FOREIGN COUNTRIES' POLICIES AND PROGRAMS
Venezuelan Wheat Market In Midst Of Transition
Few people know that Venezuela is the United States' largest trading partner in South America, and a key importer of both wheat and corn. For the U.S. wheat industry, annual sales have been remarkably steady (totaling 540,000 to 600,000 tons per year), and Venezuela is an important buyer of higher quality wheats. Not only is Venezuela a large buyer of durum (for pasta production), with annual imports of about 300,000 tons (of which 60-70,000 tons come from the United States), in addition, bread wheat imports from the United States are usually of higher priced Hard Red Spring or Hard Red Winter.
While total U.S. exports have been steady, durum sales have fallen sharply (from well over 100,000 tons per year in the early 1990's) due to aggressive marketing by the Canadian Wheat Board and recent dissatisfaction with perceived irregular quality and higher clean-out requirements for U.S. durum. These concerns extend to other wheat varieties, and import patterns seem to indicate a preference for Canadian wheat, with U.S. sales jumping by fifty percent during winter months when shipments of Canadian wheat via the Saint Lawrence are on hold.
While there may be long term potential for growth in Venezuela's wheat consumption, short term consumption will likely be flat. Bread and pasta are consumed as staple foods, but thanks to import barriers and high floor prices, Venezuela has fostered self-sufficiency in production of competing staples, especially rice and white corn. At the same time, the Andean Pact price-band system ensures that wheat cannot enter cheaply enough to upset the price relationship between wheat products (esp. pasta) and locally-produced staples. Any long term growth in consumption likely depends on the success of recent calls, heard throughout the Andean Pact , for a lowering of import duties on wheat.
Even if there is no change in total consumption levels, two recent developments may lead to substantial changes in U.S. and Canadian shares of the Venezuelan market. First, in the past two months wheat importers have undergone a major consolidation. U.S. agribusiness giant Cargill (already Venezuela's largest wheat importer) has purchased its two leading competitors, Monaca and Gramoven. These three companies were by far the largest importers in Venezuela, and Cargill is now positioned to dominate imports. In addition, Cargill awaits approval of its planned purchase of Continental Grain, another significant importer of wheat into Venezuela and a leading importer of corn.
The second development is a major improvement in grain handling capacity and expansion of storage facilities at Puerto Cabello. Purchasing patterns have long been influenced by the tendency for millers to buy smaller lots, for immediate delivery, owing to a lack of storage space. Even though port improvements are rapidly nearing completion, it is still too early to tell whether these changes will work to the advantage of U.S. or Canadian wheat. So, while Venezuela has long been a large and predictable buyer, consolidation among importers, infrastructure changes, and the prospect of major political change (following the election of a populist presidential candidate) all point to the possibility of substantial change in the wheat import market.
For further information, please call Morgan Perkins at (202) 690-4135.
Colombia's Import Policies and Quality Needs Spell Potential for U.S. Rough Rice
Colombia was the third largest export destination for U.S. rice in marketing year 1997/98 (Aug-Jul), with purchases of over 200,000 tons (milled equivalent) of rough rice. Colombia turned to the United States when its usual rice suppliers, Ecuador or Venezuela, were unable to meet demand due to El Nino-related production problems. With the departure of the El Nino, Colombia is expected to return to these regional suppliers for the majority of imports in 1999. However, millers were reportedly pleased with the high quality and good milling yields of U.S. paddy, and are likely to import U.S. rice in the coming year to blend with domestic supplies.
Since the mid-1990's, imports have constituted an important component of Colombia's overall rice supply. Venezuela and Ecuador have been the largest suppliers, in part due to preferential tariff treatment as members of the Andean Community. As members of this trade pact, rice imports from these countries enter Colombia duty-free. In contrast, U.S. rice is subject to import duty assessments equal to 20 percent for milled rice and 15 percent for rough rice. Venezuela also enjoys the advantage of a March 1997 trade agreement between the two countries which calls for Colombia to import 100,000 tons (paddy equivalent) of Venezuelan rice annually. The agreement does not require imports, but provides preference in the event that they are necessary. The Colombian industry signed the agreement in an attempt to control the cross-border flow of unauthorized, subsidized rice.
