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Argentina Agribusiness Report - Grains Outlook - Q2 2011

Publication: BMI - Industry Forecast Scenario Provider: Business Monitor International March 17, 2011 BMI Supply View: For 2010/11 we have revised down our corn forecasts by 6% to 19.5mn tonnes, due to poor weather and a lack of water supply during the growing season. Out to 2014/15, we are forecasting production to increase by 34% to 30.5mn tonnes. We expect the area harvested to increase as improved prices and export opportunities arising from increasing livestock and biofuel production encourage farmers to plant corn. In addition, farmers are increasingly rotating soybean with corn and wheat. However, some of this growth will also be due to base effects. We have also increased our forecast for Argentine sorghum production, as favourable weather conditions produce exceptionally high yields. After a massive increase in production to 3.5mn tonnes in 2009/10, we are forecasting production to increase again in 2010/11. This is due to crop substitution as farmers convert acreage previously sown with corn and wheat to sorghum owing to its hardy, drought-resistant qualities. We see production growing to 3.6mn tonnes in 2010/11. We still see sorghum production remaining strong over our forecast period, supported by demand for feed crops both domestically and on the export market. Over the forecast period to 2014/15, we forecast production to grow 11% from the decimated 2009/10 level to 3.9mn tonnes. After a strong rebound in wheat production in 2009/10, we forecast another increase to 14.1mn tonnes, based on the increased acreage devoted to wheat as farmers are encouraged by higher prices and export opportunities. As with corn, farmers are also starting to rotate wheat with soybean because of concerns about the negative ecological effects of monocropping. Furthermore, increasingly strong export opportunities are expected to drive longterm growth. By 2014/15, we forecast wheat production to reach 21.8mn tonnes, up 97% from 2009/10, and will likely surpass the record wheat outputs in 2007/08. However, some of this growth will be due to base effects. BMI Demand View: Domestic corn consumption has increased rapidly in the last few years, following a large fall brought about by the economic crisis at the beginning of the decade. In 2010, consumption recovered to 6.9mn tonnes, fuelled largely by an increase in demand for corn from the livestock sector, especially poultry. The current low livestock numbers and high prices are encouraging farmers to increase supplemental feeding with corn to increase slaughter weights, thus increasing demand for corn. As such, in 2011 we are forecasting corn demand to increase slightly to 7mn tonnes. Out to 2015, we forecast

corn consumption to grow 16% from 2010 to reach 8mn tones, which will be driven by the livestock sector, which is forecast to grow, significantly in the case of poultry. Export opportunities, particularly to Asia, will be another significant growth driver, as Argentina is one of only a handful of large corn exporters (along with the US and Argentina). Sorghum consumption stood at just 1.7mn tonnes in 2009, down from 2.30mn tonnes in 2006. We estimate consumption in 2011 to increase to 2.1mn tonnes fuelled by increased availability owing to the better than expected yields. Demand will be driven by the livestock sector, with sorghum used as a complement and substitute for corn. However, over the forecast period, we project consumption to decline to 1.5mn tonnes due to substitution effects with other crops. However, sorghum consumption has proven volatile in recent years and consumption could expand depending on the price of other grains. Wheat consumption will likely show the least amount of growth over our forecast period by only 6% to 6.2mn tonnes, largely because it is not used for feed as much as the other grains. Export Table To Excel

ARGENTIN A Wheat Production, Consumption & Trade 2010 Wheat 11,000. Production, 0 '000 tonnes 1 Wheat Consumption 5,825.0 , '000 tonnes 1 Wheat Net Trade 5,175.0 Balance, '000 tonnes 2 Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA, BMI. 2 INDEC, FAPRI, 201 2012 1 201 2014 3 201 5 18,374. f 20,914. f 21,768. f 5 9 8 f f f

14,074. f 5

16,299. f 8

5,725.5 f

5,850.0 f

5,971.6

6,096.2

6,223.7

8,349.0 f

10,449. f 8

12,402. f 14,818. f 15,545. f 9 7 1

USDA. Export Table To Excel

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ARGENTIN A Corn Production, Consumption & Trade 2010 Corn 22,800. Production, 0 '000 tonnes 1 Corn Consumption 6,900.0 , '000 tonnes 1 Corn Net Trade 15,900. Balance, '000 0 tonnes 2 Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA, BMI. 2 INDEC, FAPRI, USDA. Export Table To Excel 201 2012 1 201 2014 3 201 5 24,425. f 27,292. f 30,494. f 5 8 7 f f f

19,520. f 4

21,812. f 5

7,096.4 f

7,317.5 f

7,545.4

7,780.2

8,022.1

12,424. f 0

14,495. f 0

16,880. f 19,512. f 22,472. f 2 6 6

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ARGENTINA Barley Production, Consumption & Trade 2010 Barley Production, '000 tonnes 1 Barley Consumption, '000 tonnes 1 1,356.0 2011 2012 2013 2014 201 5 2,201.2 f 2,291.7 f 2,385.7 f

