November 18, 2009

Government intervention in agricultural markets has caused corn and wheat trade at the local grain exchanges to plunge and is depriving the sector of the reference prices needed to make planting and investment decision, according to a report from local think tank Fundacion Mediterranea.

 

Traders are frequently unable to close deals for the two grains due to repeated closure of corn and wheat exports and government price accords with millers and exporters, according to Fundacion Mediterranea.

 

During the first 10 months of the year, wheat was traded on just 64 of the 207 days the Rosario Grain Exchange was open. Corn was traded on just 108 of those days. Similar results were posted during the same period in 2008, when a series of farm strikes over four months shut down the exchanges, in addition to sporadic export closures.

 

In 2007, before the government began to intervene heavily in corn and wheat markets, the grains were traded on almost every day the exchange was open.

 

Government policies are the main reason for the market distortions, said Rosario Grain Exchange chief analyst Rogelio Ponton.

 

"When there's no market, there are no prices. When there are no prices, no one knows how much things are worth. When no one knows what things are worth, no one knows if it makes sense to buy or sell, to grow or not or invest," Fundacion Mediterranea said.

 

In September, the government announced it had reached a deal with grain exporters and millers to open up wheat and corn shipments while guaranteeing domestic supply.

 

As part of the deal, exporters agreed to pay farmers a theoretical Free-Alongside-Ship, or FAS, price determined by the government. That theoretical FAS price is the Free-On-Board price minus export taxes and transport costs.

 

The government agreed to grant export permits for 2009-2010 corn and wheat in exchange for a commitment from exporters to ensure 6.5 million tonnes of wheat and eight million tonnes of corn for domestic supply. Exporters will sell back supplies if the government finds the crops have been oversold.

 

Despite the agreement, farmers have yet to see those higher prices.

 

The intervention in the markets has stifled the normal competition between exporters and local millers which worked to set prices at the exchanges and is causing farmers to receive less for their grains, according to the study. The constant spectre of government intervention leads buyers to deduct a risk premium from the purchase price they're willing to pay.

 

The uncertainty has led farmers to shift away from corn and wheat and increase planting of soy. The government hasn't moved to close soy exports, as there is virtually no domestic demand for the oilseed.

 

Wheat planting this season fell by almost 40 percent on the year and marks the lowest amount planted with the grain since records have been kept. Corn area is expected to fall by at least 24 percent this season compared to a year earlier, while soy area is expected to jump 7 percent and set a new record.