Required Report - public distribution

**Date:** 1/6/2004

**GAIN Report Number:** PE4001

PE4001

**Peru**

**Grain and Feed**

**Annual**

**2004**

**Approved by:**

![](media/image1.wmf)Melinda D. Sallyards

U.S. Embassy

**Prepared by:**

Gaspar E. Nolte

**Report Highlights:**

Wheat imports in marketing year 2003/2004 (July/June) are forecast at
1.4 MMT. On January 1, 2004, Peru reduced import tariffs for wheat to 17
percent. Corn production continues increasing and it is forecast at 1.6
MMT in MY2003/2004 (October/September), imports are expected at 800,000
MT for the same period. Rice imports continue falling and are expected
at 20,000 MT for MY 2004 (January/December).

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Lima \[PE1\]

\[PE\]

**Executive Summary**

Wheat imports for marketing year 2003/2004 (July/June) are forecast at
1.4 Million Metric Tons (MMT). Though wheat consumption has been rather
steady at around 1.2 million MT for the past few years, it increased to
1.4 in 2001 and is expected to remain at that level next year. The
increase in consumption is mainly due to increased demand for bread
given an increase in population and a recovering economy. However, bread
consumption continues to be low (39 killograms per annum) and we expect
growth in the coming years if the economy continues its recovery. On
January 1, 2004, Peru reduced import tariff for wheat from 25 to 17
percent, still among the highest in the region.

In December 2003, MERCOSUR accepted Peru's request to become a member.
While the tariff reduction schedule is still being negotiated, Argentine
grains could become more competitive under this agreement.

Under the Andean Community of Nation's (CAN) Decision 414, Peru is
committed to reduce import duties of several agricultural products,
including wheat and wheat products, from CAN member countries. The
implementation date of this decision was originally January 1, 2004, but
the CAN has recently postponed the decision to March 1, 2004.

Post forecasts corn imports to reach 800,000 MT during MY
(October/September) 2003/2004. Corn consumption is expected to increase
as the Peruvian economy recovers, but local production is also expected
to increase. The government's import substitution policy is encouraging
corn production in Peru. Sponsored by the government, corn and poultry
producers have signed an agreement to increase local purchases. These
agreement aims to increase local production to a level of
self-sufficiency within five years.

U.S. corn exports are expected to increase to 250,000 MT mainly. Lack of
rain during the Argentine planting season will probably produce a small
crop and higher prices.

Rice imports into Peru continue their downward trend. Imports for MY2004
are forecast at 20,000 MT. The decrease in imports, which began in 1996,
is a result of a government's import substitution policy, which
encourages rice production through credits for seeds and fertilizers.

  ---------------- ----------- ---------- ---------- ---------- ---------- ---------- ---------
  **PSD Table**                                                                       

  **Country**      **Peru**                                                           

  **Commodity**    **Wheat**                                    (1000                 
                                                                HA)(1000              
                                                                MT)                   

                   2002        Revised    2003       Estimate   2004       Forecast   UOM

                   USDA        Post       USDA       Post       USDA       Post       
                   Official    Estimate   Official   Estimate   Official   Estimate   
                   \[Old\]     \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]    

  **Market Year                07/2002               07/2003               07/2004    MM/YYYY
  Begin**                                                                             

  Area Harvested   165         139        160        140        0          140        (1000 HA)

  Beginning Stocks 200         193        200        265        200        282        (1000 MT)

  Production       185         187        170        189        0          190        (1000 MT)

  TOTAL Mkt. Yr.   1200        1327       1300       1350       0          1400       (1000 MT)
  Imports                                                                             

  Jul-Jun Imports  1200        1327       1300       1350       0          1400       (1000 MT)

  Jul-Jun Import   406         320        0          720        0          650        (1000 MT)
  U.S.                                                                                

  TOTAL SUPPLY     1585        1707       1670       1804       200        1872       (1000 MT)

  TOTAL Mkt. Yr.   27          0          25         0          0          0          (1000 MT)
  Exports                                                                             

  Jul-Jun Exports  27          0          25         0          0          0          (1000 MT)

  Feed Dom.        120         130        125        140        0          140        (1000 MT)
  Consumption                                                                         

  TOTAL Dom.       1358        1442       1445       1522       0          1612       (1000 MT)
  Consumption                                                                         

  Ending Stocks    200         265        200        282        0          260        (1000 MT)

  TOTAL            1585        1707       1670       1804       0          1872       (1000 MT)
  DISTRIBUTION                                                                        
  ---------------- ----------- ---------- ---------- ---------- ---------- ---------- ---------

