US embassy cable - 03KUWAIT2415

UNCLAS SECTION 01 OF 06 KUWAIT 002415 
 
SIPDIS 
 
STATE ALSO PASS USAID/W 
STATE PLEASE REPEAT TO IO COLLECTIVE 
STATE FOR PRM/ANE, EUR/SE, NEA/NGA, IO AND SA/PAB 
NSC FOR EABRAMS, SMCCORMICK, STAHIR-KHELI, JDWORKEN 
USAID FOR USAID/A, DCHA/AA, DCHA/RMT, DCHA/FFP 
USAID FOR DCHA/OTI, DCHA/DG, ANE/AA 
USAID FOR DCHA/OFDA:WGARVELINK, BMCCONNELL, KFARNSWORTH 
USAID FOR ANE/AA:WCHAMBERLIN 
ROME FOR FODAG 
GENEVA FOR RMA AND NKYLOH 
ANKARA FOR AMB WRPEARSON, ECON AJSIROTIC AND DART 
AMMAN FOR USAID AND DART 
 
E.O. 12958:  N/A 
TAGS: EAID, PREF, IZ, WFP 
SUBJECT:  PURCHASING WHEAT AND BARLEY IN IRAQ 
 
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SUMMARY 
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1.  The Executive Director of WFP met with ORHA staff in 
Baghdad on 13 May.  The primary discussion point was WFP's 
plan for purchasing the local harvest.  WFP has set aside 
USD 42 million for the purchase of approximately 100,000 MT 
wheat in the north.  DART held follow-up conversations with 
WFP regarding the mechanics of making an additional local 
purchase.  WFP is willing to pursue a purchase to fill the 
remaining wheat deficit in its Emergency Operation, as well 
as assist in the purchase of the entire harvest.  Pre- 
requisites for this action are a functioning Grain Board and 
a way to move money around in a secure environment.  WFP is 
preparing a proposal to the U.N. Office of Iraq Programs in 
New York to make the purchase.  FAO also plans to purchase 
4,000 MT of wheat seed in the north and is willing to 
discuss possibilities of purchasing some barley in 
south/central.  A summary of the week's discussions follows. 
No firm decisions have yet been made, but parties are 
drawing nearer to final steps.  End Summary. 
 
----------------------------- 
WFP'S JAMES MORRIS MEETS ORHA 
----------------------------- 
 
2.  The Executive Director of the U.N. World Food Program 
(WFP) James Morris met with members of the Office of 
Reconstruction and Humanitarian Assistance (ORHA) on 11 May 
in Baghdad.  WFP Regional Director Khaled Adly and Country 
Director Torben Due were also present.  ORHA staff included 
George Ward, Robin Raphel, Susan Hamrock, Frank Ostrander, 
Richard Wilcox, and DART Food Officer Regina Davis. 
 
3.  Ward opened the meeting by saying how crucial WFP's work 
is to the success of the revival of the Public Distribution 
System (PDS), and asked that WFP notify ORHA about 
obstacles.  After introductions, Raphel immediately asked 
WFP about its plans for purchasing wheat from the upcoming 
harvest. 
 
4.  Morris said that purchasing the local wheat crop was 
important and that WFP needed to do it.  He added that WFP 
was thinking that the wheat flour requirements for months 5 
and 6 of its extended Emergency Operation could likely be 
filled by the wheat purchase.  Morris also asked ORHA for 
assistance in securing the warehouses, silos, and mills. 
 
5.  Raphel replied that the military/ORHA relationship was 
improving.  In the last week, ORHA had worked with WFP and 
the military to get the GPS (global positioning system) 
coordinates for the silos and warehouses that WFP needed and 
now had almost all the coordinates.  Regarding security, she 
said that the coalition does not have forces to provide 
security all hours of every day.  But she added that ORHA 
was budgeting for a local force to protect these structures. 
 
6.  Raphel said that estimates of the country-wide harvest 
were 1.25 million MT of wheat and 500,000 MT of barley. 
Purchase price estimates are between USD 130 and USD 150 
million.  In the past, the Government of Iraq (GOI) set the 
selling price for the country, and last year's wheat price 
was 155,000 dinars per ton (USD 77.50 at an exchange rate of 
2,000 dinars to the USD).  The barley harvest (primarily 
used for animal feed) began on 17 May, and the wheat harvest 
has already begun in the south.  Raphel clearly stated that 
she hoped that WFP could use Oil for Food (OFF) monies to 
make the purchase. 
 
7.  Adly listed details that needed to be sorted through 
before WFP could proceed with a local purchase: 
 
A.  There is currently no mechanism in place to move money 
around the country. 
 
B.  The Ministry of Trade (MOT) Grain Board had a system in 
place whereby it tested the quality of the wheat, ranked it, 
and weighed it, as well as serving as the purchaser.  The 
Grain Board needs to be involved in this process, but 
requires assistance in getting up and running again. 
 
