Reforms boost Argentine grain industry

by Pamela Aguirre Leonetti
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Just days after taking office last year, Argentina President Mauricio Macri implemented significant changes in the country’s agricultural sector. First and foremost, he announced a 5% reduction of the export tax on soybeans and its byproducts and the elimination of export taxes on all other agricultural commodities.

In addition, the president fulfilled two other campaign promises: he eliminated the export permit system known as the Register of Export Operations (ROEs), and he rolled back what was popularly known as the “dollar clamp,” which lifted capital controls and in so doing devaluated the Argentine peso by about 45%, boosting the competitiveness of the agricultural sector.

Because of these policy changes, Argentine grain producers and analysts see a favorable future for the country’s grain industry. Speaking to World Grain, Guillermo Rossi, grains and oilseeds analyst at the Board of Trade in Rosario (BCR), a key agricultural shipping port in Argentina, said the elimination of export taxes has improved producers’ profitability and it will surely have a positive impact on planting decisions for 2016-17 and beyond. He said wheat and corn are the two grains that benefit most from these policies, followed by sunflower.

Soybean output is not as favored by the changes, he said, since producers still pay high export taxes. There is a 30% tax on soybean exports and a 27% tax on its byproducts.

Rodolfo Rossi, president of the Association of the Argentine Soybean Chain (ACSOJA), said that the sector reacted positively to the new policies since they place producers in a better position to plant crops such as corn, wheat and sunflower, which will in turn lead to more sustainable agriculture. He also said producers are already investing more in equipment, something they haven’t done for many years.

“With the new policies, the country becomes more competitive. Exporters don’t have to add the payment of high taxes to the efforts they already make to create profitable prices for producers, and this increases export sales and allows the country to look for new markets for its crops,” said Guillermo Rossi.

Although he thinks the true impact for the sector will be seen in the 2016-17 season and beyond, as the elimination of export taxes and all the other polices came after producers had harvested or already planted their 2015-16 crops, Rossi said there will also be some positive short-term outcomes.

He explained, for instance, that this year wheat and barley exports will increase by nearly 50% compared to last year, while export sales of soybeans and its byproducts will also increase and probably set records in the case of soybean meal (32 million tonnes) and soybean oil (6 tonnes). In fact, in January and February export sales of soybean meal were close to 5.5 million tonnes, compared to 3 million tonnes that had been sold during the same period last year. Of course, the negative consequence of these greater supplies and of Argentine return to the international market is the bearish positions across agricultural commodities.

For the 2015-16 season, total grain production, according to Guillermo Rossi and BCR expectations, may reach 115 million tonnes, including 9.6 million tonnes of wheat, 24.5 million of corn, 59 million of soybeans, 3.2 million of sunflower, and 3.3 million of sorghum. The remainder will include export sales of grains, flours, oils, and biodiesel, which will amount to $24 billion at current international prices. Wheat and corn export sales in the 2015-16 season are forecast at 7 and 9 million tonnes, respectively. It is estimated that soybean production will reach 56 million tonnes, of which 90% will be exported either as grain or as industrialized products.

Regarding expectations for the 2016-17 season, Guilleromo Rossi expects an increase in grain planting areas, with an increase in corn and a decrease in soybean plantings, and a growth in the total agricultural area, especially in the northern part of the country. As a result, production is expected to increase the most in wheat and corn, followed by sunflower.

He said wheat was the most harmed by former policies and because of that, as well as other factors, there were still 4 million tonnes waiting to be sold by the end of November 2015. He said wheat will benefit the most with the changes that have been implemented.

“For the 2016-17 season, we expect an increase of at least 30 percent in wheat production,” said Guilleromo Rossi.

David Hughes, president of ArgenTrigo, the Argentine Wheat Association, has similar expectations. “It seems that conditions are given to plant a lot. During a first stage, we expect at least an increase of 25 percentage points in wheat production. This percentage can be higher, but we must be cautious because producers are just recovering from more than 10 years of unfavorable policies,” he said.

Hughes also pointed out that until recently the weather has helped the agricultural sector and that the soil moisture is good for planting, which will support the increase of wheat production.

On the other hand, he said that this year the price relationship between wheat and nitrogen fertilizer is really good and will help to improve soil quality.

Regarding planting areas, Guilleromo Rossi said wheat could gain 1.5 million hectares this year, while Hughes believes there will be a gain of at least 1 million hectares. In 2015, the average wheat area was about 3.4 million hectares, according to the Board of Trade in Rosario and ArgenTrigo estimations. So if there is an increase of between 1 million and 1.5 million hectares this year, the new wheat season will be about 4.4 and 4.9 million hectares, which means an area increase of 30% to 44% in comparison with 2015.

Thus, it seems that the 2016-17 wheat season will be very good, although the figures are still below what Argentina used to plant and harvest. Average wheat area between 2000 and 2008 was about 6 million hectares.

In the case of wheat, Argentina, at least in recent years, has been producing lower quality wheat than in the past. The amount of protein is low because of infertile soil and inadequate crop rotation, and that has a negative impact on prices and export opportunities.

