February 23, 2004

Argentina Wheat Prices Down On Weak Brazilian Demand
 
Wheat prices in Argentina remained low as demand from Brazilian millers, who normally take up the majority of Argentina's wheat exports, are buying less than usual, according to the Argentine Association of Regional Consortiums for Agricultural Experimentation, or Aacrea.
 
On Thursday, local wheat prices closed at around 335 pesos ($1=ARS2.935) per metric ton in the southern port of Bahia Blanca and for 332 at the Rosario Cereals Exchange.
 
Rosario prices are down from around 380 pesos in mid-January and down from 360 pesos a year ago.
 
Brazil appears to be buying less wheat for a couple of reasons, Aacrea said in a report released late Thursday.
 
First, Brazil is producing more wheat, thus reducing, even if only moderately, demand for imported wheat.
 
Brazil produced 5.5 million metric tons of wheat in 2003-04, according to the U.S. Department of Agriculture. This is up from 2.94 million in 2002-03 and 3.25 million the previous year, according to USDA estimates.
 
Of the 5.5 million tons, around 2 million is soft wheat and the rest is a mixture of hard and medium wheat, according to Aacrea.
 
More so than in the past, Brazilian millers are mixing this production of both hard and soft wheat with successful results, which reduces the need for Argentine wheat.
 
"Mills in Sao Paolo are currently mixing hard or medium wheat with softer wheat and are ending up with quality results," according Juan Martin Rebolini, who developed the Aacrea report. "Because of this, the Brazilian industry is not buying corrective wheat from Argentina."
 
Consequently, Brazil bought only 300,000 tons of Argentine wheat in January, compared with around 700,000 tons during the same month a year ago, Rebolini said. So far this year, Brazil has bought only 1,550,000 tons of 2003-04 wheat, compared with 2,400,000 tons of 2002-03 wheat by this time last year, according to the Agriculture Secretariat.
 
"But not only this, (last year) for the first time, Brazil exported some 600,000 tons of wheat and they estimate that this year they could end up exporting close to 1 million tons, mainly to Middle Eastern and North African markets," Rebolini said.
 
Brazilian agricultural leaders have said they want the country to become "self-sufficient" in wheat production within the next three or four years. And while Argentine officials have said this is not a threat to local wheat exports, Rebolini said Brazil's aims must be taken seriously.
 
"This is something we need to keep in mind," Rebolini told OsterDowJones. "What we are worried about is the fact that Brazil is getting good yields in the center-east and production in this area could expand even further, which could drive wheat prices down. Even if climatic problems pose obstacles to the expansion of Brazil's wheat crop, they could boost production, especially in years when the climatic conditions are favorable."
 
But Argentina is seeking to reduce its dependence on Brazil by selling wheat in other markets. And this year Argentina has been successful, Rebolini said.
 
"Fortunately, in the first 45 days of 2004 Argentina sold 1.6 million tons of wheat to other markets and this partially compensated for the situation," Rebolini said in the Aacrea report. "If this year had been like 2003, when we had no important markets other than Brazil, we would be facing a grave problem with respect to local prices."
 
But the situation in Brazil is likely to change soon, Rebolini said.
 
For one thing, Brazilian production probably will only be able to meet the demands of Brazilian millers for another month or so, according to Rebolini. After that, Brazil will need to buy more wheat from abroad.
 
When this happens, Argentina will be able to take advantage of its
proximity to Brazil and beat competition from the U.S., Canada and the
European Union, Rebolini told OsterDowJones.
 
"The freight costs from Argentina to Brazil are only $20 (per ton) while it costs $38 from the Gulf of Mexico for U.S. wheat and $48 from Europe, so Argentina clearly has an advantage," said Rebolini. "Freight costs have soared recently, so while Brazil brought in wheat from the U.S. and Canada last year, Argentine wheat is going to be a better value this year."
 
Beyond Brazilian demand, local wheat prices are also being kept down because local production is up, according to Aacrea.
 
Indeed, on Wednesday, the Agriculture Secretariat estimated that 2003-04 wheat output will total a much better-than-expected 14 million tons.
 
This puts production far above some earlier estimates and up substantially from 12.3 million tons a year ago.
 
Just last month, the Secretariat forecast production at only 13.2 million tons. Moreover, last year some local analysts, citing a long drought, said 2003-04 output might not even surpass 10 million tons.
 
"This has negatively affected the prospects for wheat prices in the domestic market," said Aacrea.
 
But prices probably will not be depressed for too long, Rebolini said.
 
"Local wheat prices will be pretty calm in February and will tend to rise in March and go up again in April and May," said Rebolini, citing an expected increase in demand from Brazil and other markets.