A state strategy aimed at keeping food prices low risks producing shortages, writes TOM HENNIGANin São Paulo

LONG ONE of the world’s leading food exporters, Argentina runs the risk of having to import beef and wheat during the next year in the latest signal that heavy government intervention in the economy is resulting in shortages and distortions.

Farmers say this year’s drought – the worst in decades – has only served to highlight how government mismanagement has damaged the agricultural sector, leaving supply for domestic demand tight and prompting the spectre of imports in this traditional exporter.

In a bid to get soaring inflation under control the government has in recent years looked to protect local consumers by manipulating prices and restricting exports of both beef and wheat.

This has pushed many farmers to join the move from cattle ranching and wheat farming into soy production, which has doubled in the last decade.

Soy is heavily taxed but there is little domestic demand so farmers know they will not be suddenly shut out of export markets by their own government in order to lower domestic prices, as happened to beef farmers when the government banned beef exports for six months in 2006.

This change in the pattern of farming, the result of government policies designed to keep beef and bread cheap, now risks producing shortages of beef and wheat according to local farmer organisations.

This could force the government to choose between more lucrative exports – and the much needed foreign currency they bring – or export bans in a bid to prop up sagging public support with cheaper domestic prices.

In making its decision the government will be acutely aware that food riots in 1989 and 2001 played a key role in toppling two presidents.

Beef has long been a sensitive political subject in Argentina with politicians knowing maintaining a cheap and plentiful supply is essential to maintaining political support.

“When beef for local consumers becomes expensive, it is transformed into a serious political issue as cheap meat is the goal of Argentinian politicians,” says Nieves Pascuzzi, an economist at Argentina’s Rural Society, the oldest of the country’s farmer organisations.

The 2006 export ban and government interference in beef prices since then has forced down the domestic price but Argentinian farmers have lost lucrative long-standing foreign customers to Brazil and Uruguay.

A rise in domestic beef consumption has not offset this price-loss to farmers, helping accelerate the move by many from beef to soy.

The result has been a dramatic drop in beef exports, from 771,000 tonnes in 2005 to 429,000 tonnes in 2008. The Rural Society says total national production in 2010 will be no more than 2.7 million tonnes, down from 3.1 million in 2008. The size of the national herd is expected to fall from 57 million head in 2008 to around 50 million by next year as farmers cut back or move out of beef production altogether.

“The reality is falling herd numbers and rising domestic consumption means national production will not be able to supply the domestic market,” says Ms Pascuzzi who predicts the government will either have to ban all beef exports again, or allow more lucrative beef exports to continue but import cheaper beef to make up the deficit, possibly becoming a net importer.

The drought and similar government interference in the wheat market could see the world’s fourth biggest exporter of wheat last year be forced to withdraw from the export market altogether in 2010.

Wheat exports have already seen steep declines in recent years partly in response to government price-fixing as part of its attempts to keep bread and other staples cheap. The country is expected to ship abroad 4.5 tonnes of wheat this year, less than half the 11.2 million tonnes shipped in 2008.

The area now being sown with wheat for harvest next year will be the smallest in a century, according to the Buenos Aires Cereals Exchange; grain traders warn any more adverse weather conditions could see the harvest struggle to meet local demand, leading to a ban on exports.