Consumption of Wheat&Rice Unaffected by Ecuador’s Economic Woes March 21, 2017

Highlights

Despite Ecuador’s economic slowdown, consumption of wheat and rice will increase modestly in 2017/18 owing to population growth. Ecuador is expected to import a record level of wheat. Rice imports will decrease as domestic production recovers from low yields in 2016/17. Yellow corn production in 2017/18 is expected to decrease due to phytosanitary issues and uncertainties in domestic agricultural policy. Feed manufactures are expected to continue the use of corn substitutes in animal diets.

Executive Summary

FAS Quito forecasts Ecuador’s wheat production in marketing year (MY) 2017/18 (July-June) to reach 4,000 metric tons (MT), the same level of production as in MY 2016/17. Ecuador is an insignificant producer of wheat, dependent almost entirely on foreign imports. We forecast Ecuador’s wheat imports in MY 2017/18 at a record 1,005,000 MT, up 30,000 MT or three percent compared to the MY 2016/17 estimate of 975,000 metric tons. We attribute the increase to sustained internal demand despite Ecuador’s economic contraction. This estimate also assumes that demand by the country’s animal feed industry will slightly increase. FAS Quito forecasts Ecuador’s corn production in MY 2017/18 (May-April) at 820,000 MT, down from the MY 2016/17 estimate of 960,000 MT. We attribute the downward trend in production to low world prices, phytosanitary issues and the uncertainties surrounding domestic agricultural policies, factors that are discouraging farmers from planting. We forecast Ecuador’s corn imports in MY 2017/18 at 275,000 MT, up some 125,000 MT compared to the MY 2016/17 estimate of 150,000 MT.

FAS Quito forecasts Ecuador’s milled rice production in MY 2017/18 (April-March) at 690,000 MT, up 30,000 MT or 4.5 percent compared to the MY 2016/17 revised estimate of 660,000 metric tons. We attribute this level of production to a recovery in area harvested and yield following MY 2016/17, a year with lower productivity and a decrease in harvested areas. The forecast assumes that the current heavy rainy season associated with the 2017 La Niña Modoki phenomena not jeopardizing grain quality and harvesting activities. The peak of this year’s first harvest will likely occur in May, and yields are expected to be high. In the context of increased domestic production for MY 2017/18, FAS Quito forecasts that total imports will decline in MY 2017/18. At FAS Quito we estimate exports of rice to Ecuador from neighboring countries at 130,000 MT in MY 2016/17.

Commodities:

Wheat

Production

FAS Quito forecasts Ecuador’s wheat production in marketing year (MY) 2017/18 (July-June) to reach 4,000 metric tons (MT), the same level of production as in MY 2016/17. Ecuador is an insignificant producer of wheat, dependent almost entirely on foreign imports. Ecuador’s domestic wheat production has declined steeply since the 1970s. Throughout the 1990s, the country still managed to produce some 28,000 MT of wheat per year on some 30,000 hectares. Production has fallen since then due to a scarcity of suitable land for cultivation, soil quality problems, and reduced yields.

The government’s subsidization of wheat imports during the 1970s’ inflationary oil boom years also resulted in the sharp drop in the consumption of domestic wheat in favor of more affordable imports. FAS Quito estimates that close to 5,000 hectares are currently in wheat production. FAS Quito forecasts Ecuador’s wheat yields in MY 2017/18 at 0.8 MT/hectare. Government incentives in place since 2008 aimed at increasing cultivation, namely through the provision of subsidized fertilizers, government-backed loans, and improved seed varieties, have not yielded the expected results. Central and northern highland farmers have opted instead to switch to more profitable crops such as quinoa.

FAS Quito estimates that of the 4,000 MT of domestically produced wheat in MY 2016/17 only 3,000 MT makes its way to millers. Nearly half of the local production is consumed in small towns near the growing areas. Millers question the sustainability of government efforts to increase production given the market’s size and bakers’ preferences for high-quality flour. In response, in 2015 Ecuador’s Association of Wheat Millers (ASEMOL) commenced promoting the development of seed types more suitable for Ecuadorian soils. ASEMOL has invested to date about $120,000. Results from the initiative are expected sometime in 2017.

