Advancing grain trade in Argentina
July 01, 1998
by Teresa Acklin
Argentina increases participation in grain trade by improving grain handling systems, infrastructure and markets.
By Eric Schroeder Assistant Editor
Argentina, with 35.5 million people and a vast array of natural resources at its disposal, ranks as the eighth largest country in the world in terms of land area. The country covers 2.8 million square kilometers including a wide temperate belt that is ideally suited for agricultural production.
As such, with the onset of the 1990s, Argentina, through several major policy changes and a strong desire to expand its agriculture, set out to become a world leader in grain production and grain trade. By addressing problems that existed in its grain handling systems and infrastructure, Argentina has been able to achieve beyond its expectations.
Several major programs and organizations have been developed in recent years that have allowed Argentina to use its available land and resources to better accommodate its more than 35 million inhabitants. As a result, wheat, soybean and maize production, along with wheat and maize exports, have risen to record highs.
Of particular importance in recent years has been the establishment of Mercosur, the regional trade agreement that has enabled the countries of Latin America to trade freely among themselves. Argentina has approached these new markets with an eye towards becoming more influential on a global scale. Thanks to a series of programs aimed at reducing trade restrictions, Argentina has been able to compete for markets that previously were controlled only by the United States, Australia, Europe and Canada.
The road that Argentina has taken to get where it is today has been one of many ups and downs. Problems eliminating smuggling, abolition of the Argentinean grain board and the change from a military government to civilian government have at times left the country struggling to find an identity. Patience and endurance have paid off though, as Argentina as risen to the ranks of the world's elite in terms of exports of wheat, soybeans and maize.
Argentina's agricultural history has been shaped by a series of on-again, off-again decisions regarding the sector's structure. Beginning in 1933, when Argentina's government spent time and money developing a national scheme that would allow for country and terminal grain silos to be operated under government control, the country has been trying to shape its grain industry into a competitive world power. The Junta Nacional de Granos (J.N.G.) was established in 1955 and served as the national grain board in Argentina for 36 years. In 1973, the J.N.G. took on additional responsibilities to become the only trader in wheat, maize, grain sorghum and sunflower seeds in both the domestic and export markets of Argentina. The role of grain trader was short lived for the J.N.G. though, as grain trade returned to private hands in 1976.
Following the return of the grain trade to private hands was a sequence of events that jump started the grain industry in Argentina. Initially, a program was established to set a fixed margin between international and domestic prices that guaranteed producers of major grains an 80% to 85% return on exports. The following year, Argentina received a loan from the World Bank to be used to revitalize the grain distribution system. The U.S.$105 million loan was spread over 15 years towards the spending of U.S.$280 million on a “project to improve its grain marketing and to stimulate grain production and exports.” The remaining U.S.$175 million was provided by the grain board, private banks, Argentinean railways and Argentina's government.
The World Bank loan was an instrumental step in the development stages of Argentina's grain industry. The loan allowed the country to strategically develop ports and marketing systems and to set the groundwork for future growth.
In 1979, a major barrier inhibiting growth was resolved as the private sector received the go-ahead to construct export facilities and to rent state-owned storage capacity for private use. With the construction, the export market of Argentina was well on its way towards rapid expansion. Total wheat exports in 1979 registered 4.7 million tonnes, the third highest total in the previous 20 years. The following year, coarse grains and maize exports established highs in exports, further showing the benefits of expanded export facilities.
In 1982, which was the first “boom” year for many agricultural products in Argentina, total exports amounted to U.S.$7.6 billion, with agricultural exports accounting for 75%. Of total agricultural exports, grains represented 40%, for total U.S. sales of $4.2 billion. Wheat exports increased to 9.8 million tonnes after totaling only 3.6 million the previous year.
By the mid-1980s, Argentina had shifted from a military to a civilian government and had completed most of its major export facility construction. In 1986, Argentina had 28 ports and 110 milling establishments located across the country. Total wheat processing capacity had reached 4.5 million tonnes and wheat production, according to the Argentine Rural Society, was expected to double if the government could encourage further expansion in planted hectares.
While wheat production did not double, it did increase, leading Argentina into the 1990s with a strong identity and a vast array of resources in which to develop an expanded export market.
