High prices boost competition

UKRAINE AND ARGENTINA BENEFIT FROM INVESTMENT IN INFRASTRUCTURE

as worries mounted early this year about tight supplies of corn, wheat, and soybeans, prices mounted, sending a clear signal: “Produce more!”

Canadian growers weren’t the only ones to get the message.  Farmers in countries like Ukraine and Argentina responded to the same call, and the result could be more competition for export market sales in the future.

“When higher prices encourage increased production, part of the scenario you get is more motivation to invest in agriculture,” explains Dr. Jay O’Neil, senior agricultural economist at the International Grains Program, Kansas State University.

“Countries like the Ukraine, Russia and Kazakhstan are all increasing their production of wheat, corn and barley, and as they increase, they will have larger exportable surpluses, making them a bigger competitor,” he says.

Ukrainian farmers are making more aggressive use of fertilizers and chemicals to increase yields, according to Ray Grabanski, president of Progressive Ag Marketing.

Grabanski saw winter wheat yields as high as 100 bushels per acre in Ukraine this year.  “Their ability to get the financing for more inputs suggests there is potential for [growth] in the future,” he says.

Key infrastructure is also better in the Ukraine than in South America, he noted.  “They have a lot of paved roads, and their access to the Black Sea is a tremendous export advantage.”

On the down side, Ukrainian farmers  have little or no grain storage, forcing them to sell the bulk of their production at harvest.

They also lack marketing intermediaries like grain elevators and risk management tools like the ability to hedge.

commitment to exports in eastern europe
That could begin to change.  According to O’Neil, capital spending on port facilities and export capacity is increasing in Ukraine, and multinational exporters like Cargill are investing in the region.

Ukraine’s government is also emphasizing exports.  Ukrainian President Viktor Yanukovych has said he wants Ukraine to capture a larger share of export sales to countries like Egypt, the world’s largest wheat importer. 

Concrete evidence of the government’s commitment to building exports came earlier this year when Ukraine temporarily abolished its export tax on wheat and corn in order to compete against the Russians more effectively.

Recent estimates by US Department of Agriculture (USDA) analysts project Ukrainian wheat production increasing from 16.84 million metric tons in 2010-11 to 22 mmt in 2011-12.  The same report forecast Ukrainian corn production increasing from 11.92 mmt to 21 mmt and exports more than doubling from five to 12 mmt.

In the longer term, projections by the Food and Agriculture Policy Research Institute (FAPRI) see Ukraine’s corn exports increasing to 8.2 mmt and wheat exports to 10.8 mmt by 2020-21.

an eye on argentina
Around the world, investments are under way that could also strengthen Argentina’s competitive position, including an increase in storage and transportation infrastructure.
While Brazil gets more headlines, analysts at Rabobank Agri Commodity Markets Research suggest increases in Argentine corn production could have a bigger impact on world markets. 

Corn yields in Argentina are about double the level in Brazil, and Argentina normally exports about two-thirds of its production.

In the short term, the biggest factor for Argentine exports will be weather.  Last winter’s La Niña weakened in March but never fully disappeared. As with two previous strong La Niñas, it has strengthened again, according to Elwynn Taylor, Iowa State University extension climatologist.

“A second year La Niña is typically not as harsh, but it can still have a strong effect worldwide,” he explains. “The best scientific information at present is that it will continue through March at least. 

“This greatly increases the risk of drought from southern Brazil down through Uruguay, Paraguay and Argentina,” Taylor says. Ultimately, Argentina, like Ukraine, is expected to expand production.  Planted acreages are increasing, and seed industry sources report that Argentina and Brazil are very actively adopting biotechnology as a tool to drive productivity. Even with the La Niña threat, USDA analysts suggest Argentina’s corn production will increase from 22.5 to 27.5 mmt this year and soybeans will jump from 49 to 53 mmt.

FAPRI’s outlook for the decade shows Argentine corn exports declining but wheat shipments up from 8.6 to almost 10 mmt and soybean exports increasing from 11.6 to 14.8 mmt. •