Rice in the MERCOSUR: Present and Future

Alvaro Durand-Morat, Fundación PROARROZ, Argentina.

Many specialists agree that the MERCOSUR[1] region holds great potential to expand rice production and improve its net-exporting position, and hence enhance the food security situation in the future. In fact, MERCOSUR more than tripled its exports over the last decade while global trade expanded only 25 percent, resulting in a significant three-fold increase in its global market share.

But what are the fundamental characteristics of the MERCOSUR rice sector, the main challenges, and possible roads to achieve the expansion in production?

Brazil is by far the largest rice producer and consumer in the region (roughly 82 percent and 95 percent of the total for the region, respectively). Brazil has historically been a net importer of rice except for two surplus events in 2008/09 and 2010/11, in which it became the 10^th largest net exporter in the world with a volume of 700 tmt[2].

Rice is a matter of food security in Brazil, which has maintained a policy of self sufficiency for decades. The prime policy over the last years has been the Subsidy Auction Program (Prêmio para Escoamento do Produto, PEP), which guarantees a minimum support price (MSP) for rice conditional on the government dictating the destination of the auctioned output[3]. Despite the potential stabilizing effect of a MSP policy, the minimum guaranteed price has consistently been below the production cost over the last five years, and even in some instances below the market price (e.g., 2007/08 through 2009/10). The situation continues into the current 2011/12 season, which raises concerns about the resilience of rice production in Brazil after more than 5 years of running economic losses and the improving prospects of competing crops. The rising cost of rice production observed over the last several years is only worsening with the depreciation of the Real vis-à-vis the U.S. Dollar as observed in the first half of 2012.       

Uruguay and, to a lesser extent, Argentina and Paraguay, have clear net-exporting positions, with over 90 percent of the production being exported from Uruguay, and roughly 2/3 from the other two. Clearly the well-being of the rice sectors in these countries depends on their competitiveness in the international market.

For logistical and political reasons[4], Brazil has historically attracted the bulk of regional exports. Commercial relationships today go far beyond ordinary trade, also involving investments and joint ventures in primary production as well as milling across the region, which makes Brazil the most reliable market for other MERCOSUR members.

The sources of competitiveness of the rice sector vary across the region.

The Uruguayan rice industry has made quality one of its most salient virtues. From the genetics of the varieties used, to the high level of production technology, to state of the art post-harvest and milling facilities, Uruguay is able to deliver high quality long grain rice that carries a premium in the market even over U.S. rice, the traditional benchmark in rice quality. On the cost side, its competitiveness is a result of primarily high productivity, strong public investment in infrastructure (all rice area is irrigated with electric pumps, a cost-efficient, environmentally-friendly source of energy), and a low cost (labor-saving, capital-intensive) milling industry.

However, of all MERCOSUR countries, Uruguay is the most constrained to expand production. Rice land is in short supply, even shrinking in the face of competition from other more profitable crops. The high efficiency in production already achieved makes it hard to expect significant productivity gains without groundbreaking genetic improvements.

Argentina and Paraguay arguably have higher potentials to sustain rice sector growth because of ample land and water endowments. Pushed by rising costs and more profitable competing crops, the geographic distribution of rice production in Argentina is shifting north and east from the traditional area in search for cheaper resources (both land and water). The potential downside of this transformation is that, without appropriate investment in transport infrastructure, the logistical cost of exports may more than offset the efficiency gains in production. Arguably the greatest limitation faced by the Argentinean rice sector in the short run is the high level of inflation that results in a significant appreciation of the real exchange rate. Furthermore, the government imposes export tariffs on rice varying from 5 percent to 10 percent, and has stringent regulations on the declaration of foreign currency earnings, all of which add to the cost of exports and undermines competitiveness. 

As most long-term projections suggest[5], MERCOSUR remains a promising region to expand rice production. Short-term challenges relate primarily to macroeconomic policies in the region. The rice sector has historically shown high resiliency and adaptability to changing macroeconomic environments and this period will likely not be the exception. Stakeholders must continue working towards increasing the efficiency and sustainability in the use of the resources, investing in R&D and infrastructure, and pursuing more transparent policy environments in which enterprises and commerce can flourish.