“Last year, investments in fertilizers were low and that affected mainly the amount of protein of the grain, which is on average 9.5% on a wet basis, a figure that amounts to approximately 11% on a dry basis. That’s why now we have lower trading prices as more than half of the wheat is not good for bread. The import standard for medium- to low-quality wheat should contain a minimum of 12% protein on a dry basis and can only be sold as forage wheat,” said Guillermo Rossi.

Selling to Egypt again

Regarding export sales, Rossi said wheat exemplifies the positive consequences of the new policies since soon after the changes were announced, in December 2015, Argentina sold wheat to Egypt, the world’s largest importer, for the first time in three years, selling 123,000 tonnes.

Argentina also closed deals with South Korea after more than a decade and with Vietnam after more than eight years. In January Argentina sold 28,600 tonnes to South Korea and 20,000 tonnes to Vietnam.

Rossi expects wheat export sales for the 2015-16 season to reach 7 million tonnes, which almost doubles last year sales. However, due to the drop in international prices, the increase in value will be less. From this 7 million, almost 45% will be bread wheat, while the other 55% will be low protein wheat, whose FOB value is reached by a 10% discount or more.

Hughes said the agricultural sector is pleased wtih the active role the government has been playing to help them place the grains in the international market. He said that he had just returned from Brazil, where he met with Brazilian agricultural representatives and the Minister of Agricultural Affairs of the Province of Buenos Aires, Leonardo Sarquís, who told Brazilian authorities that Argentina wants to be Brazil’s preferred wheat supplier.

Experts agree that Brazil will continue to be the main importer of Argentine wheat since it needs 6 million tonnes of wheat annually. However, Rossi said the Brazilian market is facing serious challenges. Its domestic flour demand dropped due to recession and the situation was worsened by the devaluation of the Brazilian real, which reduced the purchasing power of imports. The recent strength demonstrated by Brazilian currency is good news for Argentina, but in this uncertain context Argentina must also be prepared to look for new markets to sell its wheat.

Both Hughes and Rossi said that, apart from Brazil, Argentina will look for new markets mainly in North Africa and in Asia, where Argentine wheat is already well known. The greatest challenge is to recover the credibility that was lost due to the drastic variations in export sales from one year to the other and the uneven wheat quality, they said.

Hughes said the country is also working to sell wheat to China, and that the sector is eager to fully come back to the international market. Of course, this will depend not only on Argentine policies but also on the output of wheat producers such as Canada, the U.S., Australia, and the countries in the Black Sea region.

Corn area to increase

The other crop that has greatly benefited from the new policies is corn. Rossi expects that during the 2016-17 season corn area may increase by approximately 1 million hectares from 2015, reaching 5.2 million hectares.

Rossi said Argentina’s corn export markets are diverse, but Africa and Latin America are the most important.

He said sunflower area could increase by 400,000 hectares or more in the 2016-17 season.

The production of this oilseed for the 2015-16 is forecast at 3.2 million tonnes, of which more than 90% will be targeted for industrial purposes, such as crushing, and less than 10% will be exported as grain.

Sorghum and barley planting areas will remain relatively stable, Rossi said, whereas rice and cotton may undergo some positive changes. As for barley, its export markets will depend on its quality, Rossi said. Forage barley will probably be sold to Saudi Arabia and other Arab countries, while malting barley will be mainly sold to Latin American countries, primarily to Brazil but also Uruguay.

Soybean production is a special case under the new Argentine agricultural policy since it is the only commodity that still has to pay high export taxes. Rodolfo Rossi said the elimination and reduction of quotas on agricultural exports has two main impacts on soybeans.

He said the 5% export tax reduction on soybeans and its byproducts has not had a real impact on the crop profitability, which is minimal in those regions located far away from ports or with low crop yields. That’s why the entire soybean chain has asked for a reduction in production. But, he added, soybeans will still be the best option in regions where other crops tend to be more risky to grow and require greater investment.

Rodolfo Rossi expects wheat area will increase by at least 1 million hectares near the cities of Pergamino, Salto, and Rojas, and this will have a direct impact on soybean production as it was the main crop in that area in recent years. It is also expected that the rise in wheat area might lead to an increase of what is called “second-rate” soybeans. These soybeans are planted at the end of November and beginning of December, once wheat has been harvested.

He said that the ACSOJA expects about 56 million tonnes of soybean production for the 2015-16 season, while for the 2016-17 season he expects 55 million tonnes based on average crop yields and the decrease of soybean area.

Export sales for soybeans for the 2015-16 season will amount to more than 95% of production, including soybean meal, oils, biodiesel and whole soybeans, which will amount to approximately 53 million tonnes, he said. Rudolfo Rossi said he expects export markets to remain stable, with about 10 million tonnes of soybeans being sold to China, and soybean oils being sold to India and other Asian countries.

For the 2016-17 season, he does not expect major changes in Argentina’s soybean export markets. Europe, for instance, will still be the major importer of soybean meal. However, Argentina might add markets in Africa and Eastern Europe for its soybeans, he said. Rossi also said that producers will closely follow what happens with inflation and the exchange rate since these two variables may have an impact on the sector.
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