Development of Mercosur.
For Argentina, 1991 was the year that production, exports, infrastructure and markets came together in a cohesive manner. In 1991, Mercosur was created by the Treaty of Asuncion, which was signed on March 26 and took effect in November. Original members of the group included Argentina, Brazil, Paraguay and Uruguay.
The goal of Mercosur was to bring together the markets of the member countries in order to create a more open system of trade. By forming a pact among the countries of Latin America, Mercosur officials hoped to bring the organization to a level comparable with European Union and United States institutions. While no immediate economic impact was felt by Mercosur countries, the groundwork had been established for future productivity.
Equally important during this same time was the abolition of the Junta Nacional de Granos. With the elimination of the grain board, many millers in Argentina were given even more control in terms of marketing their products. In addition, all ports were transferred into private hands.
In 1992, Argentina's wheat exports accounted for about 5% of world trade and wheat production accounted for 2.5%. Exporting was turned over completely into private hands, and all taxes on the export of wheat, maize and oilseed meal were eliminated. PROMEX, a branch of the Argentine Secretariat of Agriculture, was created to increase Argentina's exports of non-traditional agricultural products in foreign markets.
Between 1991 and 1993, Argentina's total exports to Mercosur countries increased 86% from previous years, going to U.S.$3.7 billion from U.S.$2 billion. Countries in the Mercosur bloc absorbed 28% of Argentina's exports during this time.
Mercosur was officially put into effect in December of 1994, and the further blossoming of Argentina's agricultural sector quickly followed. Mercosur, which calls for the gradual elimination of all tariffs on goods originating in and traded among its member states, amassed U.S.$11 billion in trade in 1994. In addition to the elimination of tariffs among member states, maximum tariffs on all goods dropped to 20% from 50%, reaching an average tariff of about 10%, down from 39% in 1989.
Mercosur countries accounted for 33% of Argentina's total exports in 1994, with Brazil maintaining its role as the dominant destination source by accounting for 20%. Brazil also absorbed almost half of Argentina's cereal grain shipments, including 80% of rice exports, 70% of wheat exports and 42% of flour exports. These figures are astounding when considering that prior to 1991 and the establishment of Mercosur, very few Argentinean mills exported to Brazil. Currently, Brazil produces around 2 million tonnes of flour per year after producing nearly 6 million tonnes per year prior to Mercosur.
Another influencing factor during this time was the Convertibility Plan, which serves as a quasi currency board that provides stability for the country. The plan helped to control inflation and increased the average annual gross domestic product by more than 7% during 1991 to 1994.
By 1995, wheat trade for Argentina was almost entirely centralized within Latin America. Brazil was once again the leading market for wheat, accounting for about 65% of total wheat exports.
Also by 1995, the structure of the milling industry in Argentina had undergone more change. As part of a consolidation process, the small, inefficient mills slowly disappeared, while stronger firms grew in capacity or were bought by large, multinational firms. All these changes helped lead Argentina into what has become the greatest agricultural production phase of its history.
Discovering New Horizons.
In 1996, Argentina achieved something that has rarely been done anywhere in the world: record crop numbers in maize, wheat and rice. This huge outburst of production was partially made possible by Argentina's ability to be competitive in new markets.
North Africa, Eastern Europe and the European Union became new targets for Argentina's record wheat crop of 15.9 million tonnes. Throughout this time, Mercosur relations also continued to improve, with Brazil maintaining a heavy reliance on the agricultural products of its neighbor.
Another reason for the boom in production and exports was the privatization of grain elevators. By privatizing the grain elevators, the government helped the country lower existing handling rates. Because most elevators are owned by grain traders the privatization allowed for lower related transaction costs.
The figures surrounding Argentina's grain industry in 1996 were astounding. In addition to achieving record production numbers, the industry also witnessed wheat and maize exports that each surpassed the 10-million tonne mark for the first time in the country's history.
Production and export numbers in 1997 were slightly off from the record totals established in 1996, but were still extremely high. Agricultural-related exports climbed to a record total of nearly U.S.$9 billion, with soybean exports rebounding from an eight-year low of 750,000 tonnes to a very respectable total of 2.1 million tonnes.
