation rose 5.2% month-on-month, the highest climb in seven years. The minimum wage, which President Chávez proudly touts as the highest in Latin America, is still insufficient to cover the basic basket of goods, according to the central bank.
The 14 Mercal items in question are: cooking oil, rice, peas, sugar, black beans, meat, wholemeal flour, dough, powdered milk, lentils, margarine, mortadella, pasta and chicken.There have been well documented problems all this year with supplies of powdered milk, cooking oil, sugar and pasta in particular. In September, sources in Venezuela, both in Caracas and elsewhere, told LatinNews that these basic items were getting scarcer and more expensive. Edecio Pineda, the president of the dairy association Asoprole, told the daily El Nacional on 11 October that the local pasteurized milk sector was in danger of paralysis, with producers unable to cover their margins due to rising costs for inputs like cardboard. Pineda pointed out that the regulated retail price of milk is BF3.6/litre, but farmers demand BF4.1/litre, forcing producers to operate at a loss. He estimated that pasteurized milk output had fallen by 30% to 35% annually to date this year, calling for the partial liberalisation of prices so that producers could sell 50% of their output at regulated prices and the other 50% at non-regulated prices.
These anecdotal reports of price and supply pressures are backed up by the latest official figures. Although the government trumpeted the fact that the national index of consumer prices fell month-on-month in September (to 1.6%, from 2.2% in August), it was still running at 26.5% year-on-year, the fourth consecutive increase and the highest annual rate since March, led by (government-authorized) higher education costs at the start of the school term.
More notably, though food prices fell in the month, accumulated food price inflation was 22.4% in the first nine months of the year, above the overall accumulated rate of 18.7%. Moreover, the central bank’s ‘scarcity index’ rose to 14% in September, up from 13.5% in August, while its index of diversity fell to 156.2, from 168.5.
The fact that food prices and the scarcity index are both rising in tandem probably reflects stronger consumer demand this year, as people have more cash in their pockets. With one eye firmly on kickstarting the domestic economy ahead of the 2012 elections, the central government has rapidly monetized its record high oil export revenues this year to boost the local money supply (including the supply of US dollars for external trade) and stimulate consumption. The rebound in domestic demand has prompted a spike in imports. Latest central bank figures put total imports in the first half at US$21.47bn, up almost 23% year-on-year, with increases in both public and private sector imports.
Venezuela depends almost exclusively on imports of food (which make up about 70% of total food requirements). Indeed, critics of President Chávez regularly point out that the country seems further away from food self-sufficiency now than when he took office in 1999 and first made it a priority.
The government has long complained that private sector speculation and hoarding is partly to blame for high prices. It also, with some justification, blames higher global food price trends. Private producers counter that there are fewer incentives to increase production, given the price caps and other official market-distorting mechanisms. Its also the case that distribution networks in Venezuela are inefficient. For instance, the road network has been set up in such a way that trucks have to head to the capital first before taking goods back to other parts of the territory.
One thing seems very clear: supply is simply not meeting demand, even for the most basic goods. Sources tell us that the shortages are as bad, if not worse, in the state-run stores, which begs the question as to their efficiency. Its one thing for a state to intervene in the local market to set price caps for a basket of basic foods, but its quite another for a very centralised government to take on responsibility for food production and distribution throughout the entire chain.
President Chávez once boasted that there was “zero inflation” in Mercal. Announcing the latest price increases, Agriculture Minister Osorio said the changes would be phased in, as was the case in 2009. Osorio blamed higher international prices but also noted that the state needed Mercal outlets to be “sustainable”. “We know that there must be an earnings margin, so that… structures can be sustainable over time”, he said. The opposition daily El Universal was quick to reprint a statement by Luis Fernández Abreu, Mercal’s vice-president of operations, who on 20 June last clearly stated that “there are no retail price adjustments contemplated for subsidised products”.
Osorio stressed that Mercal’s new prices, which he suggested would take effect in January-February 2012, would remain up to 40% below the level of current regulated prices. “Venezuela is immersed in a capitalist world where, lamentably, foods are not seen as products to satisfy basic necessities, but as a way to make money”, he complained. Oddly, Ricardo Menéndez, his colleague in government, flatly refuted such plans the very next day, leaving consumers and local Mercal operators alike in the dark as to what to expect next.
An appeal for fairness
On 11 October Cecilia Sosa, a former supreme court president, petitioned the constitutional chamber of the supreme court to nullify the controversial new Law of Costs and Just Prices, decreed by President Chávez in August. The decree states that “flagrant abuses of monopoly power in many sectors of the economy” have led to “constant price rises for no other reason than the exploitation of the people”. Effectively, the law makes inflation illegal. So, the state will thus set “fair prices” across the whole economy (with the exception of the banking sector). It is worth noting that these “fair prices” will be applicable not only to the retail sector but also to the wholesale/producer sector. There is a huge question as to how this will work, but the government insists it will have an operating framework in place by November.
Sosa, who intends to compete in the opposition presidential primaries in February next, argues that the law does not comply with the 1999 magna carta, promulgated by Chávez himself. According to her, “the law imposes a communist system, eliminating the institution of the market, a feature of democratic states”. “It eliminates free competition, by assigning a state organ the power to set prices for all commercial goods and services, and also to control earnings, which will no longer depend on the market but on the burueacratic and arbitrary criteria of a state entity”, she added.
- More debt?
On 11 October the Venezuelan government announced a fresh global bond issue to the tune of US$3bn. Notwithstanding the odd timing of the issue in the midst of severe global risk aversion, the sale brings total government debt issuance this year to US$7.2bn, the highest ever. Adding in the debt issued by the state oil company Petróleos de Venezuela (Pdvsa) this year, the total comes to US$13.2bn, which is more than the combined total sold by the rest of Latin American governments this year, according to Barclays Bank. And yet export prices for Venezuelan oil are also at a record high this year, averaging US$99/barrel to date. Analysts estimate the total cost of this latest bond, which, at the official FX rate, will generate just US$2.85bn for the authorities, at some US$5.3bn over its lifetime.
- Food imports
There are no official figures for food imports but Pablo Baraybar, president of Cavidea, the national chamber of food industries, put it at BF13.01bn (US$3.0bn) in 2010, based on figures from the central bank and the national statistics institute. He suggests this figure will rise to BF16bn (US$3.7bn) in 2011. It was just US$0.54bn in 2004. Mercal sources 60% of its stock from abroad. Venezuela’s agri sector still only accounts for about 4% of GDP, according to the latest (September 2011) US state department country report.