C.  Pre-war, the GOI kept six months of stocks in its 
National Strategic Reserve (NSR).  A determination now needs 
to be made about how much stock should be kept in the NSR. 
 
D.  The U.N. Security Council Resolution (UNSCR) 1472 has 
language to accommodate the purchase of local commodities, 
but expires on 3 June.  Therefore, all transactions need to 
be completed by that date.  There is discussion of extending 
it for six months, but no action has yet been taken. 
 
8.  Raphel replied that ORHA was in the process of 
consolidating assets in 25 banks, and found themselves "not 
being as agile, as they would like to be."  She reiterated 
that ORHA planned to give all Iraqi civil servants the USD 
20 payment as a measure to tide themselves over until a 
salary payment system can be established.  Raphel stated 
that a general salary schedule should be issued by the end 
of the week (i.e., by 16 May), and that ORHA was committed 
to paying workers retroactively to when they last got paid. 
 
--------------------------------------------- ---- 
WFP THINKING ON THE LOCAL PURCHASE OF THE HARVEST 
--------------------------------------------- ---- 
 
9.  On 15 May, DART Chief Food Officer further discussed the 
details of how such a purchase would take place with WFP's 
Adly.  WFP reports that it fully supports measures to re- 
establish a marketing arrangement for the harvest, and 
considers it critical to promoting stability and 
contributing to the kick-start of the economy in general, 
particularly for the rural populations. 
 
10.  Pre-war, the MOT Grain Board maintained a network of 
collection centers spread throughout the production areas 
and procured the grain at fixed prices, taking into 
consideration the inputs provided to the farmers (seed, 
fertilizer and pesticides) at highly subsidized prices. This 
year, the Grain Board Manager reports that due to the war 
and the looting which has taken place at the collection 
centers, farmers have been advised that grain should be 
delivered by the farmers to the MOT warehouses and silos 
directly. 
 
(Note:  The DART subsequently learned that ORHA set the 
price of wheat at USD 80 USD per MT and USD 50 USD per MT 
for barley, but most recent information indicates these 
prices may rise.  ORHA realizes the initial prices are low, 
but is trying to encourage farmers to seek other markets. 
Because of the current wide fluctuations in the exchange 
rates, the DART is concerned that setting low prices will 
leave farmers with little cash to put forward towards buying 
seeds, fertilizer, and pesticides for the planting season, 
forcing them once again to be reliant on subsidies.  DART 
Field Team South reports that in a matter of three days the 
exchange rate dropped in Basrah from 2,000 dinars to one 
USD, to 1,700 dinars to one USD, to 600 dinars to one USD. 
End Note.) 
 
11.  Without a functioning banking system, and the absence 
of a secure working environment for the MOT/Grain Board (GB) 
staff, WFP feels that implementing a program of this 
magnitude will not be possible without assurances of 
security from ORHA and the Coalition.  Secure storage of the 
grain is also a concern. 
 
--------------------------------------------- ---- 
LOCAL PURCHASE IN THE THREE NORTHERN GOVERNORATES 
--------------------------------------------- ---- 
 
12.  UNSCR 1472 provides for the use of escrow account funds 
for the procurement of food in Iraq.  WFP has already 
received $42 million from the OFF 13 percent account (the 
account dedicated to projects in the north) with which it 
plans to buy a portion of the harvest in the north, 
approximately 90,000 to 100,000 MT wheat flour.  (Note: 
Estimate for the harvest in the three northern governorates 
is more than 700,000 MT.  End Note.)  Because the monies 
come from the 13 percent account, WFP prefers to buy in the 
three northern governorates and WFP is required to 
distribute the wheat flour purchase in the north under UNSCR 
986.   In the north, WFP reports that it is possible to 
purchase through private sector companies, security 
conditions are more stable, and there is an established 
system of private sector banking arrangements in neighboring 
countries where payments can be deposited. 
 
------------------------------------ 
LOCAL PURCHASE IN SOUTH/CENTRAL IRAQ 
------------------------------------ 
 
13.  For the six-month emergency operation (EMOP) launched 
by WFP to support the PDS, there is a current resource 
shortfall of wheat in the range of 300,000 MT.  Provided 
that there is a further extension of the OFF which is 
currently set to expire on 3 June (UNSCR 1472/76), it is 
WFP's intention to procure the shortfall tonnage of 300,000 
MT wheat through the GB during June/July.  The pre- 
requisites for the transaction are as follows:  OIP releases 
the funds; ORHA authorities re-establish a functioning Grain 
Board; and a way to move money around in a secure 
environment is established.  (Note:  The 300,000 MT would be 
in addition to the 90,000 to 100,000 MT in the north, for a 
total of about 400,000 MT.  End Note.) 
 
