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Jan 16, 2013 | 11:30 GMT

Venezuela Faces Food Shortages

Venezuela Faces Food Shortages
LEO RAMIREZ/AFP/Getty Images
Summary

Venezuela's worsening food shortages should be manageable through raising fixed prices on goods and decreasing the value of the country's currency, but these efforts will likely lead to more political pressure on the new government. Overall scarcity has reportedly reached its highest level in four years and comes at a time when President Hugo Chavez may be near death and uncertainty surrounds the next government. If the economy deteriorates, the public's support for the Venezuelan government is likely to do the same.

According to the Venezuelan Central Bank, the overall scarcity index in Venezuela — which relies on regular checks of store shelves to document when stores run out of basic goods, such as corn flour and cooking oil — was reportedly 16.3 percent in December 2012. The actual scarcity index in December 2012 may have been as high as 20 percent, according to statements by the chief of Datanalysis, a reputable but opposition-oriented economic analysis firm. The average rate of scarcity between 2007 and 2012 was 14.2 percent. The worst scarcities were recorded in January 2008, when the scarcity index registered 24.7 percent. For comparison, during the period before Chavez's rule, from 1994 to 1999 the scarcity index averaged 4.34 percent.

Traffic disruptions may be responsible for some of the recent shortages. According to transportation groups, potholes in roads and other infrastructure deterioration have lengthened the amount of time it takes to transport goods to the degree that what had previously been one-day trips now take two or three. These traffic problems have been exacerbated by a decree in October that barred heavy trucking on holidays (including around the elections) and on weekends. The decree has been lifted, so this aspect may begin to improve. Public holidays may also have led to decreased production at state companies responsible for food products. 

However, these logistical challenges are not likely to provide a full explanation for the shortages. For one thing, shortages have primarily affected the products that have the strongest price controls, like chicken, milk, sugar, flour and cooking oils. A few factors contribute to these shortages. First, stores may not be able to afford to sell at regulated prices if input costs experience inflationary pressure, which would increase costs for the store. Indeed, according to Venezuela's Central Bank, the price of agricultural products in Venezuela rose 35 percent in 2012, and farmers report that transportation and fertilizer costs have increased and can be difficult to secure. Rising input costs for price-controlled goods reduce profit margins, which could force producers to go out of business. Shortages caused by this process will prod the government to raise fixed prices once again, but continued inflationary pressure will shrink profit margins on goods even with the new price.

The second factor contributing to shortages is that people likely are moving goods out of the government-regulated market into black-market sales to get a better price. Though it is difficult to verify the degree to which this is occurring, the government has accused people of hoarding food to manipulate the market. Two such incidents have occurred in the past several days, including the seizure of 900 metric tons of powdered milk, announced by Venezuela's Bolivarian National Guard on Jan. 11. In an earlier case, Venezuelan officials arrested four employees of transportation and logistics firm TBC in the El Soco Industrial Zone in La Victoria, Aragua state, on charges of hoarding about 8,900 metric tons of refined sugar. TBC and PepsiCo Inc. protested the move, claiming that the sugar was legally imported in accordance with the processes of the central bank for the purpose of making soda. In total, the government claims to have confiscated 46 metric tons of foodstuffs in recent weeks that were stored for more than a week. 

Venezuela map

Venezuela Baseline Map



Scarcities are exacerbated by an active black market, particularly on Venezuela's border. The controlled prices in Venezuela are as low as one-third of the price of basic staples in Colombia. As a result, Colombians living along the border with Venezuela frequently travel over the border to buy cheaper — and in many cases subsidized — goods. This has long been true for gasoline, which is sold at far below the cost of production throughout Venezuela. It is also true for basic foodstuffs, and the additional demand cannot help but place additional strain on supplies. To the extent that Venezuelan producers are government-subsidized, this is also a drain on public resources. Nevertheless, cross-border purchases have a limited impact. The border of Venezuela and Colombia is lightly populated, and the bulk of the populations in both countries live farther into the interior. This distance and the difficulties associated with traveling in the Colombian countryside naturally limit the black- and gray-market exchanges between Colombia and Venezuela.

Perhaps the biggest challenges, and those most likely to affect Venezuela's economic stability in the long term, are issues associated with the country's import-export systems and the availability of hard currencies to the private sector. The application process for importing anything into Venezuela is inefficient, and companies frequently report delays in processing that disrupt commerce. In the final quarter of 2012, delays in licensing caused three bulk maritime shipments of wheat to sit at the dock in Puerto Cabello, resulting in wheat shortages, according to a report from Venezuelan newspaper El Universal. This is a case where, like in the hoarding instances mentioned above, the long-term storage of foodstuffs can flood the market once released. In some cases, food spoils because of these delays.

Imports are also limited by dollar availability, which is strictly controlled by the branch of the Venezuelan Central Bank that controls currency exchange. The central bank must be careful about its allocation of dollar reserves, since the bank is also responsible for financing a range of government activities, from transferring bulk funds to government slush funds like Fonden, or directly financing struggling state-owned industries. 

Because the unofficial value of Venezuela's currency, the bolivar, has fallen to near 20 bolivares per U.S. dollar over the past two months and the central bank needs to hold the official exchange rate around 4-to-1, there is huge pressure on the central bank to devalue the official rate of the bolivar. Doing so would also relieve pressure on Venezuela's $29 billion in foreign exchange reserves, which would immediately cause inflation, forcing the Venezuelan population to accept a lower purchasing power for imports of consumable goods. This would surely have negative political consequences, but it would not be the first time Venezuela has had to devalue its currency. The government can be expected to react in other ways as well. Seizures of productive facilities cannot be ruled out, and the government may attempt to exert greater control over imports, as it has attempted to do previously.

Ultimately, as long as oil prices are high, Venezuela's macroeconomic picture will remain relatively stable. The political management of oil flows and the management of an increasingly state-dominated economy will be the test for a post-Chavez government. Changes such as exchange rate shifts that were made under Chavez's leadership may be more difficult without him present. From Vice President Nicolas Maduro's perspective, these difficult economic choices add to concerns about an erosion of support from the Venezuelan armed forces, government and populace. Chavez commanded the loyalty of all these groups, but a new government not led by the ailing Venezuelan president may lose public confidence if the economy continues to deteriorate.

Editor's Note: An earlier version of this report misstated the time frame for the rate of scarcity.

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