Iraq Has Strong Farm Sector Potential, USDA Official Says

Statement of H. Lee Schatz, Foreign Agricultural Service,
U. S. Department of Agriculture
Before the House Committee on Agriculture

Washington, D. C. June 16, 2004

Mr. Chairman, members of the Committee, I appreciate the opportunity to review the work of the U. S. Department of Agriculture (USDA) in Iraq and assess the outlook for U. S. agricultural exports to that market.

Introduction

I would like to provide a brief overview of Iraq's agricultural production and highlight the trade opportunities and challenges ahead for U. S. exporters. I also will bring you up-to-date on what USDA and our private sector partners are doing to renew relationships with Iraqi public and private sector partners.

I arrived in Iraq on April 24, 2003, shortly after the fall of Baghdad. As the first USDA employee in Iraq, I served for nine weeks as the senior advisor to the Iraq Ministry of Agriculture for the Office of Reconstruction and Humanitarian Assistance and its successor, the Coalition Provisional Authority (CPA). Since my return to the United States, I have continued to work full time on Iraq issues for USDA.

Ten additional employees from USDA have served in Iraq assisting in reconstruction efforts. USDA has already designated two Foreign Service officers to staff the agriculture office of the new Embassy.

Iraqi Government Agencies

USDA has been working primarily with two government agencies -- the Ministry of Agriculture (MOA) and the Ministry of Trade (MOT). MOA focuses on the domestic production of food, fiber, livestock and poultry. This ministry controls and administers land ownership, manages water resources and delivery, may dictate what crops are to be produced, and proposes domestic procurement prices. It imports all production inputs from seeds and fertilizer to fan belts for tractors, veterinary supplies and sprinkler systems. MOA is also responsible for imports of two commodities -- corn and protein meal for use in poultry production. The Ministry subsidizes the sales of these inputs to keep food prices low.

MOT imports all food distributed through the Public Distribution System (PDS). The PDS continues to operate, providing every man, woman, and child an adequate food ration meeting goals set earlier in consultation under the Oil For Food program as administered by the United Nations.

Even prior to the Oil For Food program, MOT's Grain Board purchased all imported wheat and rice. This ministry contracts for the milling and distribution of wheat through their own and private sector mills to final market points. MOT buys domestic wheat and rice at pre-announced prices. They operate their own truck fleet and grain silos.

Iraq's Agricultural Situation

Decades of state intervention in the economy have marginalized private, market-driven initiatives in agriculture and nearly every other sector of the economy. A limited number of large agricultural producers and processors operate in Iraq, but they are, the most part, technologically still in the 1980's.

For the past 20-plus years, Iraq's agriculture and agribusiness effectively have been cut off from innovation. Adoption and use of high-yield varieties, modern herbicides and pesticides, the full range of improved cultural practices (tillage, planting, irrigation, fertilizer use), and new post harvest technologies have largely bypassed Iraq agriculture.

But despite an extended period of mismanagement of its resources, Iraq still has the land, water, and human resources needed for a successful agricultural sector. However, if agriculture is to flourish, it will take time, and require tough decisions on the part of the new leaders in Iraq, including how to budget their money.

We estimate that the Ministry of Agriculture, if their new budget allows, will need to import over $1 billion of agricultural inputs annually for Iraq's producers to boost production.

For the next several years, and most likely longer, Iraq will need to rely on imports to meet a large portion of its food and fiber needs, even with substantial gains in production.

Public Sector Purchases

To meet current Iraq food needs, the government of Iraq, through MOT, imports and distributes nearly a half million tons of key food items monthly. That requires about 500--600 trucks moving into the country daily. Supplying this Public Distribution System, as it is known, is a huge responsibility. It appears that the Iraqis will continue to fund with their own money this massive public sector purchasing for the near future. In fact, MOT leaders have discussed adding items to the ration to show the Iraqi public that the situation is improving.

MOT has completed its first purchases since resuming responsibility for the PDS, and we are assessing that effort. In the past, Iraq had a six-month stock of goods in warehouses to avoid shortages, but that luxury is not available today. But MOT, along with the CPA, is working to rebuild at least a three-month buffer stock to better ensure adequate food availability.

We expect that for at least the next year, MOT will remain the major customer for food sales to Iraq. In addition, there may be opportunities for small sales to traders in countries bordering Iraq, who will move those goods into Iraq for the limited private food sector.

But commodities like wheat, rice, and pulses will move almost exclusively through Iraq Government purchases. And the volumes, based on current monthly distribution plans, will be substantial. For the next 12 months, distribution requirements met through imports, will be at or near the following levels:

-- Wheat 2.6 million tons
-- Rice 1 million tons
-- Pulses over 300,000 tons
-- Ghee and oil over 400,000 tons
-- Sugar over 600,000 tons
-- Full fat dry milk over 150,000 tons
-- Other items included in the PDS are tea, salt, infant formula, weaning cereals, soap, and detergent.

