Argentina - Agricultural Sector Review (Vol. 1 of 2) : Main Report

Document of The World Bank FOR OFFICIAL USE ONLY CONFIDENTIAL Report No. 7733-AR ARGENTINA AGRICULTURAL SECTOR REVIEW Volume I: Main Report June 30, 1989 Agricultural Operations Division IV Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit - Austral (A) Argentina has a single official rate of exchange which on June 9, 1989 was: US$1.00 - A184 A1.00 = US$0.005 The free exchange rate quoted in Montevideo on the same date was: US$1.00 = A370 A1.00 - US$0.003 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES The metric system has been used throughout the report. ABBREVIATIONS See Appendix 2 FOR OFFICIAL USE ONLY CONFIDENTIAL ARGENTINA AGRICULTURAL SECTOR REVIEW Table of Contents Volume I: Main Report Page No. EECUTIVESM RY ..........................*************** * i A. Agriculture in the Economy .............................. i B. Price Discrimination ..................................... i C. Comparative Advantage .................................... ii D. Opportunities for Growth ................................. iii E. Technical Constraints .................................... iv F. Marketing Constraints ................................. v Cereals and Oilseeds .... .... .o....0.. ... . ........ Meat ... ......... o...o. o...... .. .. . .- .o..... .. .. .. ..... vi Wool o............ .. .. ........ ..... .. . . ...... vi Horticulture ... o.. ........... .... ............. vii G. Agricultural Services and Institutions ........ vii The Secretariat of Agriculture, Livestock and Fisheries .............hee.. ... o.. ... .... vii Agricultural Research .....sro.............. ......... vii Animal Health ............. ................ viii Plant Protection ..... .o..... .......... viii The National Forestry Institute ......se.... ix The National Grain Board a..d.. ........... ix The National Meat Board ....oard................. x H. Conclusions and Recommendations .................... xi Strategy.....g... ... ... .. .. .. . . .... ....... xi Pricing Policy ................... .. ......... . ... xi The Exchange Rate ................................. xi Taxation ...... ... ... .. . .. .. . ............ ... xii Trade Policy icy...........o................... xii Cereal and Oilseed Marketing ...rei..g...o.... . xii Other Product Marketing .......rg......... ....... xiii Institutional Strengthening ...........en.i.n...... xiii Infrastructure .................................. zxiv £ This review is based on the findings of an agricultural sector mission that visited Argentina in MHay 1988 comprising Messrs. M. Wilson, S. Oliver, P. Brumby, T. Glaessner, M. Hagerstrom, J. Nash, Ms. S. Gohari (Bank); ff. Sarquis (IDB), F. Blanc, R. Owens, M. Simeon, K. Rachie (FAO/IBRD CP); T. Bailey, M. Fairless, R. LaCroix, V. Mott (Consultants); and Mrs. S. Watt (local coordinator). Basic preparatory work for the mission was provided by the Government of Argentina through 3AGyP. Considerable support and background papers were provided by the IICA Resident Office in Argentina in its capacity as consultant to SAGyP. Ms. Julia Richardsoa assisted in the production of the report. I r * A- - .rr &t - - * rt ,r 4 & -tr it t *n ar i may he 1 ad h refinipnt only in the oerformance of Table of Contents (Continued) Page No. I. THE ROLE OF AGRICULTURE IN THE ECONOMY ...................... 1 The Macroeconomic Context ................................... 1 Growth in the Agricultural Sector ......ct.... .............. 1 Trade and Agriculture ....................................... 2 Price Discrimination ........................................ 3 Agricultural Policy and Planning ...............n........... 4 II. RESOURCES, LAND USE AND TECHNICAL CONSTRAINTS .............. 6 A. Overview . ..................................... 6 B. Cereals and Oilseeds .................................... 7 Importance mnd Areas ........rea............. 7 Performance and Output .... ............. 8 Productivity and Input Use ........................... Patterns of Production ........... 10 Technical Constraints in Cereals and Oilseeds ........ 11 C. Livestock ............................................... 13 General ............................................. 13 Beef Cattle .....tle................... ............. 13 Dairy ............................................... 14 Sheep ............................................... 16 Poultry ............................................. 17 Pigs ............................................... 17 Technical Constraints in Livestock ................... 18 D. Horticulture ........................ ................... 19 General ..............................,.............. 19 Resources .................................... ....... 19 Potential ...ntal. ................. ............. 20 Technical Constraints in Horticulture .......... 22 E. Irrigation ......itn...........** ......................... 22 F. Forestry ..... ... ..... ....................., ..,....... 23 Resources .....cs......3... -, ....................... 23 Forest Management ................................... 24 Technical Constraints in Forestry .................. 24 G. Fisheries .......... .. . .. . ................ ... 25 General ......................................... .... 25 The Fleet .....e.... ................................. 25 Resources ............................................ 25 Technical Constraints in Fisheries ................... 26 III. AGRICULTURAL SERVICES ....................................... 27 A. The Secretariat of Agriculture, Livestock and Fisheries .. 27 B. Research Services ..... ................................. 27 Crops ................................ .......... .. 27 Livestock .......... ................................ 29 Horticulture ........iue........ ................... 29. Forestry ........................9......... ......... 29 Fisheries .......e..... .......................s.... . 30 C. Extension Services ...........v3............. ........... 30 Public Extension .... ............................... 30 Private Extension ......ensi........ 30 D. Animal Health Services ......................... 31 E. Plant Protection Services ....oP................ .... 32 Table of Contents (Continued) Paae No. F. Farmer Organizations ................-.................... 33 G. Other Private Initiatives ................................ 34 H. Agricultural Credit ...................................... 35 IV. ISSUES IN AGRICULTURAL MARKETING ............................ 36 A. Cereals and Oilseeds ........................... ......... 36 General Conditions Governing Trade ................... 36 Role of the Public Sector ........................... 38 The National Grain Board ............................ 38 B. Livestock ............................................... 40 Meat Marketing ....................................... 40 The National Meat Board .............................. 42 Wool Marketing ....................................... 44 C. Horticulture ............................................. 45 D. Forestry ................................................. 46 E. Fisheries ................................................ 47 List of Text Tables 1. Key Agricultural Statistics ................................. i 2. Comparative Advantage in Cereal and Oilseed Production ....... 11 1.1 Export Price Differentials Between fob Argentina and fob Mexican Gulf ....................................... 2 2.1 Size Distribution of Land Holdings ........................... 7 2.2 Cereal and Oilseed Production ................................ 8 2.3 Cereal and Oilseed Yields .................................... 9 2.4 Comparative Yields and Costs ................................. 10 2.5 Cereals and Oilseeds: Areas Harvested . ...................... 11 2.6 Key Horticultural Crops ...................................... 19 Appendices 1. A Historical Review of Agricultural Development in Argentina 2. Abbreviations Chart 1 : The Secretariat of Agriculture, Livestock and Fisheries Graphic 1: Agricultural Production Zones (3 pages) MAP IBRD 21034 Table of Contents (Continued) Volume II: Technical Annexes 1. Cereals and Oilseeds 2. Grain Marketing 3. Livestock 4. Horticulture 5. Forestry 6. Fisheries 7. Agricultural Pricing and Trade Policy 8. Statistical Annex ARGENTINA AGRICULTURAL SECTOR REVIEW EXECUTIVE SUMMARY A. Agriculture in the Economy 1. Agriculture and agroindustry have been crucial in Argentina's economic development, and thay offer the best potential for future recovery and growth. Primary agriculture contributes about 15% of GDP, and agroindustry contributes a further 15-202. Together they account for about 75Z of Argentine exports. Historically, domestic policy has been oriented to using the agricultural surplus to finance industrial development. Estimates of this transfer indicate that in the early 1980s the agricultural sector transferred on average 45Z of its GDP to other sectors of the economy and to the Government. Table 1: Key Agricultural Statistics Level of Direct Argentine Ag. Exports and Indirect Grain Exports Agriculture as Z of Taxation of the as Z of as Z of Total Ag. Sector as World Grain Period GDP a/ Exports b/ 2 of Ag. GDP c/ Trade 1971-75 13.2 76.2 18.0 11.7 1976-80 13.5 76.5 25.4 10.6 1981-85 15.1 74.2 45.6 10.9 1986 14.8 67.2 - 9.0 Source: a/ Table 2.1-A, CEM 1985. j/ Table 3.6, CEM 1987, Categories I-VI, VIII, and X. S/ Sturzenegger, Background Paper, Table 17b. 2. Critical to the medium-term prospects of the economy is whether agriculture can continue this role. Heavy export taxation and overvaluation of the currency--in the past the principal instruments used to extract the agricultural surplus--appear to be increasingly untenable. After years of disinvestment, the competitiveness of Argentina's rich agriculture may not be sustainable without a reversal of the resource flow -from the sector. B. Price Discrimination 3. Price discrimination (via trade and exchange rate policies) has been directed primarily against the traditional export products (cereals, oilseeds and beef), but its consequences have affected the entire - ii - agricultural sector. The combination of direct and indirect nominal protection (i.e., the effects of measures specific to each product and of those which affect all trade) was strongly negative for the whole period 1960-1985, and the levels were similar between products. Agriculture was discriminated against during this period by between 40-50% (i.e., product prices would have been between 80-100% higher in the absence of these distortions). Over the long term, direct measures of discrimination (e.g., export taxes) have been higher when a high real rate of exchange or high internat;onal prices have prevailed. Export taxes and the exchange rate have been used interchangeably to discriminate against agriculture. Intervention has been conservative, maintaining incomes at given levels rather than prices. Discrimination within the sector has neutralized long- run changes in productivity. 4. The effect of price discrimination on the output of the sector has been significant. Response to price changes at the producer level is strong. Estimates show that in the absence of intervention the output of the five major cereals and oilseeds would have grown to an average of about 60 million tons per year in the period 1980-85, with a predicted high in 19a2 of 70 million tons. In practice, production over the period was an average of 34 million tons, with a high of 44 million tons in the 1984/85 crop year. The incremental earnings in 1985 would have been US$5.4 billion, a sum equal to 64Z of all exports in that year and 167% of the value of actual exports of the five products. C. Comparative Advantage 5. About 60? of agricultural output is produced in the central- eastern region of the country known as the Pampas, one of the most fertile regions in the world for temperate agriculture. Over 56Z of the soils of this region are classified as Type I or Type II (i.e., very good to excellent for arable farming). This natural productivity contributes to some of the lowest production costs in the world. Variable production costs in 1987 were only 1/2 to 2/3 of those in the US. Table 2: Comparative Advantage in Cereal and Oilseed Production a/ Product 1981/82 1982/83 1983/84 1984/85 October 1986 Wheat 0.38 0.34 0.43 0.48 0.76 Corn 0.34 0.31 0.35 0.36 0.65 Grain Sorghum 0.43 0.41 0.50 0.39 0.64 Soybeans 0.31 0.14 0.32 0.18 0.32 Sunflower 0.33 0.41 0.31 0-31 0.60 a/ Domestic resource cost coeffictents divided by the official exchange rate. Source: F. Cirio and M. Regunaga, 1986. - .1ii - 6. These low production costs were achieved despite the price distortions noted above and the unav&tlability of some inputs. If these factors are taken into account, the inherent competitiveness of Argentina's agricultural sector is even more evident. Valuing inputs to production at their economic costs, the estimates shown in Table 2 of the domestic resource costs of production indicate that the foreign exchange generated by cereal and oilseed production is two to three times the cost of domestic resources used in their production. 7. Although the fertile plains of the Pampas will remain the center of Argentina's productive base in agriculture, a great diversity of micro- climates and soils permits the production of a wide range of c-ops, from wheat, rice, and oilseeds to grapes and other fruits and even tropical products. Many of these crops, in addition to those which alreAdy are important in international trade, also can be produced at costs hat are competitive with elsewhere in the world. D. Opportunities for Growth 8. The natural potential for Argentina's crop, livestock, horticulture, forestry and fisheries subsectors is enormous. Furthermore, the main technical constraints to growth are already well known and can be removed. The catalyst for growth will be a coherent and consistent domestic policy environment that is perceived by producers as supporting the sector's long-term growth and development. Unfortunately, this environment is aot yet in place. Complementary to this is the need for the reform and strengthening of many of the institutions serving the sector. 9. Assuming a favorable macroeconomic en-.ironment, and despite the constraint to improved crop and livestock productivity presented by absentee landownership (para. 11), the growth potential by subsector can be summarized as follows: (a) Cereals and Oilseeds. A return to the peak years of the mid- 1980s is feasible provided world markets maintain their current strength and if recent climatic extremes (flooding followed by drought) return to a more normal pattern. The short/medium-term prospects for oilseeds are particularly good. (b) Beef. The beef industry has been a pillar of Argentina's development for over a century. Despite its decline in recent decades, it is a subsector that continues to be very important in the domestic economy. Meat export prospects could also improve and appear to warrant special promotion, especially higher-value, cooked products. (c) Wool. Although the wool industry has been in decline until recently, there is hope that renewed growth can be based on the increasing world demand for fine wool products. Sheep production is gradually coming back into the farm rotation in southern Buenos Aires Province. Patagonia would also benefit from such growth, due to the existing system of regional preferences. However, this system itself needs examining to ensure the development of a more efficient wool industry that can meet international quality standards. - iv - (d) Horticulture. Fruits and vegetables are major potential growth areas if Argentina can exploit its Southern Hemisphere location and its controlled growing environment in irrigated arid zones. Temperate fruits are likely to be leading candidates, and markets could include not only the US and the EC but also the USSR and Japan. (e) Forestry. This largely unexploited but huge natural resource offers considerable scope for import substitution and gradual growth in exports, especially of chips and eucalyptus roundlogs to the EC. (f) Fisheries. In the last decade, this sector has attracted considerable attention from foreign fleets and interest in forming joint ventures for investment purposes (e.g., Japan, Spain, Italy, West Germany). A major increase in exports is possible in the short/medium-term, but this will depend on a substantial investment in upgrading and rehabilitating the fishing fleet. 10. The single most important non-macroeconomic constraint to growth in most of these subsectors is the lack of marketing expertise for export. Argentina's nontraditional agricultural exports do not enjoy a good reputation overseas, little promotion is carried out, and there is a distinct lack of understanding of what export markets need (e.g., in terms of varieties, quality standards and timing of demand). A major priority is the need to develop a coordinated public and private sector effort to improve export marketing and promotion of nontraditional agricultural products. This is extremely important to reduce already demonstrated risks of overdependence on cereal and oilseed exports. E. Technical Constraints 11. In Cereals and Oilseeds, the two major constraints to increasing productivity are a worsening problem of hydraulic soil erosion and absentee landownership. Hydraulic soil erosion occurs in about one-third of the cereal and oilseed zone, and is in part the result of crop rotations that do not include pastures or adequate soil conservation practices. The long- term impact of this on Argentina's productive base could be extremely serious. Absentee landowners are still common in Argentina, and underexploitation of the potential of land is in part due to larger absentee-owned farms which generate sufficient income because of their scale of operations. Their owners are often risk-averse and reluctant to invest in new technology due to Argentina's inflationary economy and tradition of discrimination against agriculture. An attsmpt to introduce a federal land tax to stimulate improved productivity in 1986-87 failed due to pressures in part from the Argentine Rural Society which comprises many a large absentee owners. -12. Flooding is also a serious constraint to cereal and oilseed production in the Pampas. The primary flood areas are in the five municipalities of 9 de Julio, 25 de Mayo, Carlos Casares, Pehuaj6 and Trenque Lauquen. At their peak, floods have affected 4.0 million ha, and the claims for disaster relief by farmers have averaged about 10,000 per year since 1985. Rural infrastructure and urban areas have also been affected. Unfortunately, political pressures led to an uncoordinated response. However, the Provincial Government of Buenos Aires has now initiated a master plan study to determine an aDronriate filtiure stratov - v - 13. In livestock, the key constraints are low reproductive coefficienta, poor pasture management and absentee landownership. Animal diseases, principally foot and mouth disease (FMD) and brucellosis, have a major impact on: (a) the marketability of beef abroad; and (b) animal breeding coefficients. In wool, poor quality results from inadequate marketing techniques and inadequate grading. 14. In horticulture, the key constraints ares (a) inadequate packing, storage, processing facilities and equipment; (b) obsolete varieties that no longer meet the requirements and quality standards in the export market; and (c) poor market research and a lack of an export image for Argentine products. 15. A further potential problem for horticulture is irrigation. The irrigation subsector has experienced major problems in recent years as performance and water distribution efficiencies have declined to about 33Z. Of the 1.9 million ha command area, only 1.5 million ha are equipped with distribution works. Schemes in operation suffer not only from poor management but lack funds for operation and maintenance. At the farm level, water application systems are incomplete and antiquated, and poor knowledge of irrigation techniques has contributed to problems of salinity (0.5 million ha) and water-logging (0.5 million ha). 16. In fisheries, the ocean-going fleet is antiquated and on-shore plants need reequipping to produce new product lines. In addition, port infrastructure in Patagonia is inadequate; coordination between public agencies is lacking; personnel training is inadequate; and research needs strengthening. 17. In forestry, there is inadequate information on the extent and composition of the forestry resource and a forestry demand forecast is needed. The plantation area will require significant expansion to meet the future demand for wood products, and forest management needs to be improved to ensure the supply of appropriate trees to meet the needs of mechanical as well as pulp plants. In this context, there is an urgent need to modernize the industry to improve the quality of sawnwood. F. Marketing Constraints Cereals and Oilseeds 18. The four principal areas where improvements are needed in the marketing system for cereals and oilseeds are: (a) the transport system (rail and road); (b) storage and handling at the ocean terminals; (c) the merchandizing system (commodities exchanges, futures markets, storage warrants), needed for effective risk management and the financing of stocks; and (d) the National Grain Board (JNG). 19. Due to a lack of investment, the condition of the land transportation system, particularly that of the railways, has deteriorated to the point that transporting cereals and oilseeds over land is both time- consuming and unreliable. The first priority is to modernize the railway tracks and rolling sto,7k. To improve efficiency, it may be necessary to privatize some of the key routes. Sizeable investment may also be required for reversing the deterioration of the road system. - vi - 20. Cereal and oilseed storage capacity is adequate in Argentina. Host of the facilities inland are private, and there is also considerable competition in storage and handling at the ports, except at Bahia Blanca where JNG has a monopoly. The improvement in this area, therefore, can come from modernization/privatization of JNG's terminal port fa'ilities, demonopolization of the Bahia Blanca facility and closure of those inland elevators still owned by JNG that are judged to be uneconomic. 21. At present, none of the agents participating in the marketing of cereals and oilseeds, the farmers, the millers or the exporters, make much use of the commodity futures exchange. Moreover, due to the absence of speculators in the market, its use for hedging has been very limited. To put the producers and the traders in Argentina on an equal footing in risk management with their counterparts in other major exporting countries, considerable improvements are needed in the operation of exchanges, including a revision of the rules, information dissemination, and improved access to the foreign commodity futures exchanges. Meat 22. The demand for high-value cuts is growing in the EC, Scandinavia, Japan, and Southeast Asia. However, EC quotas and sanitary regulations currently restrict further market penetration by Argentine products. In the event that EC price supports were reduced and intervention stocks run down, there would be an opening for greater Argentine penetrationt (a) into the EC's traditional export markets; and (b) in the longer term, into the EC itself. Hewever, the best short-term strategy would appear to be to focus on cooked products. To this end, Argentine meat marketing efforts should be directed at securing changes in import controls for cooked meats. 23. Export promotion is lacking for all but the largest firms and the National Meat Board (JNC) is only able by law to allocate a maximum of 30% of its total revenue (US$15 million) to promotional activities. By comparison, the Australian Mtt and Livestock Corporation spends about 70% of its annual budget of US$50 million on promotional activities. An expanded role for JNC in promotion and market research is therefore essential to Argentina's export strategy for meats. Wool 24. Unlike other Southern Hemisphere competitors (e.g., Australia and New ZeLland), Argentina has no public body involved in the wool industry and it does not belong to the International Wool Secretariat. The private sector has open access to the wool clip, and local branches of international merchant houses dominate the export business. They also own large sheep properties and processing plants in Patagonia. As a result, the industry is controlled by a few, large, vertically-integrated groups, five of which handle 70% of Argentina's wool exports. These groups operate in an oligopolistic manner and there is little competitive or public pressure to raise grading or quality standards. 25. Public policy towards wool processing adversely affects the efficiency of the Argentine industry in two ways: (a) stratified export taxes favor domestic processing, while high domestic processing costs suggest a need to export raw wool rather than the processed product; and (b) regional incentive schemes favor processing in Patagonia which seriously distorts efficient production, processing and export of non- Patagonian wool. - vii - Horticulture 26. An export market development strategy for horticultural products is conspicuously lacking. and greater coordination between private, public and research agencies will be central to the exploitation of Argentina's considerable natural potential in this area. 27. A recent survey by the Inter-American Institute for Agricultural Cooperation (IICA) indicated an investment credit demand of over US$100 million to e4pand and improve the subsector's capacity for processing fruits and vegetables. However, before embarking on a major investment program, a technical assistance campaign will be needed for small- and medium-sized producers. International technical consultants are needed to discuss the latest developments and techniques in fresh fruit and vegetable harvesting, handling, cold storage and packing, and food processing. 