2,025.2 f

2,100.0 f

1,060.0

972.7

1,012.3 f

1,054.0 f 1,093.3 f 1,136.2 f

Barley Net Trade Balance, '000 296.0 tonnes 2 Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA, BMI. 2 INDEC, FAPRI, USDA. Export Table To Excel

1,052.5 f

1,087.8 f

1,147.2 f 1,198.4 f 1,249.5 f

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ARGENTINA Sorghum Production, Consumption & Trade 2010 Sorghum 3,529.0 2011 2012 2013 2014 201 5 3,786.7 f 3,855.7 f 3,925.6 f

3,642.5 f

3,709.4 f

Production, '000 tonnes 1 Sorghum Consumption, '000 tonnes 1 Sorghum Net Trade Balance, '000 tonnes 2 Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA, BMI. 2 INDEC, FAPRI, USDA. Export Table To Excel 1,900.0 2,058.9 f 1,968.2 f 1,809.6 f 1,644.1 f 1,471.3 f

1,629.0

1,583.6 f

1,741.2 f

1,977.0 f 2,211.6 f 2,454.2 f

Export this table as seen Grain Industry Hit By Port Strikes In late March 2010, Argentina's grain industry was hit by more than a week of strikes by dockworkers at the country's key grain-exporting ports. Exports ground to a halt after employees of the Port Workers Cooperative began striking at the ports of San Martin, San Lorenzo and Timbues to demand that the rates to load ships be more than doubled. On March 31 2010, the strike was called off after union leaders negotiated a 27% rise (in US dollar terms) in cargo fees for loading and unloading grains charged by the port workers' cooperative and a similar rise in dockworkers' salaries. However, the strike had a significant impact on Argentina's trade surplus, which plunged to US$311mn, down 77% yo-y and the second lowest figure in almost a decade, according to Argentina's National Institute of Statistics (INDEC). The strike highlights the continued threat to Argentine agricultural sector posed by tense relationships between the government and workers. Corn, Wheat Production Revised Down, Up Respectively In January 2011, we made changes to our Argentine wheat and corn production forecasts for 2010/11. For wheat, we revised up production by 5% to 14.1mn tonnes, as good weather in wheat growing areas prompted the Buenos Aires grains exchange to improve the outlook for production. We also revised down our corn estimate by 15% due to dry weather that has reduced yields in corn growing areas. The changes to production are unlikely to have a significant effect on wheat prices, although it will help loosen a market that is expected to remain in deficit in 2010/11. For corn, the production fall will further tighten the market and further support prices.

Argentina was once a large wheat exporter, but droughts in consecutive seasons until 2009/10 led to a significant fall in production. For 2010/11, BMI originally forecast a production increase due to higher plantings on the back of higher prices, as wheat prices during Argentina's planted period for the 2010/11 season were elevated on the back of problems in major producers around the world. We expect the changes from Argentina to only have a minimal effect on prices for two main reasons. First, we have revised our wheat output up by only 5%, which will loosen the global wheat market, which is forecast to remain in deficit in 2010/11, but not to a significant degree. Second, with Argentine farmers effectively banning all grain sales over the short term due to conflicts with the government, the extra production will not contribute to more wheat on the global market, at least in the short term. For corn prices, however, the changes in Argentina have the chance to boost prices beyond current levels. The dry weather (due to La Ni?a) that reduced yields has led us to revise down our production forecast to 19.5mn tonnes in 2010/11. For global corn prices, the downgrade is the latest in a series of woes that has left the global corn market with a significant forecast deficit of 32mn tonnes, and the ending stocks for the 2010/11 season at their lowest levels in decades. Since Argentine farmers have banned corn sales over the short term as well, BMI maintains its long-held view of corn price outperformance over the medium term due to the tightness of the market, which we forecast to remain in place until at least 2012/13 due to strong demand growth. Tax Reforms Should Bode Well For Grains Exports The recent draft bill agreed by Argentine opposition lawmakers has effectively displaced power to set grains export taxes from President Cristina Fernandez. At present, Argentine grains taxes are very high; 20% for corn and 23% for wheat. The proposal approved in the last week of August, would cut the corn taxes from 20% to 10% with the aim of totally phasing it out by 2013. As for wheat, the current 23% tax would be scrapped immediately. However, political analysts doubt that the measures will be approved by Congress without changes. This is so as the president could likely veto any such law on the ground that it would threaten state finances. That said, protests remain that the reforms do not serve to solve the growing problem of wealth inequality between the large and small to medium scale producers. Members of the Argentine Agrarian Federation (FAA), which represents smaller-scale growers, would rather a sliding-scale on export taxes. Nevertheless, reduction in export taxes for the highly regulated industry in Argentine should generally boost production overall, especially amid the current high wheat prices. Some Respite For Argentine Wheat Wheat is a staple food in Argentina. Per capita consumption at 124kg in 2009, according to the Food and Agricultural Policy Research Institute (FAPRI), is around the same as that for the EU and Australia and significantly higher than in the US. In 2009/10 wheat planting in Argentina plunged to a multi-decade low of 3.2mn ha. However, the area dedicated to wheat may continue to fall, as farmers turn away from the crop, deterred by the vulnerability of wheat to adverse weather conditions, price controls and tight government restrictions on exports. Argentina was previously a major exporter of wheat, exporting over 11mn tonnes, as recently as 2007/08. However, with farmers increasingly turning towards

