Government Interventions Crucial In Determining Sector's Trajectory
BMI View: We continue to favour the Brazilian agricultural sector over the rest of the region because of better targeted and adjustable government support. Argentina's and Paraguay's agricultural sectors will continue to be plagued by counterproductive levies on crop exports, discouraging investment in production. Mexico's government support to the sector will continue to focus on consumer prices, leaving the country highly dependent on imports in the long term.
Out of all the region's government support frameworks, we believe Brazilian agricultural policy has been the most efficient in encouraging production and enhancing competitiveness on the global scene. The country's agricultural sector has relatively little support by global standards. Total support to the sector, which includes support to producers and the financing of general services to agriculture, averaged BRL8.2bn (US$ 2.7bn) annually over 2002-2004. This is only 0.5% of GDP, compared with 1.1% on average for OECD countries. Also, three-quarters of this support is delivered directly to producers, and accounts for approximately 3% of total gross farm receipts in 2002-2004, one of the lowest percentages globally.
|Close To New Zealand|
|Select Countries - Producers Support (% of total gross farm receipts)|
Most of Brazil's government support is targeting specific weaknesses in the country, such as problematic access to credit. The government distributes preferential loans to farmers and initiated a process of debt restructuring in the 2000s for farmers suffering from unsustainable leverage ratios. This has been very important for the sugar sector, as most of the country's mills were on the brink of bankruptcy after the 2008 financial crisis. We believe the effects of the recent debt restructuring for these mills are starting to be seen; sugar plantations are showing higher-than-expected rates of replanting, as the sector's profitability is not being restricted by heavy debt burdens.
|More Money To Uncompetitive Crops|
|Brazil - Producer Support Estimate By Commodity (% of total gross farm receipts)|
Overall, Brazil's grains and oilseed sectors have benefited strongly from the lack of restriction on investment in the agricultural input industry as well as for the export sector. Developments by Monsanto and Syngenta in Brazil have not been restricted by the government, and the rapid growth in seed offerings has benefited the expansion of the country's corn and soy yields over the past decade. The agricultural machinery industry has also developed without restriction in the country, helping productivity in the grain sector. Finally, agricultural exports out of the country are tariff, and the only restrictions they encounter are in recipient countries (outside of Mercosur), where they can be subject to quotas, origin preference or dumping accusations.
On the contrary, agricultural policies in Argentina and Paraguay have partially discouraged production in these countries. Both regularly impose taxes on agricultural exports with a focus on raising government revenues in times of weak fiscal situations and to ensure sufficient supply for the domestic market while controlling inflation. Export taxes have mainly targeted grains and oilseeds in both countries, while Argentina has extended them to meat and dairy. These taxes have discouraged local producers from boosting production, as the domestic consumer market does not offer enough growth potential on its own compared with the export market. As a result, entire sectors including beef and dairy, which represented a huge export industry in the past, have shrunk massively, and Argentine farmers have become less competitive than neighbouring Brazil.
|Boost From Liberalised Imports Of Agricultural Inputs|
|Argentina - Select Inputs Import Values (US$ '000, LHS) & Corn, Soy Yields (tonnes/hectare)|
In spite of these factors, the Argentine agricultural sector remains significant globally, with major crops expanding and the country's farmers adapting rapidly to the changes in export tax regimes. First, this is because the country's agricultural sector still represents 10% of the country's GDP (compared with 20% in 1959), and the farming lobby is extremely powerful. Second, the liberalisation of imports of agricultural inputs in the 1990s encouraged a boost in productivity for the sector and partially compensated for the loss in profitability due to remaining export taxes. In the 1990s, Argentina's fertiliser, pesticide and agricultural machinery use, as well as plant genetics and seed development, lagged well behind the US. In fact, the national average application rate for all fertilisers was only 8 kg/hectare (ha), compared with 55kg in Brazil and nearly 187 kg in the US. By 1998, the country had tripled its fertiliser use to 32kg/ha, and latest data show that fertiliser use now stands at 38.8kg/ha.
The tremendous growth in machinery and pesticides imports also helped take yields much higher over the past two decades. Finally, the country's farmers have proved very quick to adapt to changes in the country's grain export taxes, recently shifting plantings away from wheat as the grain is currently subject to the highest taxes (23% on wheat; 20% on corn, sorghum and barley; and 5-10% on rice).
|Products covered under |
the forward contract program in 2011 (%)
|Source: ASERCA/SAGARPA, USDA|
For Mexico, we do not believe the current government's support for forward contracts programmes between farmers and buyers will have any major impact on local production. The grain sector (corn in particular) will continue to be favoured by government support, with support prices for farmers selling these crops helping to maintain a certain amount of revenues and therefore reinvestment in the country's crop. Overall, we see government intervention mainly targeting consumer prices with the aim of maintaining sufficient supply of tortilla bread on the domestic market and controlling price movements for the staple. As a result, we expect the country to remain very dependent on imports over the medium term, with government support very likely easing imports at the expense of boosting production.