December 18, 2006

 

Argentina government intervention stunting farm output

 

 

Government policies to hold down domestic food prices are stunting production in the meat, wheat and corn sectors and spurring a shift to greater soy cultivation, according to Rogelio Ponton, the director of the Economic Studies Department of the Rosario Cereals Exchange, the largest in Latin America.

 

"The government has committed major mistakes...and farmers do not have the certainty needed to invest in increased production," Ponton said.

 

Over the past year, the government has intervened in the meat, wheat and corn markets to limit exports in an attempt to contain domestic inflation in food prices.

 

Last week, Argentina's leading farm groups went on strike for one week to protest government intervention in agricultural markets. The strike was the second this year. In July, the Argentine Rural Confederation held a four-day strike in response to government meddling in the sector.

 

In March, the president blocked all beef exports as domestic prices soared, driven by export demand. The ban has since been eased and now beef exports are limited to 70 percent of 2005 levels.

 

Similarly, the government recently shut down the export registry for corn and wheat as high international prices threatened to drive up domestic prices of bread and grain-fed poultry and pork. New crop export declarations had reached unprecedented levels. The government is currently studying mechanisms to allow farmers to benefit from the high international prices without boosting domestic prices.

 

"All these measures against corn, wheat and meat, would cause farmers to say we're going to go towards soy where we don't have any internal problems because the domestic consumption of soy is very small," Ponton said.

 

Argentina is the world's leading exporter of soymeal and soy oil. But because of low domestic usage and a consequent lack of any impact on domestic inflation, surging soy prices have avoided government scrutiny.

 

Soy production has soared over the past decade, with 15.6 million hectares dedicated to the beans in 2006-07, compared with 5.2 million hectares for wheat and 3.4 million hectares for corn, according to the Agriculture Secretariat.

 

Some 480,000 hectares also were shifted from cattle pasture to soy cultivation this year, according to a report from the Buenos Aires Cereals Exchange.

 

However, there is speculation that the government may step into the soy market to prevent increased production at the expense of meat and grain output.

 

"With farmers moving towards soy, there are implicit threats that the government would increase the export tax on soybeans from 23 percent to 30-35 percent," Ponton said.

 

Increased tension following the farm strike has made such a move more likely, said Ponton.

 

"Dialogue broke down due to the strike and threats of new strikes and nobody wants to back down...it wouldn't be strange if the government raises the export taxes (on soy)," he said.

 

Argentina has greatly expanded soy crushing capacity over recent years. The soy industry generates some US$9 billion a year in revenue, Ponton pointed out, 70 percent more than oil and gas exports.

 

Argentina has a soybean crushing capacity of 150,000 tonnes a day. Only the US has greater capacity, at 170,000 tonnes a day, Ponton said.

 

High international corn prices this year would have stimulated much greater corn production if not for fears of government intervention, he said.

 

"Corn could be an excellent investment, but farmers do not know what would happen due to the government's pressure to keep down domestic prices, so they're not planting as much as they would otherwise," Ponton said.

 

With firm demand due to higher US corn consumption for the production of ethanol, Argentina would have had a great opportunity to fill the void created by lower US exports, he said. Argentina is the world's second leading corn exporter behind the US

 

Ponton said that Argentina has lost similar opportunities with beef exports.

 

Last year, there were conditions where Argentina could export large volumes at high values, with Russia buying lots of meat and the European Union and US suffering outbreaks of mad cow disease, while Brazil struggled with foot and mouth disease, he said.

 

However, government limits on exports deprived farmers of this windfall, said Ponton.

 

Argentina's beef exports during the first 10 months of 2006 fell 23 percent compared with the same period last year, according to the animal and food-inspection agency, Senasa.

 

Likewise, wheat growers have missed an opportunity presented by production problems in Europe and Australia, which drove up prices this year, Ponton said.

 

The series of government interventions in agricultural markets are indicative of an anti-market sentiment within the government, he said.

 

"Some officials and economists assisting the government have the idea that one has to control earnings and this does not fit with a capitalist system," said Ponton. "Here in Argentina there is the idea that the producer should not make too much money.

 

The government would likely change a bit, but they are clearly not going to allow prices to increase before the presidential elections in October 2007, said Ponton.