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Macroeconomic Situation Food Prices and Consumption

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Macroeconomic Situation Food Prices and Consumption Dr. Eugenia Muchnik, Manager Agroindustrial Dept., Fundacion Chile, Santiago, Chile Loreto Infante, Agricultural Economist, Assistant CHILE Tomas Borzutzky; Agricultural Economist, Agroindustrial Dept., Fundacion Chile Macroeconomic Situation price index had a -1 percent reduction. Inflation rates and food price fter 2000, in which the Chilean economy exhibited increases are not expected to differ much during 2003 unless there are an encouraging growth rate of 5.4 percent, 2001 unexpected external shocks. The proximity of Argentina and the showed a slowdown, reaching a rate of 2.8 percent, reduction of its export prices as a result of a drastic devaluation may in with growth led by fisheries and energy. Agricultural fact result in price reductions; prices of agricultural inputs have been AGDP grew by 4.7 percent, double the average growth declining, while there are no reasons to expect important changes in rate for the economy as a whole. On the low end of the spectrum, the Chilean real exchange rate. manufacturing experienced a negative growth of -0.3 percent, and in general, the slowest economic growth took place in sectors more dependent on the behavior of domestic demand. There were two Food Processing and Marketing events that took place in the second half of 2001 that changed the At present, the most dynamic sectors in the food processing industry external scenario of the global economy, increasing uncertainty in are wine production and the manufacture of meats and dairy products. financial markets and reducing global growth: the terrorist attacks of In the wine industry, as a result of the rapid expansion of vineyard September 11 and the rapid deterioration of Argentina’s economy. plantations, there is a deficit in terms of processing, aging, and storage The main consequences were lower export demand and a deteriora- infrastructure that, coupled with a scenario of international expansion tion of the terms of trade. Terms of trade had a loss of 7.1 percent in in plantations and slower growth in consumption, has resulted in respect to 2000, being responsible of this shortfall the reduction of major price reductions on grapes. The aim is to open new markets and the prices of copper, cellulose, salmon, and to a lesser extent, those of set as a priority the creation of a country image abroad where Chilean fresh fruits. Undoubtedly, Argentina’s financial and political crisis wine is not known. It is expected that wine exports will rise from the affected Chile in many ways and will continue to do so probably even present level of US$600 million up to US$1,000 million by 2006. more drastically in the months to come. One way was by inducing a The plan anticipates an investment of US$18.6 million on interna- real depreciation of the Chilean peso due to the devaluation of the tional marketing and US$1.5 million for domestic promotion. Argentine peso. Regardless of this depreciation, inflation was lower During 2001, a rapid increase in milk deliveries to processing than expected, reaching a 2.6 percent rate during 2001, explained by plants met with a reduction in producer prices while world prices were the lower petroleum prices and a depressed domestic demand as still rising and the depreciation of the Chilean peso should have made could be expected from the 9.2 percent unemployment rate observed competing imports more expensive. The decline in producer prices during 2001. Because of the peso depreciation, total Chilean exports was the outcome of unsold, accumulated imported stocks coupled continued to register growth (7.1 percent) despite weak external with stagnant domestic demand. As a result, a continuous confronta- demand. For 2002, a deceleration of export activity is foreseen with a tion is observed between milk farmers and the dairy industry. growth index near 4.2 percent, recovering again by 2003 (7.3 per- Moreover, two major dairy industries, Soprole, controlled by the New cent). Total imports have also declined in a slowdown linked to a Zealand Fonterra Cooperative Group Ltd., the world’s major dairy reduction of domestic demand growth (-0.5 percent), which is exporting firm, and Nestle, announced their intention to create a expected to recover to rates of 4.1 percent by 2002. Such a recovery strategic alliance for the joint industrialization and commercialization would sustain the 3.3 percent growth index for GDP expected for of selected dairy products in Latin America. The Antitrust this year and 5.3 percent for 2003. The latest events in the Middle Commission has so far objected to this alliance. Soprole and Nestle East conflict may add new uncertainties to the coming year such as a have a market share of 26 percent and 21 percent, respectively. Due to rise once more in petroleum prices. This may cause a further depreci- expected lower prices paid by the industry, milk production growth