IMPACT OF THE DROUGHT IN CHILE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010093-8
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 15
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 93
• Publication Date: November 1, 1968
• Content Type: IM

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Confidential
~o ~ I S ~Z
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Impact of the Drought in. Chile
Confidential
ER IM 68-143
November 1968
Copy No. 56
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
Eadud.d Gom aulomelic
dove "grading and
dedarrifcalion
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
November 1968
INTELLIGENCE MEMORANDUM
Impact of the Drought in Chile
Summary
The worst drought in 44 years will intensify
Chile's economic problems and is likely to lead to
a weakening in the position of President Eduardo
Frei's Christian Democrats in the elections of
1969-70. Agricultural output is expected to drop
by 20 to 30 percent in 1969. Through its impact on
agricultural output, the agricultural processing
industries, hydroelectric power supplies, and large
industrial users of power, the drought could cause
a decline of as much as 10 percent in gross domestic
product per capita in 1969. Chile's chronic prob-
lems of inflation and balance-of-payments disequili-
brium almost certainly will be compounded by the
drought, and an increase in unemployment in both the
countryside and urban centers seems likely.
This year's drought is affecting much of the
Central Valley, where most of Chile's agriculture
and industry and three-fourths of the population
are located. Little precipitation can be expected
during the next several months (Chile's summer) .
Despite a recent snowstorm, there is a below-normal
accumulation of snow in the Andes, which is the
main source of water supplies during the summer.
If agricultural output declines as anticipated,
Chile probably would have to boost agricultural
imports from an estimated $190 million in 1967 to
between $250 million and $270 million in 1969 in
Note: This memorandum was produced solely by CIA.
It was prepared by th? Office of Economic Research
and was coordinated with the Office of Current
Inte Zligence.
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order to maintain consumption levels. At the same
time, export earnings are likely to decline because
of weakening world prices for copper, a small decline
in the vclume of mineral exports, and losses in agri-
cultural exports. The government's practice of de-
valuing the escudo every few weeks to reflect the
inflation will help to keep Chilean manufactures
competitive abroad but will do little to prevent a
decline in total export earnings.
So far, the Frei government has not announced
any changes in its own programs to deal with the
budget and balance -of-payments problems that are
arising from the drought. In its proposed budget
for 1969, however, the government allocates to
drought relief the proceeds from expected additional
shipments of $40 million worth of US surplus agri-
cultural products under Public Law 480. Available
evidence suggests that Frei is relying on the
United States to cover almost all of the costs of
drought relief.
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Introduction
1. Chile is suffering this year from the
worst drought since 1924. Rainfall has bee:i below
normal in the entire region between Puerto Montt
and the Peruvian border, and the area extending
from Concepcion to La Serena (the northern Central
Valley) has been unusually dry. In the Santiago
area, rainfall is expected to approximate only
inches in 1968, compared with. a long-term av-.irage
of about 14 inches annually. The area most ser-
iously affected by the drought accounts for most
of Chile's agricultural production and contains
most of Chile's industry and about three-fourths
of the population (see Figure 1). North of this
area, there is normally almost no rain; while to
the south, the rainfall this year -- although con-
si%erably less than ncrmal -- still is sufficient
for crop production.
2. Even more serious than Chile's lack of
rainfall, however, is the below-normal accumula-
tion of snow in the Andes. It is the runoff from
the Andes that provides most of Chile's water for
household use, irrigation, industry, and other
vital purposes during the almost rainless summer
months. Chile had a lia'it win.`.er in 1967, and
despite a snowstorm in late October, the snow
accumulated in the !-mc:c!s this year is much less
than normal in the severely affected zone. As a
result, many rivers and streams that usually would
he full now with spring runoff are nearly dry.
Many reservoirs and ponds also are either dry or
have very low water levels. In view of the normal
seasonal pattern of precipitation in Chile, little
relief from the drought can reasonably be expected
until May 1969 (see Figure 2).
Impact on Agriculture
3. The drought is severely disrupting Chilean
agriculture. It is having serious immediate
effects on crop output and is causing widespread
slaughtering of breeding stock and dairy herds,
which will hold down output of livestock products
for some time after more normal weather returns.
Chile's overall agricultural output is expected
to decline by 20 to 30 percent from 1968 to 1969.