28. As part of an improved horticulture marketing strategy, the National Institute for Agricultural Technology (INTA) should work with producer groups and trade associations on production technology. In addition, an Expert Market Development Scheme should be set up to help finance, amongst other things, market surveys, promotional campaigns, and INTA research in relevant areas such as the development of new varieties. G. Agricultural Services and Institutions The Secretariat of Agriculture, Livestock and Fisheries 29. The Secretariat of Agriculture, Livestock and Fisheries (SAGyP) comprises: (a) four subsecretariats: Agriculture, Livestock, Fisheries and Agricultural Economy; and (b) ten parastatals, the principal of which aret the National Grain Board (JNG), the National Meat Board (JNC), the National Forestry Institute (IFONA), the National Institute for Agricultural Techr logy (INTA) and the National Fisheries Research and Development Institute (INIDEP). SAGyP is a dependency of the Ministry of Economy (MEC) which has traditionally meant that policies affecting the sector are largely based on MEC (and Central Bank) initiatives, with SAGyP acting as technical adviser rather than policy maker and planner. Public expenditures on agriculture and livestock in 1987 were 0.3Z of total public expenditures, compared to 1.2Z for the manufacturing sector. Aaricultural Research 30. In 1956, the Government created INTA to carry out research and extension. INTA's current research program includes 37 experimental stations, 1,363 professional researchers and a support staff of about 3,500 who service both research and extension needs. Recently. INTA's management took important steps towards ensuring an expanded role for the institution in the future. In 1988, it created an Economic and Social Research *Institute to improve economic and marketing aspects of its technical packages. A major institutional strengthening is also underway focussing heavily on overseas training (financed in part by IDB). 31. INTA needs to identify its areas of comparative advantage to avoid duplication with the private sector. Potential areas on which INTA should focus include: (a) basic research into genetic engineering; (b) basic germplasm development; and (c) specific problem areas such as soil -viii - conservation, integrated pest management and crop stress response. On the latter, the importance of research into water stress has been highlighted by the floods of 1985-88 and the drought of 1988/89. The floods affected between 2-4 million ha and the current drought is estimated to have reduced total grain and oilseed output from 39 to about 30 million tons (i.e., by over 20X) in 1988/89. The crops most affected by the drought are maize and soybeans. 32. Applied research needs to be integrated more closely with the technology validation and diffusion network, and scientists need to work more closely with farmers in carrying out on-farm research. Researchers also need to develop and maintain better professional contacts with colleagues working in similar agroclimatic regions of the world, especially the International Agricultural Research Centers, to minimize duplication of research and to speed up the technology transfer process. In addition, closer contact with private seed companies would avoid wasting scarce resources. The seed companies dominate the market for hybrid seeds (maize, sorghum and sunflower) and contribute at least half of the seed of self- pollinated species (wheat, soybeans and grasses). Animal Health 33. Veterinary services in Argentina are provided by private professionals, provincial veterinary services and the National Animal Health Service (SENASA). Coordination between SENASA and provincial veterinary services is ensured by a National Animal Health Commission (CONASA). The production, distribution and import of vaccines and veterinary pharmaceuticals is carried out by private companies, but SENASA is responsible for quality control. 34. SENASA's disease control and meat inspection services are vital not only for the domestic market but even more importantly for the export market, since most countries impnse rigid disease control and sanitary certification requirements on meat imports. There is some suggestion that there may be a shortage of trained veterinarians and that budgetary restrictions may be limiting the effectiveness of the sanitary control programs. In particular, there needs to be more effective training of farmers and SENASA employees, and more extension and evaluation at the farm level of the effectiveness of disease control programs. 35. The key issues which require urgent attention in animal health services are: (a) the low level of SENASA resources, including compensation and facilities; (b) unsatisfactory work programs due to limited interaction between interested agencies and farmers; and (c) the need to improve production of FMD vaccine in order to support a more comprehensive control plan. Plant Protection 36. Within SAGyP's Subsecretariat of Agriculture, the Plant Protection Service (Sanidad Vegetal) and Plant Inspection Service (Fiscalizaci6n de Producci6n/Comercializaci6n Agricola) have a meager complement of 56 technical staff and less than 150 support staff to cover the entire country. The programs on which these services mainly focus are: (a) containing citrus canker to the northeastern region; (b) attempting to control the endemic fruit fly; and (c) providing laboratory analysis of pesticide residues. - ix - 37. The key constraints to Argentina's plant protection services are: (a) insufficient resources (technical Etaff, vehicles), fluctuating finances, and a poor information system; (b) inadequate interaction between federal, regional and private agencies; (c) the lack of a coordinated national program; and (d) the lack of quarantine station for exports. The National Forestry Institute 38. IFONA administers the national forests, but responsibility for overseeing provincial forestry resources rests with the provincial governments. IFONA's functions .nclude: policy implementation; law enforcement; planning; forest management; economics; administration of the planting subsidy scheme; extension and publicity; forestry for social development; and, through its field offices, research and fire protection. It is seriously constrained by inadequate staff (77 professionals, 92 administrators and 119 support personnel), low salaries and low operating and research budgets. 39. If the forestry sector in Argentina is to exploit its considerable potential, several key institutional issues need to be resolved, namely: (a) strengthening of IFONA's capacity in planning, policy, economics, law, forest management, extension and education; and (b) improvement in the capacity of provincial managers to administer and control forestry operations. 40. There is also a need for greater coordination of forestry research, which is currently carried out by IFONA, INTA and a number of other private and public bodies. Priority research areas include: (a) forest tree improvement for increasing yields from plantation-grown species; (b) forest management to identify optimum management regimes in areas of natural and plantation forest; and (c) wood technology to identify uses for the lesser-known species of the mixed, semi-tropical for,cts of the northwest. The National Grain Board 41. JNG is an autarchic institution answerable to the Secretary of Agriculture. Its main functions are: (a) trade regulation; (b) quality control; (c) market information; (d) operation of public infrastructure (mainly grain elevators); (e) provision of insurance against non-delivery by companies registered to operate in the grain trade; (f) trading (currently about 30Z of the wheat crop and 15Z of cereal and oilseed exports); and (g) acting as an executing agency for certain government programs (e.g, support to producers in marginal areas). The JNG also retains the function of establishing minimum export registration prices which are needed to minimize under-invoicing of exports, to control foreign exchange remittances and to measure taxable trading profits. 42. The most controversial of JNG's functions are its operation of -terminal grain elevators, its monopoly in grain handling at Bahia Blanca. the nation's principal deep-water facility, and its trading of grains (mainly wheat) on the domestic market. The JNG terminal grain elevators are run-down and overmanned. Divestiture is long overdue. Opposition from the labor movement is strong, however, and there are difficult legal and commercial issues to be resolved before divestiture of these public assets can take place. 43. The issue of JNG's monopoly at Bahia Blanca has also not yet been resolved. Various suggestions, including the possibility of constructing a second facility, owned by the cooperatives (FACA/ACA). are currently being considered. The impartance of this issue would be further increased if the Rosario-Bahia Blanca railway track were modernized, when the flow of exports through Bahia Blanca would increase significantly. 44. The domestic trading activities of JNG primarily involve wheat. JNG nortally holds the majority of the stock of wheat used by the millers and through its financing terms indirectly subsidizes the consumption of bread. The JNG stocks of wheat are built up through purchases at a so- called floor price (precio de sostdn) and sold to the millers on the basis of cost-plus contracts. In this way JNG acts as effective banker and insurer to the milling industry. In recent years, the implicit subsidy offered by JNG has become large, because the gap between market interest rates and the interest rate used in calculating the cost of carry has widened, in large part because domestic interest rates include a large default risk premium. 45. The rational for this policy clearly needs to be reviewed, as does the current wheat export quota system. Under the current quote system the Government conserves about 4.3 million tons of wheat for the domestic market. This in itself has a negative impac. on producer prices, but it is made far worse by the allocation of shares of the overall quota to specific exporters. Given a guaranteed quota, an export company has little incentive to buy wheat at the time of harvest, when it can make high returns by depositing its pre-export finance in the domestic money market. The months following the wheat harvest are crucial to the farmer's cash flow, as proceeds from wheat sales finance the variable costs of the following summer crops. Without the quota there would be considerably increased competition from wheat exporters in the early months after the harvest, which would relieve JNG of much of the need to intervene in support of domestic producers. The National Heat Board 46. The fortunes of JNC have fluctuate6 with changes in government policy, but the trend over recent years has been downwards along with the general decline in meat exports. With this decline, JNC has become less effective in developing and maintaining its role in the industry. Furthermore, the direct appointment by government of the president, the vice-president and four of the eight directors severely limits JNC's operational independence. The general quality of staffing has also suffered. With operations concentrated on meat grading, there are few professionally qualified and trained senior staff to maintain even basic statistical services. Important functions, including economic analysis, market research and meat promotion, are not being performed effectively. 47. JNC's institutional problems recently have been analyzed and proposals for restructuring endorsed by the JNC Board. Recommendations on new positions include a general manager and two new managers, for economic studies and planning and for promotion and extension. The priorities for JNC in the future are therefore likely to be: (a) to professionalize its management and staff; (b) to direct its attention to the general conditions governing Argentina's export trade in meat products; (c) to review its existing grading systems; and (d) to develop and implement a new market- oriented organizational structure with far greater independence from the Government. -xi- H. Conclusions and Recommendations Strategy 48. The advent of a new administration in Argentina brings with it the need to redefine agricultural strategy. Those engaged in this exercise will need to recognize that the policy instruments and resources within the control of the sector itself are of minor significance compared to those beyond its control (e.g., exchange rate, trade policy, fiscal and monetary policy). The failure of PRONAGRO (the 1984-87 National Farm Plan), which set targets and attempted to design sector-specific credit, pricing and marketing policies around them, illustrates this point. Sector strategy should therefore be defined first in terms of the economic conditions necessary for sectoral growth and second in terms of the limited resources available and how best to use them. 49. The definition of strategy for the agricultural sector and of the policy measures needed to implement it depends on the long-term role which the Government int-1s it to play in economic recovery and growth. The basic recommendation of this review is that the sector should be allowed to exploit fully its compara.ive advantage, bringing idle resources into production and stimulating increases in productivity, thereby generating significant increases in export revenues. The sector does not require special treatment to thrive, merely a non-discriminatory policy environment. The key policy requirements are not sector-specific but macroeconomic. Pricing Policy 50. The critical components of discriminatory pricing policy against agriculture in the past have been through the trade regime. An overvalued currency, explicit export taxes (retenciones) and high levels of industrial protection have been used over a long period to lower returns to farmers, simultaneously transferring income to consumers and industry and (to a lesser extent) generating fiscal revenues. At any given time, it is essential to observe the combined impact of these components on the incentive structure for agriculture. A reduction in this burden must be central to the resumption of investment and growth in agriculture. The Exchange Rate 51. The single most important element in the incentive framework for agriculture is the exchange rate. This applies to all subsectors (traditional and nontraditional) and to agroindustry. Growth in the agricultural sector depends almost wholly on its performance in export markets. The maintenance of a consistently competitive exchange rate is crucial. Recurring economic crises and the packages of short-term measures established to provide relief are clearly incompatible with the maintenance of long-term policies designed to encourage investment and growth. The -long-term maintenance of an exchange rate competitive for exports is essential not just for agriculture but for the economy as a whole as liberalization and opening of the economy proceed. - xii - Taxation 52. The tax structure, as defined by law, includes instruments appropriate to Argentina's level of economic development but there is an enormous divergence between the theoretical and the effective tax systems. A proliferation of incentives and exemptions, inflation, inadequate enforcement and an ingrained tax evasion philosophy are the basic causes. A major requirement for economic recovery and growth is a reform of the tax system to achieve an increase in fiscal revenues in a predictable and sustainable manner. With the progressive removal of discrimination against the agricultural sector, the provision of resources to the remainder of the economy should be confined to an equitable fiscal treatment through a tax system designed to be broadly neutral across sectors. 53. The fiscal treatment of agriculture should be different only to the extent that agriculture is different from other economic sectors. Recent difficulties encountered in introducing a Federal Land Tax should not deter efforts to reform the fiscal role of agriculture. These efforts should concentrate on the strengthening of the Provincial Land Tax (with possible Federal revenue sharing) and on improving income tax collection in both rural and urban sectors. To this end, it is important to complete the work now under way in SAGyP to provide a sound technical basis for a land tax and, as a condition for introducing a land tax, consideration should be given to eliminating existing taxes on capital and net worth. Trade Policy 54. Argentina in the recent past has already taken the first steps toward establishing an economy that is more outward-oriented. Such policies not only improve the efficiency of the economy as a whole, but are particularly beneficial for export sectors such as agriculture. The most beneficial trade policy the GOA could follow toward agriculture, therefore, is the continued reduction of protection for import-substitutes. More specifically, the high protection rates of the past for agricultural inputs should be reduced. While some steps in this direction have been taken, including the GOA's recent removal of quantitative restrictions on tractor and agro-chemical imports, much remains to be done. Cereal and Oilseed Marketing' 55. In the cereals and oilseeds market, the key item on the agenda (apart from export taxes) must be the role of JNG. The most urgent reform at this point is the elimination of the export quota system. Export quotas can be used as effectively as taxes to create a distortion between international and domestic prices and for this reason are inconsistent with the need to improve incentives for exportables. To a great extent, the activities of JNG in the domestic wheat market are a response to conditions brought about by the export quota. There would be no clear rationale for JNG acting as agent for the flour millers if the interface between the domestic and external markets were fully competitive. 56. JNG has a clear function in regulating the trade and in providing greater transparency in the market. In the international market, JNG has a role in government-to-government trade but m.ch of this should be - xiii - contracted to private traders. The agenda for reform in JNG should include the divestiture of the terminal elevators and some of the remaining 37 inland elevators. These actions would require financing for staff reduction and investments in renovating elevators before private operators assume the responsibility. Some minor investments 7ay also be needed to improve the cash management, regulatory capabilities and information dissemination function of JNG. 57. The social support functions of JNG should be eliminated or severely modified. This refers particularly to the subsidization of bread consumption and support for producers in marginal areas. Both should be accomplished through direct and fully-accounted budgetary transfers, the first in the form of targeted programs and the second in the form of specific cost reduction in the supply of inputs. Other Product Marketing 58. With respect to other exports, in particular meats, fruits and vegetables, it will be important to maintain export taxes at low levels and to include these products in any "quasi-free trade" programs for exports. This would imply the automatic inclusion of any of their imported ;-1puts in the recently expanded temporary admission regime, as well as the program to rebate indirect taxes for exports. In the medium term, these programs should be extended to cereals and oilseeds as well. Export promotion programs, however, should concentrate on removing artificial barriers, rather than creating artificial incentives by, for example, subsidized financing. The latter type of scheme can easily turn out to be a costly way of promoting relatively inefficient exports. Institutional Strengthening 59. The long-term capacity of the agricultural sector to exploit its comparative advantage is contingent not only on the macroeconomic environment but also on the strength of the institutions which serve it. The need for improvement covers a wide range. Many of the problems are familiar issues, related to poor funding and lack of direction. The total resources needed on an annual basis are not necessarily large but they are fundamental to the long-run productive and marketing potential of the country's key sector. They therefore deserve high priority and, since agricultural technology is advancing rapidly on an international level, they are particularly suitable for external financial and technical assistance. 60. The principal components of a strategy for developing agricultural services are: (a) the setting of clear priorities in INTA; (b) the strengthening of plant protection and animal health services; (c) provision of market research, varietal development and export promotion for fruits and vegetables, involving extensive external technical advice and cooperation; (d) increased emphasis on the control of soil erosion and on pasture improvement; (e) development of a more autonomous JNC, with emphasis on bilateral trading relations at governmental level, on the development of broad export g,tdelines for the private sector and on research into improving reproductive coefficients for the beef industry; and (f) the strengthening of IFONA, with emphasis on forest management and on producing forest inventory studies. - xiv - Infrastructure 61. In the foreseeable future, the ability of domestic financial markets to generate long-term investment resources will be extremely limited, as will be the ability of the public sector to allocate resources for infrastructural investment and basic services. It is, therefore, certain that external assistance will be needed and that, in mobilizing that assistance, clear priorities will have to be established, both between and within sectors. In view of its comparative advantage, it is likely that agriculture and agroindustry will receive a high priority. 62. Rehabilitating the country's agricultural infrastructure. involves potentially much larger sums of money than previously expended. Major flood control works are required, as are investments in irrigation rehabilitation, rural roads, drainage, and trunk road and rail facilities. Very careful choices must clearly be made, since resources will not be available to meet all potential needs. 63. An essential requirement for allocating resources in this area is a close decision-making connection between federal and provincial governments, since many potential investment proposals should be originated by the provinces and would require provincial financing and administration. Given the extreme shortage of public resources, the overall strategy should be to concentrate on building the capacity of the provinces to initiate and evaluate small- and medium-scale projects (e.g., irrigation, rural roads, market infrastructure, drainage) and to apply high standards of economic analysis in the process of selecting them. ARGENTINA AGRICULTURAL SECTOR REVIEW I. THE ROLE OF AGRICULTURE IN THE ECONOMY The Macroeconomic Context 1.1 Argentina was among the seven richest countries in the world in 1929, but by 1988 the per capita income of countries of similar resource endowment was four to five times greater than that of Argentina. The reasons for this relative decline are mostly domestic. After the Second World War, the outlook for Argentina's traditional agricultural exports improved considerably, but the Government neutralized the signals with a policy framework based on discrimination against the agricultural sector and on high levels of protection for industry. The basic failure of this development strategy has culminated in inflation, economic and political instability and a deeply-ingrained lack of confidence in institutions and policy-makers, especially among the rural population. Growth in the Agricultural Sector 1 1.2 In contrast to the pattern observed in most countries, where the relative contribution of agriculture has declined over time, in the case of Argentina agriculture's share in GDP actually increased in the last 15 years. While industry stagnated during this time, agriculture and agro- industry expanded despite declining real prices for foodstuffs in international markets. In 1970, agriculture contribtitad about 13% of GDP; by 1985, this share had increased to about 152. This increasing share is in sharp contrast to the industrial sector, which declined from about 36% to under 30Z during the same period. While industry's overall share declined, the food industry's share of manufacturing increased, from about 152 to 172. Meanwhile, labor productivity in agriculture grew at an average annual rate of nearly 3Z compared to less than 0.3Z in industry. These figures are reflected in agriculture's share of the labor force which decreased from about 16% in 1970 to under 142 by 1980. 1.3 The declining share of industry in value-added and the rising contribution of agriculture and agro-industry began with the stagnation in the economy in the second half of the 1970s. While the manufacturing sector had slightly negative growth in the late part of the 1970s, agriculture continued to grow at a modest 1.42. By the first half of the 1980s, the contrast in performance was even greater, with manufacturing declining at nearly 42 annually while agricultural GDP grew at slightly over 2Z. This contrast in performance is even more remarkable since the manufacturing sector was heavily protected during this period while the agricultural sector faced high taxation and a declining, unstable trend in international prices. 