Changes In Argentinian Government To Affect U.S. Wheat Prices

By Alvaro Garcia

The Merriam-Webster dictionary defines globalization as: “the act or process of globalizing :the state of being globalized; especially : the development of an increasingly integrated global economy marked especially by free trade, free flow of capital, and the tapping of cheaper foreign labor markets”.

Today’s agriculture operates in a globalized world where something that happens in one region or country affects another. Communications have acted as a catalyst for this globalization; what took days or even weeks to be known in the past, take seconds today. There is a commitment by the World Trade Organization (WTO) to remove all “barriers” to international trade and lead to “free trade” among countries. There will be Strengths, Weaknesses, Opportunities, and Threats for every country, the SWOT analysis performed on any project or endeavor.

One example is that of Argentina and it’s near future impacts on U.S. grain prices. According to the World Agricultural Supply and Demand Estimates from the USDA (December 9, 2015) global wheat supplies for 2015/16 increased 2.3 million tons primarily due to increased production but also higher beginning stocks. For this next year wheat trade is expected to raise up 1.3 million tons because of larger supplies. A significant player in this market will be Argentina whose wheat exports are expected to grow by 1 million tons.

This is not just explained by a great harvest in this South American country. The previous Argentinian government (which ended its mandate on 12/9/15), had established what were called “retentions” to several of their exportable agricultural products. In essence it was a pre-established percentage (tax) effective at the time of the sale that each farmer had to pay. The funds “retained” were incorporated to the national budget. Soybeans for example had 35% retention, just imagine how much money did 35% of the Argentinian soybean crop represented!

Farmers who sold grain in the international market did so at the world price minus these “government retentions”. Not only was Argentina doing it but also China and Russia. This last country a world leader in wheat exports has 40 % retention.

On December 10th 2015 Argentina had national government elections and radically changed the direction of its economy. The new president announced a radical change, with zero retentions for several of their agricultural exports. Government retentions up to this moment had been as follows: wheat 23%, corn 20%, sunflowers 32%, and beef 15%. From now on there will be zero retentions for all of them! The only exception are soybeans for which retentions will now be 30% down from the previous 35%. A record soybean harvest is announced for 2016.

If this new incentive to production is combined with the predicted $30-40 dollar a barrel of crude oil for 2016 and beyond it’s not difficult to imagine what will happen to world agricultural production and prices. To make matters even worse the Argentinian government has announced a devaluation of its currency soon. This will strengthen even more the U.S. dollar and make them even more competitive globally.

Now, more than ever US farmers will have to be extremely cautious with their cost of production. Significantly decreasing costs per acre during 2016 and beyond is going to be key to remain competitive and sustainable in this global market. In an article published this past year on iGrow the key components of wheat production and how much they weighed on the total were analyzed (Table 1).

Table 1. Wheat: Operating costs (including hired labor) per bushel