soya production, feeding domestic consumption is now threatening to become a serious issue. On February 16 2010, Julian Domnguez admitted that Argentina's wheat production was in dire straits. He called the dramatic decline in wheat production 'a national emergency' and gave assurances that measures had been taken to meet domestic demand, including purchasing an additional 2.5mn tonnes for milling and providing credit at a rate of 3.5% for the purchase and retention of wheat. However, a boost to wheat production in Argentina came in the form of a joint venture (JV) between the world's fourth-largest seed producer, French firm Vilmorin and domestic company DonMario, which has annual sales of EUR50mn. The JV, announced on February 9 2010, will develop and sell wheat varieties in South America and form part of Vilmorin's efforts to expand beyond Europe and into other wheat-producing zones. Further relief promises to come from the improved price margins for wheat and the increasing concerns about soybean mono-cropping, encouraging farmers to rotate their harvests with other grains. Indeed, the project appears to be successful over the short term, as production is forecast to increase in 2010/11 due to improved weather and higher yields, as well as a larger area planted. Export Table To Excel

ARGENTIN A Wheat Production, Consumption & Trade 2006 Wheat 14,500. Production, 0 '000 tonnes 1 Wheat Consumption, 5,000.0 '000 tonnes 1 Wheat Net Trade 9,468.0 Balance, '000 tonnes 2 Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA, BMI. 200 2008 7 16,000. 0 5,350.0 200 2010 9 18,000. 0 5,650.0 201 1 11,000. 0 5,325.0 11,000. 0 5,825.0 14,074. f 5 5,725.5 f

10,704. 0

11,193. 0

5,975.0

5,175.0

8,349.0

2 INDEC, FAPRI, USDA. Export Table To Excel

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ARGENTIN A Corn Production, Consumption & Trade 2006 Corn 15,800. Production, 0 '000 tonnes 1 Corn Consumption, 6,200.0 '000 tonnes 1 Corn Net Trade 15,296. Balance, '000 0 tonnes 2 Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA, BMI. 2 INDEC, FAPRI, USDA. Export Table To Excel 200 2008 7 22,500. 0 6,700.0 200 2010 9 22,000. 0 7,000.0 201 1 15,500. 0 6,400.0 22,800. 0 6,900.0 19,520. f 4 7,096.4 f

14,950. 0

6,875.0

7,375.0

15,900. 0

12,424. f 0

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ARGENTINA Barley Production, Consumption & Trade 2006 2007 2008 Barley Production, '000 tonnes 1 Barley Consumption, '000 tonnes 1 800.0 550.0 1,330.0 825.0 2009 2010 1,600.0 825.0 201 1 2,110.0 1,356.0 e 2,025.2 f 895.0 1,060.0 e 972.7 f

Barley Net Trade Balance, '000 tonnes 531.0 2 Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA, BMI. 2 INDEC, FAPRI, USDA. Export Table To Excel

911.0

750.0

900.0

296.0

e 1,052.5 f

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ARGENTINA Sorghum Production, Consumption & Trade 2006 Sorghum Production, '000 tonnes 1 2,330.0 2007 2008 2,800.0 2009 2010 2,937.0 201 1 1,660.0 3,529.0 3,642.5 f

Sorghum Consumption, '000 2,300.0 tonnes 1 Sorghum Net Trade Balance, '000 tonnes 2 Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA, BMI. 2 INDEC, FAPRI, USDA. Export Table To Excel 1,081.0

1,700.0

1,700.0

850.0

1,900.0 2,058.9 f

1,160.0

1,222.0

900.0

1,629.0 1,583.6 f

Export this table as seen Risks To Outlook BMI's corn forecast can change depending on the government's export policy. Severe restrictions on exports may serve as a disincentive for farmers to improve the size and quality of yields, which have already been declining. High input costs, and corn's yield volatility, would deem it a riskier crop to produce if lost export earnings endured for longer than the time it took to build sufficient domestic stockpiles. The resultant impact may see domestic consumers paying higher prices and would lead us to revising down our forecast for consumption growth. Sorghum looks set to enjoy periods of robust production as a hardier and relatively cheaper crop than corn and wheat. Sorghum's versatility as a source of feed, food and fuel make it an adequate substitute, at a time when the main grains are experiencing difficulties. However, we perceive a potential threat to arise if the prices were to increase rapidly, resulting in higher levels of production for export, and subsequently higher taxes imposed by the government, leading, in turn, to the same issues that are prevalent in the corn and, to a lesser extent, the wheat market. While increased rains have vastly improved crop yields, this episode of La Ni?a could still bring dry weather to the 2010/11 harvest that could dry out the crops (the harvest for which has not completely finished), leading to lower yields and likely to decreasing production.

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