1.4 The main engine of growth in the sector has been cereals and oilseeds. Between the crop years 1972/73 and 1984/85, cereals and oilseed production increased by 65%, an average annual growth of about 42. Four- 1/ A more detailed historical review of agricultural development in Argentina is given in Appendix 1. - 2 - fifths of the increase can be attributed to incremental yields resulting from the uptake of new technology in the 1970s. 1.5 Productivity increases and favorable international prices generated an increase in profitability and sustained the expansion. However, the fall in international grain prices throughout the 1980s (particularly dramatic after 1985) generated a drop in profits and greatly reduced expectations, exacerbated by climatic problems, credit shortages, and increased costs. Between 1984/85 and 1986/87, the production of cereals and oilseeds fell from 44 to 32 million tons, with exports cut in half from 24 to 12 million tons. The harmful effects of falling production and exports were not confined to farmers, but also provcked major problems for country merchants, exporters, and machinery and input suppliers. Trade and Agriculture 1.6 Agriculture in Argentina is largely a traded sector. On average, between 55% and 70% of the wheat crop and between 60% and 90X uf the oilseed crop is expovted. Cereal and oilseed exports in the 1980s have found markets primarily in the EC and the USSR, the latter being a highly unstable market. Exports of agricultural crops are characterized by increasing volumes and declining prices. While export volumes increased by 67% between 1980 and 1986, prices declined by 38Z. In 1987, extremely low international prices combined with a pour crop resulted in the lowest value of agricultural exports in decades, US$4.3 billion in comparison to an average of US$6.2 billion in 1979-81. By the late 1980s, Argentina's share of the world export market of grains and oilseeds had declined to less than 10?, compared to 17? in the early 1960s. 1.7 While Argentina's share of world markets has declined, the margins between international prices and FOB prices have increased. Part of this increase in margins is due to the end of the US grain embargo which gave Argentina's grain a premium. However, another reason for the increase in margins is explained by the high cost of shipping grain from Argentine ports due to shallow water in the Parant River which necessitates topping up of larger vessels at the deepwater port of Bahia Blanca on the Atlantic coast or by transhipment in the deepwater channel (the Alpha Zone) off Montevideo. Further discussion of this problem is given in Section IV below and in Annex 1. Table 1.1: Export Price Differentials Between fob Argentina and fob Mexican Gulf a/ Year Wheat Maize Sorghum Soybeans 1980 27 38 22 -24 1981 24 -11 -21 -31 '1982 4 -7 -21 -14 1983 -17 -4 -17 -14 1984 -18 -6 -18 -18 1985 -32 -10 -11 -17 1986 -27 -16 -14 -3 1987 -24 -2 -13 2 ITn rnn t, nt I CIA n Ve' dnl I yr rl, r r t nn -3- Price Discrimination 1.8 Although agriculture has grown faster than the economy as a whole, its performance has been substantially below its potential, and investment in the sector has been minimal in recent years. The uncertainty arising from dependence on international markets has for many years been compounded by excessive explicit and implicit taxation. Domestic policy has been oriented to using the agricultural surplus to finance industrial development. 1.9 Between 1960-1985, price discrimination was primarily against the traditional export products (cereals, oilseeds and beef), which are mainly produced in the humid Pampas Ipara. 2.4), although the direct consequences have affected the entire agricultural sector. 2 Discrimination was mainly by way of export duties, high tariffs on industrial imports and an overvalued currency designed to provide industrial protection. Slight compensation was provided by way of subsidized credit, tax exemptions on machinery, and small public expenditures on research. 1.10 The combination of direct and indirect nominal protection (i.e., the effects of product specific measures and of those which affect all trade) is strongly negative for the 1960-1985 period, and the levels are similar between products. Agricultural prices were discriminated against by between 40-50Z (i.e., prices would have been between 80-100% higher in the absence of these distortions). Over the same period, the levels of total effective protection, measuring the effects of discrimination in terms of value-added and thereby accounting for levels of protection on production inputs, are similar. This reflects the low level of use of purchased inputs in Argentina's agricultural production system. Recent trade reform measures, in particular those aimed at reducing restrictions on imports of agricultural machinery and chemicals, have provided some relief. However, they are of relatively small significance compared with exchange rate and tax policy in the overall incentive framework. 1.11 Over the long term, export taxes and the exchange rate have been used interchangeably to discriminate against agriculture. The direct measures of discrimination (e.g., export taxes) have been higher when a high real rate of exchange or high international prices have prevailed. Export taxes have been an unreliable source of fiscal revenue; between 1970-1986, the average anual revenue from export taxes was equivalent to 0.8Z of GDP, or 4Z of total fiscal revenue, but varied between 0.02-2.OOZ of GDP. 1/ The main agricultural export products also are important components of the consumer basket of goods, with major and far-reaching consequences . for macroeconomic policy in Argentina. Both beef and wheat are staples in the Argentine diet--per capita consumption in 1987 waE 70 kg and 88 kg, respectively. Together, meat and cereal products represent about 20Z of the consumer basket in the CPI (total food and beverages currently account for 46Z of the CPI). Changes in international prices are important in the evolution of the CPI and real wages. This in part explains the efforts of successive governments to isolate or neutralize the effects of price changes using the mechanism oi exchange rates and 1.12 Intervention has been conservative in effect, maintaining incomes at given levels rather than prices. Discrimination within the sector has had the effect of neutralizing long-run changes in productivity. For example, increases in maize yields provoked increases in export taxation on maize. The effect of discrimination on sector output is significant. Response to prices at the producer level is strong: when relative prices change, the structure of output responds. Estimates3 show that with no intervention the output of the five major cereals and oilseeds wLuld have grown to an average of about 60 million tons per year in the period 1980-85, with an estimated high in 1982 of 70 millton tons.4 Agricultural Policy and Planning 1.13 Argentina has one of the most couater-productive policies towards its agricultural sector of any of the world's major agricultural exporters. Agriculture, specifically Pampean agriculture, remains competitive in world markets in spite of government policy, not because of it. Discrimination against the sector includes not just macroeconomic policy but also those policies which concern the transport, storage and shipping of exports, which have contributed to a high-cost, rent-seeking structure which further reduces farmgate prices. 1.14 During the 1980s there have been two attempts at long-term planning: the National Farm Plan for 1984-87 (PRONAGRO) and the National Development Plan for 1987-91. Both have produced little change and have effectively been abandoned. PRONAGRO was a coherent policy statement based on the premise that the sector had a key role to play in economic recovery within the context of a balance of payments crisis and serious foreign debt burden. It was intended to set clear "rules of the game' to remove uncertainty and to provide the confidence necessary for investment and growth. 1.15 In defining its objectives, PRONAGRO looked for: (a) an increase in cereal and oilseed production and exports; (b) regional agricultural development; (c) an attack on rural poverty; and (d) the rational use and conservation of resources. The proposed strategy distinguished between the Pampas and the rest of Argentina. In the Pampas, the adoption and use of known technology was expected to increase cereal and oilseed production to 60 million tons (from 44 million tons in 1984/85). It was to include renewed diffusion of technology; increased research; cost reduction of key inputs; development of agro-industry; rural infrastructure; credit; farm mechanization; and tax policy. Outside the Pampas, the strategy was to: 31 Adolfo Sturzenegger: A Comparative Study of the Political Economy of Agricultural Pricing Policies in Argentina, January 1988 The cumulative output and consumption effects were calaculated on the basis of producer prices adjusted to remove the effects of direct and indirect price intervention and a series of own and cross-price supply elasticities in a comparative dynamics analysis. A/ The high degree of landowner absenteeism in Argentine agriculture which precludes maximizing productivity and the constraints outlined in para. 1.8 suggest that about 50 million tons may more accurately r f I t'r ,4 - - 5 - improve research into exportable products; adjust the supply of traditional products to levels compatible with domestic demand; open new agricultural areas; improve infrastructure; increase credit; aLd promote rural development programs. 1.16 PRONAGRO's policy instruments were defined in ten categories. However, the true policy instruments were few in number and took little account of macroeconcmic implications. For example, the stated intention of price policy included a reduction in input costs and an increase in (and stabilization of) product prices. No explanation was provided on how the former would be achieved. The latter was to be achieved by replacing production-negative export taxes with a production-neutral federal land tax (FLT). Support prices--calculated on the basis of average costs of production of the most efficient producers and maintained in real terms-- were also to be provided. These were to be backed through intervention in the market by JNG. In practice, export taxes were increased with the introduction of the Plan Austral and were only reduced in the face of near- catastrop;ic declines in commodity prices in 1986 and 1987. The FLT could not be introduced in the face of pressure from some parts of the agricultural sector and support prices could not be introduced as envisaged. Furthermore, JNG's role in purchasing has been very small because of budgetary constraints. 1.17 The other areas of policy addressed by PRONAGRO have fared little better. Credit policy, intended to be selective, closely regulated, and focussed on technical change and investment, has been rendered virtually nonexistent by the squeeze on available resources and high interest rates caused by monetary and fiscal policy. Marketing policy, designed to confront the infrastructural problems of a 60 million ton harvest, was frustrated by the fall to almost 30 million tons in 1986/87. Although the subsequent National Development Plan for 1987-91 attempted to address this new reality, it fared no better than PRONAGRO and has continued the perennial reality of agricultural policy in Argentina, namely that in practice there is no systematic approach to policy development. 1.18 It is apparent that the single most important instrument to create a relevant incentive framework for agriculture is the exchange rate. Growth depends almost wholly on export markets, with maintenance of a stable competitive exchange rate crucial. This applies to all agricultural subsectors (traditional and non-traditional) and to agroindustry. However, beginning with the Spring Plan of August 1988, the Government introduced a multiple exchange rate system specifically designed to discriminate against the agricultural sector. The system was adjusted almost continuously after its introduction. The introduction of a single officiaZ exchange rate in Hay 1989 was accompanied by the reintroduction of the explicit export taxes (retenciones) at a high level. 1.19 The long-term consequence of these policies has been the development of a low-cost, extensive form of agriculture, with little capital stock (the average age of the tractor fleet is 18 years) and little debt. Of all the major agricultural producers in the world, Argentina's agriculture is by far the least protected and yet it has continued to grow. The implication is that, with stronger positive signals, the potential for new investment and growth is exceptional. Without these signals, stagnation is likely. Given Lhe importance of the sector in GDP and exports and the strength of its comparative advantage in a wide range of products, a strategy of maximum growth for agriculture is clearly - 6 - appropriate. This does not require an elaborate strategic agenda of government action. The prime requirements for growth are a non- discriminatory and predictable tax policy (involving a broadly-based fiscal reform) and equitable trade and exchange rate policies, supported by vigorous programs of research, phitosanitary control, animal disease control, quality control and cost-effective infrastructural investment. II. RESOURCES, LAND USE AND TECHNICAL CONSTRAINTS A. Overview 2.1 Traditionally, Argentina has been consdiered as having two major agricultural zonest the Pampas and the Non-Pampean zones. However, the latter can be subdivided into three areas which, from north to south, are: the Chaco, the Andean Zone, and Patagonia. 2.2 The Pampas is the largest ecological zone. It is a broad herbaceous plain radiating out to the north, northwest and south of the city of Buenos Aires, covering about 45 million ha. It comprises most of the provinces of Buenos Aires, C6rdoba, La Pampa, Santa F4, and Entre Rios. It contains about 80% of Argentina's Class I and II soils and about 50% of its cultivable land (Soil Classes I through IV). The climate is temperate with annual rainfall of between 600-1,000 mm with peaks between November and March. 2.3 About 65% of the area is called 'Humid Pampas", typically with deep, black, friable, fertile soils similar to the Great Plains of the US. The zone allows considerable substitution of crop and livestock activities, but is not uniform. The northern part has richer soils and is known as the "maize zone". The southeast Salado Basin is primarily a livestock area and the western area is typically mixed farming. 2.4 In the Pampas, the gross cropped area rose significantly in the period between 1961-65 and 1981-85, from 8.1 million ha to 12.9 million ha, of which 1.5-2.0 million ha are double-crop,id with soybeans. It is important to note that the net cultivated area in the Pampas is about 16.5 million ha, and that much of this cropped land is also used to raise livestock, mostly cattle. 2.5 The Chaco covers the lowlands in the north of Argentina. It is about one-third the size of the Pampas and is subtropical with annual rainfall of between 700 mm in the east and 1,300 mm in the western portion. It comprises the Provinces of Formosa, Chaco, the upper parts of Santa F6 and Entre Rios, Misiones and Corrientes. The latter three provinces, which lie between the Parant and Uruguay rivers, comprise the region of Mesopotamia with important forestry resources. Principal products include crossbred cattle (zebu), cotton, nuts, tea, rice, mate, tobacco and citrus. The northeastern part of the area has latosols which are leached and -infertile. 2.6 The Andean Zone to the west of the Pampas includes the provinces of San Juan and Mendoza (together known as the "Cuyo"); La Rioja, San Luis and northeast C6rdoba (known as the "Centro"); the border provinces of Jujuy, Salta, and Catamarca, along with Tucumin and Santiago del Estero (know as the "Noreste"). Much of the area in the north of this zone is rugged, with annual rainfall of less than 300 mm. Irrigation is necessary for cropping -7- except in some valleys. Sugarcane, tobacco, a variety of cash crops i.ncluding beans, and citrus are grown in the center and northern regions. The wine industry is located in the Cuyo zone. 2.7 Pataaonia in the south comprises the provinces of Neuqudn, Rio Negro, Chubut, Santa Cruz and the Territory of Tierra del Fuego. It is about the same size as the Pampas but is a sparsely populated, semi-arid, windy plateau mainly used for sheep grazing. Annual rainfall averages between 200-300 mm. There are forests in the south along the Andes. In the Comahue zone (Neuqudn and Rio Negro) in the north, high quality temperate fruits (apples and pears) are grown under irrigation. Soils are lithosols in the highlands, brownsoils in the west and south, and sierozem (grayish and low humus) in the east. Table 2.1s Size Distribution of Land Holdings Farm Size Farms Area Range Pampas Nationwide Pampas Nationwide (ha) ----------------- of total------------------- 0 - 50 38 30 3 2 51 - 100 18 13 5 3 101 - 200 18 11 10 4 201 - 500 15 16 16 9 501 - 1,000 6 5 16 7 1,001 - 2,500 3 3 18 15 2,501 - 5,000 1 1 13 12 5,001 - 10,000 <1 <1 11 14 >10,001 <1 <1 8 34 Source: CONINAGRO, 1988. 2.8 Overall, Argentina possesses 183 million ha of land highly suitable for agriculture or livestock. Of this, 23 million ha is under annual or perennial crops; 15 million ha under improved pasture and 145 million ha natural pasture. In addition, 45 million ha are under forest, and 51 million ha are unsuitable for any form of agriculture. 2.9 The productive area includes about 552,800 holdings of various sizes, with the Pampas accounting for about 269,600 (Table 2.1). In the Pampas, approxirstely 75Z of the total productive land is privately owned, 12-15% rented, and the rest is in other forms of holding. B. Cereals and Oilseeds Importance and Areas 2.10 The production of cereals and oilseeds is the dominant farming activity in Argentina, accounting for almost 80% of the planted area and producing over 60% of value-added from crop production. It is also the prime source of foreign exchange for the economy. The main production area is the Pampas, which has relatively flat topography and favorable climatic conditions for the production of cereals, oilseeds and pastures for - 8 - 2.11 Five crops--wheat, maize, sorghum, soybeans and sunflower--account for over 80Z of the cereal and oilseed area. Farming enterprises are generally family owned and operated and commercially oriented. Cropping is often mixed with extensive livestock activities (mostly cattle and, to a lesser extent, sheep), and semi-permanent pastures traditionally have been an important part of the crop rotation, particularly on large farms and in less humid areas. In the humid Pampas, which focusses more exclusively on crops, the average family farm is between 75-100 ha. Performance and Output 2.12 After periods of stagnation in the 1940s and 1950s and of modest growth in the 1960s, cereal and oilseed output increased at about 42 per year between the early 1970s and the mid-1980s. However, since the record harvest of 44 million tons in 1985, production has declined because of depressed world market prices. Subsector exports mirrored this decline, dropping from 24 million tons in 1985 to 12 million tons in 1987. A summary of the changes in gross production of the five main grains is given in Table 2.2. Table 2.2: Cereal and Oilseed Production (millions of tons) 1970 1980 1984 1985 1988 Wheat 7.0 8.1 13.0 13.6 10.0 Maize 9.4 6.4 9.5 11.9 8.6 Grain Sorghum 3.8 3.0 6.9 6.2 3.1 Soybeans <0.1 3.5 7.0 6.5 8.9 Sunflower 1.1 1.7 2.2 3.3 2.7 Total 21.4 22.7 38.6 41.5 33.3 Source: SAGyP Productivity and Input Use 2.13 Major gains in productivity have provided the impetus for the long- term upward trend in cereal and oilseed output. These improvements, which account for over 80% of output growth during the past 25 years, stem from the widespread adoption of (imported) hybrid seeds, agrochemicals and - mechanization as well as from changes in crop rotations. The following table summarizes growth in average yields by main crop between 1970 and 1987/88. - 9 - Table 2.3: Cereal and Oilseed Yields (tons per ha) 1970 1987/88 Peak Year Wheat 1.4 2.0 2.3 (1985) Maize 2.3 3.6 3.8 (1981) Sorghum 2.0 3.2 3.6 (1981) Soybeans 1.0 2.1 2.4 (1984) Sunflower 0.9 1.4 1.4 (1985) Source: SAGyP 2.14 Hybrid seed and improved varieties have been quickly adopted. Maize and sorghum hybrids now cover almost 100? of the planted area. Recently-introduced sunflower hybrids increased from 15% of the area planted in 1970 to 60% by the early 1980s, while early-maturing Mexican wheat varieties, first available in 1973, grew from less than 1% of the area planted to 60% in 10 years. The application of agrochemicals, particularly herbicides, also has expanded by over 3Z annually, as the need for weed control measures increased with new tillage practices and rotations. 2.15 Inve3tment in tractors and farm machinery has been fundamental to increasing productivity. The intensification in cropping demanded greater availability of tractors for more efficient farming practices, and the neuly applied technologies required more specialized equipment such as seed drills and chemical sprayers. Between 1970-1979, an average of about 17,200 tractors per year were sold, stimulated by high crop prices, subsidized credit and tax incentives. :a the second half of the 1970s, the overvalued currency stimulated imports of tractors which in turn also forced Argentine manufacturers to be more competitive. However, sales began to taper off by the end of the 1970s, averaging 6,400 units per year between 1978-86, and falling to 3,100 units in 1987. While more powerful tractors (100 hp) have been purchased in recent years, the average available horsepower per ha has declined slightly. Sales of farm machinery, especially seeders and sprayers, continued at a healthy pace through 1986, despite the relative slowdown in tractor purchases; now even these have dwindled. 2.16 An increase in the use of contracted machinery services has accompanied the overall slowdown in tractor and machinery sales. Custom harvesting of cereals and oilseeds is now standard practice in the Pampas, and contract farming has become an integral part of production in the major crop areas; in some zones, up to half of the cultivated area is reportedly .farmed on a contract basis. Much of the rapid diffusion of machinery-based technology can be directly attributed to contractors since they have to some extent helped farmers overcome investment constraints. 2.17 The pace at which low cost technological innovations are adopted by Argentine farmers is noteworthy. Farmers normally are open to innovations and actively seek and adopt financially viable technologies. For example, in the Pampas information on new seed varieties spreads quickly and - 10 - technology gaps between farmers are quickly closed. The net results are good yields (still with scope for improvement) and low production costs that have enabled Argentina to maintain a competitive edge over other exporting countries. Table 2.4: Comparative Yields and Costs Yield Costs (tons/ha) (1985 US$ per ton) Variable Total FOB Wheat: Argentina 1.8 35 94 Canada 2.2 56 188 US 2.3 67 198 Australia 1.6 42 152 Soybeanst Argentina 2.1 66 153 US 2.3 90 282 Brazil 1.5 111 220 Source: Annex 1. 2.18 In contrast to the rapid adoption of low-cost innovations, fertilizers have not made an important contribution to productivity gains.5 Unfavorable fertilizer/crop price relationships and a continued willingness by farmers to mine the natural fertility of the soil generally have impeded a more widespread use of fertilizers. Even under a recent government promotional program, fertilizer use has reached only 25% of the cropped area. Patterns of Production 2.19 The net area planted to cereals and oilseeds since the early 1970s has grown only modestly at 0.72 per year. However, in the 1970s and early 1980s there were important shifts in crop rotations away from semi- permanent pastures, due to technological advances and product prices favoring cropping over livestock activities. This occurred mostly in the maize zone of the Pampas and initially on smaller farming units. In response to the availability of new technologies and relative movements in crop prices, there have also been important changes in the allocation of -land between competing crops, as shown in Table 2.5. 5/ Regional political pressures (from Neuqudn and Salta) in the early 1980s most likely constrained the development of an internationally r r i t i n noT rti1 i, r 4ini r, iii I r , t4 - 11 - Tabli 2.5: Cereals and 0ilseeds: Areas Harvested (million ha) Crop 1970 1980 .984 1985 1988 Wheat 5.2 4.7 7.1 5.8 4.8 Maize 4.0 2.5 3.0 3.3 2.4 Sorghum 1.9 1.3 2.4 2.0 1.0 Soybeans <0.1 2.0 2.9 3.3 4.3 Sunflower 1.3 1.9 2.0 2.4 2.0 Total 12.5 12.4 17.4 16.8 14.5 Source: SAGyP 2.20 The significant expansion of oilseed production, especially soybeans, has been helped by the adoption of improved technologies and has occurred partly at the expense of maize and pasture areas. In addition, the increased use of herbicides has allowed farmers to control weed infestations without traditional recourse to pasture rotations. The use of early-maturing Mexican wheat varieties and the greater availability of tractors has also enabled farmers to double-crop soybeans after wheat. However, the reduction in potential yield of soybeans under this system has in recent years caused a movement to single cropping of soybeans. This produces higher soybean yields but also greater soil erosion problems and a greater problem of grass weed infestation, especially Johnson Grass. Despite these latter constraints, the inclusion of soybeans in the rotation has given greater flexibility to the subsector and has enabled producers to diversify in the face of major declines in coarse grain prices, which by 1987 had fallen to 35-402 of their 1970 real levels. Technical Constraints in Cereals and Oilseeds 2.21. Soil Erosion. The practice of continuous cropping using extensive, low-input technologies and heavy tillage methods creates serious problems of erosion, soil degradation and weed infestation. In the primary cereal and oilseed zone it is estimated that about one-third of the area is affected by hydraulic erosion; over half of the original organic matter has been lost; nutrient and soil structure losses are becoming serious; and perennial weed infestation is a problem over three-quarters of the area. Light to moderate erosion affects about 15 million ha in the Pampas and about 26 million ha outside the Pampas. There is also a problem of wind erosion in the western, sandy Pampas as well as in the sheep production *areas of Patagonia (para. 2.47). 2.22 The potential long-term impact has been analyzed by INTA in the Carcarala River basin, where the level of topsoil declined from 23 cm to 17.5 cm in the last 30 years. Official surveys currently estimate the total yield loss due to soil erosion at about US$100 million per year. In an attempt to tackle this problem, INTA launched a soil conservation program (Provecto de Agricultura Permanente) in 1986 which is targeted at - 12 - the main cereal and oilseed zone of the Pampas. However, despite the existence of a 1981 Law (2248) promoting soil conservation, the impact of INTA's program so far has been very small. 2.23 The program aims to develop and spread the use of soil-conserving technologies in areas of continuous cropping. These include contour plowing, strip farming, terracing and green manuring. However, several factors have slowed its spread: an unfavorable input/crop price relationship; the scarcity of credit for inputs and investment; limited farm size in the main cropping areas; and the nature of contract farming. 