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Production
Estimates and Crop Assessment Division |
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Production
Estimates and Crop Assessment Division |
July 12, 2002
Argentine producers face difficult planting decisions in 2002/03 because of economic uncertainty. Since the 2001/02 planting season, the government defaulted on it's international loans and the country has undergone a severe national economic crisis. This has created a national banking crisis, high unemployment, and a return to double-digit inflation, with the rapid devaluation of the peso (Arg$). Devaluation is a double edge sword: it encourages producers to expand area for some crops but has reduced the availability of credit for all crops. Crops that are favored by the export policies and that are less costly to produce will expand, while other crops requiring high input costs are more likely to contract in area. Total harvested area for the major field crops is expected to decrease less than one percent, unlike the expansion of the last four years. Total production, however, is expected to decrease by over 6 percent from last year's levels, as less high-yielding corn is planted and more lower-yielding soybeans are planted. Area forecasts, except for wheat, are very tenuous. Wheat is currently being planted and future economic conditions should have little effect beyond that already seen. If economic conditions deteriorate further, and farmers find themselves unable to procure necessary inputs, a further reduction of crop production prospects is possible. Wheat area is expected to decline 12 percent; corn area is expected to decline 18 percent. Sunflower area is expected to expand 16 percent, compared to a 6 percent increase in soybean area. Sorghum area is relatively unchanged, up 1 percent. Rice is expected to increase in area by 8 percent. Cotton is expected to increase by 47 percent from a disastrous 2001/02 season.
Devaluation of the currency started after the Argentine peso was decoupled from the U.S. dollar in January 2002. In early February, the Government of Argentina (GOA) allowed the peso to float freely in international markets. Since then, the peso has lost over 70 percent of its value. The consumer price index (CPI) has increased 26 percent since the GOA decided to abandon the convertibility law. Currency devaluation, given all other economic conditions remain the same, typically produces a boon for export-oriented commodities, as was the case in Brazil after the 32 percent devaluation of the real in 1999. The imposition of export taxes and dramatic rise of input prices as measured by the producer price index (PPI)--up nearly 71 percent from a year ago--has mitigated any gains from the devaluation. The future strength of the Argentine currency is uncertain given the current political turmoil as consumer prices rise. Argentineans dumped the peso in favor of alternative investments. With reduced foreign investment, the continuing bank crisis, and low monetary reserves, the Argentine Central Bank has little leverage to support the peso.
Inflation, as measured by the CPI, is estimated up at least by 50 percent by the end of 2002, after being under control for the past 10 years. Some economists estimate this year’s inflation rate at 100 percent. During the first five months of this year, the CPI increased by 25.9 percent. In April of 1991, the GOA established a currency board that fixed the peso to the U.S. dollar at a 1-to-1 rate and decreed that no new money could be printed that was not backed by hard currency. Prior to that currency link (peso to U.S. dollar), Argentina had severe hyperinflation rates due to recurring fiscal deficits and printing new money. Prospects for future international borrowing to support the general economy are limited due to the default to the World Bank in December 2001. Currently, fiscal deficits need to be financed by printing new money or by raising taxes. This situation has created fears of run-away inflation and a return to pre-April 1991 hyperinflation. Diesel fuel prices have soared over 80 percent since the peso’s January devaluation. Commodities that can be traded internationally such as diesel fuel, wheat flour, barley malt, vegetable oil, and urea, are rising in price to match the currency devaluation.
Prior to 1991, export taxes on agriculture were high, reaching a maximum 40 percent on soybeans in 1989/90. Soybean export taxes were set at 18 percent in 1982, but varied annually, to help pay for the Argentine and United Kingdom conflict. After 1991, most export taxes were eliminated except for an export tax of 3.5 percent on soybeans. In March and again in April 2002, Argentina raised export taxes. They are now at 23.5 percent on soybeans and sunflowerseed, 20 percent on wheat, corn, and oilseed products; 10 percent for fruit, rice, and cotton; and, 5 percent on beef, dairy, pork, and poultry. Lower tax rates on processed products are used to encourage the domestic processing industry. The agricultural community fears that the GOA will raise export taxes again to produce more revenue. Export taxes serve as a transfer of funds to the Federal sector from the important agricultural provinces, namely Santa Fe, Cordoba, and Buenos Aires. The Governors of these provinces are not in favor of further export taxes.