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CHILE: LOCATION AND
IMPORTANCE OF THE
DROUGHT AREA
IN 1965, THIS AREA ACCOUNTED FOR:
45 percent of the cultivated and fallow land
54 percent of the sown area
86 percent of the irrigated area
31 percent of the improved pasture
76 percent of the orchards and vineyards
52 percent of production of wheat
82 percent of production of barley
98 percent of production of corn
100 percent of production of rice
More than 50 percent of production of vegetables
More. than 75 percent of production of fruit
34 percent of the cattle
25 percent of the sheep
44 percent of the hogs
39 percent of production of dairy products
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Figure 2
CHILE: RAINFALL IN THE SANTIAGO AREA
ANNUAL RAINFALL
1957-68
RAINFALL BY MONTH
(Winter)
1968
-amuie
01 1 1 1 1 I 1 1 I I I 1
1957 58 59 60 61 62 63 64 65 66 67 68 J F M 1A M J J A S O N D
(Est.)
75047 11-68 CIA
Crops
4. Unirrigated winter wheat and forage crops
in the northern Central Valley have been severely
damaged, and some farmers -- faced with shortages
of irrigation water and lack of soil moisture
have decided that it would be futile to plant
crops this year. The available supply of irriga-
tion water during the coming summer probably will
require that the irrigated area (three-fifths of
which is used for crops) be reduced by about 500,000
hectares from its normal extent of 1.1 million
hectares. Crop losses in the northern Central
Valley, which usually accounts for almost three-
fourths of the value of Chile's crop output, could
range as high as 50 percent. Although losse3 in
this region may be partly offset by increased
plantings and improved yields in the area south
of Concepcion, total output of crops is expected
to drop by 25 to 35 percent.
5. The impact of the drought will be particu-
larly serious for grains, oil seeds, and forage
crops. Production of wheat, the most important
crop in Chile, probably will drop to some 850,000
metric tons in 1969, compared with 1.2 million
metric tons in 1968. Most available irrigation
water will be used in an attempt to preserve val-
uable orchards, vineyards, and improved pastures
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or will be concentrated on crops of greater value
per hectare, such as potatoes, green vegetables,
and sugar beets. Despite these efforts, orchards
and vineyards in some areas are likely to be
severely injured, reducing production of fruit in
future years.
Livestock
6. Chile's livestock sector also is being
seriously hurt. Most of the unirrigated pasture
in the northern Central Valley already has been
largely destroyed by the drought. In some impor-
tant grazing areas, rivers and ponds already are
dry or nearly dry, causing a critical shortage of
stock-watering facilities -- a shortage that is
sure to worsen during the summer. More than
300,000 sheep (almost the entire spring lamb drop
in the drought region) and 40,000 cattle out of a
total of 3 million already have died. In addition,
large numbers of cattle and sheep are in extremely
poor condition because of the lack of forage. Some
livestock owners have been selling their breeding
stock for slaughter in anticipation of worsening
pasture conditions in the summer. Indeed, increased
slaughtering has permitted Chile to stop imports
of beef from Argentina, which normally amount to
about $30 million annually.
7. During the next six months, the area of
irrigated pasture and forage crops probably will
amount to only one-third to one-half its normal
extent of some 450,000 hectares. Forced sales of
stock are likely to continue until January or February
1969 and probably will assure an adequate supply
of meat during this period. With the approach of
winter several months later, however, there could
be a shortage of meat, as farmers begin to hold
their stock off the market in anticipation of
improved pasture and watering conditions.
Other Repercussions in Agriculture
8. Livestock losses and inability to grow
crops during the coming growing season will bank-
rupt many Chilean farmers if the government does
not grant emergency financial assistance. In the
absence of such aid and public works programs,
rural unemployment probably will be widespread in
the northern Central Valley and could be as high
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as 100,000 workers, or about 30 percent of the
agricultural labor force in the drought area.
9. The drought also will intensify the finan-
cial problems of the Agrarian Reform Corporation
(CORA), the agency charged with carrying out Chile's
agrarian reform. Although the government had
planned to speed up the pace of agrarian reform
during 1969, budgetary problems could force a slow-
down. CORA is responsible for advancing living
allowances to about 10,000 families settled on
expropriated estates, almost all of which are
located in the drought area. These loans normally
are repayable at harvest time, but this year many
of CORA's cooperative settlements will be unable
to repay them because of the drought. In addition,
CORA may have to meet some financial obligations
of the agrarian reform cooperatives, such as pay-
ments due on past loans and installments due on
land purchases.
10. The agricultural outlook is further clouded
by CORA's stated intention to begin concentrating
its activities in the southern Central Valley,
which is outside the main drought zone and has
been subjected to almost no agrarian reform
activity to date. There is little doubt that CORA
is extending its activities to the south because
of the financial difficulties being raised by the
drought-ravaged farms it presently manages. This
move by CORA could further disrupt agricultural
output, inasmuch as the farmers in the southern
region apparently are organizing and arming them-
selves to oppose the reform by violent means, if
necessary.