2.24 In the traditional farming system of the Pampas, semi-permanent pastures have played a major role in the rotation by restoring fertility, controlling weed infestation and reducing soil erosior.. Initially, the introduction of soybeans was seen as a panacea, allowing farmers to increase cropping intensities and income without a reduction in soil fertility. However, although soybeans contribute to the soil's nitrogen content, they do not provide adequate ground cover during rainfall periods and add little organic matter. Furthermort, the full technological package--with fertilizers to restore fertility and herbicides to control weeds--has not been universally adopted, mainly due its high cost and the perceived inherent fertility of the Pampas. 2.25 Farm size and contract farming in the major grain area also pose obstacles to implementing soil conservation measures. Since the average farm in the maize zone is only about 75-100 ha, these relativoly small farmers have limited ability to finance the required investments or to diversify. INTA is trying to develop alternatives, such as small livestock raising, intensive horticulture or forage-seed production. Other practical approaches that could be considered include direct seeding of soybean into wheat. This would reduce tillage and herbicide costs while improving moisture retention and reducing erosion. These measures potentially could increase yields by at least 1OZ. 2.26 Many contractors are also small farmers themselves who often service up to four times the size of their own holdings. They service both large farms, where the primary activity is livestock and the owner is unwilling to make the investments required to crop, and small farms, where economies of scale frequently do not justify investment in machinery. The contractor usually is paid in kind, no formal contract exists, and the arrangement typically covers only one crop cycle. This emphasizes short-term financial gains and precludes the likelihood of investment in long-term land improvements, the use of soil-conserving tillage practices, or proper use of farm inputs. Farmers are aware of the soil erosion problem and of what needs to be done to combat it. However, unless a long- term philosophy for soil management is developed, it is doubtful that the current cropping system is sustainable in the long term. Inaction could lead to Argentina losing its comparative advantage as a low-cost producer of cereals and oilseeds. 2.27 Flooding. The flooding problem, which resumed its long cycle in 1985 and continues to the present time primarily in northwestern Buenos Aires Province, has caused an estimated US$500 million in damage to agricultural and rural areas. This sparsely-populated area of 7 million ha, which is the traditional beef fattening zone (zona invernada), demonstrated impressive growth in crop production until recently. By 1985, about 2 million ha were under crops, producing about 12Z of Argentina's national cereal and oilseed harvest. Estimates were that by 1990 this would increase to about 20Z. However, floofs have dPva- rto 11-h nf rho - 13 - area, due to abnormally high rainfall combined with inherently poor drainage (i.e., a lack of slope in the area to evacuate water). 2.28 The primary flood impact areas are in the five municipalities of 9 de Julio, 25 de Mayo, Carlos Casares, Pehuaj6 and Trenque Lauquen. At their peak the floods affected 4 million ha, and the number of claims for disaster relief by farmers has averaged about 10,000 per year since 1985. Rural infrastructure and urban areas also were affected. Unfortunately, political pressures led to uncoordinated responses. However, the Provincial Government of Buenos Aires has initiated a master plan study to determine an appropriate future strategy. The World Bank is assisting in this effort and results are expected by mid-1990. C. Livestock General 2.29 The Pampas is the focal point for Argentina's livestock industry, containing about 70% of the national cattle herd, 30% of the sheep, and most of the pigs and poultry. Like cereals and oilseeds, livestock production in Argentina is low-cost and enjoys a large comparative advantage in international trade. Livestock exports, mainly beef and wool, traditionally have supplied about 30% of agricultural export value and about the same percentage of agricultural production, currently about US$1 billion per year. Beef Cattle 2.30 Argentina's beef cattle industry is world-renowned since it produces high quality breeding cattle. Furthermore, its human population has the highest satisfied demand for beef in the world (currently about 70 kg per person per year). The natural resource base is excellent for cattle production and Argentina's production system is extensive and low-cost, depending almost entirely on pasture. 2.31 In the evolution of Argentina's cattle industry, it is important to recognize the peculiarities of its beef cycle.6 Since about 70? of the herd is located in the Pampas, farmers not only expand their herds when beef prices are high but also shift resources to and from cropping 6/ The beef cycle refers to changes in cattle numbers over time. The specific phase in the cycle is determined by whether farmers are holding back stock and expanding their herds or whether they are selling off cattle and reducing their herds (i.e., in liquidation). The expansion phase begins when prices improve and farmers begin to hola back calves and females to expand their cattle numbers. As the supply of cattle for slaughter diminishes, prices increase. This competition for cattle results from cattle representing both a capital investment as well as a product for sale. The reduction of cattle for salp continues for two to three years, which is the time that most cattle take to reach maturity in Argentina. After this period, the supply of fat cattle suddenly increases and depresses prices, which in turn triggers the herd liquidation phase. During this phase the herd size declines, the volume of slaughter peaks, and the percentage of female stock slaughtered rises. -14 - enterprises. This accentuates the beef cycle. Furthermore, beef has a low price elasticity of demand in Argentina. Consequently, during the herd expansion phase exports suffer but not domestic consumption. 2.32 During the early 1970s, Argentina expanded its cattle herd, peaking at 59 million head in 1977. Thereafter, an extremely long liquidation phase occurred up to 1987. One of the factors that precipitated this phase was the extraordinary growth of the cropping sector in the Pampas between 1976-85, financed in part from the sale of cattle. When the opportunity cost of land increased, cattle production became financially less attractive. 2.33 Although more farmers are beginning to fatten their own production, the industry is still basically stratified into two groups: breeders and fatteners. Each region has a combination of both, with fatteners usually located on the better soils, combining their operations with cropping. Since the mid-1970s, cattle numbers in northern Buenos Aires and southern Santa F4 Provinces have declined due to: (a) the effects of increased cropping; and (b) the normal impact of the liquidation phase of the cattle cycle. In contrast, in the Peripampean region (west and southwestern areas of the Pampas), cattle numbers (mainly breeding cattle) have increased. The national herd is tentatively estimated at about 51 million head (down 8 million from 10 years ago), and has produced an average of 2.6 million tons of meat annually over the past 15 years.7 While the prevalent breed in the Pampas is Aberdeen Angus, in the north Zebu cattle or crossbreeds with European stock predominate. Annual cattle slaughter is about 12 million head, with animals slaughtered on average at 30 months of age. 2.34 Productivity coefficients for cattle fatteners (45-125 kg/ha) exceed those of breeders (25-90 kg/ha) because of better management and because fattening operations are often located on better soils. For example, over 50% of fattener pastures are improved compared to only 10Z for breeders. In general, breeding operations have shown little managerial improvement in 25 years. Current data indicate little quality control of bull semen (only 15% tested) or pregnancy testing (20% of farmers); late average age of first conception (24 months); and low weaning rate per cow (60%). 2.35 Both breeders and fatteners face three constraints to further improve their operatiuns: (a) lack of a stable or consistent government policy towards the subsector; (b) low breeding coefficients, which make calves relatively more expensive; and (c) infectious diseases. Da&i 2.36 Argentina is the largest milk producer in Latin America with an annual output of 5.5-6 billion liters (1) per year. Total per capita milk and milk product consumption is the second highest in Latin America after uruguay, fluctuating between 175 and 205 1 per year. Although annual fluid 7/ The size of the national cattle herd is the subject of considerable debate. A national census carried out in late 1988 should provide a wara afn4y4tra aot*4 to h, 4A 1oA - 15 - milk consumption is stable at about 53 1/capita, consumption of milk products have increased in recent years due to greater product diversification and to increasing concentration of sales through supermarket chains. In addition, about 30% of powdered milk produced in Argentina is distributed by the National Food Program to schools and the needy. 2,37 The milk processing industry currently employs over 300,000 people and ranks among the country's five most important agroindustries along with beef, edible oils, sugar and wines. Milk is produced mostly in the Pampas on specialized, family-owned dairy farms that are often share-milked by other families (medieros). Cattle mainly belong to specialized dairy breeds, usually Argentine Fresians. The milk industry emphasizes efficiency both on farms and in plants. The number of small, inefficient dairy farms is declining. Similarly, small dairy plants that cannot compete with better vrganized and integrated plants have been either absorbed by larger plants or eliminated. 2.38 Exports of milk products have been erratic, currently accounting for only 5Z of total output, with markets mainly in Latin America. This is because Argentine milk exports have to compete with subsidized products from the US and the EC. Opportunities to increase exports couid develop if these competitors continue to curtail production or if incomes in other Latin American neighbors rise (especially in Brazil). 2.39 Dairying in Argentina is pasture-based, and pasture growth is seasonal with peaks in spring and autumn and almost no growth in winter. National milk yields are low, at about 50 kg of butterfat (BF) per ha per year. Production is geared toward the domestic market, where demand is stable throughout the year and the pricing system provides an incentive to produce milk in winter. Consequently, concentrate feed supplements are fed as an expensive substitute for pasture in winter. 2.40 There is a high correlation between the dairy farm size, level of technology and productivity. A large dairy farm produces over 1,000 1/day and is usually run by an owner/manager who contracts the milking operation to a share-milker. It typically has at least 150 ha with about 40% under permanent pasture, is mechanized, uses artificial insemination, keeps records and receives technical assistance. Conversely, a typical small dairy enterprise is owner-operated, produces less than 250 1/day and usually has a very small area of permanent pastures. Instead, temporary pastures are used along with native pastures and crop residues. Cows are usually milked once daily by hand and calves are left to suckle. Cattle are rarely given supplemental feed. The medium-sized operation falls between these two levels of technology. 2.41 The main milksheds are in the Pampas, which produces 75% of total milk output, plus several regional milksheds supplying the cities of Mendoza and Tucumin. and smaller regional milksheds in the Provinces of Salta, Santiago del Estero, Catamarca and Rio Negro. The large Pampas milksheds obtain most of their milk from the Provinces of Buenos Aires, Santa F4, and Cdrdoba. The main milkshed in southern Santa F4 Province provides liquid milk to Rosario, Santa F4, and Buenos Aires. Productivity is relatively high (about 70 kg BF per ha per year), production per cow-in- milk is also good (2,600 1 per year), and replacements are usually reared off-farm because of the high value of land for cropping. - 16 - 2.42 An example of a regional milkshed, the Zona Central milkshed, located in the center of the Provinces of Santa F6 and C6rdoba, is an area that has traditionally supplied milk for processing. It collects from a large number of smaller and less efficient farms than those located in the Pampas, and calf-rearing is important due to the owners' interest in diversifying risk. Sheep 2.43 Sheep production and wool exports have been important in Argentina since the nineteenth century. By the late 1800s, there were 80 million sheep, wool exports exceeded 200,000 tons per year. with the industry centered in Buenos Aires Province. By the early 1900s, cattle began to displace sheep in the central and northern areas of the country, while sheep production expanded in Patagonia. This trend has continued, with the added factor of crops displacing both sheep and cattle in the Pampas. Currently, of the existing flock of 24 million animals, 12 million are to be found in Patagonia. 2.44 A breed change accompanied this geographical shift. In Patagonia, the fine-wool merino sheep (originally from Spain) currently predominate, and medium-to- coarse-wool breeds are common in the central and northern regions. The production decline occurred primarily in the latter breeds, with total wool output dropping about 30Z between the mid-1960s (200,000 tons) and 1987 (below 140,000 tons). Similarly, wool exports showed a corresponding decline (from 160,000 tons to 110,000 tons) over the same period. 2.45 In Patagonia, the system of sheep production takes the form of large flocks dedicated to wool production (1,000 to 5,000 head) that graze natural grassland at low stocking rates. In central and northern Argentina, flocks generally are much smaller (100 to 500 head), raised for both wool and meat, and are mostly integrated with cattle and arable farming. 2.46 Currently about 100,000 farmers raise sheep in Argentina. Wool yields approximate 4 to 5 kg per sheep. with lambing rates of 70-80Z and carcasses weighing about 17 kg. Even though little commercial lamb- fattening takes place, six million sheep are slaughtered annually of which about 40% go to slaughter houses, the rest being for on-fam consumption. Only about 7,000 tons of sheepmeat are exported annually (Argentina's official yearly export quota is 14,000 tons), and domestic consumption is low, at 3 kg per capita per year. 2.47 Major production problems center on high mortality rates caused mainly by climate (death from co:.d shock following shearing is widespread) and nutritional stress, especially in Patagonia. Wind erosion also causes serious soil losses and a reduction in range production. Although there are few technological unknowns in sheep production in Argentina, there are marketing factors that mitigate against implementing critical management changes at the farm level. These are discussed below in paras. 4.35 to 4.38. - 17 - Poultry 2.48 Vertical integration of poultry production and processing began in Argentina in the early'1970s. Today, about 40 integrated companies produce 95Z of the poultry meat. Of these firms, 80Z produce their own day-old chicks and balanced feed, and operate their own meat processing facilities. Half of these enterprises are small, producing 1,000 tons per year each; three comprise 302 of the market at about 26,000 tons per year each; and the rest are medium-scale enterprises at about 8,000 tons per year each. The three largest production units sell under their own brand name. In general, there is a move towards additional processing to higher-value poultry mee t cuts. 2.49 Poultry production performance has improved steadily over the past 10-15 years, accompanied by an average mortality drop from 122 in 1976 to about 5% in 1988. The average age at slaughter also declined over the same period, from 67 to 58 days, and feed conversion efficiency improved from 2.6 to 2.4 kg feed per kg bird produced. Poultry industry profitability is largely a functio. of meat price and feed costs (60-70% of the variable costs), and the level of consumer demand depends on both the price and level of substitution of poultry meat relative to beef, in combination with consrmer income. However, unlike beef, the poultry production process is relatively fast, responding much more quickly to these factors than many other competing commodities. 2.50 Poultry meat consumption is second only to beef in Argentina and is its main substitute. Production is mostly for domestic consumption. Over the last 20 years, consumption has increased from 200,000 and 400,000 tons per year, with per capita consumption increasing from 10 kg to 14 kg over the period. Although prospects for expansion of domestic consumption depend directly on relative beef prices, development of poultry meat exports will depend on the extent to which major competitors continue to subsidize their poultry exports. Furthermore, there is currently no export of eggs. Per capita consumption is about 145 eggs per year, with a 1986 total output of about 4,500 million eggs. Pias 2.51 Pig production in Argentina is relatively small and a secondary farm activity, usually to maize production in the Pampas. In other areas, production is mostly for family consumption, with limited surpluses going to market. Pork generally is consumed in the form of processed and specialty meats rather than as fresh meat. The traditional system on small- and medium-sized farms is extensive or semi-extensive. Breeding, rearing, and fattening are carried out by the same farmer, and animals are kept on pastures, with supplementary feeding consisting mostly of maize. Disease control is limited to vaccination against hog cholera and anti-parasite treatments. Installations are rudimentary with pigs slaughtered at 10-15 months of age at a relatively heavy liveweight of .110-120 kg, usually for production of processed meat. The current pig population is around 3.6 million head, per capita pork consumption is 7.3 kg per year and exports are minimal with little immediate prospect for expansion. - 18 - Technical Constraints in Livestock 2.52 In recent years the Argentine beef cattle herd has declined to such an extent that only about 102 of its production is currently exported, compared to 60Z in the mid-1920s. Since beef exports are residual, cattle numbers and productivity must increase if these exports are to increase. The activity in need of most improvement is the performance of the breeding herd, specifically through highet reproductive coefficients, better animal nutrition and significantly better farm management practices. 2.53 Reproductive coefficients can be improved with modest capital investment byt (a) reducing venereal disease by inspecting bulls before the mating season starts; and (b) reducing the length of the mating season with better timing of breeding so that calving coincides with periods of good pasture growth. Two diseases cause major problems: brucellosis, which causes abortions, and FMD, which severely restricts entry into foreign markets for Argentine beef. The former should be eradicated and FED should be earmarked for special, renewed efforts as proposed under an Agricultural Services Project currently being prepared by SAGyP. 2.54 Animal nutrition suffers on breeding farms due in part to the low level of improved pastures and poor management of native pastures. Improved technology is available. However, INTA needs to do a better job of diffusing results. Similarly, if the seasonal nature of pasture production could be evened out by using artificial pastures or forage reserves, such as hay or silage, this would have a significant impact on breeding farms, especially if focussed on winter feed requirements. 2.55 Absentee land-ownership is a major reason for the poor level of farm management on many cattle breeding operations. Cattle breeding farms or ranches are often quite large, and the owner, especially if he is an absentee, tends to be risk-averse and reluctant to invest on his farm. This focus limits the options open to management. In addition, day-to-day management decisions are often made by very practical, yet poorly educated, farm foremen who are often not delegated enough authority to make important management decisions. With the notable exception of a small number of those farmers who are members of a Regional Agricultural Experimentation Groups (CREA) (para. 3.16), it is difficult in this environment to encourage technological innovation on these farms. Due to the sheer size of his holding, the average absentee owner/manager usually has sufficient income to live well and is wary of risk in an environment of unstable prices brought about by the beef cycle. Given these circumstances, it is unlikely that a higher level of intensity will be brought about unless there is a change in the fiscal treatment of agriculture. The failure to implement a federal land tax reflects the large rancaers' political strength and ability to resist change. 2.56 In the sheep industry, there is a need to improve the quality of Argentine wool. To achieve this, technical assistance will be needed to astablish cooperatives of small flock owners to allow bulking of consignments, better grading practices and higher-quality wool production to meet export market demand. This would also open the market to greater competition among wool traders and contribute to reduced marketing margins and increased producer incomes. In poultry, there are no major technical constraints. In pig production, the prevailing problem is low productivity. However, given the industry's poor prospects, it is difficult to suggest taking major actions at this time. - 19 - D. Horticulture General 2.57 The horticultural subsector includes fruit, vegetables and specialty crops. The value of the horticultural crop in 1987/88 was estimated at about $1.1 billion, about one-quarter of the value of all crops. In certain regions, these products are particularly important to the local economy (e.g., wine grapes in Mendoza, and apples and pears in Rio Negro and Neuqudn). However, compared to Chile and Brazil, Argentina generally has not taken advantage of expanding fruit and vegetable markets in the Northern Hemisphere, and its market share in fresh fruit exports actually has been declining. A summary of the production and value of key horticulture crops is shown in Table 2.6. Table 2.6t Key Horticultural Crops (1986-1987) Area Gross Harvested Production Value ('000 ha) ('000 tons) (US$ million) Fruit & vegetables: Apples 53 900 119 Pears 18 170 35 Peaches 43 200 72 Mandarins 23 250 21 Lemons 22 490 35 Oranges 52 620 74 Grapefruit 12 200 26 Potatoes 100 2,300 116 Tomatoes 38 820 98 Onions 4 300 40 Garlic & peppers 13 125 36 Specialty crops: Grapes 282 3,690 248 Tea 37 175 24 Yerba mate 105 135 103 Total 802 10,375 1,047 Source: IICA 'esources 2.58 Argentina's water, soil, and climatic resources create production zones, both irrigated and rainfed, capable of producing a wide range of horticultural products. Low rainfall and humidity in arid zones, in combination with low-cost irrigation, create an ideal environment for horticulture production. However, the principal attribute is a Southern Hemisphere location, since estimates show that only 102 of the world's - 20 - fresh apple, citrus and table grape production is produced there. Consequently, with an increasing market for year-around fresh fruit and vegetables, countries in this hemisphere are in an excellent position to meet the demands of expanding northern markets. 2.59 The abundance of natural resources leads to a cost structure lower than that of many Northern Hemisphere countries. Although the unit costs of pesticides, herbicides and seeds are urually higher than in Northern Hemisphere production areas, irrigated land in Argentina is relatively cheap (US$500 to US$1,000 per ha), natural gas is readily available and cheap for agroindustry (US$0.055 per thousand cubic meters), and agricultural labor costs are low (US$4.00 to US$7.00 per day). At the same time, the growth in horticultural production in Chile has caused a dramatic increase in its costs, increased the value of irrigated land and exacerbated localized water constraints, all of which provide a growing comparative advantage for Argentina. Potential 2.60 Increased production opportunities exist in Argentina for a variety of horticultural products, including seedless table grapes, fresh apples, pears, and citrus, and processed products. Growth has been constrained by shortages of investment capital, exchange rate instability, and limited access to international markets and new technology. As a result, Argentina's horticulture-based industries are now in a position of having to invest to catch-up with competitors like Chile. This will require careful analysis of future market opportunities, assessment of comparative advantage, effective mobilization of long-term investment capital and close coordination between the public and private sectors. 2.61 Grapes. The principal production areas for grapes are the irrigated zones of Mendoza and San Juan where 97Z of the crop is converted to wine. The area has a long history of producing low-cost, common table wine for the domestic market. However, since 1970 per capita consumption of wine in Argentina has gradually dect ased. This created a crisis in the vineyards of Mendoza, but the industry is now beginning to adjust and fine wine production is expected to rise. The initially slow response in part was due to the perceptions embodied in an old wine law (Ley de Vitivinicultura) that set restraints on the development and introduction of new grape hybrids. About 262,000 ha of existing grapes need replanting to new varieties. Some of these replantings already have been made by the larger wineries which have traditionally been interested in exporting. However, considerable further replanting is still required, since both the domestic and export market require higher-quality fine wines. 