Colombia's domestic rice production is forecast to increase in 1998/99, but quality is expected to be poor. The main crop, which is harvested from late June through October, comprises about 70 percent of annual production, with a second, smaller crop becoming available in April. Reportedly, a large number of growers planted non-certified seed for the main crop, which resulted in high yields, but low quality and milling output. As a result, many millers hope to import U.S. rice next spring to maintain the quality of their branded, packaged rice. The lower quality domestic rice will likely end up in wet markets, as well as used for blending. The Government of Colombia is also reportedly providing a storage subsidy, which would help to spread the supply of the lower quality rice out over the year.
Colombia's imports from the United States are likely to continue to be in the form of rough rice, not only because of the millers' need for quality, but also due to import policies. The Andean Community price band and reference price system and Colombia's import licensing regime favor imports of rough rice. Specifically, milled rice imports are subject to the Andean Community's price band and reference price systems. The calculation of the import duty for rice is based upon the CIF adjusted floor, ceiling, and reference price levels determined by the Andean Board of Directors. Under this system, import duties are levied on calculated reference prices rather than actual invoice prices. The Andean Community establishes annual ceiling and floor prices in April, with reference prices adjusted every two weeks. When the reference price falls below the floor price, a variable levy or surcharge is applied which is based on the difference between the floor price and the reference price. This surcharge is levied in addition to the applied duty. Conversely, when the reference price exceeds the ceiling price, a reduction is made to the applied duty based on the difference between the reference and the ceiling prices. Imports of paddy rice are not subject to the price band and reference price systems.
In addition, all rice imports must be licensed by the Ministry of Agriculture and are subject to the Government of Colombia's domestic absorption policies. The Ministry of Agriculture normally requires that all domestic rice supplies be marketed before it grants approval for imports, with preferences given to those firms that have purchased the local crop in the issuance of import allocations. Since millers purchase the bulk of locally-produced paddy, they are in the best position to demonstrate that they are in compliance with domestic absorption requirements and, therefore, usually obtain the bulk of import allocations.
Based on a report by David Rosenbloom, Agricultural Counselor in the Office of Agricultural Affairs, American Embassy, Bogota. For further information, please contact Linda Kotschwar at 202-690-1147.
Brazil Reopens Market for U.S. Wheat
On November 26, 1998, Brazil officially published the executive order to allow the entry of U.S. Hard Red Winter (HRW) wheat into Brazil. This executive order was based on the 'Certification Protocol' that USDA and the Brazilian Ministry of Agriculture signed on November 9, 1998. This is significant because the U.S. has not exported wheat to Brazil since September, 1996. The ban on U.S. wheat was originally put in place due to the wheat fungus Tilletia Controversa Kuhn (TCK). After numerous technical talks, the U.S. and Brazil signed a waiver that removed Brazilian restrictions on the importation of U.S. wheat due to TCK on April 20, 1998. However this did not open the market because the Brazilians raised concerns about other wheat diseases, namely cereal stripe and flag smut. The recently signed protocol is based on a systems approach to mitigate the risk of these two wheat diseases. The protocol states that the wheat must be exported through Mississippi and Gulf ports. The protocol also states that Hard Red Winter wheat is grown almost exclusively in the states of Texas, Oklahoma, New Mexico, Kansas, Colorado, Nebraska and Missouri. However, the protocol does not require that the state(s) of origin be identified on the phytosanitary certificate.