is ation of the Chilean peso, which, if does not fuel inflation, may have expected to decline during 2003, while efforts will be made to increase favorable consequences on the outlook for the food and agricultural exports, particularly within the Latin American market. sector with a rise in food prices to consumers. Supermarkets continue to expand in Chile, particularly under the hypermarket format (28 percent of the market). Four chains dominate the market: D&S (Chilean ownership), the leader; Santa Isabel, Food Prices and Consumption belonging to the Ahold multinational group; Jumbo; and the French The inflation rate during 2001 was lower than expected, a 2.6 percent chain Carrefour. The number of pharmacies has also expanded very increase in consumer prices. Growth in wholesale prices slowed (3.1 rapidly, particularly large chains, which include some food items such percent), compared to 2000 (7.9 percent), due to the influence of the as sodas, snacks, cereals, baby foods and sweets and chocolates. lower petroleum prices, depressed domestic demand, and good weath- New products such as pre-cut vegetables are now commonly er conditions. Food costs at the consumer level kept close to the gen- found in supermarkets, with just a few manufacturing companies pro- eral index, with a variation of 2 percent, meanwhile the wholesale food ducing these products. Vacuum-packed ostrich meat is also a novelty 12 PACIFIC FOOD SYSTEM OUTLOOK 2002–2003 CHILE to be found in supermarkets as well as vacuum-packed fresh lamb improve the livelihoods of the rural population, including increasing meat, Chilean fruits, wine, legumes, and forest products. The products the competitiveness of peasant farming. with positive outlooks are grapes, apples, wine, and salmon. Also, after The major policy issue for farmers continues to be protecting three years of negotiations, Chilean lily bulbs have been authorized for their activities from unfair foreign competition and highly unstable exportation to Japan. Exports of flower bulbs, nonexistent less than a world prices, in view of the fact that the main instrument used so far decade ago, have been growing rapidly, mostly for export to the —price bands in three commodities — is being challenged by the United States and Europe. Trade perspectives for 2003 and 2004 are major trading partners, given the WTO declaration that price bands positive, with the main question marks placed on future cereal, beef, are an illegitimate pricing policy tool. Although the Chilean govern- oilseeds, and milk imports from Argentina, which could skyrocket fol- ment is appealing this verdict, it is quite possible that this mechanism lowing the huge devaluation that has recently taken place. will not be accepted. With respect to safeguards, the Chilean commit- The “El Niño” phenomenon is predicted to increase winter rains tee responsible for applying this policy instrument has been extremely and ocean water warmth this year. It can cause severe damage, conservative in approving its use, and there is a 1-year limit for its although experts predict that it will not be as damaging as it was in application. The government is evaluating other alternatives to the 1997. Weather conditions have already affected agricultural produc- price band system, including the creation of price insurance, a stabi- tion this year. Rain at harvest time caused losses in berries and in red lization fund, or another mechanism that would enable applying vines, and will negatively affect potatoes and beans, with the most more flexible tariffs within the maximum levels consolidated at the damages to small farmers. WTO. The final decision by the WTO will probably be known at the end of 2002. Among the novel policy tools introduced during 2001 was an agri- Food and Agricultural Policy cultural insurance scheme to insure climatic risks, as well as an Agricultural and food policies in Chile continue to be designed to Agricultural Products Exchange. The insurance scheme is providing a achieve competitiveness in the context of an open economy with service to cover climatic risk to farmers producing annual crops, not prices set in the international marketplace and exchange rates deter- including fruit orchards, with subsidized fees for small farmers. Last mined by market forces. The main challenges identified are two: rural year, US$6 million in public funds were spent for this purpose. The development and the need for coordinating the regulations for the target number of farmers that were expected to contract this insurance whole agri-food system. The first issue is a long-term goal that was 4,000, but the actual number has been considerably lower. Farmer requires redefining the scope and actions to be implemented by the associations consider the fees still too high and believe the scheme Ministry of Agriculture. The latter is expected to require incorporat- should cover fruit orchards. A private commodity exchange project is ing food regulations within the ministry’s regulatory functions.
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