February 9 – Should North American Wheat Farmers Be Worried About Argentina?

Should North American wheat farmers be worried about Argentina’s exports?

From an international trade standtpoint, they may need to be!

Long gone are the days when Argentine farmers had to pick between a 35% export tariffs on soybeans, or cross their fingers the wheat export quotas weren’t so bad.

Is the Argentine wheat industry finally on the rise?

About a decade ago, wheat export quotas and tariffs were introduced by former administrations  as a way to for the goverment to earn additional revenue on agricultural products while also maintaining grain stocks.

But the exact opposite happened.

Wheat production fell from 18.6 million tonnes in 2008 to 11.0 million tonnes in 2009. Farmers were so desperate to avoid the wheat catastrophes they chose a 35% export tariff on soybeans instead. In 2013, only 3.1 million acres of wheat were planted.

During the time Argentina farmers focused on soybeans, the U.S. jumped at the opportunity to export wheat to Brazil, Argentina’s largest market. From 2013-2015, the U.S. exported wheat to Brazil for 28 months straight.

This led the U.S. to beat out Argentina as Brazil’s top supplier for the first time.

Then in 2015, the newly elected President Mauricio Marci repealed former President Kirchner’s wheat exports quotas and tariffs. No longer would wheat farmers be taxed the 23% to get their production into the wheat exports market!

Once the quotas and tariffs were repealed, wheat planting increased and production hit 15.7 million tonnes last yeer in 2017. This was the highest its been since 2002.

This year, Argentina’s Ministry of Agriculture estimates the 2018 crop at 18.5 million tonnes.

Wheat acres weren’t the only thing on the rise. Yes, there may be a global wheat surplus, but Argentina may not have to worry. For one thing, they have their guaranteed buyer, Brazil.

In 2017, Brazil imported 4.8 million tonnes of wheat. This is the most they’ve imported in a decade. Argentina claimed 84% of Brazil’s wheat imports in 2017, compared to just 27% in 2014.

And the demand doesn’t seem to be stopping. From the 1980s to 2017, Brazil has almost doubled its demand to 12.1 million tonnes. Their production is only about half of that at 6.7 million tonnes.

Furthermore, if the drought in North America continues, this means less wheat from Canada and the US that go into the wheat exports markets.

This would be the perfect window for Argentina to sneak in. We’ve already seen Argentine wheat win tenders to MENA countries (Middle East and North Africa). This is surprising given the price premium awarded to the likes of Ukraine, Russia, and the EU, given their geographical proximity to these major import markets.

Ultimately, Argentina is looking better for wheat trading activity because they’re not fighting drought conditions like the major wheat producers of the U.S. or Canada.

Because of the drier weather in majory wheat areas across the US, Argentine wheat prices have been cheaper than US Gulf and Pacific Northwest soft wheat since Sept 2017.

This being said, Argentina’s wheat is generally lower protein quality, meaning it competes more with the likes of winter wheat. However, given the amount of international blending going on, it has an affect on spring wheat as well.

This is to say that international millers, such as those in Indonesia (the new wheat king), are buying lower protein product from the likes of Russia and Argentina, and then blending it with the good stuff from North America.   

Thus, not only are Argentina’s wheat prices more competitive, but also geographically they’re better positioned to sell to their Central and South American neighbors, areas where we’ve said more spring wheat could be heading. Most of these countries must import their wheat due to weather and land.

Argentina is back on the rise in the wheat industry. After years of constant struggle, they could finally start to claim back the market share.

 

North American Wheat Struggles Open Door for Argentina

Then-Argentine President Cristina Fernández de Kirchner’s tenure did not randomly coincide with Argentine wheat’s lowest eight-year production total since 1989-96. Kirchner introduced a wheat exports quota and tariff to maintain grain stocks and curb soybean production, but the result was the exact opposite. Wheat production tumbled from 18.6 million tonnes in 2008 to 11.0 million tonnes in 2009 driven by a 5.9 million acre decrease in area planted during that timespan.

Just five days after taking office, current President Mauricio Macri eliminated the maligned wheat exports tax on Dec. 15, 2015. By no accident, wheat planting jumped to 15.7 million acres in 2017—its highest total since 2002. Brazil, Argentina’s top wheat trade partner, imported 4.8 million tonnes in 2017, the most in a decade.

Argentina’s Ministry of Agriculture recently estimated its 2018 wheat crop at 18.5 million tonnes, just 100,000 tonnes shy of the 2008 record. A friendlier export policy has Argentine farmers optimistic about wheat again. While there may be a global wheat surplus, Argentina has a guaranteed importer in Brazil. And as drought continues to plague the North American wheat crop, Argentina could try to capture a higher share of the Central and South American export market.

A shifting landscape

Argentina mainly produced corn and wheat until soybean demand emerged in the 1980s. Soybean acreage grew steadily through the 1990s and overtook wheat as Argentina’s most planted crop beginning in 1997/98, or 1998 according to the USDA. Córdoba and Santa Fe were the first provinces where wheat lost significant acreage to soybeans. In 1973, Santa Fe planted 2.2 million and 247,105 acres of wheat and soybeans, respectively. Over the next 30 years, wheat slipped to 2.1 acres million while soybeans skyrocketed to 8.2 million acres. Soybean acreage quintupled to 13.8 million acres in Córdoba between 1986 and 2016. Wheat took its biggest blow when Buenos Aires began planting more soybeans. Buenos Aires is Argentina’s top wheat producer, but its wheat area fell from 11 million acres in 1997 to 7.3 million acres in 2008.

