Argentina revamps wheat policy

Argentina’s new wheat export system promises to spur output from the grains-producing powerhouse at a time when farmers are hurting from dry weather and the government needs more foreign currency.

The administration of recently re-elected President Cristina Fernandez will scrap incremental export quotas in a bid to improve prices for farmers by boosting competition among the global trading houses that bid for their crops.

“This means more freedom and transparency in the commercialization of wheat and it will definitely improve the prices that are paid to farmers,” said a Buenos Aires-based export company executive who asked not to be named.

The executive and other analysts consulted by Reuters said the market will scrutinize the fine print of the new policy and its implementation to see if it prompts more wheat plantings.

Double-digit inflation is a headache for the government, as is its long-standing feud with the agricultural sector, which has chafed at policies such as the export quotas and the 35 per cent tax on soybean exports.

The impact of the new wheat-selling system on world supply will be muted because, even with the new system, Argentina will produce relatively little wheat for the international market. The total crop of the current season is expected to be 13 million to 14 million tonnes, seven million of which will be kept in the country for local use.

The world produces about 680 million tonnes of wheat every year, 130 million of which is sold internationally, Argentine agricultural economist Manuel Alvarado Ledesma said.

“Wheat has always been ‘a political grain’ because it is key to making the most basic foods. This is why many countries keep their wheat production for domestic use. It is not like soy, which countries need to import from producers such as Argentina, Brazil and the United States,” Alvarado Ledesma said.

“The new system should neutralize the distortions that the discretionary quotas had imposed,” he added. “It will allow farmers to finally be paid a fair market price for their wheat, which will motivate production at a time of great financial need for farmers, who have been hit hard recently by drought.”

Argentina’s grains sector will receive about $10 billion less this season due to the dry weather, mainly affecting corn and soy, Alvarado Ledesma said.

The new wheat scheme will cap total exports to ensure sufficient domestic grain supplies, but will end the gradual quota system to give growers more control over sales.

Farmers hated the quota system, saying it killed profits while trying to tamp down domestic bread and pasta prices. The system still applies to corn, but officials are working to revamp that as well and an announcement is expected next month. Argentina, Latin America’s No. 3 economy, is a leading global exporter of soybeans, corn and wheat. The country’s brisk economic growth in recent years has been fuelled in part by high global grain prices.

Need for dollars

Argentine farmers are currently harvesting wheat and planting 2011-12 soybeans and corn. The Buenos Aires Grains Exchange has raised its outlook for the 2011-12 wheat harvest to 14 million tonnes from an earlier 13.6 million.

Brazil tops the list of buyers of Argentine wheat.

“It remains to be seen how this new scheme is put in practice, but if it guarantees better prices for wheat producers, it could stimulate wheat production which has remained stagnant since the beginning of the 2000s,” said Ignacio Labaqui, a local analyst with Medley Global Advisors.

The government needs the dollar inflows that would come with more wheat exports as it scrambles to protect its trade surplus. A positive trade balance has been a pillar of economic policy since 2003.

The surplus has allowed the central bank to accumulate foreign currency reserves, which the government has said it could use again next year to pay debt.

“The elimination of the past wheat system probably aims at generating a larger exportable surplus in order to boost exports and strengthen Argentina’s declining trade surplus,” Labaqui said.

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