Brazil & Southern Cone - January 2012 (ISSN 1741-4431)

If 2011 proved yet another successful year for the Paraguayan economy, 2012 is shaping up to be disastrous, amid major problems in the key agricultural sector.

The problems began in September 2011 when a Foot and Mouth Disease (FMD) outbreak was detected in the department of San Pedro. Up to that point, Paraguay was ranked a FMD-free country with a vaccination scheme, a status that opened up many international markets for Paraguayan beef, the country’s second most important source of revenue. Upon the outbreak, several customers suspended Paraguayan beef imports, leading to an estimated US$300m in losses for Paraguay in the last quarter of 2011. The authorities’ quick action in officially informing the pertinent international organisations of the outbreak and in providing detailed plans to deal with the situation meant that some of the import restrictions were eased relatively quickly.

However the situation took another turn for the worse on 3 January, when the local authorities confirmed a second FMD outbreak in San Pedro. Key importers like Russia then suspended trade indefinitely. Domestically, there are questions to be answered about the second outbreak, including whether it was the result of negligence on the part of farmers or whether the national animal health service (Senacsa) might have provided bad vaccines or failed to adequately control the vaccination scheme. In fact, criticism of Senacsa forced the government to remove its head, Daniel Rojas, replacing him with Félix Otazú on 17 January.

To make matters worse, the Southern Cone summer, which began in December, has included a severe drought, which has affected the country’s most important source of revenue, soya. The situation now appears critical. Soya producers in Itapúa and Alto Paraná, two of the most productive departments, estimate that the inclement weather has decimated between 70% and 80% of their first harvest.

Moreover, they say that if rain does not come soon they will also have problems planting the next harvest, which could lead to severe shortages. Producers called on the government to declare a state of emergency in order to provide them with some sort of assistance with their incalculable financial losses. On 17 January President Fernando Lugo declared a national state of food emergency, the first ever in the country, in order to deal with the crisis.

The ministry of agriculture and livestock (MAG) is already conducting studies to try to determine the level of losses for farmers. According to the deputy minister, Andrés Werlhe, the MAG estimates that up to 40% of the county’s entire agricultural production has been affected by the drought. Along with soya, this also includes corn, cotton, sesame and peanuts. Werlhe noted that the hot and dry conditions have also caused wildfires in pastures around the country which will also negatively affect beef production.

The drought has also resulted in a severe fall in water levels in the Paraguay River, the landlocked country’s main trading route. A four metre decline in the water level in December forced the national hydrology, navigation and ports authority (ANNP) to temporarily close the port of Asunción, as the river at that point was rendered non-navigable. Up to 60% of Paraguay’s trade passes through the river and while the port of Pilar, downstream from Asunción, is still operating, Víctor Morínigo, the ANNP spokesman, declared that a further decline in the water level could have “disastrous” economic effects, as exporters stand to lose up to US$15bn. Guillermo Ehreke, a representative of the local river shipping transportation centre, which groups freight companies, estimates that that its members have already lost some US$400m. Moreover, crucial imports are not entering the country. In Ehreke’s opinion, this has the potential to affect all sectors in the economy, meaning that “the country could lose hundreds of millions of dollars every month”.

The government has recognised the extent and severity of the problems; and is now starting to react. On 11 January Finance Minister Dionisio Borda announced that President Lugo’s economic team would hold an emergency meeting to discuss the more pressing issues. After the meeting, Borda urged congress to release some US$300 in loans and donations in order to fund things like dredging the Paraguay River. The industrial and trade federation (Feprinco) reached an agreement with the government to share the costs of dredging critical parts of the river in order to ensure that it remains navigable in the future. Feprinco’s president, Eduardo Felippo, said that a formal agreement would be signed on 18 January so that work could begin immediately.

The presidential decree establishing the 90 day national state of food emergency stipulates that all the administrative and financial efforts are to be coordinated by the MAG, but it does not provide any exact details. While the measure is mainly intended to provide assistance to very vulnerable small- and medium-sized farmers, it is unclear whether the assistance will also extend to large scale producers. The decree acknowledges that the government is obligated “to adopt measures to mitigate damages caused by natural phenomena or any other which escapes human control”.

Most of the damage has already been done and the worry is that the government is too late in acting. Moreover, as with the FMD outbreak, the scale of the problems could have been diminished had the government exercised a little more foresight.  It’s not as if it had no money – Paraguay has enjoyed an unprecedented economic boom in recent years on the back of its agriculture sector.

• Selling Energy

On 12 January in Asunción, President Lugo met Argentina’s planning minister, Julio de Vido, in which he put an offer on the table to purchase Paraguay’s excess energy from the Acaray dam at market prices. However on 17 January, Paraguay’s deputy energy minister, Mercedes Canese, said that as tempting as the offer was, Paraguay’s priority is to sell energy to Uruguay, adding that it is “good to diversify customers”. Paraguay has been trying to sell energy to Uruguay via Argentina since May 2011; but negotiations with the Argentine government over the transfer price to the Uruguayan grid have been tricky.