Prior to the recent imposition of export taxes, Argentina’s tax structure favored exports. Argentina has a value-added tax (VAT) of 21 percent imposed on domestic- and export-oriented products. There is a rebate for the VAT if the product is exported. During the past 6 months, the slow repayment of the VAT rebate to agricultural exporters of approximately US$800 million has at times impeded the smooth functioning of the Argentine grain markets. The GOA and the agricultural exporters, after much debate, have arranged a series of 17 payments of the rebate, the third in the series was paid May 28, 2002.
Agricultural credit for the upcoming 2002/03 season is expected to be very limited. Major input suppliers are expected to sell inputs for cash or commodities only. Input suppliers are a major source of short-term credit for the agricultural sector, with an estimated US$1.7 billion (out of input needs of US$2.3 billion) loaned to producers in 2001/02. The current GOA policy of repaying input suppliers in pesos makes it unlikely at this point that the suppliers will be repaid the full amount. With this policy in place, input suppliers will grant credit for the 2002/03 season when producers pay off credit for this year. The initial government decision in February 2002 to convert all outstanding credit (agricultural and non-agricultural) into pesos at a one-to-one exchange rate has greatly complicated the credit situation. Most input loans were denominated in dollars, so this decision set the stage for major losses by input suppliers. In a subsequent decision in March 2002, the government announced that all agricultural-sector dollar-denominated credit from input suppliers will be repaid at "the same exchange rate as the exchange rate for exports of that product", which has cleared the way for input suppliers in the grain sector to receive additional payment.
A more recent announcement of discounts for dollar debts owed by producers ensures that the input suppliers will not recoup all of their debt, but it does help them recoup a portion of their debt. Discounts for grain producers are set at 25 percent, for meat at 40 percent, and for dairy at 50 percent, reflecting the differences associated with the export potential of the products. The debt discounts can be illustrated by an example. A U.S.$1,000 debt by a grain producer to an input supplier was converted to pesos at the current exchange rate of 3.5 equaling Arg$3,500. The discount of 25 percent is applied resulting in a debt of Arg$2,625 to be paid to the input supplier. This improves the situation for input suppliers; they do not get a full repayment but they are able to recoup 75 percent. Input suppliers, before this announced decision, were already giving discounts to farmers, and reportedly more than half of the producers' debt has been renegotiated. For the remaining there will be difficulties collecting the outstanding debts, in part because some farmers are hoping for yet another change in government policy on agricultural credit. Farmers seeking credit from other sources will have to compete with government borrowing, with interest rates as high as 95 percent in annual terms for short-term credit. There is speculation that the GOA will offer low-interest loans for the agricultural sector. Self-financing of farm operations for 2002/03 is preferred. Producers are holding 2001/02 crops and selling only when needed.
Argentina produces an average of 15 to 16 million tons of wheat per crop year. Wheat production prospects for 2002/03 crop are forecast at 14 million tons, down 2.5 million from last month and 1.5 million tons from the previous year. This drop is due to an expected decline in area as producers opt for the least-risk crop which is first-crop soybeans. Although economic incentives exist to plant more wheat, as Argentine wheat prices have been spiraling upward, farmers believe that sowing first-crop soybeans will provide the same returns with less risk. Major input suppliers and farmers are not able to come to agreement on the terms of payment, such as currency and exchange rate. In addition, input suppliers are becoming firmer on credit owed by farmers by only granting credit when farmers are able to pay-off their current debt.
Reportedly, farmers are using the bare minimum of inputs for wheat planting this year and they’re expecting a 10 to 15 percent reduction in their output. Planting is also slow, as farmers have to make tough decisions as to how much and what to plant based on financial difficulties.
Wheat in Argentina is planted starting in May for northern Argentina, June in central Argentina, and finishes in August for southern Argentina. Argentina’s wheat crop is 50 percent planted as of June 28, 2002; on pace with last two years but slower than 1999/00. In central Argentina, however, planting of Argentina’s 2002/03 wheat crop is off to a slow start and area planted is expected to be reduced significantly. For southern Argentina wheat planting is on a similar pace to the last three years. Modest area reductions of approximately 7 percent are expected.