CPA advisors have worked to move Iraqi buying to a more transparent, open system. But the terms of trade used by Iraq in recent years, and likely in the period ahead, are considered quite onerous by U.S. traders. These terms include requirements such as: quality and quantity inspection at the final destination (not the origin of loading) in Iraq; arbitration in Iraq; transportation required on the seller's account to the final warehouse in Iraq; payment 30 days after the presentation of all documents; and no allowances for demurrage.

However, we must remember that these same terms found willing suppliers under the Oil for Food (OFF) program. We all recognize that the previous Iraqi government corrupted the operations of the Oil For Food program. Today, advisors to the Ministries have developed new management teams to change old ways of doing business. Every Ministry now has an independent Office of the Inspector General to audit activities.

Anticipated Demand for Agricultural Products

We believe that there is much room for growth in the Iraqi market. If we look at the levels of wheat consumption in Iraq we discover that per capita consumption is about 60 percent of the level in Turkey, 70 percent of the level in Iran, and 80 percent of the level in Syria. In the long run, we believe that Iraq will remain a major commercial food market --and a market that will demand high quality from its suppliers.

Iraq has a long history as a commercial market. It was a major market for U. S. agricultural products and our largest market for rice in the late 1980's with annual rice sales in the 400,000 -500,000 ton range. While the World Food Program (WFP) did have a presence in Iraq, it was not there to provide food aid. WFP had a monitoring (and in the north,
distribution) role under the OFF program and earlier this year assisted CPA and the MOT in making commercial purchases. While some isolated food aid for vulnerable groups in Iraq (displaced groups) may be appropriate in the future, in general we do not see a need for U. S. food aid.

USDA's long-term relationship with WFP decision-makers allowed USDA officials to work effectively to ensure that U. S. exporters had an opportunity to compete in the first open and transparent tenders earlier this year. As with any commercial market, U. S. producers had to compete for sales. Our wheat industry demonstrated its competitiveness with sales of 325,000 tons, representing one-third of purchases. U.S. rice, however, faces a different situation. Strong early season U.S. sales this year moved our rice prices sharply above those of our Asian competitors. Although U. S. rice has an image of top quality and Iraq buyers are eager to resume imports, the current premiums for U.S. rice have kept Iraq's purchases focused on Asian supplies.

Status of Export Credit Guarantees

For the remainder of 2004, budgets developed for food imports will allow Iraq to continue commercial cash imports with Iraqi funds.

As you are aware, in 1991 Iraq discontinued all payments against its purchases from the United States under the Commodity Credit Corporation's
(CCC) direct sales program, as well as the export credit guarantee programs. That total debt is approximately $1.975 billion; late interest has accrued since then in the amount of $1.92 billion. International discussions, through the Paris Club, have begun on the forgiveness and rescheduling of Iraq's debts. USDA awaits those results and in the interim, USDA is reviewing the possibility of a future guarantee program.

U.S. Government and Private Sector Efforts

Dangerous situations throughout the country have limited our ability to identify and pursue broad capacity building and technical assistance projects. When such work can be undertaken, indications are that the demand for assistance to help Iraq catch-up with 21st century agriculture techniques will be substantial.

For now, USDA has fielded 10 advisors for varying periods of time to work with Iraqis. A major function of USDA's presence in the new Embassy in Baghdad will be to continue to work with the Government of Iraq to identify and provide such assistance to strengthen Iraq's agribusiness sector.

Since late last year, even given the unstable security situation, U.S. private sector trade groups, specifically our market development partners, have been working in Iraq. Their work is limited to training and support from outside the country. U.S. feed grain, soybean, wheat, rice, and pulse cooperators have renewed contacts with Iraqi buyers.

Two of USDA's Market Development Program Cooperators, the U.S. Grains Council and the American Soybean Association, have received USDA funds to help Iraq's broiler and layer producers restart and modernize their industry.

A number of technical training seminars for managers of facilities have already been completed. In addition, work is progressing to form a poultry producers association in Iraq. This association would strengthen Iraq private sector involvement in the development of a modern industry.

USDA also supported representatives of the U. S. wheat, rice, and pulse industry to meet with Government of Iraq buyers in Amman, Jordan in February of this year to begin the process of clarifying and modifying contract terms used by Iraq. As a result of these initial meetings, U.S. commodities are once again able to meet Iraq import quality specifications. Contract terms are still an issue, but upcoming meetings with the U.S. industry will continue to work on those outstanding issues.

USDA's Foreign Agricultural Service (FAS) used the Foreign Market Development Program to support the U. S. Grains Council in its proposal to contract an Iraqi specialist to undertake work on behalf of all cooperators desiring to penetrate the Iraqi market. An initial Iraqi contractor has been hired.

Supporting and guiding market promotion activities will be a key focus for the USDA team that will staff the Embassy. We are currently working to reschedule the first visit to the United States of a team of senior MOT officials. These individuals already know the quality of U.S. agricultural exports, but there is nothing stronger than renewed personal contacts, with our producers, handlers, and exporters to convince Iraq's decision makers that we are ready and able to meet their needs for quality agricultural products.

Mr. Chairman, that concludes my testimony. I would be happy to answer any questions