2.62 The almost singular focus on wine production has excluded Argentina from the rapidly expanding market for seedless table grapes. Although competitors like Chile have performed impressively in this export market, additional export markets still exist. Also, the domestic market offers -good prospects. Despite the fact that annual per capita consumption of fresh grapes (mostly seeded varieties) has decreased from 12.6 kg in 1970 to 2.3 kg in 1985, there is scope to stimulate this domestic demand if seedless varieties are presented to the market. 2.63 Citrus. The region of Mesopotamia (Entre Rios, Corrientes and Misiones) produces about two-thirds (92,000 ha) of all Argentine citrus --mostly oranges and mandarins--and the northeast (Salta, Jujuy and - 21 - TucumAn) produces about one-third (37,000 ha), principally lemons and oranges. About 5,000 producers (over half with 20 ha or less) market through 400 packing houses and 18 processing plants. While the domestic market shows little evidence of expanding, fresh and processed fruit exports are increasing, with a large world market ready to purchase frozen citrus concentrate. Despite disease problems in the northeast, Argentine fresh citrus is well accepted in Europe and additional quantities of grapefruit and navel oranges are being sought by European buyers. Processed citrus exports, while small compared to those from Brazil, have found a market for blending with low-quality concentrates. Processors have good access to equipment and technology, and the citrus industry has good expansion potential. Constraints include inappropriate and low-quality varieties and traditional management practices. 2.64 Apples and Pears. The principal production areas are in the Provinces of Rio Negro and Neuqu4n with a total of 70,450 ha located in a long, compact irrigated strip along the Rio Negro. The average producer farms 10 to 20 ha, but larger grovers may own two or three farming units and be vertically integrated. The production area is serviced by 195 packing houses, most with cold storage but a limited number (3Z) have controlled-atmosphere storage. Sixty percent of the packing houses are fully integrated and packing capacity is estimated at 25 million cartons per season in Rio Negro and Neuqudn. Many of the larger export-oriented packing houses have up-to-date sizing, grading and precooling facilities using Argentine-manufactured equipment. A market exists to support greater cultivation of pears since the quality and size of Argentina's product are superior to many of its competitors. However, a key constraint in the apple industry is its heavy dependence on two varieties: the Starking Red Delicious (62Z) and Granny Smith (30-35%), both .f which have limited value in today's export market. Replanting has begun, and in the process yields can be doubled not only through new varieties but also by use of improved trellis systems and better cultural care. 2.65 Stone Fruit. This category of fruits (apricots, peaches, plums, cherries, nectarines) is grown principally for the local market and for processing (concentrates, dehydration, canning). Export is currently not important. However, a good export market exists for improved varieties. Good production areas exist in Mendoza where plantings could be expanded, and new varieties also would have the added benefit of extending the production season. 2.66 Vegetables. The principal production area is located in Buenos Aires Province and supplies major urban centers. A wide range of vegetables is available and growing seasons are extended using products from northern and southern locations. Most farms are small, with limited post-harvest facilities. However, this will change as supermarkets increase their demand for pre-packaged, graded product. Tomatoes are grown for processing in Mandoza Province and opportunities exist to expand production at low cost and in turn to increase processing. A small -industry in the production of white asparagus and strawberries for export to Europe by air also has begun, and exporters are anxious to establish cooling facilities at Buenos Aires' Ezeiza International Airport. 2.61 Specialty Crops. Two beverage crops--tea and verba mate--have a crop value of about US$125 million and are important to the provincial economies of Misiones and Corrientes. Tea is already exported. Yerba mate is a popular beverage in Argentina, Uruguay, and southern Brazil, and - 22 - indications point to expanding export markets in Asia and the Middle East. The export of other specialty/perishable crops such as cut flowers, however, is currently restricted by the high transport costs to North American and European markets. Technical Constraints in Horticulture 2.68 Several technical constraints limit greater exploitation of Argentina's considerable growth potential in the horticulture sector, including: (a) inadequate packing, storage and processing facilities caused by a lack of investment credit in the past; (b) obsolete varieties that no longer meet the quality standards of Northern Hemisphere markets; (c) poor market research; (d) a lack of export experience and export mentality; and (e) a poor export image. E. Irrigation 2.69 Irrigated agriculture in Argentina is underexploited and poorly studied. It accounts for only 5% of the planted area, with about half of this under horticultural crops. However, Argentina has abundant water and land resources for irrigation, with an estimated potential of serving about 20% of the arable area (about 6.1 million ha). About 2.7 million ha of the potential area is located in the arid and semi-arid areas of the west, where irrigation is critical for cropping. The remainder of the potential of 3.4 million ha is located in humid areas, wherz irrigation is supplementary. Development has progressed much further in the less humid areas with approximately 602 of the potential area benefitting from primary works. By contrast, in humid areas less than 10Z of the potential has been dominated. As a result, only about one-third (1.9 million ha) of the total potential area is currently commanded by irrigation infrastructure. 2.70 Most irrigation schemes are administered by provincial agencies or, in a limited number of cases, by federal agencies. Farmer involvement occurs through irrigation consortia (Consorcios de Regantes) but these are weak administrative structures. As a result, major problems have been experienced in recent years as performance and water distribution efficiencies have declined to about 33Z. Of the 1.9 million ha command area, only 1.5 million ha are equipped with distribution works. Schemes in operation not only suffer from poor management but also lack funds for operation and maintenance. Water charges rarely meet 50Z of actual operating costs since they are not systematically collected. Consequently, conservation is sporadic and infrastructure continues to deteriorate. 2.71 At the farm level, water application systems are incomplete and antiquated, and knowledge of irrigation techniques by extensionists and farmers is inadequate. When combined with low-cost water, these factors have contributed to problems of salinity (0.5 million ha) and water logging (0.5 million ha). In less humid areas, salinity is reported on over 452 of -the total area and water-logging on 402 of the fields. Antiquated infrastructure and poor water management have been exacerbated by uncertain markets for horticultural crops generally produced in irrigated areas. Except for apple and pear exporters in Rio Negro, most crops grown under irrigation in Argentina are destined for domestic consumption where demand has been stagnant and markets subject to oversupply (e.g., common wines). In some areas (Mendoza), irrigable land is actually being abandoned and land values have fallen below US$500 per ha. - 23 - 2.72 It is clear that Argentina lacks a strategy for the use of its irrigation resources. In particular, an analysis is needed of: (a) the appropriate role of federal, provincial and private groups in administering irrigation areas; (b) appropriate measures for operation and maintenance of schemes; (c) priority areas for rehabilitation; and (d) the role of the public sector in financing rehabilitation schemes. 2.73 The immediate priority is to rehabilitate existing systems and to place strong emphasis on improved water management, as in the case of the IDB-supported Small Scale Irrigation Rehabilitation of about 300,000 ha in southern Buenos Aires, Rio Negro and Chubut Provinces. This effort is now near completion and a second phase is being considered. The goal is to expand and integrate the rehabilitation process with research and extension services to focus on the growing salinity problem. F. Forestry Resources 2.74 Forestry accounts for only 0.2Z of GDP, but its potential is largely unexploited. Although reliable data on the extent of the forest resource are lacking, Argentina is estimated to have about 60 million ha of woody vegetation, of which about 45 million ha is forested land. The area of potentially productive forest is estimated at about 15 million ha, with 54% of the overall forest area privately owned and 462 under state control. The productivity of these natural forest areas is extremely low, with annual increments below 1 m3 per ha and a recorded total annual output of only 7.0 million m3. With improved management, the indigenous forest offers great potential in the longer term for expanded production. The principal uses for the indigenous forest resources are the production of sawnlogs, pulpwood, fuelvood, tannin, and charcoal. 2.75 In addition to the natural forest, there are about 900,000 ha of forest plantations, most of which are privately owned, in the Provinces of Corrientes, Entre Rios and Misiones, producing mainly conifers (44z) and eucalyptus (27Z). The bulk of these trees are under 15 years of age and will mature over the next 6-10 years, causing raw material supplies to increase threefold over current levels. Plantation yields are high: conifers yield 25 m3 per ha per year in an 18-25 year rotation, and eucalyptus 25 m3 per ha per year in 15-20 years. High increments of over 30 m3 are considered readily achievable. No serious pests are present and establishment costs are relatively low, varying between US$250-750 per ha. Plantation-grown pines are used for the production of mechanical wood products and pulp. In addition, resin, which is used in the manufacture of turpentine, disinfectants, adhesives and solvents, is produced by tapping Pinus elliotti. 2.76 Most plantations have been established under a government subsidy .scheme that covers 70? of planting costs. In this context, some investment in plantations clearly has been stimulated more by tax exemption benefits to investors rather than by a desire to expand production per se. Despite this situation, the government's annual planting target of 70,000 ha has not been met in recent years, primarily due to a lack of funds. The average area planted in 1987 and 1988 was only about 40,000 ha per year. - 24 - Forest Management 2.77 Forest management on state lands is the joint responsibility of IFONA and provincial administrations. In theory, IFONA is responsible for preparing forest management plans and the provincial administration is responsible for their implementation. In practice, few plans exist and the provincial administrations merely issue licenses permitting license holders selectively to log overmature trees above specific diameters. Supervision of logging operations is poor and loggers frequently overexploit the easy areas and avoid the more difficult terrain. 2.78 IFONA was created in 1973 to administer the national forests as a successor to the National Forestry Commission (1948). Its functions include: policy implementation, law enforcement, planning, forest management, economics, administration of the plan%ing subsidy scheme, extension and publicity, forestry for social development, and, through its field offices, research and fire protection. It is also responsible for forestry in Tierra del Fuego. In practice, it performs few of these functions adequately. It is seriously constrained by inadequate staff (77 professionals, 92 administrators and 119 support personnel), low salaries and low budgets. 2.79 In part, IFONA's responsibility to conserve forest resources is the administration of the Government's 1977 tree planting subsidy which covers 70Z of planting costs of IFONA-apprived plans. However, this and other legislation is poorly implemented due to internal institutional constraints. Logging operations in natural forests often are uncontrolled, and low success rates in plantation schemes are often the result of poor supervision at planting and inadequate follow-up. 2.80 Privately-owned natural forest of less than 300 ha is worked by permit. When an area is above this threshold it must be worked in accordance with a management plan prepared by the owner. In most cases this means rotational felling of trees above a specified cutting limit over a cycle of 20 or 30 years. However, in most cases these conditions are not complied with due to inadequate field supervision. Plantations are also often poorly managed resulting in inadequate thinning and smaller diameter trees capable of only being used in pulp milling. Technical Constraints in Forestry 2.81 Argentina has the potential to be both self-sufficient in forest products and to develop a surplus for export. However, if the sector is to exploit that potential, several key institutional and technical constraints have to be overcome. On the institutional side, it is necessary to strengthen IFONA's capacity in planning, policy, economics, law, forest management, extension and education, and provincial governments will need to improve their capacity to administer and control forestry operations. The following technical issues have to be addressed: (a) There is inadequate information on the extent and composition of the resource base, especially the indigenous forest resource and for purposes of long-term planning, a forest inventory is required; - 25 - (b) An up-to-date demand forecast for all forest products to the year 2015 is needed. As a first phase, a demand forecast for mechanical wood products, financed under a World Bank PPF, was completed in January 1989; (c) Inadequate funding and duplication of effort are undermining the effectiveness of research work (para. 3.11 below); (d) Inadequate vocational training facilities for middle-managers and shop-floor personnel constrain the quantity and quality of output from industry. Improvements to professional and subprofessional training facilities also are required to enhance the quality of trained personnel; and (e) Forest fees are inadequate. Stumpage fees need to be reviewed and the introduction of capacity-related annual licenses for wood processing plants considered. Revenue from these sources could then be used to finance forestry development, such as planting subsidies. G. Fisheries General 2.82 The South Atlantic continental shelf contains one of the few underexploited, abundant fish reserves in the world. Commercial international operations only began in 1978, and total international catches peaked in 1983 at 848,000 tons. Total Argentine catches currently average about 410,000 tons, but have reached 550,000 tons (1979). This large resource is found in three distinct zones: the 200-mile exclusive economic zone; the disputed 150-mile zone around the Falkland Islands (Islas Malvinas); and the outer continental shelf. The Fleet 2.83 The extraction sector is divided into coastal craft, using small boats belonging to individuals and small companies, and large ships for deep-sea fishing by corporations. The coastal fleet comprises: (a) 230 launches (8-14 m) and small boats (14-19 m); and (b) 64 larger units of semi-deep-sea boats (25m, 450 hp, refrigerated, 15-day trip time). Eighty percent of the coastal fleet is based at Mar del Plata, and operating costs are high due to the advanced age of boats (30 years for smaller boats and 14 years for larger vessels). 2.84 The deep sea fleet comprises fresh-fish boats, freezers, and factory ships. The 112 trawler, fresh-fish fleet (25-63 m, 300-1900 hp) operates an average of six days per week out of port. Its vessels have chilling facilities on board and belong to companies with processing plants *at the base port of Mar del Plata. Their average age is 20 years. The balance of 27 freezer trawlers and 12 factory ships (100 m, 800-2500 hp) are owned by processing companies based in Bahia Blanca and Puerto Deseado. Resources 2.85 The main species caught is hake (Merluccius hubbsi), accounting for 652 of the total catch, with the balance mainly squid, anchovy, eel, sea bass, prawn and shark. The highest concentrations can be found along the - 26 - coast of the provinces of Buenos Aires, Rio Negro, and Chubut. There are 16 fishing ports; however, three (Mar del Plata, Quequdn, and Bahia Blanca) offload over 80? of the catch brought to land. Mar del Plata dominates with 70Z of this catch. Ports along the southernmost coast in Patagonia are small in their share of total catch but make a significant contribution to regional economies. Unfortunately, these southern ports lack good processing infrastructure. 2.86 Data on the maximum sustainable catch (CMS) are difficult to obtain since other nations ( the USSR, Bulgaria and Japan) fish in the Argentine zone and their catch is not readily ascertainable. Hake offers little prospect for growth, since the CMS is estimated at 380,000 tons per year and catches have varied between 326,000-445,000 tons per year. Likewise, in other deep-sea and coastal catches of eel, sea bass, and sea salmon, the CMS of 240,000 tons does not offer much scope for increased catch, and little is known about the CMS of shellfish.* Although prawn and shrimp catches are extremely variable (8,000-20,000 tons), squid and common squid offer considerable scope, since the CMS is about 0.2-0.3 million to-is, with current catches only around 30,000 tons. The Artntine anchovy (Engraulis anchiota) also offers good prospects, with CMS estimates varying from 0.45 to 1 million tons per year but current catches of only 15,000-20,000 tons per year. Despite these estimates, the available statistical information is poor and additional study is needed on the overall CMS, which the National Fisheries Research and Development Institute (INIDEP) tentatively estimates at 1.9-2.5 mJllion tons per year for the 19 commercial species. These figures do not include the enormous potential resource of sardines and krill. Technical Constraints in Fisheries 2.87 In general, it may be concluded that expansion of the Argentine fishing industry is restricted more by social, economic and technical factors than a shortage of fish resources. A new Fisheries Law is under consideration in the Congress which, if passed, should enhance the Government's effective program of deregulation of the fishing industry in recent years. A cause for concern is the inadequate monitoring and supervision of resources in the Patagonia region, which is currently exploited by a wide range of foreign vessels. 2.88 The main technical problems faced by the fishing industry are the need to update Argentina's antiquated fleet and to modernize and acquire equipment for on-shore plants to produce new product lines. These problems relate to two factors: a lack of long-term credit geared to fisheries operations, and the high customs duty and tax on imported fishing equipment not available locally (53Z of the CIF value). This duty is now under review and a considerable reduction has been proposed. In addition to these financial constraints, there are also physical and institutional constraints that include: (a) inadequate port infrastructure, especially in Patagonia; (b) a lack of coordination among public agencies at the federal -and provincial levels; and (c) inadequate personnel training and applied research (para. 3.12). 8/ In the southern deep-sea waters around the Falkland Islands the 450,000 tons per year CMS offers prospects for an additional catch of 180,000 tons per year, but this is not available to Aroentina. - 27 - III. AGRICULTURAL SERVICES A. The Secretariat of Agriculture, Livestock and Fisheries 3.1 The Secretariat of Agriculture, Livestock and Fisheries (SAGyP) (Chart 1). comprisess (a) four subsecretariats: Agriculture. Livestock, Fisheries and Agricultural Economy; and (b) ten parastatals, the principal of which are: the National Grain Board (JNG), the National Meat Board (JNC), the National Forestry Institute (IFONA), the National Institute for Agricultural Technology (INTA), and the National Fisheries Research and Development Institute (INIDEP). SAGyP is a dependency of the Ministry of Economy (MEC) which historically has meant that sector policies largely stem from MEC (and Central Bank) initiatives, with SAGyP acting more as technical adviser than policy-maker and planner. As a result, sectoral policies are often subordinated to short-term macroeconomic expediences authorized by NEC. Efforts are currently underway to strengthen the planning and policy-making functions of SAGyP's Subsecretariat of Agricultural Economy under a World Bank Public Sector Management Technical Assistance Loan (Ln. 2712-AR). 3.2 Public expenditures on agriculture and livestock in 1987 were 0.3% of total public expenditures compared to the manufacturing sector which received 1.22. This is a relatively low level of support to agriculture when both sectors' 1987 contributions to GDP are compared: about 14% for agriculture, compared to about 24Z for manufacturing. In addition, as a public body, SAGyP has difficulty attracting and keeping full-time staff due to low levels of compensation.9 Within the public sector apparatus, therefore, SAGyP does not reflect the importance which the agriculture sector has in the economy, especially in the export sector. B. Research Services Crops 3.3 The need for a high level of agricultural research has been recognized in Argentina since the time of the 1878 Belgrano initiatives when ways to improve agricultural productivity were sought. In 1911, the Secretariat of Agriculture created five research centers, and its Pergamino station, northwest of the city of Buenos Aires, has enjoyed an international reputation for decades. However, it was not until 1956 that the Government created INTA to carry out research and to link the researcher with the farmer through extension service. INTA's current research program includes 37 experimental stations, 1,363 professional researchers, and a support staff of about 3,500 who service both research and extension needs. 9/ Estimates of SAGyP's total staff are elusive. Tentative estimates in the four subsecretariats are low at about 1,000 staff with an additional approximately 20,000 in the parastatals. The level of competence and training is extremely mixed. - 28 - 3.4 Private farmer groups have also been interested in research, beginning in 1923 when Danish immigrants at the Tres Arroyos Cooperative in southern Buenos Aires Province established their own research station. In the same year, the private sector also hired a US expert to develop hybrid maize at Pergamino. However, as has often occurred in Argentina, there was a distinct lack of follow-up in these efforts. At several times in Argentina's history it was on the leading edge of technology, on1y to let its position slip. This was highlighted in a recent INTA ay of the period between 1935-1965, which noted that Argentine grain yields only increased by about 10%, while Australia increased 40Z tn almost equal Argentina in absolute terms, and the US over the same period increased by 68?. 3.5 However, INTA did play a major role in hybrid maize development, wheat improvement and the development of the technical package for soybeans (varieties, innoculants, chemicals, soil management). In 1970, these technical results were accepted by a newly-created Permanent Commission to Promote Soybeans. The result was a highly successful, coordinated effort between the public and private sectors to expand soybean production in the Pampas. INTA continued its research efforts into the serious perennial weed problem which led to major changes in herbicide selection and a resultant high level of herbicide use. By 1984/85, herbicides were being used on 89% of the wheat, 77% of the maize, 55% of the sorghum, and 25% of the sunflower areas. The marked expansion of machinery usage in the Pampas also can be attributed in part to INTA technical packages. 3.6 Recently, INTA management has taken deliberate steps towards ensuring a useful role for the institution in the future. In 1988 it created an Economics and Rural Sociology Institute to improve economic and marketing aspects of its technical packages. A major institutional strengthening is also underway, focussing heavily on overseas training (financed in part by IDB). Despite these changes, INTA still needs to identify its areas of comparative advantage to avoid duplication with the private sector and to complement these other initiatives. Potential areas include: (a) basic research into genetic engineering at its Castelar Station; (b) basic germplasm development; and (c) specific problem areas such as soil conservation, integrated pest management, fertilizer use and fertility, and crop stress response. On the latter, the importance of research into water stress has been highlighted by the floods of 1985-88 and the drought of 1988/89. 3.7 Applied research needs to be integrated more fully with the technology validation and diffusion network, and scientists need to work more closely with farmers in carrying out on-farm research. Researchers also need to develop and maintain better professional contacts with colleagues working in similar agroclimatic regions of the world to minimize duplication of research and to speed up the technology transfer process. The International Agricultural Research Centers--especially CIMMYT (Mexico), CIAT (Colombia) and ICRISAT (India)--offer good international -sources of information about genetic stocks of several crop species grown in Argentina. 