Many analysts expected an increase in 2002/03 wheat area as Argentine farmers opted to plant low cost crops such as wheat. The combination of wheat and second-crop soybeans was expected to be one of the most remunerative crop combinations. However, early reports indicate that wheat area is declining in the central portions of Argentina—southern Santa Fe, eastern Cordoba, and northern Buenos Aires Provinces. These areas, in the 2001/02 season, planted a large portion to the high yielding French varieties marketed under the name “baguette.” The Baguette varieties were apparently more susceptible to fusarium than traditional varieties, which was a major problem due to wet weather. Producers also report that the added cost of using more inputs were often not reflected in significantly higher yields.
The devaluation of the peso, high cost of inputs, and difficulty of obtaining credit will result in an increase in soybean area in 2002/03. Harvested area is forecast at 12.0 million hectares, up 6 percent or 700,000 hectares from 2001/02. Meanwhile, production is forecast at 30.0 million tons, up 2 percent or 500,000 tons. The general tightness of credit will cause farmers to want to reduce cash expenses, and they can do that by planting soybeans instead of corn, because corn requires a higher level of inputs.
Soybean yield, on the other hand, is forecast to decline from 2.61 tons per hectare to 2.50 tons per hectare. Tight credit is expected to cause farmers to reduce their use of phosphorous, potassium, and sulfur that they might otherwise have used more freely. Nearly all soybeans produced in Argentina are genetically modified and farmers retain seed from the previous season. Seed quality should not be an issue. Wheat plantings appear to have been reduced, and it is expected that the ratio of single crop soybeans to second crop soybeans (following wheat) will increase. Single crop soybeans generally yield about 0.5 tons per hectare above second crop soybeans, so this factor will mitigate the yield decline from other factors.
Soybeans in Argentina are planted starting in October for first-crop soybeans and finishing in January for the second crop. Soybeans are a low-cost and low-risk crop; area and production has increased steadily over the last 10 years. In some areas in central Argentina, the total planted area for major field crops is stable. In these regions, competition for land will mean that area of one crop needs to decrease in order that area for another crop increases. Another factor in the main soybean-producing areas is the switching of dairy operations to field crops. Soybean area is most likely to benefit. In other areas such as Cordoba, total planted area for the major crops is increasing, perhaps at the expense of pasture.
Sunflower also benefits from the devaluation. Sunflower has a competitive advantage in western Buenos Aires, southern Cordoba, and northern La Pampa Provinces. Sunflower area is forecast to increase in these areas at the expense of corn. Additionally, sunflower area is likely to increase in southwestern Buenos Aires Province as wheat area declines. USDA/FAS forecasts sunflowerseed production for 2002/03 at 4.0 million tons, up 8 percent from last year’s output of 3.7 million. Sunflower area is forecast at 2.3 million hectares, up 320 thousand or 16 percent from last year’s area of 1.98 million. Pasture areas in western Buenos Aires Province are likely to switch to sunflowerseed. Yield is forecast at 1.74 tons per hectare, similar to the 5-year average. Sunflowers in Argentina are planted starting in August in northern Argentina and finishing in December in southern Argentina. Nationally, sunflower area is forecast to be higher than corn area, as it was in 1998/99 and 1999/00 seasons.
The average corn output is around 16 million tons. For 2002/03, corn is forecast at 11 million tons, unchanged from last month, but down 3.4 million from the previous year resulting from lower area. Inflation expectations have caused uncertainty about fuel and input prices for the 2002 corn-planting season which will begin in September. In addition to the higher cost of fuel, corn requires the purchase of new hybrid seed while soybeans can be planted with seed saved from the previous season and requires less inputs such as fertilizer. Seed companies are discounting the prices of hybrid seeds to encourage more producers to plant corn. The higher costs of production for corn compared to soybeans will cause a shift in favor of soybeans. Under normal circumstances, the higher returns per hectare for corn over soybeans are the driving force for the farmers to plant more corn; however; in this case farmers will be faced with higher credit needs required to produce corn. The lack of financial resources will favor soybeans as the input costs are lower. Corn in Argentina is planted starting in September in northern Argentina and finishing in December in southern Argentina. Corn area declines are expected in central Argentina as first-crop soybeans displaces corn area, and in western Argentina, where sunflowers are displacing corn. Argentina’s corn production has declined 43 percent since 1997/98 when production was a record 19.4 million tons. Direct costs for corn are higher than competing crops—soybeans, wheat, and sunflowerseed; however, net income for corn is higher than those crops in most areas. Corn is a profitable crop in Argentina when input use is high. In these uncertain economic times, input use is expected to decline making corn more risky.