  ----------------------------------- -----------------------------------
  **Import Trade Matrix**             

  **Country**                         Peru

  **Commodity**                       Wheat

  Time Period                         CY2003

  Imports for:                        

  U.S.                                610185

  Others                              

  Argentina                           175484

  Canada                              142207

  Ukraine                             128493

  Russia                              103958

  Total for Others                    550142

  Others not Listed                   163256

  Grand Total                         1323583
  ----------------------------------- -----------------------------------

Units: Metric Tons

Source: Peruvian Customs

**Wheat**

Production

Wheat is a minor crop in Peru. Production in MY2004 is forecast at
190,000 MT and is likely to remain around that level in the near future.
Most wheat produced in Peru, grown in the southern highlands of the
Andes under very rudimentary cultural practices, is soft, not suitable
for milling and consumed directly in soups and purees.

Crop area will probably remain at current levels, 140,000 hectares, in
MY2004. Wheat area in Peru may vary significantly from year to year
depending on prices and producers' profit expectations. Average yields
in 2002 were 1.15 MT per hectare, somewhat higher than the previous year
due to better weather conditions.

Alicorp, Peru's largest wheat miller, has started a program to produce
durum wheat in southern Peru. Currently they are producing around 8,000
MT but expect to reach 25,000 in the upcoming years. Alicorp provides
improved seed and technical assistance to local producers and contracts
production in advance.

Consumption

With 10 kilograms per capita, Peru continues to be the second largest
pasta consumer in South America. Bread consumption on the other hand,
about 39 kilograms per annum, remains at very low levels compared with
consumption in other countries in the area. The Peruvian cracker and
cookie consumption is estimated at around 63,000 MT per year worth
almost \$85 million.

A strong recession began in Peru in 1999, and continued throughout 2001.
As a result, flour and pasta consumption remain flat. Flour and pasta
consumption in 2003 were 960,000 MT and 280,000 MT respectively. The
consumption increase is driven mainly by an increase of bread
consumption due to population growth and a slight economic recovery.

Trade

Peru's wheat imports in CY2003 reached 1.32 MMT, about the same as the
previous year. With 610,185 MT, the U.S. was the largest wheat exporter
to Peru followed by Argentina with 175,484 MT and Canada with 142,207
MT.

Due to unusual high prices in MY 2002, Peru imported wheat from non
traditional countries such as Pakistan and Ukraine. According to
millers, the milling quality of that wheat was extremely poor and had to
purchase quite a bit of the high end wheat to blend it. However, Peru
returned to its traditional suppliers (U.S., Argentina and Canada) in MY
2003.

Policy

On January 1, 2004, the GOP reduced import tariffs for wheat from 25
percent to 17 percent, still among the highest in the region. Wheat is
also assessed 19 percent value-added tax (VAT). Even though Peru's
production of wheat suitable for milling is negligible, representatives
of agricultural producers have expressed their concern about this tariff
reduction and stated that this measure will allegedly harm 150,000
producers.

In December 2003, MERCOSUR accepted Peru's request to become a member.
So far, the agreement has been signed but the annexes specifying the
tariff reduction schedule is still under negotiations. Grains will
probably be one of the most important agricultural trade issues,
especially for Argentina.

Under the Andean Community of Nation's (CAN) Decision 414, Peru is
committed to reduce import duties of several agricultural products,
including wheat and wheat products, from CAN member countries. Since
none of the CAN countries are wheat producers, the relevance of this
decision is the tariff reduction of wheat products.

This measure does not only grants tariff preferences to Andean
countries, placing U.S. flour and pasta at a disadvantage, but is also
threatening to destroy the Peruvian milling industry. Peru has the
highest import duty for wheat in the region and it is not planning to
reduce it any time soon. If Peru grants tariff preferences for wheat
products and maintains high import duties for wheat, its market will
soon be flooded with wheat products from neighboring countries and put
the Peruvian milling industry out of business.

The implementation date of this decision was originally January 1, 2004,
but the GOP has recently postponed it to March 1, 2004.

