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CHALLENGES 2006-2007: China Fuels Mercosur Agricultural Boom

Marcela Valente *

BUENOS AIRES, Dec 26 2006 (IPS) - Grains, beef, fruit, fish, coffee, milk, sugar, honey, juice and even wine – all of this and more is produced in both quantity and quality by the members and associates of South America’s Mercosur trade bloc, and will continue to be thanks to the huge and growing demand from giants like China and India.

The agricultural boom enjoyed by Argentina, Brazil, Paraguay and Uruguay, the four countries that founded Mercosur (Southern Common Market) in 1991, as well as the bloc’s two oldest associate members, Chile and Bolivia, can be partly explained by their well-known comparative advantages, but even more so by the investment made in recent years in technology and infrastructure, and by improvements in health standards.

The advances made by the agriculture and food industries in terms of production and added value has enabled the region to meet the growing demand that has driven international prices up.

Analysts who spoke to IPS predicted that in spite of internal difficulties in the bloc, both offer and demand will remain strong for at least the next three years. Nevertheless, some experts recommend increased investment and diversification of markets in order for the growth in trade to contribute to true development in the bloc’s members and associates.

“Our countries have been net exporters of food for centuries because of their natural conditions and advantages, but in the last three years the region’s performance has been extraordinary,” Benedito Rosa do Espiritu Santo, the representative of the Inter-American Institute for Cooperation on Agriculture (IICA) in Argentina, told IPS.

“The pressure of the demand from China and its neighbours in the last few years has been so great that it reversed a decade-long downward price trend and shifted the balance of payments in such a way that it has helped countries dig their way out of debt,” said the expert, alluding to policies applied by Argentina, Brazil and Uruguay, which paid off their debts to the International Monetary Fund (IMF).

Do Espiritu Santo said the number of consumers in China is increasing by more than 20 million a year, which means the market will continue to grow “for many years to come.” In South America, the countries best able to respond to the growing demand, by increasing output, are Argentina and Brazil, Mercosur’s biggest members, he added.

Argentina is doing so through investment in infrastructure and technology for the production of agricultural goods, and through the diversification of exports, which is giving a boost to the country’s provinces through increased sales of fruit, wine, honey, fish and seafood.

Brazil, on the other hand, which is in a better position than its neighbours to expand the area under cultivation, will have to invest in roads and ports, and improve business management, said the IICA representative. It also has an uncompetitive exchange rate and higher taxes than the rest of the region, he added.

Nevertheless, Brazil has become the world’s leading exporter of beef in terms of both volume and revenues this year, and it was already the leader in exports of pork, chicken, soybeans, sugar, coffee and orange juice. The country’s agricultural exports skyrocketed from 20 billion dollars in 2000 to 50 billion in 2006.

Brazil’s strong performance has been due to a rise in productivity that is a result of better-trained farmers and improved seeds and planting techniques, as well as the expansion of the area under cultivation, Paulo Molinari, a consultant with the Safras & Mercados news agency, remarked to IPS.

But Molinari said the agricultural industry is facing a serious crisis due to the overvaluation of the real, the local currency, with respect to the dollar. “This is a factor that affects all export products,” he complained.

Exporters loudly protested the overvaluation of the real this year in the offices of economic policy-makers.

However, he said the problem had “touched bottom” and that recovery may begin in the coming year.

The area under cultivation in Argentina next year will be greater than ever before, led by soybeans, of which the country is the world’s third largest exporter. Other farm products include sunflowers, peanuts, corn, wheat, rice and barley.

And despite government restrictions on exports to ensure domestic supplies, Argentina remains the world’s third largest exporter of beef.

“Investment in machinery, fertiliser, and the incorporation of advances made in biotechnology in the past decade enabled us to make a leap in productivity and begin to produce on a large scale, with good business management and steadily growing harvests,” economist Ernesto Ambrosetti, with the Argentine Rural Society (the large landowners’ association), told IPS.

Ambrosetti said the high international prices – although not as strong as the record high prices of 1996-1997 – had fuelled investment. He attributed the rise in prices to the sustained demand from Asia, which he said would remain high for food products and renewable energy sources.

Several products will now have new uses. Corn will go towards the production of ethanol and soybean oil towards the production of diesel fuel, said Molinari. The increasing use of alternative fuels will boost exports in Argentina, Brazil and Uruguay.

While the latest social outlook report by the Economic Commission for Latin America and the Caribbean (ECLAC) indicates that the rise in prices of agricultural products, which have driven development in the region, is slowing down, the experts who spoke to IPS believe the future remains bright.

In Uruguay, agricultural production grew six percent this year with respect to 2005. Total beef exports reached a new high in terms of revenues, and the small country of just 3.2 million people is the sixth biggest exporter of rice in the world, accounting for four percent of global output.

“This is a historic boom period caused by favourable international circumstances, like the improvement of prices resulting from the growing demand in Asia and the need for grains for alternative fuels,” Daniela Alfaro, an adviser to the Rural Association of Uruguay, explained to IPS.

The agricultural sector of Uruguay, the smallest member of Mercosur, grew more in the last four years than in the past three decades. As in the rest of the bloc’s members, investment in technology in the areas of dairy, beef, grains and rice is driving the increase.

Exports of soybeans and other rural products are also on the rise in Paraguay, and to a lesser extent Bolivia, although with limits.

Do Espiritu Santo explained that the Bolivian government has no political interest in an expansion of soybean production, while Paraguay is at the limit of its capacity due to a lack of investment.

Chile, meanwhile, which is free of agricultural safety and health problems, stands out for the quality of its fish, fruit and wine. “It’s like an island, which favours its competitiveness,” said do Espiritu Santo, referring to the fact that Chile is separated from Argentina to the east by the Andes mountains and from Peru and Bolivia to the north by desert.

* With additional reporting from Mario Osava (Brazil) and Raúl Pierri (Uruguay).

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