Cotton production is forecast at 425,000 bales for 2002/03, up 70 percent from last year’s output of 250,000. Cotton area is forecast at 220,000 hectares, up 70,000 or 47 percent from last year. Lint yields are up at 421 kilograms per hectare, similar to the 10-year average but well above the weather-affected yield of 363 kilograms of 2001/02. Cotton in Argentina is planted starting in November and finishing in late December. Almost 90 percent of the cotton area is in Chaco and Santiago del Estero Provinces in northern Argentina. Cotton production has been declining in Argentina since the record output of 1.93 million bales in 1995/96. Several crops compete with cotton, but it has been the growth of soybean area in northern Argentina that has displaced cotton to the greatest extend. In Chaco Province, total planted area for the major field crops is increasing, displacing cotton.
Crops in the last four years were badly affected by adverse weather. In the past two years, international prices have been very low, adding to the problems of cotton farmers. After the devaluation in early January, the dollar went from 1:1 pesos to 1:2 in February, 1:2.4 in March, 1:2.8 in April and 1:3.3 in May. Farmgate cotton prices have fluctuated together with the exchange rate. Raw cotton prices have roughly remained in dollar terms the same as last year at about U.S.$220 per ton (SLM, 28 mm, 33-35 percent ginning ratio). Although the devaluation has theoretically improved growers’ returns, it has not brought great benefits. Most costs are valued in dollars (seeds, inputs, spare parts for equipment, diesel, etc) increasing production costs. Credit available to cover production cost is difficult to find. In February, the GOA reduced the export rebates for cotton from 5.4 to 2.7 percent and in March it imposed export taxes of 10 percent for cotton and 5 percent for yarn and fabric. Given these circumstances, producers’ returns are very tight and are likely to remain tight through the 2002/03 season. In MY2001/02, costs of production (field work, inputs, and harvesting) were on average U.S.$280 per hectare which at the average price of last year’s crop of U.S.$186 per ton of raw cotton, farmers needed to produce at least 1.5 ton per hectare to break even. With a national average of around 1.1 ton per hectare, most producers had lower yields than the 1.5 tons. Cost of production for the MY2002/03 crop will be very difficult to determine as most producers will sow with a high degree of uncertainty in this environment of constant change. On the plus side, the cost of ginning cotton has decreased significantly as most costs (e.g. electricity and hand labor) are in pesos. In addition, cottonseed is valued in dollars. In MY2000/01 gins would charge 35 pesos per ton and would retain the cottonseed. In MY2001/02, gins eliminated the ginning fee but kept the seed which they sell to oil crushers at U.S.$65 dollars per ton.
Rice production for 2002/03 is estimated at 440,000 tons, milled basis, up 7 percent from last year’s output of 410,000. Rough yields are forecast at 5.2 tons per hectare, similar to the 5-year average. Rice in Argentina is planted starting in late September and finishing in December. Almost 90 percent of the rice area is in Corrientes and Entre Rios Provinces in eastern Argentina.
Rice farmers are in a better economic position than cotton farmers as rice farmers had purchased large amounts of farm equipment prior to devaluation and have since repaid loans with the devalued peso. Area planted to rice is expected to bounce back somewhat from the currently low area, to reach 130,000 hectares in 2002/03. As with cotton, the devaluation has increased the profitability of planting rice, although problems getting credit to finance the relatively high cost of producing rice will make a large increase in area unlikely. However, established producers in the main rice growing region in Corrientes are expected to increase area (producers in this area are closely connected to the large Brazil market), while rice farmers that switched to soybeans in recent years are expected to continue planting soybeans.