Hard Red Winter wheat, which is higher in protein and used for yeast breads, is the primary wheat the U.S. has traditionally exported to Brazil. However, beginning in the 1990s the U.S. also started making sales of Hard Red Spring (HRS) and Soft Red Winter (SRW) to Brazil. HRS, which is very high in protein, is used in yeast bread and hard rolls, while SRW is used for flat bread, cakes, pastries and crackers. In the early 1990s, prior to the ban, the U.S. wheat industry had worked extensively with the Brazilian millers to educate them about the different types of U.S. wheat and their characteristics. In 1991/92, the year of the first HRS sale, U.S. exports of HRS were 274,500 tons. In 1996/97 (June/May), Brazil imported 826,000 tons of U.S. wheat: 698,300 tons was Hard Red Winter; 85,800 tons was Soft Red Winter; and 42,300 tons was Hard Red Spring.
Now that the ban on U.S. Hard Red Winter wheat has been lifted, export opportunities for U.S. wheat will depend on a variety of factors. These factors include the economy and it's impact on consumption of wheat-based products; Brazilian wheat production; and our price competitiveness which partly depends on tariff rates.
Despite slowing in the growth of the Brazilian economy in 1998, consumption of wheat-based products is expected to remain fairly steady, although there will not be much growth in the market. USDA estimates domestic wheat consumption for 1998/99 at approximately 8.3 million tons. This is above last year's level of 8.1 millions tons, but this year, 200,000 tons of that consumption is feed wheat, so food consumption remains unchanged. Brazil's economic stabilization program, the Real Plan, which was introduced in mid-1994, continues to hold inflation down. The 1998 inflation rate is now estimated around 5 percent compared to 1,140 percent in 1994. In the first few years after the implementation of the Real Plan, consumption of wheat-based products increased substantially at the expense of rice and manioc. This longer-term shift to wheat-based products is not likely to be reversed. In the higher income classes, consumption of wheat-based products is partially driven by the increase in fast food chains in Brazil and an increase in the demand for sandwich style bread. Another important change is the increase in the consumption of pasta. The Brazilian Pasta Association estimated that pasta production increased 15 percent in 1997.
The second factor affecting Brazilian demand is their local production. The majority of the wheat in Brazil is grown in the south of the country in the states of Rio Grande do Sul (RS), Santa Catarina (SC), and Parana (PR). The main planting season is from April through June, and the main harvest period is September through November. Brazilian wheat production for 1998/99 is estimated at 2.2 million tons which is down 200,000 tons from last year, mainly due to weather conditions. Wheat production over the past five years has ranged from a high of 3.2 million tons in 1996 to a low of 2.1 million tons in 1994. Brazil is not expected to achieve any significant long term growth in the production of wheat.
Several factors which will affect U.S. competitiveness have changed slightly since the U.S. last sold wheat to the Brazilian market. Brazil relies heavily on Argentina for the majority of its imports, usually about 4.0 to 4.5 million tons. Since Argentina is a member of the Southern Cone Common Market (MERCOSUL) along with Brazil, it has a large competitive advantage in the Brazilian market because of lower transportation costs, shorter delivery times, and a zero duty on wheat. Non-MERCOSUL members face a 13 percent tariff on wheat and a 15 percent tariff on wheat flour. This Common External Tariff was raised 3 percentage points in November, 1997. Canada is the other major competitor in this market. While the United States was shut out of the Brazilian wheat market, Canada was able to take advantage of being the main supplier after Argentina, and has been an aggressive seller to selected Brazilian millers. In 1997, Canada sold 817,000 tons of wheat to Brazil. One positive change for U.S. exporters since 1996, is the exemption from the 25 percent Merchant Marine Tax in January 1997 for shipments into and out of Brazil's North and Northeast Regions. Given the proximity of these regions to the United States and their distance from Argentina, the removal of the Merchant Marine Tax (which was estimated to add US$ 5.00/mt to the landed cost of U.S. wheat) should enhance the competitiveness of U.S. wheat in those regions.
Brazil is forecast to import 6.1 million tons of wheat in 1998/99 (July/June). This is up from 5.7 million tons in 1997/98 and 5.5 million tons in both 1996/97 and 1995/96. Given that the Argentine harvest begins in December, U.S. sales will be limited by the Argentine price advantage in the first half of 1999. However, the United States generally has a window of opportunity between May and September, prior to the Brazilian harvest. So, although the U.S. may not see immediate wheat sales to Brazil, it will likely be competitive there next spring and summer.