**Peru's Commitment Under CAN's Decision 414**

(Import Duties in Percentage)

  ------------- ---------- ----------- ---------- ----------- ---------- -----------
                **2003**               **2004 -               **2006**   
                                       2005**                            

  **Product**   **CAN**    **Other**   **CAN**    **Other**   **CAN**    **Other**

  **Wheat**     5          25          0          25          0          25

  **Flour**     21.25      25          16         20          0          20

  **Pasta**     21.25      25          16         20          0          20
  ------------- ---------- ----------- ---------- ----------- ---------- -----------

  ---------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
  **PSD Table**                                                                      

  **Country**      **Peru**                                                          

  **Commodity**    **Corn**                                    (1000                 
                                                               HA)(1000              
                                                               MT)                   

                   2002       Revised    2003       Estimate   2004       Forecast   UOM

                   USDA       Post       USDA       Post       USDA       Post       
                   Official   Estimate   Official   Estimate   Official   Estimate   
                   \[Old\]    \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]    

  **Market Year               10/2002               10/2003               10/2004    MM/YYYY
  Begin**                                                                            

  Area Harvested   512        483        520        545        0          590        (1000 HA)

  Beginning Stocks 91         16         96         15         96         35         (1000 MT)

  Production       1355       1293       1500       1471       0          1600       (1000 MT)

  TOTAL Mkt. Yr.   900        922        750        895        0          800        (1000 MT)
  Imports                                                                            

  Oct-Sep Imports  900        922        750        895        0          800        (1000 MT)

  Oct-Sep Import   0          248        0          52         0          250        (1000 MT)
  U.S.                                                                               

  TOTAL SUPPLY     2346       2231       2346       2381       96         2435       (1000 MT)

  TOTAL Mkt. Yr.   0          0          0          0          0          0          (1000 MT)
  Exports                                                                            

  Oct-Sep Exports  0          0          0          0          0          0          (1000 MT)

  Feed Dom.        2060       1962       2060       2081       0          2192       (1000 MT)
  Consumption                                                                        

  TOTAL Dom.       2250       2216       2250       2346       0          2405       (1000 MT)
  Consumption                                                                        

  Ending Stocks    96         15         96         35         0          30         (1000 MT)

  TOTAL            2346       2231       2346       2381       0          2435       (1000 MT)
  DISTRIBUTION                                                                       
  ---------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------

  ------------------------------ ----------------------------------------
  **Import Trade Matrix**        

  **Country**                    Peru

  **Commodity**                  Corn

  Time Period                    2003

  Imports for:                   

  U.S.                           52500

  Others                         

  Argentina                      774385

  Paraguay                       65478

  UK                             14665

  Bolivia                        4763

                                 

  Total for Others               859291

  Others not Listed              556

  Grand Total                    912347
  ------------------------------ ----------------------------------------

Units: Metric Tons

Source: Peruvian Customs

**Corn**

**Production**

Corn production in Peru is estimated at 1.6 MMT for MY
(October/September) 2003/2004, an increase of nine percent compared to
the previous year. Among the several types of corn produced in Peru, the
most important varieties are starchy corn, with production estimated at
267,000 MT in 2003, which is consumed directly by humans, and yellow
corn with production estimated at 1.18 MMT for the same period of time
which is primarily used in the animal feed industry.

The harvested area in MY2003 was 316,000 hectares and 229,000 hectares
for yellow and starchy corn respectively compared with 270,000 hectares
and 213,000 hectares in MY2002. Yields are expected to be around 3.36 MT
per hectare for yellow corn and 1.17 MT per hectare for starchy corn.
Corn is mainly grown along the Peruvian coast and in the range forest on
the eastern slopes of the Andes. The sharp increase of corn production,
which started in 1997, is driven by yellow corn, given the increasing
demand from the poultry industry and the GOP's import substitution
program.

**Consumption**

Peru has a 26 million chicken-per-month poultry market, which is the
major user of yellow corn. Corn is about 65 percent of the chicken feed.
Corn consumption is estimated at 2.405 MMT for 2004. Poultry meat
continues to be one the cheapest source of protein in the Peruvian diet.
A major problem poultry producers have to face is competition from
informal producers, who account for about 30 percent of the poultry meat
industry. Corn demand correlates strongly with poultry demand.

**Trade**

In CY2003, Peru imported 912,347MT of yellow corn, of which 774,385MT
came from Argentina. The U.S. market in CY2003 was reduced
significantly, to only 52,500 MT due mainly to lower prices from
competitors. For most of CY2003, until October, Argentine corn has been
around \$120 per MT and U.S. corn was about \$10 to 15 per MT higher. Of
this differential, about \$5-7 per MT was caused by cheaper freight from
Argentina and the rest from lower prices. In October, freight from
Argentina increased to \$33-35 per MT placing both prices at about the
same level \$148 per MT.

