Venezuela Agribusiness Report Q4 2009

In BMI's Venezuela Agribusiness Report for Q4 2009, we introduce the new Grain Outlook. Venezuela's grain production has seen some success over recent years. Production of corn, Venezuela's most significant grain crop, grew more than 50% from 2004 to 2008, reversing the declines in production through the 1990s. Despite this, growing demand for both corn and wheat, of which Venezuela produces little domestically, mean that the country is still a major net importer of grain.

President Hugo Chavez is aiming not only self-sufficiency in corn, but the development of a surplus for export. With the right policies and investment, this aim is certainly not unachievable. The area planted to corn has risen rapidly in the past few years under the government's National Sowing Plan. Despite this, the underdeveloped state of Venezuela's agricultural sector means there is still an abundance of fertile land available for further expansion of the production area. Chavez' hoped-for gains in production are held back, however, by a combination of poor allocation of government resources and price controls which inhibit private investment.

Many farmers who have been granted land to farm complain that inputs such as feed and fertiliser as well as training that were promised by the government has been slow in appearing. This has meant much of the new land to be put to the tiller is still lying fallow. If Venezuela is to become self-sufficient in corn, the government needs to work on ensuring that along with land, the poor are also granted the means to farm it. The government-set farmgate price also needs to be high enough to make investment in yield improvement worthwhile.

The disruption caused by price controls on agricultural commodities was amply shown in August by the seizure of coffee plants belonging to Fama de America and Cafe Madrid. Together, the two companies control around 80% of Venezuela's coffee market. The seizures were motivated by warning from the two companies that they were running out of coffee supplies. The government alleged that the companies had recently made large purchases of coffee, and therefore something untoward must be going on. The companies stand accused of illegally exporting coffee to Colombia, where prices are much higher. A temporary intervention was issued and government workers seized the plants. A few days later, Chavez said that he intended to expropriate the companies' assets, making the seizures permanent.

The seizures are the latest in a long line of blows struck to Venezuela's food and agriculture industries.

Regardless of whether these two companies were guilty of illicitly exporting coffee - an allegation both firms deny - the differential in the price paid for coffee in Venezuela and neighbouring Colombia means coffee will inevitably find its way over the border. Seizing processors will not change this. The only way to effectively stem the trade is setting the price for coffee at a rate closer to that on the world market.

While illicit trade with Colombia will no doubt be carrying on as strongly as ever, formal trade has fallen dramatically since the end of July following the most recent spat between Venezuelan President Hugo Chavez and Colombian President Alvaro Uribe. This could see food shortages return as Venezuela struggles to import enough food to meet demand following the collapse in supplies from Colombia.