3.8 In addition, closer contact with private seed companies will be required to avoid wasting scarce resources (e.g., the seed companies dominate the market for hybrid seeds--maize, sorghum and sunflower--and contribute at least half of the seed of self-pollinated species--wheat, soybeans and grasses). This linkage should be strong since several key - 29 - staff in selected seed companies were former INTA researchers. Despite these technical needs, INTA management's most important task, at least in the short term, will continue to be the need to ensure a steady, adequate flow of financing to maintain not only its research but also its extension programs (para. 3.13). Livestock 3.9 INTA devotes about 40Z of its resources to livestock research and extension. It operates a Veterinary Disease Center (CICV), a Molecular Biology Institute, and complements the National Animal Health Service (SENASA) (para. 3.18) by performing advanced diagnostic services (e.g., identifying strains of FMD virus). INTA's main animal production research center is at Balcarce in southeastern Buenos Aires Province. Here a number of improved animal production and health schemes have been successfully developed including a recent joint program with SENASA and private veterinarians to improve disease control and increase livestock productivity. INTA also has established an effective dairy demonstration model at its Rafaela dairying research center in Santa F4 Province where the focus is on animal health, nutrition, pasture growth and improvement of milk quality (hygiene). INTA's wool testing laboratory at Bariloche needs major upgrading to meet the requirements of an expanding wool industry and to be competitive internationally. Horticulture 3.10 INTA is the main source of horticultural research. Unfortunately, dissemination of results is poor. Market research is a major constraint and new varietal trials must be accelerated to meet the needs of an expanding export sector. Integrated pest management and the greater use of biotechnology to reduce pesticide and herbicide usage are essential to reduce costs and ensure export market acceptance. INTA needs to identify suitable microclimates for the production of a wide range of horticultural crops. For example, improved irrigation techniques could increase the production of alfalfa pellets and vegetables in Mendoza as well as potatoes in Rio Negro. Forestry 3.11 Formal forestry research programs are conducted by both the public and private sectors. In the public sector, the principal agencies are: IFONA, INTA, the Wood Technology and Research Center (CITEMA), the Argentine Arid Lands Research Institute (IADIZA), and several universities. In the private sector, research is conducted by the larger companies and organizations, including the Forestry Research and Experience Center (CIEF). Although forestry research covers a wide spectrum of activities, most work concerns site and species selection, forest tree improvement and wood technology. Duplication of research work is common and coordination among agencies poor. Priority research areas include: (a) forest tree .improvement or increasing yields from plantation-grown species; (b) forest management to identify optimum management regimes in areas of natural forest; and (c) wood technology to identify uses for the lesser-known species of the mixed semitropical forests of the northwest. - 30 - Fisheries 3.12 INIDEP is required by law to report maximum sustainable catches (CMS) for the main commercial species at the beginning of each year as a means of controlling fleet catches. It operates laboratories, three research ships, and has a staff of about 300. In addition to biological studies and monitoring fish stocks, INIDEP carries out research into new fish products and sets up training programs for crewmen and fish processors. However, as with the other research institutes, its activities are severely constrained by inadequate budgetary resources. Although improvements in funding are essential to the efficient implementation of INIDEP's mandate, the key constraint in the sector is the shortage of long- term credit to purchase new boats andlor rehabilitate the existing fishing fleet and to modernize and expand on-shore processing facilities. C. Extension Services Public Extension 3.13 Technical change proceeded slowly in Argentine agriculture until the 1940s, primarily due to the natural richness of the land that produced high yields without improved technology. However, this began to change in 1944 when SAGyP set up the Board of Regional Agronomies with 220 local chapters to advise farmers on problems related to production. The public sector's role in extension was considered secondary to research until INTA was created in 1956. Today, INTA has 242 extension offices with 455 professional staff and is autonomous to the extent- that its financial resources come from a 1.52 levy on primary agricultural exports from the Pampas and from wool. However, variations in this percentage and sharp fluctuations in the volume and value of exports to which it is applied have caused major discontinuities in INTA's work. 3.14 In 1984, INTA attempted to redress its poor image in the farming community and began a process of decentralization, whereby Regional Councils, comprising a wide range of agricultural entities, now advise TNTA's Regional Research Centers and Extension Agencies. As a result, extension has gained an important institutional status within INTA alongside research, and a Coordinated Regional Extension System has been established. As INTA evolves, its extension and research support will become more integrated with other agricultural sector organizations and its research role will gradually predominate over direct contact with farmers, especially in the Pampas where a good network of private extension services already exists. In addition to the extension services provided by INTA, provincial Ministries of Agriculture and/or Rural Affairs and non-profit organizations also operate small extension services. Private Extension -3.15 Despite the important role of the public sector, it is the private sector which provides the greatest range of alternative technical services. Participants include commercial seed companies, chemical and fertilizer suppliers, rural cooperatives and societies, and private . advisory services. Approximately 30 commercial seed companies engage in technology generation (breeding new varieties), validation and diffusion (extension). The cooperatives employ about 500 professional extension advisers to service their members and about 1,000 private consultants give specialized services to medium- and large-scale farmers. - 31 - 3.16 The well-respected system of Regional Agricultural Experimentation Groups (CREA) is a private advisory service with a cooperative-like organization. Based on a French model, it has a three-tiered structure. There are currently 176 local groups with over 2,000 members, mainly medium and large farmers, and 15 Regional CREAs, which are jointly represented in the Argentine Association of CREA Groups (AACREA). The local tier comprises groups (CREAs) of 8-12 farmers which meet once a month on a rotating basis at a member's farm to discuss his operation. The group is led by a professional agronomist who spends an average of 8-12 days per month working for the group. He visits each member once a month, and there is regular follow-up on conclusions and recommendations. The individual member's subscription costs about the price of one farm laborer per month (US$60), of which 80% covers the professional's fee and 20% goes to the regional and national tiers. It is an effective system whose members are recognized as being in the forefront of production technology in Argentina. 3.17 The dairy sector has achieved the most impressive results, due to private technical services provided by the milk processing industry. In the early 1970s, the Argentine dairy iidustry faced problems of low productivity, highly seasonal milk production and low milk quality. When a recession hit the industry in 1976, farmers began to move out of dairying into more profitable cropping activities. This stimulated the two largest dairy plants, SANCOR and La Serenisima (private) to take direct action to ensure their supply of raw material. The SANCOR approach is a variation of the CREA concept, which works with cooperatives. La Serenisima concentrates on helping individual medium- and large-scale farmers. SANCOR technicians provide technical assistance and also help finance the purchase of inputs. These services are ultimately paid for by the producer. The results have been impressive. Between 1976-85, SANCOR increased annual milk yields from 2,050 to 2,315 1 per cow (13%), and BF yields from 28 to 42 kg per ha (50Z). At La Serenisima, annual milk yields rose from 1,880 to 3,105 1 per cow (65%), and BF yields from 27 to 57 kg BF per ha (111%). The focus of the technical package was improved animal husbandry, greater use of artificial insemination, and increased milk output during the traditionally low winter months through the more efficient use of concentrate feeding and increased forage conservation. D. Animal Health Services 3.18 Veterinary services in Argentina are provided by private sector professionals, by provincial veterinary services and by SENASA. Coordination between SENASA and provincial veterinary services is ensured by a National Animal Health Commission (CONASA). The production, distribution, and import of vaccines and veterinary pharmaceuticals are carried out by private companies. However, SENASA is responsible for quality control. 3.19 SENASA was established in 1963 and reorganized in 1972. It .currently has an adequate staff of about 3,300, including 1,500 professionals. It is an organismo, desconcentrado and is therefore managed as a self-contained organization but under civil service rules. Full institutional autonomy is being studied but this would require approval by the Congress. Ninety percent of its budget of about US$12 million equivalent is covered by earmarked taxes or fees. It comprises threj services; the Animal Disease Control Field Service (SELSA), the National Laboratory Service (SELAB), and the Livestock and Meat Sanitary Inspection - 32 - Service (SIPA). SELSA consists of 22 regional inspectorates and about 300 local offices. It works on programs dealing with FMD, brucellosis, mange, ticks, tuberculosis, rabies and specific problems of pigs, poultry and horses. SELAB manages veterinary laboratories, including one obsolete central laboratory and 14 small regional laboratories. Its major activity is FMD vaccine quality control. SIPA has the largest staff of the three, and provides sanitary inspection to about 70Z of Argentina's slaughterhouses. 3.20 As noted previously, Argentina's livestock population is affected by a number of diseases, most notably FMD, which have a negative impact or, production. Except in Patagonia, which is free of the disease, FMD vaccination is compulsory three times a year at an annual cost of US$70-80 million for vaccines alone. Vaccination first began in the early 1960s and has contributed to a reduction in FMD incidence from about 10,000 outbreaks per year to current levels of about 1,000-1,500: unfortunately, the disease is still not under full control. Moreover, the insufficient level of immunity in domestic animals is a factor that favors mutation of the virus and generation of new subtypes, as demonstrated by the 1987 outbreak. FMD shows no occurrence in the Provinces of La Rioja, San Juan, Rio Negro, Neuqudn, and south of the 420 parallel. 3.21 SENASA's disease control and meat inspection services are vital not only for the meat product directed to the domestic market but even more importantly for the export market, since most countries impose rigid disease control and sanitary certification requirements on meat imports. Because Argentina has endemic FMD in addition to the other major diseases, it is currently excluded from the fresh meat trade (as chilled or frozen product) in most major world markets. It is therefore essential that its veterinary and meat inspection services have high credibility to maintain access to the remaining markets, including those -for cooked meats. There is some suggestion, however, of a shortage of skilled, trained veterinarians and that budgetary restrictions may be limiting the effectiveness of the sanitary control programs. In particular, there needs to be more effective training of farmers and SENASA employees, and more extension and evaluation at the farm level of the effectiveness of disease control campaigns. High intensity disease control programs in the southern part of Buenos Aires Province (Balcarce) have demonstrated that with adequate funds and resources such campaigns can be made more effective. 3.22 In summary, the key issues that require urgent attention in animal health services are: (a) the low level of SENASA resources (compensation and facilities); (b) unsatisfaztory work programs due to limited interaction between interested agencies and farmers; and (c) the need to improve production of FMD vaccine (oil-added form) to support a comprehensive control plan. E. Plant Protection Services 3.23 Within SAGyP's Subsecretariat of Agriculture, the Plant Protection Service (Sanidad Vegetal) and the Plant Inspection Service (Fiscalizaci6n de Producci6n/Comercializaci6n Agricola) have a meager complement of 56 technical staff and less than 150 support staff to cover the entire country. The Plant Inspection Service is primarily involved with preparation of legislation rather than with its application. The Plant Protection Service, on the other hand, has greater operational - 33 - responsibilities but has suffered from drastic reductions in its budget in recent years. despite covering about 80% of its costs through fees and taxes. The latter return to the Treasury. The key programs on which these services focus ares (a) confining citrus canker to the northeast to allow exports to continue from the northwest; (b) providing laboratory analysis of pesticide residues; and (c) attempting to control the endemic fruit fly to ensure access to key export markets. The Far East, the US, Spain and Italy require cold quarantine for 12-16 days before accepting fruit shipments from a fruit fly area. Attempts are underway to isolate regions in order to benefit from fly-free export zones. 3.24 The key constraints to Argentina's Plant Protection Services include: (a) insufficient rasources (technical staff, and vehicles), fluctuating finances and a poor information system; (b) inadequate interaction between federal, regional and private agencies; (c) lack of a national plant protection program; and (d) lack of a quarantine station for exports. F. Farmer Organizations 3.25 Argentina has a long history of farmer organizations that today represent effective government lobbies. On major issues, their chief executives have a tendency to deal directly with the President of the Nation and to bypass SAGyP. The oldest of these organizations is the Argentine Rural Society (SRA) established in 1866. Until the 1940s, SRA was associated with those members of the farming community with the greatest wealth and power, and consequently a significant segment of the rural population (tenants and the landless) went unrepresented. As a result, SRA was generally perceived as a bastion of large absentee ranchers. Although this perception still exists, many of the current membership of about 10,000 large farmers have diversified into crop production. 3.26 Between 1880 and 1940, a network of rural entities developed advocating greater government intervention in the agricultural sector. The conflict between cattlemen in the 1920s and 1930s over UK meat quotas and the resultant commercial links between large cattlemen and meat packers led to the development of a series of producer federations and the creation of the Argentine Rural Confederation (CRA). This also marked the beginning of a changing role for the State, which actively stimulated development of new institutions in an attempt to moderate conflicts between different groups representing rural interests. CRA currently has about 100,000 medium- to large-scale farmer members. 3.27 The Argentine Agrarian Federation (FAA) also developed rapidly as a result of the troubles outlined above, and grew from 260 members in 1916 to 32,000 by 1930. It is currently a politically-important, complex network of 400 branches, 130 youth centers, 185 affiliates, and 30 linked entities with a membership of about 70,000 small- to medium-sized farmers.. It has considerable influence in regional economies and the former "colony" settlements of Southern Santa F4 and C6rdoba Provinces. FAA and CRA are arguably the most representative of those farmers who actually live on the land in Argentina. - 34 - 3.28 Cooperatives. Argentina has a long history of agricultural cooperatives. They originally grew out of the need by early colonies of European settlers to organize the provision of inputs and marketing of products. The first of these second-level entities, later known as the Association of Argentine Cooperatives (ACA), was set up in 1921. It originally focussed on the need to improve grain elevator capacity. However, today it is deeply involved in agroindustry and port handling facilities. Subsequently, the Argentine Federation of Agricultural Cooperatives (FACA) was established in 1947 with 25 cooperatives and 140,000 producers. Today. FACA is an extremely important provider of inputs and is widely involved in industry as well as domestic and international marketing activities. 3.29 The creation of a third-level cooperative structure grew out of the big expansion in the cooperative movement between 1943-55. The Confederation of Agricultural Cooperatives (CONINAGRO) gathers cooperatives from different fields in order to obtain wide representation among farmer members. Today there are 13 secondary cooperatives and 1,278 primary cooperatives with about 459,000 members in CONINAGRO. This covers about 852 of all agricultural producers in Argentina. CONINAGRO has a well- established bureaucracy with cadres of highly-qualified technical personnel (especially in ACA, FACA and the dairy coop. SANCOR). There is still a strong emphasis on the Pampas, but it is integrating more regional economies in an attempt to give a truly national representation in its dealings with goveri.ment. However, despite its large membership, CONINAGRO has less political power than SRA and CRA. G. Other Private Initiatives 3.30 In Argentina, the role of public sector institutions is clearly secondary to the dominating role of the private sector. Herein lies the true strength of the Argentine agricultural economy and its ability to respond to changing business scenarios. For the purposes of this review, the horticultural subsector has been taken as an example of these broad private sector initiatives. 3.31 Most horticultural export crops are produced by a combination of large industrial-scale processors or packers, grower cooperatives, or individual grower packers. A number of entities are also emerging to deal with export-oriented commodities, such as apples. For example, in Rio Negro and Neuqu4n, growers have formed consortia specifically to conduct export marketing, grading and packing, storage and also to provide technical assistance to members. These consortia comprise energetic groups of growers (some with professional managers) who want to expand exports. However, the availability of long-term financing represents a major constraint to this initiative. 3.32 Cooperatives are not strong among horticultural producers since the -fast-moving fruit and vegetable export industry presents special problems. Some growers do belong to apple packing or vegetable cooperatives but sell a large portion of their crop to private sector companies. CONINAGRO has several cooperative members that deal principally with horticultural products. The most effective appear to be the verba mate producers who have taken the initiative to develop export markets in the Middle and Far East. A number of wine cooperatives exist but most use outdated facilities, possess little capital, and lack the ability to move into new product lines or emerging markets. - 35 - 3.33 Active trade associations (camaras) are common, for example, in established agroindustries such as wine, apple and pear exporters and citrus processors. Their principal role is to collect statistics. disseminate information, lobby on behalf of the respective industries and coordinate their activities. The Apple and Pear Exporters' Association (CAFI) has helped groups of exporters to charter ships and to seek the best price for boxes. These associations generally perform well, although their budgets are small. 3.34 A number of small, integrated growers have expanded and emerged as major export-oriented fruit packers and processors. While plants and equipment are generally modern in export enterprises, the resource base (orchards and vineyards) is limited by type of varieties, low productivity, and poor quality. 3.35 Capital investment from nonagricultural industries also has begun to diversify into horticultural production and processing, particularly the export business (wine and apple juice concentrate). For example, an Argentine construction firm has used tax credits to build a 3,000 ha grape, fruit and vegetable production and processing complex in Mendoza. This enterprise also recently expanded into a modern vegetable dehydration plant for garlic, onions, and other vegetables to take advantage of inexpensive labor and low energy costs. 3.36 Foreign investors are increasingly interested in Argentina and are actively evaluating and seeking investments in the food processing sector. General Foods plans a frozen vegetable processing plant in Mar del Plata; Cargill and CONAGRA are already established and seeking new business opportunities; Castle & Cooke has expressed an interest in investing in fresh fruit exports; and Zumos Argentinos, S.A., the largest juice processor (100,000 tons per year), is owned by the large German-based company, Eckes. A constraint is that Argentina is considered a more difficult country than Chile in which to establish a business. A more stable business environment and corsistent government regulatory policies would undoubtedly attract more foreign investors. H. Agricultural Credit 3.37 About 102 of total banking credit was directed to the agricultural sector in 1986, down from 13.5Z in 1982. As of end-1986, commercial banks controlled 76% of banking sector assets, down from 82? in 1983. The 158 domestic private banks had the largest share (33%) of commercial bank assets, followed by 25 provincial banks with a 26? share, ana federal government banks with 19Z. 3.38 The Bank of the Argentine Nation (BNA), in addition to being the largest bank in the country, has been the main channel of credit to the -agricultural sector, along with provincial banks. BNA operates nationwide with 562 offices and has 20 offices abroad. Operations are conducted in both local and foreign currencies. BNA's share of total agricultural lending rose from 17? to 19? between 1984 and 1986. 3.39 BNA is a relatively efficient and profitable public banking institution, which, as of June 30, 1987, had an outstanding loan portfolio equivalent to about US$5.4 billion, which accounted for about 60? of its - 36 - total assets. This portfolio is composed of government entities (612), financial entities (3Z), and loans to private entities (36Z). About 722 of its outstanding loan portfolio consists of overseas operations, primarily for government entities. The remaining 282 of loans has been granted locally, with agriculture accounting for 40%, industry and commerce 202 each, and other credit operations the remaining 20Z. Government has indicated that BNA should specialize more on agricultural operations in the future and reduce participation in lending to other sectors, the responsibility for which would be assumed by other, specialized public banks. In this scenario, BNA would be the only government bank dealing with the agriculture sector. 3.40 Financial assistance to the agricultural sector during the past 20 years has mainly been for short-term credit. Medium- and long-term credit has been heavily dependent on the availability of funds from external institutions. BRA is currently implementing the Agricultural Credit Project II (Ln. 2970-AR), jointly financed by the World Bank and IDB to provide on-farm investment credit across agriculture subsectors. 3.41 The lack of credit to the agricultural sector is a serious problem but is moderated by the extensive form of production and the availability of contract services. With severe limitations on the availability of credit from the banking system, other sources of credit have emerged, such as suppliers' credits and forward contracting. Other sources will also develop, such as credit through storage warrants if the supporting institutional structure is developed. In the interim, the agricultural sector, as is the case with the other sectors in the economy, suffers from the general demise of the financial system and macroeconomic uncertainty. IV. ISSUES IN AGRICULTURAL MARKETING A. Cereals and Oilseeds General Conditions Governing Trade 4.1 Although Argentina is a relatively modest producer of cereals and oilseeds in a global context, its exports are well above average as a percentage of production. This means that Argentina has a more significant presence in world markets than production figures alone would attest. For example, wheat exports between 1974-1988 averaged almost 52 of the world wheat trade, although Argentina's wheat production was less than 2.52 of world wheat production over the same period. Similar relationships can be found for feed grains, oilseeds and their crushed products. Moreover, in recent years, cereal and oilseeds other than wheat have become very important. For example, in 1988 the dollar value of Argentine exports of soybeans and derivatives exceeded its wheat exports by 2502. 4.2 The significance of Argentina's cereal and oilseed exports as a -percentage of own-production is due to two main factors. First, in relation to many other countries, Argentine places few significant restrictions on the export of cereals and oilseeds, with the notable exception of wheat. Second, Argentina's heavy reliance on foreign exchange controls in conjunction with either export taxes or dual exchange rates as a source of government revenue, and the importance of cereal and oilseed exports in generating foreign exchange, have created great pressures to export cereal and oilseed products in the immediate post-harvest period. - 37 - These pressures have often contributed to the negative trading margins observed in recent years, as measured by comparing FOB Argentina prices to those in the US (FOB Gulf). 