Post forecasts corn imports to fall to 800,000 MT in MY2004, this
reduction is explained by higher local production. Nevertheless we
expect U.S. corn exports to increase to 250,000 MT mainly due to lack of
rain during the Argentine planting season, which will probably produce a
small crop and consequently higher prices.

Feed producers and large poultry operations prefer to use Argentine or
Peruvian corn over U.S. corn. They claim that Argentine and Peruvian
corn is harder and comes with less broken kernels. Poultry producers
often pay a \$10 per MT premium for Peruvian corn. Average price of
locally produced corn was around \$150 in the last quarter of 2003.

**Policy**

Though the GOP does not have any direct subsidy or assistance program to
encourage corn production, there has been some support through rotating
credit funds. The Ministry of Agriculture sponsored an agreement between
corn and poultry producers to encourage corn production in the eastern
region of the country. This area is excellent for corn production, but
transportation infrastructure is poor and in some cases does not exist.

So far the program to encourage corn production has been successful. In
some areas, particularly on the eastern slopes of the Andes, the few
poultry producers in the area are purchasing local corn. On the coast,
the third largest poultry producer in the country is purchasing only
local corn, through an agreement signed with corn producers in the area.
The largest poultry producer in Peru, San Fernando, with about forty
percent of total poultry production has started some trials to produce
corn.

On November 7, the GOP published a supreme decree (N°161-2003-EF)
dropping the 19 percent value added tax for both imported and locally
produced corn. But on December 1, the GOP published another supreme
decree (N°169-2003-EF) reinstating the VAT.

This measure, that would have cost the government around \$22 million in
annual tariff revenues, was aimed at reducing informal corn production
and encouraging livestock producers to purchase local corn. Most
domestic corn producers in Peru operate in the informal economy. That
is, they do not pay taxes, including the VAT, and they do not issue
receipts to purchasers. On the other hand, companies that import corn,
mainly poultry producers, operate in the formal economy and do pay
taxes, including VAT.

While the domestic corn producers were not paying VAT, they were still
selling their corn at the same price as imported corn. Since payments of
VAT is tax deductible imported corn was more appealing, companies paying
the same price as domestic corn could deduct the VAT from their taxes.
By eliminating the VAT, the government was eliminating an advantage
imported corn had.

Corn imports are assessed 12 percent import duty on CIF basis, plus a
variable levy applied under the Price Band System. The Price Band System
is an import tax, that depends on international prices, which assures
that the import price of specific commodities, after payment of the
levy, will equal a predetermined minimum import price. This tax, which
is imposed on certain \"sensitive\" products, is expressed in dollars
per metric ton. Currently the variable levy for corn is zero.

![](media/image2.wmf)

  ---------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
  **PSD Table**                                                                      

  **Country**      **Peru**                                                          

  **Commodity**    **Rice,                                     (1000                 
                   Milled**                                    HA)(1000              
                                                               MT)                   

                   2002       Revised    2003       Estimate   2004       Forecast   UOM

                   USDA       Post       USDA       Post       USDA       Post       
                   Official   Estimate   Official   Estimate   Official   Estimate   
                   \[Old\]    \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]    

  **Market Year               01/2003               01/2004               01/2005    MM/YYYY
  Begin**                                                                            

  Area Harvested   315        317        320        326        0          330        (1000 HA)

  Beginning Stocks 243        92         298        98         353        77         (1000 MT)

  Milled           1550       1482       1555       1597       0          1600       (1000 MT)
  Production                                                                         

  Rough Production 2246       2148       2254       2314       0          2319       (1000 MT)

  MILLING RATE     6900       6900       6900       6900       0          6900       (1000 MT)
  (.9999)                                                                            

  TOTAL Imports    40         34         40         15         0          20         (1000 MT)

  Jan-Dec Imports  40         34         40         15         0          20         (1000 MT)

  Jan-Dec Import   0          1          0          0          0          1          (1000 MT)
  U.S.                                                                               

  TOTAL SUPPLY     1833       1608       1893       1710       353        1697       (1000 MT)

  TOTAL Exports    10         30         5          135        0          40         (1000 MT)

  Jan-Dec Exports  10         30         5          135        0          40         (1000 MT)

  TOTAL Dom.       1525       1480       1535       1498       0          1562       (1000 MT)
  Consumption                                                                        

  Ending Stocks    298        98         353        77         0          95         (1000 MT)

  TOTAL            1833       1608       1893       1710       0          1697       (1000 MT)
  DISTRIBUTION                                                                       
  ---------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------

  ------------------------------------------ ----------------------------
  **Import Trade Matrix**                    