Consumption:

FAS Quito forecasts Ecuador’s wheat consumption in MY 2017/18 at 1,010,000 MT, increasing 40,000 MT or four percent compared to the MY 2016/17 revised estimate of 970,000 metric tons. We attribute increased consumption in MY 2017/18 to population growth and stable levels of wheat consumption for human and animal diets. There exists potential for continued slow growth through 2017. Ecuador is experiencing an economic slowdown attributed in part to lower oil revenues (its main export), combined with a strengthening of the U.S. dollar. However, consumers have not decreased consumption of bread rolls (an Ecuadorian staple priced at $0.12 since 2011) as a result of reduced purchasing power in the Ecuadorian population. Ecuador utilizes the U.S. dollar as its legal tender and lacks major financial reserves to alleviate externals shocks. FAS Quito estimates the quantity of per capita wheat consumption in MY 2016/17 at 40 kilograms/annum (Ecuador has a population of ~16.1 million – Central Intelligence Agency, July 2016 estimate). We estimate FSI consumption at 645,000 metric tons in MY 2016/17.

Ecuador’s MY 2017/18 feed wheat use is forecast at 345,000 MT, of which 200,000 MT will be absorbed by shrimp farmers seeking to boost production to meet growing global shrimp demand. Ecuador as one of the world’s largest shrimp producers (exports of $2.6 billion in calendar year 2016) has continued to benefit from the 2012/13 outbreak of early mortality syndrome (EMS – necrotizing hepatopancreatitis) in Southeast Asia. Ecuador’s poultry and pork producers are also utilizing feed wheat.

Trade

FAS Quito forecasts Ecuador’s wheat imports in MY 2017/18 at a record 1,005,000 MT, up 30,000 MT or three percent compared to the MY 2016/17 revised estimate of 975,000 metric tons. This estimate also assumes that demand by the country’s animal feed industry will slightly increase.

Although Ecuador utilizes imported wheat primarily in bread and pasta manufacturing, there has been an upswing recently to incorporate more wheat into animal feeds. We estimate that 325,000 MT of wheat made its way into animal feed in MY 2016/17. At FAS Quito, we understand that imports of hard wheat are greater than those of soft wheat. In calendar year (CY) 2015, the ratio of hard to soft wheat imports was 1.45 to one, down from 1.77 in CY 2015. Import market share of U.S.-origin wheat in CY 2016 dropped to 31 percent, down from 37 percent in 2015. U.S. import market share has remained stable due to increased demand by Ecuador’s animal feed industry, as well as from the adoption of new technologies that allow a better utilization of U.S. wheat in different flour blends.

Policy

Ecuador promotes a policy of self-sufficiency in wheat, but production levels have not yet risen to meet demand. On December 23, 2016, Ecuador’s Foreign Trade Committee passed the extension of the current tariff and duty exemption for wheat, wheat semolina, and wheat flour imports from all origins (including the United States). Wheat and wheat products benefitting from the resolution include harmonized tariff system (HS) codes 1001.19.00.00, 1001.99.10.00, 1101.00.00.00, and 1103.11.00.00. COMEX Resolution 040-2016 states that Ecuador will extend the application of the current zero percent ad valorem exemption and suspend the application of the Andean Price Band (variable levy) until December 31, 2019. This is the first time that a three-year tariff suspension has been granted, as previous extensions covered a maximum two-year period. Ecuador maintains bilateral trade agreements with Peru and Chile, as well as regional trade agreements with the Latin American Integration Association (ALADI) and the European Union. In 2004, Ecuador reached a tariff liberalization agreement with the Southern Common Market (MERCOSUR) and started implementing the agreement in April 2005. Wheat benefits from special treatment within MERCOSUR. Tariff preferences are granted on the total duty, which is comprised of the ad valorem (basic) duty plus the Andean Price Band System’s (APBS) variable levy. In 2014, Ecuador concluded trade liberalization agreement negotiations with the European Union (EU). The Agreement entered into effect on January 2, 2017. Tariffs under the APBS will be progressively eliminated. The elimination will be carried out in six equal stages, beginning on the date the agreement entered into force.

Corn

It remains to be seen if Ecuadorian corn consumers will continue to pay significantly higher prices for domestically-produced corn as opposed to switching to substitutes, which they are already starting to do. The government’s official price for corn delivered in March 2017 is set at nearly $329/metric ton, well above the world price which has fluctuated in the $150/metric ton range over the past few months.FAS Quito forecasts Ecuador’s corn production in MY 2017/18 at 820,000 MT, down from the MY 2016/17 revised estimate of 960,000 metric tons. We attribute the downward trend in production to decreased planted area as farmers face uncertainty about the next Government of Ecuador’s policies with respect to corn. A new government is due to take power at the end of May 2017.

