THE BACKGROUND

Requested by AAPROTRIGO authorities, this short summary prepared for Dr. Wilson gives a broad view of the main issues regarding wheat marketing in Argentina. Special attention has been given to certain quality concerns affecting trade and price formation.

Wheat is one of the traditional crops of the Pampas and probably the oldest grain produced in Argentina. In the first 3 decades of the last century, wheat production expanded at a high pace transforming the country in one of the main wheat exporters of the world. In the 30’s, Argentina exported more than 30% of the wheat traded internationally.

Since then and until the 90’s, wheat production stagnated owing to different reasons. The use of export taxes and a negative exchange rate environment affected agricultural production in Argentina for more than 50 years. During most of that time wheat marketing was also influenced by state intervention thru the formation of a National Grain Board. In certain periods (the mid 40’s and the mid 70’s) grain trade was exclusively managed by State authorities. Long lasting inflation, farm credit scarcity and high interest costs were also a predominant feature during a good part of those years. Periods of high international prices and some internal currency devaluations generated occasional high profitability gaps with corresponding area expansions which didn’t alter the general trend.

The deregulation of the agricultural economy and the elimination of export taxes in the 90’s created a much more positive scenario for wheat production and trade in Argentina. As it can be seen in the attached charts, area planted with wheat started to recover. Nevertheless, it is still quite below the highs reached in the 30’s. It must be noted here that Argentina’s agriculture has experienced a dramatic switch towards oilseeds (particularly soybeans from the 70’s onwards). This has substantially altered the proportion of winter and summer crops planted in the country. This reality also demonstrates some of the important climatic changes faced by the Pampas in the last 30/35 years.

Wheat production in Argentina has evolved quite positively since the mid 90’s. Average 

 

 

production in the first part of the 90’s reached 10,34 million tons (practically without changes in relation with the 80’s average), whilst in the second part of the decade the average was 14,91 million tons. Such evolution has significantly increased the exportable surplus because domestic wheat use has historically been a sleepy variable, owing to the low population increase and the traditional high levels of per capita consumption.

Presently Argentina is the 5^th. exporter of wheat with a market share of approximately 10% of world trade. The country produces mainly two types of wheat. The biggest in importance (98,5%) is the widely known argentine bread wheat which involves different types of winter wheat. Although all wheat registered varieties are defined as hard wheat, the legal definition is so broad that medium hard (or medium soft) varieties are also acceptable for planting. As time passed, original argentine wheat varieties have been crossed with others resulting from the green revolution and also Mexican varieties. Lately, high yielding French varieties (baguette) have also been introduced and are expanding. As for Durum wheat, it stands for the other 1,5% (approximately 200000 tons per year). Durum production reached about 3 or 4 times the present level back 25 or 30 years ago, giving the country in those days certain importance in durum wheat international trade.

 

MORE RECENT DEVELOPMENTS. DEMAND AND THE ISSUE OF PRICE FORMATION

The Mercosur Agreement was the most important recent development in relation with argentine wheat exports. The weight of Brazil as a wheat importer increased during the 90’s reaching the top of the list in 1994 and from 1999 onwards in USDA world trade statistics. Most of the increase in brazilian imports was originated in bigger argentine exports. The graph in the following page clearly shows that argentine wheat exports benefited from that agreement, something that has helped local farmers in their continuous struggle against European Union (EU) and US export subsidies. The lack of an internal support policy and the high proportion of local production that has to be marketed overseas, has historically left argentine producers completely exposed to the behaviour of international prices, particularly after the National Grain Board was dismantled in the early 

 

90’s. Under these conditions, the Mercosur’s Common External Tariff (CET) has been a real “protection umbrella”.

Prior to these events Argentina has been a real menace for the traditional club of wheat exporting nations. The long remembered russian grain embargo in the early 80’s was a good example of such definition. At least for a couple of years, the country benefited from massive wheat sales to the Soviet Union which were fostered by National Grain Board negotiations. Something similar can be said about the key importance of Argentina as a provider of wheat and other grains to Iran for several years after the fundamentalist revolution. It can be said that in all these cases, Argentina used those opportunities as a way of compensating European and US production and trade subsidies and access barriers that have long distorted the international wheat market.

The table in the next page clearly shows that the Mercosur Agreement has helped argentine wheat prices to achieve a much more reasonable discount in relation with the value of US wheat during the December /February period which is the high season in terms of sales.