4.3 Despite the obvious importance of its grain exports, Argentina does not have the institutional means to support the export of grains (particul .rly wheat) through the use of buffer stocks, producer price supports or sales credits. This is in stark contrast to other developed countries, such as Australia or Canada, which have m.&olithic wheat boards that support grain exports, or the US which employs a price support program for its farmers. 4.4 The structure of the export market for cereals and oilseeds has been quite competitive, with the exception of wheat. In this case, political pressures for keeping the price of bread at reasonable levels, coupled with the Government's belief that reimportation of wheat would be costly, has led to a polLcy of retaining a certain amount of wheat !or domestic consumption. This has been achieved through actions taken by JNG that can purchase and sell wheat for domestic consumption or export (paras. 4.10-4.13), and through the imposition of a global export quota for wheat which is set in light of the estimated domestic consumption requirements and harvest projections. 4.5 The average wheat crop has been 8-9 million tons per year and the JNG usually has domestic consumption requirements of about 4 million tons, implying that an average of 4-5 million tons are available for export. Existing policies under which shares of the global quota are allocated on the basis of a three-year moving average of past exports restrict entry by new exporters of wheat, and have resulted in the existence of almost 100 operators in the Argentine offshore dollar-brokered FOB market. However, only 15 of these companies account for 90Z of all Argentine exports by private companies. These 15 large companies arrange for ultimate sales to final buyers, while the other participants act as brokers that sell their export shares to large exporters. 4.6 The net effect of this policy, besides conferring rents upon those participants with export shares to sell, has been to reduce uncertainty for exporters in regard to obtaining a certain base quantity of wheat for export. Thus, given that wheat is the first grain harvested in the crop year, the existing system of share-quotas allows exporters to hold back from purchasing wheat at harvest, thereby depressing prices, in the knowledge that they will obtain a certain share of total exports regardless of the total amount allowed for export. This fact, coupled with high interest rates paid on government debt, has led to a situation where exporters prefer to invest pre-export finance in the domestic financial market prior to actual purchase of the goods. 4.7 The downward pressure on prices in the FOB market at harvest is exacerbated by other factors that affect the difference between FOB and -farmgate prices. Argentine farmers operate in a cash market where production or pre-commercialization credits are either unavailable or prohibitively expensive. The more sophisticated instruments of the trade, such as hedging in a futures market, are either unavailable to the farmer or unknown. In lieu of a more sophisticated producer-oriented trading system, the internal trade in grains has evolved with an increased reliance on barter arrangements (inputs, mostly fertilizer, for crops). Not only does the farmer have to sell most of his product when it is harvested but - 38 - an increasing percentage is mortgaged well before planting to obtain production credit through the use of anticipated payment contracts. This credit is often provided by the exporter who, with easy access to pre- export finance, is frequently the only agent in the system with credit resources. Role of the Public Sector 4.8 Currently, Argentina has no policy to support export markets or to maintain market share at the expense of local consumption. In the case of wheat, the protection of the local consumer and fulfilling-the needs for domestic consumption is a long-standing policy. However, given that other major grain exporting countries have either active public-sector involvement in their grain trade (e.g., through export subsidies or price supports) or single, monolithic trading bodies that can obtain export financing on their own to boost the competitiveness of their product, it is apparent that some public sector role, particularly in the export of wheat, may be warrarted. 4.9 Argentina's public-sector assistance to its grain trade is limited to the actions of JNG. With resources obtained yearly from the Treasury through the budget and through foreign pre-export finance obtained from the market, JNG tries to put a floor under the wheat price by a threatening to purchase at what is inappropriately called a *supports price (precio de sost6ri). There is also a small program to support marginal producers in outlying areas. JNG also acts on behalf of the GOA in negotiations with governments which have either centrally-planned economies or monopolistic influence over grain imports. In spite of this public sector role, Argentina's grain market is one of the least controlled and regulated of all the major grain producing economies in the world. The National Grain Board 4.10 JNG and its predecessors, dating back to the 1930s, have had a varying influence on the grain trade in Argentina, ranging from a monopoly to overseer of free trade. The present JNG, based on a Decree Law, No. 6698-63, is an autarchic institution answerable to the Secretary of Agriculture. Its main functions are: (a) trade regulation; (b) quality control; (c) market information; (d) operation of public infrastructure (mainly terminal and inland grain elevators;; (e) provision of insurance against non-delivery of grains to the grain terminal elevators; Cf) trading (currently about 30Z of the wheat crop and 15Z of total grain exports); and (g) executing special government programs (e.g., support for producers in marginal areas, targeted sales of subsidized wheat). Recently, JNG has once again become the collection agent for export taxes based on declared minimum export registration prices. JNG also retains the function of establishing minimum export registration prices which are needed to minimize under-invoicing of exports, to control foreign exchange remittances and to measure taxable trading profits. Finally, JNG *determines the size of the global export quota for wheat and is responsible for calculating the shares of the quota to designated exporters in the FOB brokered market. 4.11 In the continuing debate over the most appropriate role for JNG, there is little disagreement over the need for the first three public sector functions (regulation, quality control and provision of information), though these could be performed more efficiently than at - 39 - present, given some investment and reorganization in JNG. The setting of minimum export registration prices is also widely accepted as a necessary means of maximizing government tax revenues. Given the nature of the FOB market, registration prices and incentives to maximize offshore profits, participation by JNG in the grain trade may be necessary for it to carry out its mandate as controller of trade and act as a tax collection agent. The more controversial of JNG's functions are: (a) its operation of the grain terminal elevators; (b) its trading operations in the domestic market and associated use of the export quota for wheat; (c) its role as an exporter of commodities; (d) its insurance function; and (e) its role as an executing agency for the Government in administering special subsidy programs. 4.12. The grain terminal elevators owned by JNG are run down and overmanned. Divestiture is long overdue. However, opposition from the labor movement is still strong and there are difficult legal and commercial issues affecting the final outcome of negotiations. Moreover, the GOA will have to couple the divestiture of these elevators with efforts to ensure that private companies are assured free access to port areas in order to build grain elevators. 4.13 The domestic trading of JNG primarily involves wheat. In the past, JNG wheat purchases (originally intended to provide a floor price for farmgate purchases) have been used as a means of indirectly subsidizing the consumption of bread. This has been accomplished through JNG purchasing wheat at harvest at the Precio de sost4n and selling it to the millers on the basis of cost-plus contracts that often do not fully reflect domestic interest rates in calculating JNG's carrying costs. In the past, JNG has held the majority of the stock of wheat used by the millers and through its financing terms has subsidized the consumption of bread. In recent years, the implicit subsidy offered by JNG has become large, because the gap between market interest rates and the interest rate used in calculating the cost of carry has widened, in large part because domestic interest rates include a large default risk premium. In this connection it is important to note that the Government has controlled bread prices, thereby not conferring the entire subsidy on the millers. It has become increasingly difficult to calculate the extent to which JNG subsidizes the millers through this policy. A thorough review of the rationale for JNG acting as effective banker and insurer for the domestic wheat millers is clearly needed. 4.14 The need for greater accountability and competition in the domestic wheat trade is clear. Evidence exists that a number of the larger milling companies could obtain credit on commercial terms from commercial banks or other participants in the grain trade. Moreover, JNG's role in the domestic wheat market could be further questioned if guaranteed export quotas were abolished thus creating incentives for exporters to compete more actively for the wheat available for export at the time of harvest. Competition for wheat purchases at harvest time would be further enhanced by a more competitive system for financing domestic stocks at market interest rates, where millers would no longer receive subsidized financing from JNG. Removal of price controls on bread, with adequate budgetary provision for a targetted consumer subsidy under a program designed to minimize government administrative costs, is also a critical factor in promoting competition in the domestic wheat market. - 40 - 4.15 There may continue to be a role for the public sector in trading cereals and oilseeds may continue to exist in the export market, especially for wheat. The lack of competition in the world wheat market. characterized by the importance of government-to-government contracts, makes it imperative that Argentina be able to negotiaUe such transactions, even if thi actual export is contracted out to private traders. Thus, to continue to carry out this function w.ll require that JNG have access to pre-export finance on commercial terms to purchase wheat. Although it could be argued that JNG could contract out all aspects of these transactions, it is not clear that this would be feasible. In practice, JNG often cannot predict the number of government-to-government contracts that it will wish to close at the time it sets the global export quota. 4.16 JNG's insurance function involves the granting of a government guarantee to so-called comerciantes in the grain trade against non-delivery of commodities (i.e., the existing "1825" system). Originally, this system was developed to break the link between physical delivery of goods and actual payment, thereby greatly improving the efficiency of grain marketing. However, this function has gradually become less important and has been subject to the adverse selection problem as many comerciantes have sought a guarantee of delivery from private insurers that now provide such a service to 400 country merchants (acopiadores). In many cases, the better acopiadores obtain cov-age from private insurers to avoid the administrative costs of the JNG's 018250 system. 4.17 Finally, a continued role for JNG as an executing agency for Government programs (e.g., support for farmers in marginal areas, targeted sales of subsidized wheat) should be considered only under conditions of contract. Program offices should be established with contract personnel, hired temporarily for the management of the program in question. JNG should account to the Government for its management and might refuse programs it considers flawed, for instance because of insufficient funding. 4.18 The changes described above could be supported only if a new and smaller JNG can be created as a professionally-strong and financially- independent institution. This implies a dramatic change from the present situation but there is increasing recognition in Argentina that such a change is necessary. Such an institution should be legally insulated from the central government. Its management should be professional, appointed and promoted on merit, and remunerated competitively with the private sector. It should be able to act as an independent export trader, with access to financing on its own strength. As a pre-condition for this, it should be able to operate under conditions that make it competitive, in principle, with private traders. This applies, in particular, to its relation with offshore companies and external sources of financing. B. Livestock Meat Marketing 4.19 Livestock in Argentina are marketed in the following ways: (a) central markets in major cities (25Z of the total) including the world's largest at Liniers in Buenos Aires (22Z), which markets over 2.5 million cattle per year; (b) 520 rural auctions (20-35Z); (c) unregistered sales (25Z); and (d) the balance either directly to meat packing plants or through meat auctions. - 41 - 4.20 The meat industry has moved from very large slaughter facilities, operated by multinational meat-exporting companies before the Second World War, to the present situation where most capacity is held by small- to medium-sized Argentine companies. While there are many rural slaughterhouses with varying sanitary standards under local Government contract, the bulk of slaughter is through approximately 115 meat packing plants operating under federal review by JNC and SENASA. There are three facilities which slaughter exclusively for the export trade, 38 for both export and domestic sales, and the balance for the local trade. 4.21 In the domestic-market, processors have traditionally sold unchilled meat directly to wholesale butchers who, in turn, distribute to about 35,000 retail butchers nationwide (18,000 in the city of Buenos Aires). However, supermarkets are growing as a retail outlet 5or meat, causing an increasing number of small butcher shops to close. Along with this development, there is a growth in higher value-added products (such as control packs and prepared meats) which have traditionally been produced only for the export market. Furthermore, over the medium- to long-term (5-10 years), as domestic per capita consumption of beef declines (in part for health reasons), consumer demand for substitute products (poultry) is likely to increase. 4.22 Despite recent declines in Argentine meat exports, there is potential for export market growth. Over the last 25 years, the composition of Argentine beef exports has changed dramatically: between 1970-73 and 1984-87, the proportion of cooked (which kills FMD virus) and prepared beef cuts rose from 37Z to 911 of total beef exports and the proportion of chilled or frozen beef quarters and manufactured beef dropped from 33Z to 9Z. 4.23 The demand for high-value cuts is growing in the EC, Scandinavia, Japan and Southeast Asia. However, EC quotas and sanitary regulations currently restrict further market penetration by Argentine products. In the event that EC price supports were reduced and intervention stocks run down, there would be an opening for greater Argentine penetration. However, the best short-term strategy would be to focus on cooked products. Despite the fact that the cooking process tends to reduce meat quality, these products have a wider export market, since importing countries (e.g., the US and EC) usually transform this cooked meat at higher margins into other products such as soups and frozen meals/TV dinners. The Campbell Company (US) is currently developing a capacity in Argentina to produce higher-value meat products for direct export to the US. Frozen cooked beef also offers good prospects but a program of market research and promotion is needed. There is a need therefore to improve and expand processing capacity to transform meat products by dicing, slicing and packing. 4.24 As noted above, the main non-macroeconomic constraints to the development of Argentina's meat industry lie in the controls of importing countries that limit access. Given these barriers, Argentine meat -marketing efforts should be directed at securing changes in import controls for cooked meats in these countries. In the short- to medium-term, the oft-quoted future reduction in EC intervention stocks could lead to improved prospects for Argentine beef in the USSR, Egypt and the Middle East. Over the longer-term, there could also be considerable improvement in shipment levels to the EC market. - 42 - 4.25 Declining meat exports have created challenges for all sectors of the meat industry. However, the importance of beef in the domestic economy has had a marked impact on strategies adopted by Argentine meat institutions. The key difficulty now is to reorient the industry towards promoting better export performance. In this context, the larger processors, who incur high costs to maintain facilities to meet the ever- changing export registration requirements of the US and the EC, are still recovering from the crisis created when exports fell sharply after 1980. Industry indebtedness has since fallen from US$350 million (1983) to US$250 million, with two firms accounting for 50Z of the current total. The number of slaughter plants currently exporting has also fallen, from 41 in 1980 to about 21 in 1988, and capacity utilization of these plants is currently about 52%. Despite this, the processing industry overall is now profitable. However, if export prospects were to improve, there would be a need for investment capital to diversify into higher value-added products. Currently, such funds are not available for most plant operators. 4.26 Export promotion is lacking for all but the largest firms and the JNC is only able by law to allocate a maximum of 302 of its total revenue (US$15 million) to promotional activities. By comparison, the Australian Meat and Livestock Corporation spends about 70? of its annual budget of US$50 million on promotional activities. An expanded role for JNC in promotion and market research is therefore essential to Argentina's export strategy for meats. The National Meat Board 4.27 JNC was established in 1933 in response to the difficulties faced by meat producers and exporters during the Depression. One of its initial duties was to determine the extent to which multinational companies, which owned most of the slaughter facilities at the time, were extracting excessive profits from the industry. JNC is an autonomous government body funded through a levy on cattle, sheep and pig sales for slaughter. Its board consists of a president, vice-president and eight directors. The president and vice-president are government-appointed and four of the eight directors are government departmental representatives. The other four directors are from industry, two representing livestock producers and one each representing meat processors and livestock agents. 4.28 JNC's functions are to service and regulate the livestock and meat industry and to ensure an orderly and continuous flow of meat products to domestic butchers and export markets. Its major activities are to: (a) provide meat grading services at meat packing plants; (b) inspect and license terminal livestock markets and wholesale meat markets, and collect and disseminate throughput and price information for these markets; (C) administer and distribute quotas for controlled markets (mainly the EC); (d) check quality control at processing and packaging plants producing for the export market; (e) regulate exports of livestock and livestock products when necessary to ensure fair competition (it can also enter into supply agreements with foreign buyers, particularly where government-to- government arrangements are sought by purchasing countries); and (f) conduct market research and promotional activities in the local and international markets. 4.29 JNC's role has evolved over the years along with developments in the industry and in world trade. Of the total levy collected (currently around US$15 million equivalent), 30Z is for administrative expenses, - 43 - promotion and statistics, 102 for research, and 60% to maintain and develop activities covering meat production, storage, processing, marketing and transport of meat. Largely as a result of its funding through the slaughter levy, and since official beef grading is carried out on about 75Z of cattle slaughtered, grading has become the major focus of JNC activtties. Grading staff now account for around 502 of its total staff of over 500. 4.30 Despite the wide legal powers given to JNC, its industry role is restricted by staffing and political constraints. Consequently, it mainly serves an administrative and regulatory role in the domestic market, and represents the industry at an official level internationally by sending delegations to potential markets and by participating in trade fairs. However, to a large extent the major meat companies carry out the only effective promotion of Argentine meat through their representative offices in the major markets, particularly in the US and Europe. 4.31 While the fortunes of JNC have fluctuated with changes in government policy, the consistent trend over recent years has been downwards along with the general decline in exports. With this decline, it has become less effective in developing and maintaining its role in industry and is effectively unable to act independently of government. The direct appointment by government of the president and vice president and four of the eight directors severely limits JNC's operational independence. The general quality of staffing has also suffered. With operations concentrated on the grading function, there are few professionally qualified and trained senior staff to maintain even basic statistical services at levels of the secent past. Important functions, including economic analysis, market research and meat promotion.in conjunction with the private sector, are not being performed at an effective level. 4.32 There are also doubts about the relevance of JNC's grading systems in current domestic and export markets. Argentina's grading system was introduced in 1941 to service the carcass trade with the UK and, despite modification over the years to incorporate additional classes of cattle and fatness specifications, it has been overtaken by developments in the types of meat products being traded on the world market. 4.33 JNC's institutional constraints have recently been analyzed by consultants in close cooperation with its management, and recommendations for restructuring have been broadly endorsed by the JNC Board. Recommendations on new positions include a general manager and two new managers for economic studies and planning and for promotion and extension. JNC's institutional problems recently have been analyzed and proposals for restructuring endorsed by the JNC Board. Recommendations on new positions include a general manager and two new managers, for economic studies and planning and for promotion and extension. The priorities for JNC in the future are therefore likely to be: (a) to professionalize its management and staff; (b) to direct its attention to the general conditions governing *Argentina's export trade in meat products; (c) to review its existing grading systems; and (d) to develop and implement a new market-oriented organizational structure with far greater independence from the Government. - 44 - Wool Marketing 4.34 The wool processing sector is divided into two groups: (a) wool scouring (washing to remove natural grease and impurities); and (b) wool topping carding) and combing of fibers. The scouring industry currently washes around 80Z of the annual raw wool production prior to manufacture. Existing scouring capacity at 26 plants is sufficient to scour the entire greasy wool clip. However, much of the equipment needs upgrading. Unfortunately, due to regional incentive programs in Patagonia, several scouring plants north of the Colorado River are unable to compete, and wool is often transported to Patagonia from the Pampas.10 The wool topping industry operates 26 plants with over 600 combing machines and produces 21,000 tons per year. The regional preference schemes have had a similar effect on topping operations as they had on scouring operations. 4.35 The bulk of the wool clip is sold before shearing, with sales privately negotiated between the producer and exporter. The exporter usually makes advance payments before shearing when it is difficult for the farmer to make technical comparisons of wool quality. Of the 117,000 tons (greasy equivalent) exported in 1987/88, 482 was exported in scoured form, with 272 further processed into tops and yarn. The remaining 25Z was shipped to consumers in grease. In addition, 27,000 tons were processed for domestic consumption. 4.36 Unlike other major Southern Hemisphere competitors (e.g., Australia and New Zealand), Argentina has no public body involved in the wool industry and it does not belong to the International Wool Secretariat. The private sector therefore has open access to the wool clip, and local branches of international merchant houses dominate the export business. They also own large sheep properties and processing plants in Patagonia. The small- to medium-sized cooperative groups find it difficult to compete with these vertically-integrated operations and the oligopolies that exist in wool purchasing agencies. Wool sold through cooperatives only accounts for about 10% of the national clip, and further concentration within the industry is clearly underway. The Argentine Wool Federation, which represents about 50 coops, is dwarfed by these large private entities, five of which handle 70Z of Argentine wool exports (the top ten handle 852). The growth of second-tier coops operating solely in the financial interests of growers is therefore considered essential for more open competition. 