SNAP ANALYSIS: Chavez food industry move seen as risky

CARACAS (Reuters) - President Hugo Chavez seized a local unit of American food giant Cargill on Wednesday and threatened Venezuela's largest private company, renewing a nationalization drive as the OPEC nation's oil income plunges.

The clash with food companies, demanding they produce cheaper rice, came less than three weeks after he won a referendum allowing him to run for reelection.

Below are some reasons for and possible consequences of his first nationalization in seven months.

* After a two-year-long nationalization drive that included energy, telecoms, steel and cement companies, Chavez is moving on to food production, one of the last strategic sectors of the economy still largely in private hands.

Venezuela has one of the highest inflation rates in the world and food costs soared last year despite Chavez's attempts to control prices. He hopes a tighter government grip on food production will help keep prices down.

With oil revenue falling, Chavez has put on hold the costly purchase of a local unit of Santander bank due to a lack of funds. His referendum victory in February gives the close ally of Cuba the political capital despite his lower income. Takeovers in the food industry are relatively cheap and will still win points with supporters.

Wednesday's takeover is part of a wider drive to increase food production in Venezuela. The government says it plans to double the amount of cultivated land in Venezuela over the next four years and this week announced it will issue $1.9 billion in local currency bonds to finance agricultural projects.

* The plan is a risky one. As well as taking over the Cargill unit and threatening Venezuela's top food company Polar, Chavez this week created tough new quotas which oblige companies to direct most of their output to products with price caps.

Many economists and businessmen say the government's hand has distorted the market, discouraging investment and leading to sporadic shortages of products like milk and chicken which severely damaged Chavez's popularity in 2007 and contributed to his loss in a referendum -- his only defeat at the ballot box.

Chavez largely overcame shortages last year by massively increasing imports and making the state oil company set up a food distribution network. But lower oil income could force the government to devalue the bolivar currency. If that happens the cost of imports will shoot up and shortages could resurface as a political issue.

It is not known how the government will achieve its goal of doubling cultivated land, but in the past it has taken over big farms it deems idle and given them to peasant movements. The land reform has sparked violence in the countryside, with dozens of peasant farmers murdered in the last few years.

* Cargill, one of the world's largest private corporations, says it has only a 2 percent market share of Venezuela's rice industry. Operating in more than 60 countries, Cargill's Venezuelan rice unit is a tiny part of the agribusiness and trading giant's assets.

But the takeover by a man who calls capitalism evil is symbolic of Chavez's drive toward socialism and will further stoke fears that foreign companies, particularly U.S. ones, are unwelcome partners in the oil-exporting country.

Despite a rapidly growing economy in the last few years and Venezuelans' avid consumerism, foreign investment in the country has slowed to a trickle.

* Wednesday's move could also signal a new phase in Latin American leftist nationalism. Chavez's allies, in countries such as Bolivia and Ecuador, followed his lead in recent years by moving against foreign energy and mining companies in an offensive that helped boost government popularity. Now they could also take up the offensive against food companies.

Argentina's center-left government has been in an on-and-off battle with farmers since it tried to raise export levies on soy a year ago, sparking a prolonged political crisis. The government in recent days floated the idea of nationalizing grains trade, which alarmed farmers already upset over years of restrictions on exports of products including beef and wheat.

(Additional reporting by Saul Hudson; Editing by Eric Walsh)