11. Thus far the Frei government has not taken
decisive action to help the farmers being affected
by the drought. Its main effort has been to dis-
tribute emergency P.L. 480 food donations to about
8,000 families and to grant free rail transport
for livestock shipments to the southern Central
Valley and for return shipments of forage. A
National Drought Commission has been established,
and the proposed 1969 budget allocates to drought
relief the proceeds of the expected increase of
$40 million in shipments of US surplus foodstuffs
under P.L. 480. The government also has started
an emergency well-drilling program, and a request
for a $2.5 million loan from the US Agency for
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'nternational Development to purchase drilling and
pumping equipment is now under consideration.
Although the government's Production Development
Corporation (CORFO) has given high priority to this
program, the available financial and technical
resources probably will not permit enough wells
to be drilled during the next few months to alle-
viate the drought materially.
12. Extensions of financial assistance to
farmers have been stymied by conflict within high
government and Christian Democratic Party circles.
Some political leaders recognize the need for
action, but supporters of agrarian reform gen-
erally have opposed assistance on the ground that
it would strengthen the forces that are resisting
reform. Some officials of the agrarian reform
agencies, CORA and the Agricultural Development
Institute (INDAP), have advocated that the workers
organize and seize any farm that discharges them
because of the drought. The officials view this
as a way to further the reform in the northern
Central Valley without burdening CORA with addi-
tional estates suffering from the drought.
Impact on Industry
13. Mining and manufacturing output is being
cut back because of reduced output from hydro-
electric powerplants, which account for about
60 percent of total generating capacity. Only
two major hydroelectric plants, which are located
in the southern provinces and account for less
than 10 percent of hydroelectric generating capacity,
have supplies of water that are nearly normal.
Most of the other plants already are operating at
reduced levels of output.
14. Production of hydroelectric power almost
certainly will suffer a further sizable decline
before the end of the summer. As a result of
increased utilization of thermal powerplants,
rationing of power to consumers in the urban areas
has thus far been avoided. The government has
announced, however, that rationing may be neces-
sary starting in November. Increased reliance on
thermal plants, which normally are used largely
for peaking and seasonal needs, will increase
Chile's need for imports of fuel oil.
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15. The El Teniente mine, which produced
almost 30 percent of Chile's output of 665,000
metric tons of primary copper in 1967, is the only
major mine threatened by power shortages, inasmuch
as the others obtain their power from thermal
plants. Inadequate supplies of power from the
two hydroelectric plants serving El Teniente
forced a reduction of 20 percent in its production
during September and October, while the company
installed temporary diesel generating units. El
Teniente's output is presently being held about 20
percent below the pre-drought level by a shortage
of water for concentrating the ore. El Teniente
normally requires about 16 million gallons of
water daily to wash and concentrate the 40,000 tons
of copper ore mined. Although a search for under-
ground water resources is now under way at El
Teniente, production probably will be reduced fur-
ther during the summer. The other large mines have
not reported shortages of water, but more than 50
small mines in the desert around La Serena have
closed as a result of falling underground water
tables, which caused their wells to go dry.
16. The government is trying to alleviate the
shortage of electric power and water for industrial
use but can do relatively little in the short run.
It is attempting, for example, to lease power.-
generating barges to increase the supply of power
in the Concepcion area, which is heavily dependent
on hydroelectric power. CORFO is undertaking to
drill deep wells to supply water to small mines in
Atacama and Coquimbo Provinces, but the resources
being committed to this effort probably are not
adequate to the task.
17. Although the losses in manufacturing out-
put that will result from the drought are diffi-
cult to estimate at present, a small decline in
manufacturing production seems likely in 1969,
mostly as a result of a disruption of output dur-
ing the first six months of the year. Electrolytic
copper refineries, which are large users of power,
may suffer sizable declines in output. Production
losses also could become severe for the food-
processing industry as a result of shortages of raw
materials. Industrial unemployment could be fairly
widespread as a result of mine closings and reduced
manufacturing activity, but the government has not
as yet made public any plans for dealing with it.
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Prospective General Economic Effects
18. The drought will have a growing impact on
the Chilean economy during the remainder of 1968
and throughout at least the first half of 1969.
Gross domestic product (GDP) probably has not been
growing during the second half of 1968 and is
expected to show only a small rise for the year
as a whole. In 1969, GDP may fall below the 1968
level by as much as 3 to 8 percent -- or by 5 to
10 percent per capita. Consumption per capita
will drop sharply in rural areas as a direct result
of losses in agricultural output. Declines in
marketed quantities of domestically produced
grains, sugar, and other nonperishable commodities
may be offset partly or wholly by increased im-
ports, but there will be shortages of fresh vege-
tables, fruits, and milk. Since the Frei government
probably will give priority to maintaining urban
consumption levels, investment activity (which has
been sluggish recently) is likely to be held down
by import constraints and diversion of government
revenues to more urgent uses.
