Venezuela Siezes Another Cargill Plant

May 19/BMI Americas Food and Drink Insights -- The Venezuelan government of Hugo Chavez has seized control of a pasta factory owned by Cargill following a dispute over prices. Deputy food minister Rafael Coronado says the company was not producing enough of a type of pasta sold at cheap, government-controlled prices and suggested there had been a "clear transgression of the law." Coronado has said that the seizure will be for 90 days, but that after this period the government could decide to take further action against the firm. In May 2009, Cargill was forced to hand over a rice processing plant under similar circumstances, and Business Monitor International Ltd. (BMI) thinks that Venezuela's current food policies mean the newly occupied plant is likely to remain under government control indefinitely.

Cargill entered Venezuela in 1986 through the acquisition of Agroindustrial MiMesa (a pasta and flour business) in Maracaibo. Over the last 23 years the business has expanded, and the division now has 2,000 employees spread across 22 locations, including 13 factories. The firm produces branded products, as well as product ingredients, and distributes them across the country through its own distribution network. However, this business, which BMI estimates generates between $1 billion to $2 billion a year and accounts for around 2% of Cargill's total turnover, now looks increasingly under threat.

In 2003, Chávez introduced price caps on a range of basic foodstuffs in an attempt to control spiralling inflation. However, many producers claim that they are unable to make a profit while operating under these price caps, and resulting food shortages have led to numerous spats between the food sector and the government. These shortages, along with the high cost of living, are a major threat to the president's popularity, and Chávez has become increasingly radical in his attempts to take control of the food industry. Along with the appropriation of plants owned by Cargill, the government has seized control of a plant belonging to Venezuela's largest food firm Empresas Polar and seized control of 1,500 hectares (3,700 acres) of land owned by Ireland-based packaging giant Smurfit Kappa Group, with the government insisting that the plot should be used to produce food rather than paper.

Although BMI does not believe that the nationalization of food production is an effective tool to battle price inflation, the Venezuelan government clearly does and may be motivated by latest inflation data to make further moves in this direction; consumer price inflation reversed its six-month downtrend in April, rising to 29.4% y-o-y from 28.5% y-o-y in March. This is in contrast to a gradual easing of inflation in most other economies, in line with the global economic downturn and reduced demand for commodities, and we believe that this rise in inflation represents a return to the longer-term uptrend. We currently forecast that inflation will hit 40.0% by the end of 2009 and believe that current developments, particularly the announcement by Chávez that he would take over oil service companies and their assets, are turning increasingly ripe for a hyperinflationary bust; we have therefore revised our end-2010 forecast from 31.0% to 50.0%.

This is clearly bad news for the economy and likely to put enormous pressure on purchasing power. However, it could prove to be particularly bad news for food producers, who are likely to be accused of profiteering by Chávez's government if they raise prices in line with the rising costs and may face further censure in the form of fines and appropriations.  

From the May 26, 2009, Prepared Foods E-dition