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Argentina braces for competition as Brazil mulls opening up duty-free wheat imports

London — Argentina is bracing itself for competition in the Brazilian wheat market, where it currently dominates with a 80-90% market share, as the latter considers allowing 750,000 mt of tariff-free wheat imports from outside of the Mercosur trade bloc that includes Argentina, Brazil, Paraguay, Uruguay and Venezuela.

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Brazil had decided to buy up to 750,000 mt of duty-free wheat from outside Mercosur in 1995, but could not implement it. Talks of the measure have, however, resurfaced after Brazilian president Jair Bolsonaro's visit to the US in March.

The Mercosur bloc's main purpose is the free movement of goods, services and production factors.

According to the US Department of Agriculture, closer relations between Brazil and the US after Bolsonaro's election in October facilitated the announcement of the tariff rate quota during his visit to Washington.

"The TRQ (tariff rate quota) will be open to all exporting countries, but it appears that US wheat exported through the Gulf of Mexico may be particularly competitive," the USDA said in a report in April.

This subject is under discussion, Rubens Barbosa, president of Brazilian wheat industry association Abitrigo, told S&P Global Platts, adding that it may be permanent and for all countries other than Mercosur. "We believe that the regulation will be [implemented] in the next [few] months."

The volume of 750,000 mt accounts for around 11% of Brazil's total wheat imports. In the 2017-18 marketing year (October-September), Brazil imported 6.49 million mt of wheat, according to Abitrigo.

Imports for 2018-19 are forecast at 7 million mt, while 2019-20 imports are forecast at 6.7 million mt, according to the USDA.

Argentina is the largest exporter of wheat to Brazil, supplying 6 million-8 million mt/year and accounting for 80-90% of Brazil's total wheat imports. These imports are duty free as part of the Mercosur trade agreement.

OTHER MARKETS

Argentina will be looking to sell its surplus wheat in Europe, the Middle East or East Asia once Brazil implements the new duty-free quota, analysts told Platts.

If Brazil implements the duty free quota for other countries, it is likely that the US, the largest exporter of wheat to Brazil outside of Mercosur, will benefit the most, analysts said.

The participation of the US in the duty-free quota tender will also make wheat prices more competitive in Brazil, which does not augur well for the Mercosur partners, they said.

"Yes, it is a direct loss of business with Argentina, if Brazil lives up to the agreement now," Arlan Suderman chief commodities economist at INTL FCStone Financial, told Platts.

For Argentina, 750,000 mt would be around 10-12.5% of its total wheat exports to Brazil.

"Opening the TRQ would give US wheat the chance to compete on the same level as Argentine wheat and wheat from other origins outside the Mercosur agreement for the 750,000 mt each year," Steve Mercer, vice president of commissions for US Wheat Associates, told Platts.

ARGENTINA UNHAPPY

Brazil's attempt to open up its wheat imports to countries outside of Mercosur has not gone down well in Argentina.

"Brazil has been importing duty-free from countries outside Mercosur, but this is the first time they have opened such a large volume," David M. Hughes, president of Argentinian wheat industry association Argentrigo, told Platts.

Andres R. Alcaraz, corporate communications & public affair manager for Argentina's CEC grains export companies chamber CIARA told Platts: "...The Brazilian measure constitutes a prejudice and a negative precedent for the operation of Mercosur, as it does not know its consultation mechanisms."

In the 2017-18 marketing year, the US market share of Brazil's wheat imports was 2.9%, while Argentina's was 90%, according to the USDA's April report.

The market dynamics have shifted somewhat in 2018-19, with Argentina exporting a larger volume of its crop to other countries and ending February with the lowest wheat stocks for that month in 16 years, the USDA quoted Argentina's Rosario Board of Trade as saying.

Argentina's market share in in the first half of marketing year 2018-19 in Brazil is down slightly at 86%.

-- Shilpa Samant, shilpa.samant@spglobal.com

-- Edited by Jonathan Fox, newsdesk@spglobal.com

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