19. Unless the government takes steps to
create jobs, unemployment may increase in early
1969 by as much as 150,000 persons above the pre-
drought level. Such an increase would double the
present unemployment rate of about 6 percent.
Unemployment will be most serious in agriculture,
but decreased demand could force lay-offs in
industrial, commercial, and service enterprises
not affected directly by the drought. There is
also a danger that the greatly reduced flow of
rivers, into which most towns dump raw sewage,
will bring serious pollution of drinking water and
lead to epidemics.
20. The drought's adverse effects on the supply
of foodstuffs probably will cause prices to increase
more rapidly during the first half of 1969 than
during the first half of 1968, when the rise
amounted to 19 percent. Although the government
maintains price controls for a wide range of
foodstuffs, these controls will probably become
ineffective for perishable items, which will be
difficult to import in large quantities. The
prices of fresh vegetables, fruit, milk, and some
meat products thus are expected to increase con-
siderably. Larger imports of basic foodstuffs
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such as wheat and rice should hold down price
increases for these commodities in the majcL urban
areas, although local shortages are likely because
of inefficient distribution.
21. The drought also may :intensify inflation
by adversely affecting tax collections, thereby
increasing the budget deficit. Tax revenues will
be reduced by the decline in incomes in many
sectors of the economy,. In addition, the net
operating revenues of ENDESA -- the government
corporation that owns most of Chile's hydroelec-
tric powerplants -- are likely to decline from
their normal level of about $10 million per year.
Indeed, ENDESA may require emergency operating
funds from the government in 1969.
22. The drought will raise additional diffi-
culties for Chile's balance of payments, which
has improved during the past few years but is
threatened by a sharp drop in earnings from copper
exports in 1969.* The prospective decline in crop
harvests from 1968 to 1969 will require a large
increase in imports of foodstuffs, if the popula-
tion's consumption levels are to be maintained.
Imports probably will have to rise from about
450,000 to 800,000 metric tons for wheat and from
80,000 to 300,000 metric tons for feed grains and
rice. Sugar import requirements may also increase
substantially. Import requirements for beef will
depend on whether the government's rationing pro-
gram (which for several years has prohibited beef
sales on several days each week) is made more
severe. If no new effort is made to restrict con-
sumption of beef, imports could reach $50 million
,-r more in 1969, compared with $31 million in 1967.
* Th-e Chilean government recently reduced the value
of the escudo by 1 percent -- the twenty-first deval-
uation instituted this year to reflect the continuing
rapid rise in domestic prices. Periodic devaluations
can be expected to continue and will help to keep
Chile's small exports of manufactures competitive in
foreign markets. These devaluations will not,, however,
have much effect on the total dollar value of exports,
which depends primarily on the amounts of copper,
other minerals, and fruits and vegetables available
for export and on their prices in world markets.
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23. To compensate for the effects of the
drought, Chile probably will require additional
imports of foodstuffs of $60 million to $80 mil-
lion in 1969. In 1967, its imports of agricultural
products amounted to about $190 million (or almost
one-fourth of total imports). The drought probablLy
will greatly reduce Chile's exports of fruits and
1969 as a direct result of the drought. This
change may be partially offset by increased
foreign assistance and reduced internal demand for
imports of goods other than foodstuffs and petro-
leum. The Frei government apparently assumes that
assistance from the United States and other foreign
sources will finance most of its expenditure for
drought relief. Chile, nevertheless, faces an
added burden on its foreign exchange reserves (which
now amount to about $150 million) and will probably
have to resort to additional foreign borrowing or
more stringent import restrictions.
Political Implications
24. As the party in power, the Christian
Democrats are likely to suffer at the polls next
year from the voters' frustration and displeasure
over the damage caused by the drought. The
economic impact of the drought may well be at or
. near its peak by March 1969, when the congressional
elections are scheduled to be held. The financial
plight of many farmers, the prospect of growing
unemployment, and the failure of the Christian
Democrats to agree on an emergency assistance
program have made drought relief a major political
issue in the countryside. The Frei administration
will be attacked by the other parties for having
made inadequate provisions for drought relief and
may have difficulty setting forth a convincing
defense. Previous presidents have been able to
use natural disasters, such as earthquakes, to
rally support and explain away the economic short-
comings of their administrations, however, and the
Christian Democrats may be able to use the drought
in a similar manner.
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