Nevertheless, as the evolution of FOB prices shows (see graph in page 5), argentine wheat quotes are traditionally the most seasonally volatile of all wheat prices in the world market, something that affects domestic price formation. Presently this happens basically because of two reasons.

The main one is a combination of the lack of working capital (that involves not only the farmer but also other members of the marketing chain) and insufficient storage facilities. This forces farmers to pressure the market at harvest time, impelling exporters to search for international demand that can absorb those volumes. Most of that demand is from non-Mercosur destinations (Muslim countries and  African buyers) which at harvest time always compare argentine FOB prices with alternative subsidized offers from the EU or other 

 

cheap providers like the Black Sea countries. Once those initial volumes are committed, the market starts to reflect (usually in March or April depending on the volume of the crop and the pace of commitments) a different price equation which mainly involves the purchasing paying capacity of brazilian buyers. At this stage the Mercosur’s CET forces FOB prices higher, pressuring FAS prices in the same direction.

The second reason has to do with the way in which exporters and end local users (millers) manage their purchasing policy. In the first case, wheat at harvest time has to be handled quickly and shipped accordingly. Thus, quality issues are not privileged. As for millers, they try to benefit from the rush buying as much as their working capital and storage infrastructure allows them. They know that wheat at harvest time is usually the cheapest wheat and little attention is given to quality concerns except in those years when local production has some type of quality deficit (fungus problems, sprout or test weight/protein failures). All wheat is marketed locally thru a commercial grading standard which is the only practical quality rule enforced by state authorities. This standard divides wheat in 3 grades establishing premiums or discounts. Base grade is Ner. 2. Protein content above 11% (13,5% moisture content) receives a bonus and discounts are also applied.

In the case of the milling industry, quotes are usually given assuming that wheat complies with Article 12 of ex - National Grain Board Resolution 26776 which refers that gluten has to tie. Apart from those two issues, there are no other quality specifications. But millers do classify wheat at their bins, and after harvest time purchases are over, they start to originate wheat differentiating prices according to the quality aspects they need to improve in each marketing year. Thus, price differentials start to develop at the FAS level also because of this reason.

 

THE SUPPLY SIDE

As for the supply side, it is convenient to know that argentine wheat is produced in two main regions of the Pampas: the so called northern and southern wheat belts. The northern belt (that mainly involves the provinces of Entre Ríos, Santa Fe, Córdoba and northern Buenos Aires) accounts for a little more than 40% of total production. The southern belt (which involves central and southern Buenos Aires and La Pampa) 

 

represents a bit more than 55%. Other marginal areas (mainly northern provinces) account for 3% or 4%.

In the northern belt wheat plantings are increasingly performed thru a system of double crop production with soybeans. Rotation practices combine this type of production with corn. This intense agricultural model has been fostered by minimum or cero tillage methods which are increasingly popular between farmers. Thus, in the northern belt, the wheat crop has to be moved fast and is commonly used by producers as a way of generating hardly need cash resources at the end of the year (December/January) after harvest.

Besides, storage facilities are not abundant (particularly between farmers) and the arrival of the corn and soybean crops from mid-March onwards generates the consequent physical pressure. Under these conditions, producers are forced to sell at a rapid pace or eventually use “price to be fixed” contracts taking advantage of exporters and millers storage facilities. It must be noted that this special marketing characteristics are quite different from the US or Canadian models, where farmers own a much bigger proportion of the available storage capacity, have sufficient time, infrastructure and available credit for adequate quality classification and are encouraged by transparent market price differentials and agricultural policies and quality rules to assume the segregation work.

Lately, new farm storage methods using long plastic bags have reduced the storage availability problems. But this new system has not been designed for segregation purposes and the rest of the above mentioned variables are not solved by this development.

As for the southern belt, wheat is much more a “must” choice for farmers. Southern wheat is generally recognized as a better quality wheat. In fact the only massive alternative crop for this area is sunflower and to a lesser extent corn. Besides, producers have a bigger proportion of storage facilities in this region and more time for quality handling. But even still with these more favourable conditions, wheat segregation is not a general practice between producers. Most of them argue that it doesn’t pay, although this way of looking at the problem is a matter of debate.

 

FINAL COMMENTS

Since early 2002, currency devaluations and export taxes have returned to argentine economic life. The country is facing the most critical economic and financial crisis in recorded history and the issue of grain price formation involves today other factors which have not been mentioned in this summary. Information not provided herein will be matter of discussion upon the arrival of Dr. Wilson to Buenos Aires in early August.