  **Country**                                Peru

  **Commodity**                              Rice, Milled

  Time Period                                CY2003

  Imports for:                               

  U.S.                                       134

  Others                                     

  Uruguay                                    13861

                                             

  Total for Others                           13861

  Others not Listed                          1000

  Grand Total                                14995
  ------------------------------------------ ----------------------------

Units: Metric Tons

Source: Peruvian Customs

**Rice**

**Production**

Rice production for MY (January/December) 2004 is forecast at 1.6 MMT
(milled basis), about the same as the previous year. Rice in Peru is
surface irrigated and depends on the supply of water draining from
rivers in the Andes Mountains. Most of the rice in Peru is harvested May
through September. Harvested area for MY2004 is forecast as 330,000
hectares.

Major rice production areas in Peru are Lambayeque and Piura in the
northern region, and Arequipa in the south. Average yields are 7.07
metric tons per hectare, but some farmers have yields as high as 14
metric tons per hectare (paddy rice). Since most of the production is
carried out by small producers, rice quality and yields vary greatly
depending on input levels which in turn depend on prices and economic
conditions.

**Consumption**

Per capita rice consumption is estimated at about 52 kilograms. Rice is
sold traditionally in small markets, weighed out and bagged from 50
kilos sacks. In recent years, with the expansion of supermarket chains
in Peru, several consumer habits, including the purchase of rice, has
changed. There is a growing demand for prepackaged one-kilogram bags of
rice, and recently in ¾ kilogram bags, which now total 20 percent of all
rice sales. Higher quality rice, including U.S. rice, is generally
marketed in this way.

In 1999, a Peruvian importer began distributing Uncle's Ben precooked
rice, which he sold to the supermarket chains. But due to the high
prices and lack of product knowledge he had to halt imports. Currently
there is some aromatic rice in the market but they are very expensive
and are targeted for exclusive restaurants.

**Trade**

Peru imported about 14,995 MT of rice in CY2003, less than fifty percent
of the previous year. Most of the imported rice, about 13,861 MT came
from Uruguay. The U.S. was a minor supplier with less than 1,000 MT. The
largest rice importer, who owns the leading brand for bagged rice, has a
long term relationship with an Uruguayan rice exporter which not only
provides good quality rice at a competitive price, but also grants them
credit. Since the GOP implemented a ban on Asian rice based on
phytosanitary issues, the imported rice market has been shared by the
U.S. and Uruguay, but now is been taken over almost entirely by Uruguay.

Small rice importers are interested in purchasing paddy rice from the
U.S., which is currently banned for phytosanitary reasons by SENASA, the
Peruvian SPS authority. Peru has banned paddy rice for many years on the
ground that the hulls could transmit pests that are not present in Peru.
Khapra Beetle is the principal pest of concern to Peru. This is more
likely to occur if the paddy rice is sold as seed rather than milled,
but Peru claims it cannot control the use of the rice, thus the total
ban. Post is working closely with the industry and SENASA to lift this
ban. Currently a pest risk assessment is being done which will hopefully
result in elimination of the ban and additional sales of U.S. rice.

Although there are no official statistics, Post estimates that about
130,000 MT of Peruvian rice will be smuggled to Ecuador in 2003, a major
increase from last year's estimated 30,000 MT. Rice is smuggled into
Ecuador as paddy rice, which is then milled and sent to Colombia.
Ecuadorian rice has an import duty preference in Colombia, which makes
it very competitive. Rice imports for MY2004 are forecast to reach
20,000 MT.

**Policy**

Since CY1998 the GOP has been encouraging rice production through input
credits and rotating credit funds. Though production has grown sharply
during the last 6 years, it has been an economic disaster for producers.
Having flooded the market with rice and with large carry over stocks and
no possibility of exporting, other than what is smuggled into Ecuador
through the northern border, prices have plummeted making almost
impossible the recovery of producers' investment. Average prices for
rough rice in 2003 at farm gate were around \$170 per MT.

As a consequence, farmers are not able to honor their credits and in
many cases are losing their land. Banks are more reluctant than ever to
grant credits to rice producers who have to turn to millers or other
informal lenders for credits at much higher interest rates.

Rice imports are assessed 25 percent import duty on CIF plus a variable
levy applied under the Price Band System. The Price Band System is an
import tax, that depends on international prices, which assures that the
import price of specific commodities, after payment of the levy, will
equal a predetermined minimum import price. This tax, which is imposed
on certain \"sensitive\" products, is expressed in dollars per metric
ton. The current levy for rice is \$105 per MT.

![](media/image3.wmf)