How World Economies Impact Domestic Agriculture: Brazil and Argentina

Friday, June 06, 2014

   It is no secret that Brazil and Argentina are major players in the agricultural commodity markets. In the 2014/15 production year, the two countries will harvest a combined 112 million metric tons of coarse grains. That output would account for nine percent of the world’s total production. Surpluses in Brazil and Argentina provide the world a major source of grain for export. Looking ahead, the future of agriculture in Brazil and Argentina looks promising, in part because favorable economic conditions will help forge the type of linkages that support increased production.
   Strong economic ‘linkages’ are important because they reinforce connections among the agricultural industry and other various sectors. Some of the linkages that are relied on in agriculture involve transportation, communication, finance, equipment, and crop inputs. Brazil and Argentina are making progress in their efforts to improve economic linkages. Agricultural efficiency and productivity will benefit as a result.
   Both of the South American countries have made great strides in economic growth and development over recent decades. When mid-twentieth century efforts to liberalize the economies of South America started, it was necessary to correct problems associated with severe dualism in the countries. Economic dualism existed in a way that split the primary, or agricultural sectors, from the goods and services sectors. As improved linkages began to spark the commercialization of agriculture, producers were able to use surpluses to support the food bill required by increasingly urbanized secondary and tertiary economic sectors, which in return provided the agricultural sector with production inputs and consumer goods. The beneficial effect of improved linkages was reinforcing of itself and economic sectors have become more interdependent as a result.
   The current health of the Brazilian and Argentine economies could be described as reasonably stable. All countries in South America suffered economic blows after the global financial crisis in 2008, but progress is for the most part back on track. Argentine GDP is expected to grow by about 1.5 percent in the year ahead and Brazil may enjoy expansion that is just a bit higher than 2 percent. Both countries will remain active participants in the commodity trade market and will thus benefit from continued stability offered by abundant foreign currency reserves. Brazil’s current initiative to improve its agricultural infrastructure could reap tremendous rewards for the country. Although more than half of Brazil’s soybean crop is produced outside of the southern port region, only 15 percent of production is shipped out of ports in the north. Brazil looks to change that by opening passages through the Amazonian river system and building a better highway system.
   Going forward, a number of headwinds will challenge the economies in their efforts to achieve further growth and development. Argentina will be burdened by currency market instability. Producers in the country have been known to hoard grain as a hedge against the floundering peso, often using for money security what would otherwise be a marketable commodity. Argentine policymakers have also burdened commercial grain handlers with certain barriers to trade. Future agricultural trade cooperation between Brazil and Argentina will especially rely on the removal of these export restrictions.
   Economic conditions in Brazil and Argentina are mostly favorable and will continue to influence commodity prices, including those for agricultural goods in the United States. South American demand for corn is expected to grow in the 2014/15 marketing year. Increased usage of grains in the region has the potential to cut into the Brazilian and Argentine surpluses that would otherwise be marketed abroad. However, producers will gain more access to equipment and technologies that boost output as financial markets continue to improve. Good economic prospects for Brazil and Argentina mean stiff competition for U.S. grain going forward.
   Check back next week for a look at the mighty wheat growers that make up the Black Sea region. Recent political turmoil in the region has thrust Russia and Ukraine into the spotlight and tensions between the countries has been a cause for much volatility in the grain trade. We will discuss how these events, along with developing weather concerns in the region, will impact U.S. markets in the months ahead.