Production

FAS Quito estimates yields of 3.3 MT/hectare in MY 2016/17. We forecast a lower yield of 2.98 MT/hectare for MY 2017/18. Corn yields have decreased following a peak in MY 2015/16 triggered by the expansion of higher-yield seeds and improved agricultural practices. The emergence of several phytosanitary issues will likely contribute to this yield decline through MY 2017/18.

Consumption

FAS Quito forecasts Ecuador’s total corn consumption at 1,115,000 MT in MY 2017/18, down year-to-year from the MY 2016/17 revised estimate of 1,125,000 MT. We forecast MY 2017/18 total corn consumption slightly down one percent compared to the previous marketing year. We attribute the overall decline in consumption in MY 2017/18 to increasing inclusion of wheat in animal diets as a corn substitute.

FAS Quito estimates, however, that feed consumption will increase slightly in MY 2017/18 in response to population growth domestically and increasing exports of shrimp to foreign destinations. Total wheat and corn feed use combined is forecast to increase slightly from MY 2016/17 to MY 2017/18. In addition to wheat, animal feed producers are increasingly experimenting and using other corn alternatives such as wheat and rice byproducts available domestically and imported distiller grains. FAS Quito sources have indicated that feed producers do not rely as much as in the past on corn as an irreplaceable feed ingredient. FAS Quito estimates that 75 percent of local feed production is utilized by the national poultry industry; 10 percent in turn is absorbed by the aquaculture sector (mainly shrimp farmers) and 15 percent taken up by other livestock production (primarily pork). FAS Quito estimates that FSI consumption will remain flat in MY 2017/18. As a result, total corn consumption will decrease in MY 2017/18.

Ecuador’s corn consumption is dependent on the demands of the animal feed sector, along with the availability of lower-priced corn substitutes. The poultry sector is expected to experience modest growth in 2017. Per capita consumption of poultry meat is estimated at 35 kilograms/annum. FAS/Quito estimates that in 2016, the poultry flock reached 258 million birds, up 6 million from 2015 levels. The national flock is composed of 12 million egg layers and 246 million broilers.

Trade

FAS Quito forecasts Ecuador’s corn imports in MY 2017/18 at 275,000 MT, up some 125,000 MT compared to the MY 2016/17’s estimate of 150,000 metric tons. Persistent low corn prices in the world market continue to discourage users and producers from taking advantage of domestic import-substitution policies. In the past, imports filled about half of Ecuador’s corn needs. The country imported about 77,000 MT of corn in CY 2016, of which 72,000 MT came from Argentina. Corn exports from Argentina come to Ecuador by sea through the Panama Canal. Ships are usually loaded at the ports of San Lorenzo or Rosario. The shipping time from Argentine to Ecuadorian ports is approximately 18 days. Attempts to cross Cape Horn have not occurred in recent years. Shipping rates are usually more competitive for Argentina that out of the gulf. As an example, $30.00 per MT from the port of New Orleans in January 2017, compared to $20.50 per MT from the de port of San Lorenzo in December 2016.

Ecuador is a minor exporter of corn, primarily shipping to neighboring Colombia white and yellow corn for human consumption. With farmers receiving higher than normal prices on the domestic market, there is little incentive for them to shift production to exports.

Policy

White and yellow corn imports are assessed a 15 percent ad valorem duty (based on the CIF value), plus the APBS variable levy. The Andean Community set floor and ceiling prices for yellow corn are currently at $274/MT and $334/MT, respectively. The variable levy for corn remains at 30 percent; foreign corn faces import duties of 45 percent. Upon accession to the World Trade Organization (WTO), Ecuador bound its tariffs (including the additional APBS levy) for corn at 45 percent. Ecuador also maintains a worldwide corn tariff-rate quota (TRQ) of 19,600 MT at a 25 percent tariff rate. This TRQ normally fills whenever international corn prices drop, and the APBS increases duties beyond 25 percent (i.e., 15 percent ad valorem plus a variable levy of over 10 percent).

Commodities

Rice, Milled

Production

FAS Quito forecasts Ecuador’s milled rice production in MY 2017/18 at 690,000 MT, up 30,000 MT or 4.5 percent compared to the MY 2016/17 revised estimate of 660,000 metric tons. We attribute this level of production to recovery in area harvested and yield following MY 2016/17, a year with lower productivity and a decrease in harvested areas. The forecast assumes that the current heavy rainy season associated with the 2017 La Niña Modoki phenomena not jeopardizing grain quality and harvesting activities.