14.  ORHA and WFP are preparing a proposal to OIP requesting 
funds for the purchase of the entire wheat harvest of 
approximately 1.2 million MT.  The funds from OIP would go 
to the farmers, through the Grain Board (GB), for the 
purchase of the entire crop, if the funds are made 
available.  WFP would feed the initial 300,000 MT into the 
PDS under its EMOP.  The remaining 900,000 MT would go to 
the Grain Board as part of the National Strategic Reserve to 
be used at a later date.  GB could decide to feed it into 
the PDS. 
 
15.  In the center/south, the entire system of grain 
procurement was monopolized by the parastatal Grain Board. 
Private sector bulk grain traders did not exist.  As stated 
in paragraph 7B above, WFP insists that a functioning Grain 
Board is necessary to effect the transaction.  To revive the 
GB, the following must be achieved: 
 
--  Rehabilitate the administrative structure of the Grain 
Board by providing a secure working environment and re- 
equipping the Board's offices; 
 
--  Ensure back payment of salaries and regular payroll 
implementation; 
 
--  Rehabilitate warehouse and silo equipment such as 
conveyor belts, weighbridges and weighing scales; 
 
--  Provide secure means for funds handling and transfer to 
effect payment to farmers, as well as cover operating costs 
at the receiving centers; and 
 
--  Facilitate an information campaign to inform farmers of 
receiving center locations and method of payment. 
 
16.  Given the above measures, WFP could devise a system to 
track the weight and quality of the grain.  WFP could then 
advance funds to the Grain Board to commence purchasing 
operations.  WFP is also willing to provide superintendence 
(through an oversight firm), survey and monitoring services 
to reconcile payments against receipts over time.  But WFP 
is firm that the Grain Board must be involved in order for 
this to proceed in central/south. 
 
17.  Since barley is not part of the PDS, WFP would have no 
need to purchase barley.  The processes that need to be put 
into place to effect the wheat purchase could also be 
applied to the barley purchase.  To that extent, WFP is 
willing to assist.  See FAO section below regarding the 
barley. 
 
------------------- 
CURRENT SILO STOCKS 
------------------- 
 
18.  In addition to the harvest, there are also large 
quantities of wheat in the silos that are part of the NSR. 
These stocks are accumulations from prior harvests.  The 
Central MOT has told WFP there may be one million or more MT 
of wheat in the NSR.  The MOT's Grain Board could feed these 
stocks into the PDS in future months.  The MOT is already 
lending some NSR stocks to WFP for the upcoming PDS 
distribution.  In the past, NSR stocks were lent to the PDS, 
and repaid with OFF stocks. 
 
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PARTICIPATION OF FAO 
-------------------- 
 
19.  DART recently heard that the U.N. Organization for Food 
and Agriculture (FAO) had agreed to purchase the barley 
crop, used primarily for animal feed.  DART made some 
inquiries with FAO/HQ and learned the following: 
 
A.  In the current season, FAO was not planning to buy 
barley for livestock feeding.  The only barley procurement 
done by FAO was in 2000, when it procured some 1,700 MT of 
barley that was distributed to drought-affected farmers. 
 
B.  FAO does plan, however, to buy approx 4,000 MT of wheat 
grain for seed use in the three northern governorates.  FAO 
is ready to pay the market price plus a premium to get the 
best quality seed. 
 
C.  FAO has adopted contracts (under the 59 percent account) 
to import approximately 70,000 MT of barley for feed use of 
which some 25,000 MT can be shipped before June 3, the 
expiration date of UNSCR 1672/76. 
 
20.  FAO/HQ told DART Officer Davis that it was willing to 
explore the possibility of buying barley in country but, 
like WFP, would need to request funds from OIP/New York for 
the purchase.  FAO staff from Arbil is to arrive in Baghdad 
21 May and plans to discuss the issue with the U.N. 
Humanitarian Coordinator in Iraq, Ramiro Lopes da Silva, and 
with ORHA. 
 
----------------------------- 
ALTERNATIVES TO U.N. PURCHASE 
----------------------------- 
 
21.  In a meeting in Basrah on 13 May, the DART asked the 
WFP national staff about options for the farmers if they are 
unable to sell their harvestto the MOT Grain Board.  The 
options given were: 
 
A.  Farmers could probably sell to private mills directly, 
as they were never allowed to do this before.  It is 
important to note that the standard practice in Iraq was to 
mix the higher quality Australian or Russian wheat (OFF 
commodities) with Iraqi wheat in the silos prior to grinding 
it into flour.  Whether or not the mills have the purchasing 
power is unknown. 
 
B.  Farmers could sell to animal farmers for animal feed, 
but the price would be very low (10 to 20 percent of the 
price that the GB is expected to offer). 
 
C.  Farmers could sell to other countries (once sanctions 
are lifted).  Also something they could not do before. 
 
JONES