Further suppressed by Kirchner’s policies, Buenos Aires wheat planting plunged to 3.1 million acres in 2013. The Kirchner administration unpredictably varied the quota annually, so farmers increasingly planted soybeans. Cultivators preferred to grow soybeans—even with a 35 percent export tariff—rather than to produce wheat and face unexpected export restrictions. Kirchner halted wheat exports altogether in late 2013 due to poor weather affecting yields. Bad weather coincided with the least wheat planting since 1970 and resulted in Argentina’s lowest wheat production since 1981.

Macri dropped the 23 percent wheat exports tariff on his fifth day in office and removed wheat exports quotas later that month. Wheat acreage subsequently rebounded to 15.7 million acres in 2017 and Argentina’s Ministry of Agriculture estimates 14.6 million acres sown for 2018. The provinces of Entre Ríos, Santiago del Estero, and Tucumán have all increased wheat production in recent years. The Ministry of Agriculture, Livestock, and Fisheries (MAGyP) data for the 2018 wheat crop will be available on Gro when released by the Argentine government and will report whether wheat plantings have continued to shift to other provinces.

Getting Brazil back

Argentina has seen modest population growth, and its gap between wheat production and consumption has widened significantly since the 1970s. Wheat production was 4.1 million tonnes greater than consumption in 1980. The gap expanded to 13.2 million tonnes in 2017, helped by a tiny 1.2 million tonne demand increase during that timespan. Meanwhile Brazil has seen its demand nearly double to 12.1 million tonnes in the same period. Their 2017 production was only 6.7 million tonnes.

Wheat is a major export for Argentina because of this sizable surplus. Brazilians have historically imported most of their wheat from Argentina, so they were forced to look elsewhere following the strict 2013-14 export quotas. The US became Brazil’s top wheat source in 2013 and 2014, the first time Argentina was not Brazil’s top supplier since 1997. Brazil even dropped their 10 percent import tariff on non-Mercosur countries for the bulk of 2014. The US exported wheat to Brazil for 28 consecutive months between 2013 and 2015. Prior to that, the longest stretch was just 8 months.

Brazilian wheat imports from Argentina returned to normal levels by early 2015. Buoyed by its second largest wheat crop ever, Argentina covered 84 percent of Brazil’s wheat imports in 2017 compared to just 27 percent in 2014. Still, Brazil recently began to allow wheat imports from Russia. The US also continues to export modest amounts to Brazil after getting its foot in the door. Brazil’s wheat consumption and wheat flour production continue to climb. In the past, Brazil was more than willing to fulfill their wheat demand with Argentine wheat. Argentina would be wise to provide for this growing demand and box out the recent bumper crops in Russia and any US wheat exports.

Undercutting the US and Canada

Argentina should capitalize on decreasing wheat production and acreage in Canada and the US. Excluding 2013, US wheat exports to Central and South America have remained relatively flat, despite Mexico and other Central and South American countries have rising wheat demands. US wheat stocks are currently high, but if production remains low, the US will remain unable to substantially increase exports. Additionally, the bulk of US wheat exports go to Asia giving Argentina an opportunity to increase its claim on Central and South America.

Recent droughts in Canada and the US have also affected their export prices. Up-River Argentine wheat has been cheaper than US Gulf and Pacific Northwest soft wheat since September 2017. There are currently extreme drought conditions in southern Kansas, the United States’ top wheat producer. If drought persists and sustains higher prices, Argentina can undercut the US with lower prices for their South American neighbors.

Competitive, but convenient

The global wheat export market is extremely competitive, but North, Central, and South American countries chiefly import wheat from each other. Argentina has a geographical export advantage to Central and South American wheat markets. Many of these countries are net wheat importers due to climate and land constraints. Argentina has enough land and a more suitable climate than most of Central and South America. Ocean waters moderate temperatures and weather patterns in Argentina unlike in landlocked wheat regions of Canada and the US.

If production spreads southward and westward, Argentines can expect average wheat yields to decline. The fertile soils of Buenos Aires, Córdoba, and Santa Fe cannot be replaced acre-for-acre by lower wheat-yielding regions. La Pampa, Santiago del Estero and Tucumán accounted for 2.1 million wheat acres in 2017. Their weighted average yield was 2.43 tonnes per hectare, over 1 tonne per hectare less than the yields of Buenos Aires, Córdoba, and Santa Fe. Maintaining production in La Pampa and similar provinces will require much more area, and will lead to overall Argentine wheat yield dropping back below those of the US and Canada just after achieving parity.

Argentina doesn’t have to balance wheat with the dominating presence of soybeans and soaring corn production, but it may be in its best interest. The country has the ability to make a dent in Central and South American export markets as North American wheat faces tough climate conditions. Argentina should pay specific attention to US grain stocks, especially if US wheat production remains low this year. The US may take the chance to liquidate stored wheat if prices remain relatively high in 2018. If US stocks start to dwindle, Argentina could begin to flex its muscle in the western hemisphere’s wheat market.
About the Author
Brennan Turner

Brennan Turner is the CEO of FarmLead.com, North America’s Grain Marketplace. He holds a degree in economics from Yale University and spent time on Wall Street in commodity trade and analysis before starting FarmLead. In 2017, Brennan was named to Fast Company’s List of Most Creative People in Business and, in 2018, a Henry Crown Fellow. He is originally from Foam Lake, Saskatchewan where his family started farming the land nearly 100 years ago (and still do to this day!). Brennan's unique grain markets analysis can be found in everything from small-town print newspapers to large media outlets such as Bloomberg and Reuters.