Ecuadorian farmers have increased area planted/harvested. At the same time, phytosanitary problems, such as infestations of apple snails first introduced in 2010, continue to reduce yields. Farmers have been reluctant to leaving the fields fallow. The availability of improved rice varieties encourages farmers to crop more than two harvests per year in fields under irrigation. It is common to see rice fields at different stages of development all year round in Ecuador’s lowlands. The peak of this year’s first harvest will likely occur in May and yields are expected to be high. An extended rainy season might jeopardize quality. Approximately 45 percent of Ecuador’s rice production is harvested between April and June.

Rice production is concentrated in the coastal lowlands. This area floods during the November-April rainy season, but remains humid throughout the rest of the year. Production varies with rainfall, with the larger (main) harvest occurring towards the end of the rainy season (i.e., May-June). Only a third of the acreage is planted during the summer months, and limited only by access to irrigation. While large-scale farmers can afford expensive irrigation and equipment, 75 percent of Ecuador’s poorer rice farmers (five hectares or less) cannot afford these costs.

Consumption

Rice is a staple in Ecuador. Almost all local production is consumed domestically. FAS Quito forecasts total consumption at 760,000 MT in MY 2017/18, up 9,000 MT or 1.2 percent from the MY 2016/17 revised estimate of 751,000 metric tons. We attribute the increase to population growth. Per capita consumption is estimated to be stable at about 45~46 kilograms/annum.

Farm gate rice prices of $37.10 per 200 pound (90.76-kilogram) sack of paddy rice (~$409/MT) in 2016, about 9.5 percent lower than the average of 2015. Domestic rice is marketed through wholesalers in 100 pound (45.36-kilogram) sacks, with small vendors selling to consumers by the kilogram. FAS/Quito estimates that the average wholesale price of a 100 pound (45.36-kilogram) sack of milled rice grade one (maximum five percent broken) in 2016 was $36.34 (~$801/MT) and $33.82 (~$746/MT) for grade two (maximum ten percent broken). At the retail level consumers paid on average $1.07/kilogram ($1070/MT). With the expansion of the modern supermarket sector, sales of two-to-five kilogram branded rice sacks are increasingly popular, and account now for 15-20 percent of rice sales. Overall, rice prices declined from July through December.

Trade

FAS/Quito sources have stated that unless Ecuadorian mills are currently processing foreign rice, observed consumption levels of milled rice would not correspond to domestic production of paddy rice. In the context of increased domestic production for MY 2017/18, FAS Quito forecasts that total imports will decline in MY 2017/18. At FAS Quito we estimate exports of rice to Ecuador from neighboring countries at 130,000 MT in MY 2016/17.

Rice imports from countries outside the Andean Community (Colombia, Ecuador, Peru and Bolivia) require a cumbersome inter-agency approval process. Concerns with Ecuador’s balance-of-payments have been used to justify import restricting measures. Currently, rice imports from outside the Andean Community are subject to a combined 68 percent import tariff plus an additional 35 percent import surcharge/special safeguard. The latter is a provisional safeguard measure imposed to address imbalances in Ecuador’s balance of payments.

Ecuador has exported rice to Colombia, and at times to Peru, depending on the exchange rate. Ecuador has refrained from exporting rice in recent years due to persistently high domestic prices and deficits in domestic production. FAS Quito forecasts that with the U.S. dollar remaining strong, Ecuador will not export rice to its neighbors in MY 2017/18.

Stocks

Although stocks are very difficult to estimate, FAS/Quito assumes that private millers, government silos and consumers maintain two to three months of consumption in stock at any given time. The Ministry of Agriculture issues export and import permits, and acts as the authorized exporter of reserves. The government has established, but not always enforced, an emergency stock of 80,000 MT of rice to ensure national food security.

Policy

Rice imports are politically sensitive. The government has promoted rice self-sufficiency by setting farm gate prices at levels significantly higher than prices in the world market and in neighboring countries, maintaining the Andean Price Band System (APBS), and further trying to limit imports using Presidential decrees. The official minimum price at the farm gate is currently set at ~$391/MT of paddy rice, 20 percent humidity, 5 percent foreign material. The APBS currently sets a floor price of $500/MT and a ceiling of $587/metric ton. The APBS is recalculated twice per month: first at the beginning of the month and then at the beginning of its second half. Andean Community members (Colombia, Ecuador, Peru and Bolivia) are assessed a zero-tariff and are not subject to the APBS. A ministerial decree is nonetheless necessary before an import permit is issued. Other Latin American countries have been granted ad valorem tariff preferences under the ALADI, but they are still assessed the APBS variable levy.