Based on reports from the Office of Agricultural Affairs at the American Embassy in Brasilia. For further information please contact Barbara Callen at (202) 720-4203.
Indonesia Wheat Distribution and Import Channels Still Unsettled
In early September, BULOG (Badan Urusan Logistik), Indonesia's state buying and logistics agency, made an unexpected announcement that its wheat and wheat flour procurement monopoly (as well as that for soybeans and sugar) would end immediately. This sudden move was combined with the sacking of the prominent Chairman of BULOG and the lifting of duties and restrictions on flour imports. The changes open an unprecedented market opportunity for U.S. wheat exports to this 2.5 million ton market but slow release of BULOG stocks and depressed consumption are likely to temper any immediate sales.
The large consumer subsidy on wheat flour has been fully phased out as part of the changes; however, between July and September large price hikes had largely erased this subsidy. Flour may now be freely imported duty-free (from a previous rate of 10%) but a value-added tax of 10% apparently will remain.
The five flour mills, both small and large, continue to have difficulty in opening letters of credit. However, BULOG still has over 700,000 tons of wheat and flour in storage or awaiting delivery (about 3-4 months of supply), making import planning difficult. BULOG's insistence on high prices and consequent inability to move any significant portion of its huge stocks has only added to the confusion surrounding the transition from government monopoly to open market competition.
Australia and Canada dominate the Indonesian market, but the United States has so far in MY 1998/99 (June/May) exported 292,400 tons, the most since 1995/96. In July, BULOG held its first two public tenders. The first was limited to Australian origin. In the second, the United States sold 236,000 tons of wheat and the 500,000 ton balance was supplied by Canada and Australia. This was likely as a result of IMF reforms which have pressured BULOG to end its "silent buying operations."
In the meantime, the United States will donate 600,000 tons of wheat to Indonesia under the 416 (b) Food Aid Initiative. In addition, two private sector P.L. 480 sales--the first private sector agreements ever--will provide approximately 90,000 tons of wheat and transportation for the commodity.
During the most recent years of BULOG's tenure as a monopoly, the Indonesian market for wheat was about 55% low-protein (9.5-10% Australian Standard White and some Argentine), 40% protein wheat (12-13.5% Australian Prime Hard, Canadian Western Red Spring, Hard Red Spring, Northern/Dark Northern Spring), and the remainder low-protein Western Australian Standard White. Purchases of U.S. wheat so far this year have been about equally Hard Red Winter and Hard Red Spring.
Flour demand is likely to drop by over 30 percent in 1998/99 (July/June) compared with the previous year but should hopefully remain stable after that. The three types of flours distributed by BULOG have been bread flour (11.5 to 12.5% protein), all-purpose flour (9.5 to 11.5%) and biscuit flour (8.0 to 9.9%). New market segments, for example frozen dough products, bread, and hamburger buns, are small but emerging and require higher protein wheat such as Hard Red Spring of U.S. origin. However, the current economic problems will cause demand for these new products to develop very slowly.
The high domestic prices and recent lifting of flour tariffs is seeing competitively priced Australian, Malaysian and European flour entering the country since Jakarta prices of about IDR 2,650 per kg (USD 350 per ton) are well above the import prices. With the September lifting of export restrictions on several formerly subsidized commodities, including wheat and wheat flour, it remains to be seen whether Indonesia mills will look at exporting some of their flour production. Like Malaysia, excess milling capacity exists in Indonesia.
In early September, United States Wheat Associates (USWA), together with several state Wheat Commissions, hosted an information trip for representatives from three Indonesian flour milling companies. The tour included visits to U.S. port facilities, farms, mills, and processors as well as meetings with industry experts and traders.
Despite all of the changes to BULOG and Government policy, recent events suggest strongly that there will be an indefinite and uncertain transition period.
Based in part on reports from the Office of Agricultural Affairs, American Embassy, Jakarta. For further information, please contact Rick O'Meara at (202) 720-4933.
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