Total grain storage, which in 1984 was 30 million tonnes, grew to an estimated total of 43 million by 1997. Much of the grain storage has been constructed in the countryside, making it more sensible for the farmer to hold onto the grain until prices are advantageous. Argentinean farmers have recognized this and have centered much of their expansion in the areas most convenient for transporting and storing the grain.
Argentine farmers also have begun to improve their marketing practices, realizing that improved production practices alone do not guarantee profitability. For this reason, both farmers and industry have been making wider use of available marketing tools. Reportedly, some 20 million tonnes of commodities were traded on the local exchanges, representing a dramatic increase from 1992, when only 4.2 million metric tons were priced using futures or options.
A trend that is becoming noticeable in Argentina's marketing system is vertical integration in the export channel. The traditional Argentine system included middlemen between the farm gate and the port, as country buyers concentrated grain for purchase by either processors or exporters.
Now, more large trading companies are locating in the provinces to purchase grain directly for their use, thereby reducing business costs. Although farmers will continue to sell to the traditional middlemen, increased selling to the large companies could have the effect of making Argentine grain prices more competitive on world markets.
The privatization of much of the country's transportation and handling infrastructure has resulted in major improvements in rail service and port facilities, thereby increasing Argentina's export capacity. About 21% of the country's grains and oilseeds are transported by rail, and grain accounts for 46% of all rail freight. The privatization of most of the nation's railways has lowered freight costs by 20% to 25% in the grain producing region.
Major expansion and upgrades in port facilities have occurred near Rosario, along the Parana River. The river has been dredged to a depth of about 10 meters, meaning that Panamax vessels can now be loaded. Exports from the Parana ports, mainly grains and oilseeds and their products, have increased from about 16 million tonnes in 1992 to nearly 21 million in 1996. This growth is expected to continue, as many companies are in the process of expanding their loading and processing capacity for grains and oilseeds.
Also, further dredging is planned to increase the loading limits of the elevators along the river. A major project is also under way to develop the waterway further north into Paraguay and Brazil, so that products, mainly soybeans, can be brought in large quantities by barge from those countries for processing and export through Argentina.
Argentine terminal facilities can load a total of 40,000 tonnes of grain per hour, and between 1980 and 1997, storage capacity at the terminals increased to 3.9 million tonnes from 1.1 million. Currently, figures show that the total grain marketing system in Argentina is capable of moving 5 million tonnes a month without putting too much stress on the terminals.
In 1996-97, Argentina's overseas grain sales totaled 23 million tonnes. Argentine exporters sold aggressively to more than 50 countries, and shipments were undertaken with few delays, as the investments in infrastructure and privatization of ports paid dividends.
However, the country has not been free from its share of problems. While grain storage capacity is expanding, the ability to dry grain, particularly high moisture maize, has been slow to follow the expansion. Processing and shipping delays related to surplus maize and soybean production have already resulted in some crop loss and more could follow if soybean and maize production continues to grow at its current rate.
One of the latest moves in Argentina involved Felipe Sola, secretary of agriculture, who announced in May 1997 that there would be an increased effort by the country to promote and differentiate Argentine wheat according to consumer needs. The new standards, known as the trigo plata, contain specifications that include minimum and maximum values for moisture content, wet gluten, Falling Number and ash content. In addition, specifications for soft white wheat state that the wheat must have a protein content of less than 10% and be of a white color. By doing this, the government has shown concern about promoting the quality and image of the country's wheat in the world's eyes.
There has been some concern recently that the heavy rains caused as a result of El Nino could affect Argentina's wheat quality. Overall, El Nino has not been as harmful to Argentina as it has been elsewhere. Maize has been extremely resilient to the hard rains, and several areas in the country are expecting a bumper harvest after suffering through years of drought. Because Argentina is able to compete in all global maize markets, it has become one of the largest suppliers in the world, accounting for almost 20% of the world maize market.
Argentina has also benefited from the fact that maize prices are low and feed and industrial usage is high, meaning the country's vast supply of product will find a home on the world market.
Today, the grain industry in Argentina is experiencing its success because of the government's willingness to do everything it can to provide opportunities for growth. Privatization, lower tariffs and the disappearance of inflation have allowed the grain industry to make long term plans, something that has only been possible for the past decade.