4.37 In addition to macroeconomic constraints, the main factors that impede further development of the wool industry are: (a) the lack of credit which obliges small farmers to obtain high priced working capital from marketing intermediaries; (b) the concentration of the wool industry; 10/ The sheep industry in Patagonia (especially Chubut and Santa Cruz) flourished in the late 1960s and early 1970s due to tax exemptions provided to the wool processing industry under the Industrial Promotion Law. The subsequent decline in international wool prices devastated the sheep and wool industry. Signs of the collapse are still evident with excess processing capacity in selected areas of Pataaonia. - 45 - (c) stratified export taxes which favor domestic processing (domestic processing costs, in fact, favor the export of raw wool rather than processed product); and (d) regional incentive schemes favoring processing in Patagonia which seriously distort efficient production, processing and export of non-Patagonian wool. C. Horticulture 4.38 To date, Argentina's horticultural sector has been very insular in its thinking. Production has not kept pace with modern techniques and consequently there is considerable scope to increase productivity. The lack of an export focus among producers and processors has led to outmoded varieties, handling and processing techniques. However, this outlook could change quickly, as evidenced by the investment decisions currently being taken by large private entities (local and foreign). Small and medium producers, however, will still need investment credit. 4.39 Although Argentina has a comparative advantage to export fresh horticulture products, it must compete with Chile and Brazil, who have already established market niches and considerable expertise. Argentina's current horticulture situation does offer some interesting prospects for improvement: (a) Varietal Development. In apples. 48Z of production was processed by agroindustry in 1988, reflecting a serious problem of inappropriate varieties for fresh export; (b) Stability of Supply. The pear industry is expanding but the percentage of product canned or juiced by agroindustry has varied dramatically between 10Z and 39Z in the period 1978.86: stability in supply is needed to maintain market share; (c) Wine Grape Varieties. Grape growers must switch to appropriate fine wine varieties, and the industry must identify particular export as well as domestic market niches for seedless table grapes. This may require more flexible legislation to permit import of hybrid varieties; and (d) Citrus for Blending. In citrus, the domestic market shows signs of decline, while exports of fresh product and concentrate are increasing. The proportion of citrus processed is currently 26Z of the oranges, 40% of the grapefruit, 10% of the mandarins and 472 of the lemons. Scope exists for blending with lower quality citrus from other, especially nearby, countries such as Brazil. 4.40 There are over 60 firms that process horticultural products in -Argentina. Although processing facilities adequately service the current needs of the key areas in Neuqu6n, Rio Negro, Mendoza, and Entre Rios, there is considerable need for and interest in expanding and upgrading dehydration, drying, and concentrate facilities to meet future export needs. A recent survey by the Inter-American Institute for Agricultural Cooperation (IICA) indicated an investment credit demand of over US$100 million to improve the subsector's agroindustrial capacity. However, before embarking on a major investment program, a technical assistance - 46 - campaign will be needed for small- and medium-sized producers. Independent international technical engineering consultants would be required to discuss the latest developments and techniques in fresh fruit and vegetable harvesting, handling, cold storage and packing, and food processing. 4.41 As part of an improved horticulture marketing strategy, INTA should work with producer groups and trade associations on production technology. In addition, an Export Market Development Scheme should be set up to help finance market surveys, promotional campaigns, and even to partially finance INTA research in relevant areas such as development of new varieties. A necessary prerequisite would of course be a macroeconomic environment conducive to export. D. Forestry 4.42 Argentina is a net importer of forest products, most of which originate in Chile. The annual value of these imports is approximately US$100 million (422 sawnwood, 40Z paper and 18% pulp). Exports to neighboring countries are modest at US$29 million per year (58% pulp, 312 paper and 11% mechanical wood products). However, several shiploads of roundlogs, mostly eucalyptus, have recently been exported to Europe. This may represent a promising new direction for forestry exports, along with the potential to export greater quantities of chips. 4.43 In mechanical wood products there are 2,500 sawmills with a total installed capacity of 2.1 million m3 per year, 51 plywood plants (137,000 m3 per year), two fiberboard plants (110,000 m3 per year), and seven particle board plants (424,000 m3 per year). Utilization rates are low due to obsolete, poorly laid-out facilities. The percentage conversion varies from 33% in sammills using small diameter softwoods (30 cm) to 602 in sawmills using larger diameter hardwoods. There is a need to modernize and expand the industry. Modernization of treatment plants and kilns would improve current low quality levels of savnwood. Expansion is also required to meet the threefold increase in raw material supply expected from plantations over the next five years. 4.44 Information on secondary processing plants ( e.g., furniture, box making) is lacking. However, it is tentatively estimated that about 400 plants exist in this category. In this context, additional carton-making capacity would be needed if the horticultural subsector expands as estimated. 4.45 There are 21 pulpmills (capacity 790,000 tons with production of 650,000 tons) and 80 paper and carton plants (capacity 1.2 million tons with production of 0.9 million tons). Of the pulp mills, 661 operate a chemical process, 28% are chemo-mechanical, and 6Z are mechanical. However, the majority of mills are over ten years old and require new machinery. A US enterprise has expressed interest in setting up a large new pulp mill in Argentina. By contrast, the use of fuelwood and charcoal has been declining due to the availability of inexpensive natural gas. The tannin industry in Chaco, Formosa, Salta, and Misiones is in slow decline as well. 4.46 No separate organizations exist specifically to market wood products. Furthermore, existing demand forecasts are only tentative. However, modest assumptions point to an increase in demand from current - 47 - levels of 15 million m3 per year to about 40 million m3 per year by 2010. To prepare for this, the industry and the resource base will need to expand. Investment will be required in new machinery, and the area under plantations will have to increase by about 350,000 ha (40? approximately) over current levels. E. Fisheries 4.47 The domestic market absorbs about one-third (150,000 tons) of the fish caught in Argentine waters, and most freshwater fish are sold domestically. Annual per capita consumption is low at about 5 kg, with hake making up about 802 of domestic sales. All coastal fleet catches and fine species harvested by the ocean-going fleet pass through the primary sales point of the National Consolidated Fish Market in Mar del Plata. This concentration of sales, combined with strong union activities and powerful local industries in Mar del Plata, partly explains the relatively high price of fish in the domestic market and its resultant low level of consumption. Most fresh sales occur in urban areas due to the perishability of the product. However, fresh frozen fish is gaining acceptance through supermarket promotions in the city of Buenos Aires. 4.48 The growth and development of the Argentine fishing subsector is closely linked to the export market. In 1987, fish exports were valued at US$267 million and went to over 50 countries. However, 70% by volume and 75% by value were destined for only seven countries (Spain, the US, Italy, Japan, Brazil, France and West Germany). The most important export category is frozen fish (whole, fillets or blocks) representing 78? by weight and 70? by value. Hake was the main species exported, representing 50Z by weight and value of exports; frozen squid was second at 141 by weight and value. 4.49 The fish processing industry is primarily based on the export of frozen products, with 160 freezing plants with a combined capacity of about 0.8 million tons per year. There are also 45 salted-fish plants, 14 canning factories, and 14 fishmeal factories which process residues from the frozen fish factories. The total installed capacity of the latter group is about 1.0 million tons per year, but it currently operates at about one-third that capacity. Most plants are based in ports along the coast of Buenos Aires Province and they are vertically integrated with fishing boat operations and export outlets. 4.50 The fish processing sector is currently developing in two distinct wayst (a) concentration into large holding companies; and (b) increasing foreign management and ownership of bankrupt plants. A further indicator of the dynamism of the fish processing industry is the effort by entrepreneurs to diversify into higher value-added products, e.g., dry squid and surimi (processed product of mixed species) for Japan. However, the supply of investment credit to purchase and/or rehabilitate the aging *fishing fleet will be the key constraint to further development of the subsector. June 30, 1989 APPENDIX 1 Page 1 of 5 ARGENTINA AGRICULTURAL SECTOR REVIEW A Historical Review of Agricultural Development in Argentina 1 Before 1600 1. Argentina's two main regions (Pampas and non-Pampas) have developed quite differently since pre-Colombian times. In the northeast and northwest the original populations were sedentary, cultured and self- sustaining through the cultivation of over 20 species of plants. Their orientation was towards Perd, and the Spanish were able to dominate them relatively quickly, thereby also securing a source of labor. In the Pampas, on the other hand, the indigenous population was nomadic and hostile, and prior to 1600 the Spanish congregated around the port of Buenos Aires due to a lack of labor to exploit the fertile Pampas. 1600 to 1750 2. Between 1600 and 1750, crop production dominated in the northern areas and Jesuit missions flourished. .,n the early part of the 17th century the export of cattle hides began, based on wild cattle which were hunted down in 'roundups" in the Pampas. Some ranches also began to develop around the port of Buenos Aires, mainly to produce mules and horses. It was during this period that the Treaty of Utrecht (1713) granted England exclusive rights over the slave trade for a period of thirty years, an important factor in the evolution of Argentina's labor- short economy. 1750 to 1810 3. The spread of the cattle roundup progressively depleted the wild cattle herd and increased contact with the indigenous population. As a result, from 1750-1810 the large colonial estancias flourished (an estancia was a unit of 2.6 km by 7.8 km fronting on a water source). As these cstancias developed, so did the power of their owners. This not only led to conflict with city merchants but also to increasing surpluses of meat. 1810 to 1850 4. This period witnessed the development of the beef salting trade (using salt shipped from Patagonia), and the opening up of new trading opportunities after the May 1810 Revolution against Spain. The main 1/ Adapted from "Evolution of the Argentine Agriculture Sector and ProspectsO by Horacio Gilberti published in the proceedings of the XXth International Conference of Agricultural Economists, held in Buenos Aires, August 1988 (pp 1-115). APPENDIX 1 Page 2 of 5 markets for salted beef were the slave plantations of Brazil and Cuba. Beef salting made ranchers dependent on an industrial intermediary but it also led to the development of the cattle fattener/raiser (invernador) who provided both winter pasture as well as feed to replace weight lost by cattle after long drives to the port of Buenos Aires. 5. During this period, the wool industry began to develop and imports of fine-wool merinos increased. However, this period also witnessed the first of many pendulum swings in the Argentine agricultural economy. Although the opening of foreign markets and the industrial revolution in Europe meant good prospects for hides and other by-products, it also meant that manufactured goods could be imported more cheaply than locally produced goods. Furthermore, increased shipping traffic led to the import of cheap flour, wine, rice and cotton and the eventual collapse of these local industries. To compound these problems, the decline of the Jesuit missions and the Brazilian invasions of Misiones and Corrientes in 1817-18 decimated what was previously the most populated area in the country. 1850 to 1900 6. The pendulum swung back after 1850 when sheep really began to dominate the scene. This period of domestic political calm and increasing demand from Europe stimulated expansion of the merino sheep population in the Pampas, and the rural human population also began to increase. As the sheep spread so the cattlemen moved out to the periphery of the Pampas causing increased contact with indigenous peoples. This led to the 1879 military expedition to Oremovel the indigenous problem from north of the Rio Negro. 7. The fortunes of the beef industry also turned around dramatically with the development of refrigeration and the export of frozen beef. Although the first successful shipment of beef to Europe occurred in 1877, it was not until 1882 that the first meat export plant was built. This stimulated the expansion of cattle ranches, the fencing of the Pampas into squares and development of groundwater supplies using wells and windmills. The railroad began to push out the agricultural frontier. The result was the creation of an agricultural social structure comprising upper class ranchers, low class day-laborers and middle class sheep breeders and immigrants with new cropping techniques. 8. New lands in Santa Fd, Entre Rios and C6rdoba were acquired by "colonizing companies" and contracted to European immigrants who were initially provided with the means to come to Argentina by these companies. The advancing railroads spread new colonies, and protective tariffs on imported grain and flour favored crop production. As a result, by the late 1800s, Argentina was exporting about 3 million tons of grain, or two-thirds of the global trade at the time. This expansion in the grain area occurred mostly on medium-sized farms (chaceros) and, since there was a serious labor constraint, mechanization was common. Grain had therefore replaced .meat as Argentina's main export and its production was in the hands of immigrant farmers grouped into colonies. 9. As exports increased s3 did the import of bulky products (coal, rails and construction materials) and manufactured goods, leading to the solidification of Buenos Aires as the main port and focal point of the APPENDIX 1 Page 3 of 5 railroad network. Draught conditions on the Parant River restricted the use of these ports to smaller ships. 10. The areas outside the Pampas did not participate in this export boom but rather supplied the Pampas and Buenos Aires with such commodities as wine and sugar, after they were connected to the railroad. This in turn led to a modernization of their regional agroindustrial facilities. In addition, Patagonia gradually developed as a major sheep area with merinos which were being squeezed out of the Pampas by the resurgence in beef cattle and development of grain production. This Patagonian development had the added political benefit of colonizing a disputed zone with Chile. 1900 to 1920 11. This period saw the rapid development of the meat packing plants and innovations in livestock raising to meet the needs of these plants and their key market, the UK. In order to improve pastures, ranchers would rent fields to immigrants typically for a three-year rotation of flax, wheat and finally alfalfa which provided an improved cattle pasture at the end of the cycle to the rancher. The 1914 census noted that 70Z of the 60,000 Pampean small tenant farmers worked under such contracts. However, the resultant poor living conditions, combined with the union experience of the large group of foreign migrant workers from Europe, led to social upheaval which culminated in widespread demonstrations and loss of life during the so-called "Tragic Week' of 1919. 12. The beginning of the twentieth century was still a period of extensive farming which attempted to maximize the use of machinery. The public sector began to build experimental stations, five in 1911. The railroad was expanding and brought cattle directly to the meat plants. As a result, the fattener/raiser moved to the northwest of Buenos Aires Province and to the northeast of La Pampa Province where pasture production was better suited to alfalfa. As a result, the traditional fattening areas began to grow grain. Between 1900 and 1920, the grain area rose from 5.6 to 13 million ha and the fodder area from 1.6 to 8.5 million ha. From this time onwards, however, the focus of grain farmers would be primarily on increasing productivity. 13. During World War I, dairy product imports were interrupted and a local industry developed around dairy cooperatives, particularly in Santa F6 and C6rdoba. Beef exports grew to feed the allied troops in Europe but wool exports remained unchanged. Grain exports grew for the same reason and ports eventually were developed on the ParanA River. However, large ships still had to be topped up in Bahia Blanca which had deepwater facilities. Buenos Aires continued to be the export point for beef and also the key port of entry for imports. 1920 to 1940 .14. After 1920, meat packers continued to favor the major fattener/raisers since this simplified purchasing arrangements and exports. However, a split between the large cattlemen and the small farmer community was brought into the open when the UK signed trade agreements with its colonies during the Depression of the early 1930s, which left only modest APPENDIX 1 Page 4 of 5 export quotas to Argentina. The packers in turn favored the larger fatteners to supply these limited quotas. 15. By the late 1930s/early 1940s, grain production was technologically advanced by standards of the time, and the 1930s world Depression began to stimulate domestic production of oilseeds to replace imported olive oil. Agriculture in the non-Pampean areas grew much faster than in the Pampas after 1930 because of the national need to substitute imports. Cotton production by immigrant farmers in Chaco developed rapidly, and wine and rice production showed steady growth. 1940 to 1975 16. By the beginning of World War II, Argentina had recovered as an agricultural exporter. It was first worldwide in maize, beef, oats, barley and flax; number two in wheat, casein, and rye; number three in lamb; and number twelve in GNP per capita. However, during the period 1940-75 the pendulum swung back and stagnation set in on the Pampas. Grain exports fell from previous heights of 10 million tons to 2-3 million tons, resulting from government intervention. Diversification increased (for example, Santa F# from wheat into dairying). The number of landless renters declined and the political change in 1955 produced the "Agrarian Transformation" which "induced" the sharecropper to buy land and the large landowner to sell. 17. Although mechanization continued through this period, INTA studies show that between 1940 and 1965 Argentine grain productivity only grew by about 10?, compared to 40% in Australia and 68% in the US. Argentina was losing the technological race. By the end of this period, however, INTA began working on improved seed varieties and technological packages for soybeans. 18. The cattle industry in this period was affected by the switch to superfreezing of meat through medium-sized processing plants. This broke the traditional connection between the meat packer and the large fattener/ raiser. There was a movement to leaner beef production but the impact of technological advances was largely limited to medium/small ranches, while productivity on the large ranches stagnated. This stagnation in cattle productivity cut exports from 50Z of output in 1921 to about 25Z in the 1960s and 1970s and to less than 102 today. An important factor in this is the inherently high domestic demand for beef (currently 70 kg per capita, down from a high of 100 kg in 1955). Two subsequent events also depressed meat exports. The UK cut off imports of Argentine beef due to FMD in 1968, and the EC established import quotas in 1974. Over this same period (1940-75), dairying grew rapidly using share-milkers and helped by improved refrigeration in rural areas. 19. The period from 1945-1975 was also one without a clear agricultural sector strategy. This led to stagnation in the Pampas while non-Pampean areas, which produced products for import substitution, grew by about 702. APPENDIX 1 Page 5 of 5 1975 to the Present 20. Crops currently dominate livestock in importance, especially in exports. Cattle, sheep, fruits, vegetable& and forestry are still not well developed, although perennial crops are important in irrigated areas in the non-Pampean zone. Soybeans have increased substantially, primarily as a second crop to wheat. This has raised farm income, but has also led to problems of soil erosion as more short-term contract farming has developed in grain areas. Despite the decline in real international prices, low cost technical packages and improved seed varieties have allowed production to increase. There was a notable increase in operating costs, since technical packages included hybrid seeds, machinery and contractor services. Despite this, the use of fertilizer remained low. However, farmers had little capital of their own and consequently either sold cattle or entered into barter arrangements with input suppliers at high financial costs to meet their operating costs. In the process, farming became a business with greater interdependence between the farm sector and other sectors. Furthermore, because the Argentine economy has become increasingly dollarized, cropping and investment decisions nowr depend more on exchange rate levels than on production costs and expectations about yield. Summary 21. Argentina has witnessed major changes and crises in agriculture over its history. However, the pendulum has swung back after each crisis, demonstrating the ability of the sector to adjust. The current crisis is no different. With its abundant natural resources, large economies of scale and educated population, options for the sector abound. However, more so today than probably at any time in the past, agriculture's future is controlled by domestic factors outside the control of the sector itself. Although the external environment is improving, major changes in domestic policies are needed to create confidence at the farm level to reinvest and diversify. If this confidence can be developed, Argentina could again dominate world markets in a range of crop and livestock products. Argentina's future is to a great extent in its own hands. Appendix 2 Page 1 of 1 ARGENTINA AGRICULTURAL SECTCR REVIEW ABBREVIATIONS AACREA Argentine Association of Regional Agricultural Experimentation Groups ACA Association of Argentine Cooperatives BNA Bank of the Argentine Nation CAFI Apple and Pear Exporters' Association CIAT International Tropical Agriculture Center (Colombia) CICY Veterinary Disease Center CIEF Forestry Research and Experience Center CIMYT International Center to Improve Maize and Wheat (Mexico) CITEMA Wood Technology and Research Center CONASA National Animal Health Comission CONINAGRO Confederation of Agricultural Cooperatives CRA Argentine Rural Confederation CREA Regional Agricultural Experimentation Group BC European Community PAK Argentine Agrarian Federation FACA Argentine Federation of Agricultural Cooperatives FAolVORLD BANKICP Food and Agriculture Organization/World Bank Investment Center FMD Foot and Mouth Disease FOB Free on Board IADA Argentine Arid Lands Institute IADIZA Argentine Arid Lands Research Institute ICRISAT International Crops Research Institute for Semi-Arid Tropics (India) IDB Inter-American Development Bank IFOXA National Forestry Institute IICK Inter-American Institute for Agricultural Cooperation INIDEP National Fisheries Research and Development Institute INTA National Institute for Agricultural Technology - JNC National Meat Board JNG National Grain Board MEC Ministry of Economy PAN National Food Program PRONAGRO National Farm Plan for 1984-87 SAGyP Secretariat of Agriculture, Livestock, and Fisheries SELAB National Laboratory Service SELSA Animal Disease Control Field Service SENASA National Animal Health Service SIPA Livestock and Meat Sanitary Inspection Service SRA Argentine Rural Society 島。勝1。 G R A P B I C (3 Pages) 州 ,ULYI，個9 勵BRO才1679 劉 jULyl，日， ARGENTINA AGRICULTURAL SECTOR Other Crops PROVINCE BOUNDARIES INTERNATIONAL BOUND4 FRUITS INDUSTRý CROPS u UJUV\ SALT^ C! CH. Irr < f P 10 ~N >jec>" u~ 4 t Sjq -, LUIS i %UASI r~ l BUENOS MPES i BUENOS Allms M~ L^ PAI^ i 4 RO NEGRO RIO NEGRO CITRUS TOBACC CHUBUT STONE FRUIT CHUBUT COTTor APPLES I PEARS SUGAR CRU GRAPES SANT^ CRU ln~ DEL 11~ DEL U EGO FUEGO IBRD) 21034 BO l I A c. PARAGUAY B R A Z I L. SALTA Clor In FORMOSA illernardo de T0CLIMANI Inge RESISTENCI .--. Posados NES so aodel Ert~r i RRIE s C TAMARC.A [ LA RIOJ 301 0 UÃNN '1 MENDOZA S s SANilla ons. st ciön San Nic la, URUGUAY Meccedes P. SAN RAFAEL CHILlE ARGENTIN a l PLA SLANC vEUQUJEN vqe 40. ÅDMAARGENTINA AGRICULTURE SECTOR Esquol Tel R W S' REVIEW RAWSON Area of the Pampa Major roads - s Ports Rivers COMODORO Prn Bound RIVADAVIA Foia Roy O GALLEGOS C« n*n < 1O ,MImot noneoamm ~ inc Fr Cr KILOMETERS 0 200 400 600 800 Of sny 9~w rly lå