Required Report - Public distribution

**Date:** 2/19/2008

**GAIN Report Number:** EC8001

EC8001

**Ecuador**

**Grain and Feed**

**Annual Report**

**2008**

**Approved by:**

![](media/image1.wmf)Eugene Philhower

U.S. Embassy

**Prepared by:**

Rene A. Alarcon

**Report Highlights:**

High international prices will have an effect on Ecuador\'s grain
production. Wheat, although produced in very small quantities, will
double production to 6,000 MT. Corn production is likely to increase by
almost 10 percent, and rice farmers estimate a production growth of 5
percent. Although production will grow, these increases are not
sufficient to cover the demand or to make up for the current price
opportunity. Several factors, including weather conditions, price
regulations and export bans are complicating the agricultural scenario
in Ecuador.

Includes PSD Changes: No

Includes Trade Matrix: No

Annual Report

Quito \[EC1\]

\[EC\]

Table of Contents

[Executive Summary 3](#executive-summary)

[WHEAT 4](#wheat)

[Production 5](#production)

[Consumption 5](#consumption)

[Trade 6](#trade)

[Policy 7](#policy)

[CORN 8](#corn)

[Production 9](#production-1)

[Consumption 10](#consumption-1)

[Trade 10](#trade-1)

[Policy 11](#policy-1)

[RICE 13](#rice)

[Production 14](#production-2)

[Consumption 14](#consumption-2)

[Trade 15](#trade-2)

[Policy 15](#policy-2)

# Executive Summary

Wheat production in Ecuador is likely to increase to 6,000 MT as farmers
are motivated by high international prices. This production level,
however, is insufficient to meet the current demand. Imports are
estimated to decrease to 470,000 MT because of sharp increases in prices
and a predicted 10% contraction in demand of bread and wheat flour
products. On average, U.S. wheat exports to Ecuador in the period
1997-2007 were 157,000 MT/year, while Canada exported 281,000 MT/year
(or 79% more).

Corn production is expected to grow by 9.5 percent in MY 2007 440,000 MT
due to a key factor: high world prices. This market circumstance
provides an opportunity for local farmers to grow more corn, as they
know that the government will promote a high absorption price for the
2008 harvest. Overall annual consumption is expected to reach 912,000 MT
due to the rapid growth of the feed meal compound industry and increased
production of poultry, eggs, pork and shrimp. Post projects corn imports
to fall slightly to 490,000 MT in MY 2008.

Rice production will increase by 5 percent to 520,000 MT in MY 2008
(Jan-Dec). Despite high international prices and sustained demand for
Ecuadorian rice by Colombia, post estimates a small growth in
production. This is due, for the most part, to adverse climatic
conditions during the first two months of 2008 and the disincentive of
export bans in place since late 2007.

# WHEAT

![](media/image2.wmf)

![](media/image3.wmf)

## Production 

For the past 17 years, wheat production in Ecuador has declined steeply.
In 1990, Ecuador produced 30,000 MT in 37,000 harvested hectares. Since
then, unproductive yields, poor quality and low prices paid for local
wheat contributed to a reduction of production to only 3,000 MT in MY
2007. However, as international prices for wheat continue to increase,
groups of Ecuadorian farmers in the northern and central highlands are
shifting towards planting wheat for local consumption, especially by the
animal feed industry. Our estimation is that this switch towards
producing wheat (from potatoes or legumes) will bring production up to
6,000 MT and 10,000 Ha in MY 2008.

![](media/image4.wmf){width="4.510416666666667in"
height="2.8854166666666665in"}

## 

## Consumption

Fluctuating international prices and growing bread prices in Ecuador
will have an effect in the forecast consumption of wheat in MY 2008.
Ecuador will demand approximately 470,000 MT of wheat. In the period
2002-2007, the demand for wheat had experienced an average 10 percent
annual growth due mainly to nutritional habits (people eat bread twice a
day and consider pasta as a staple), and by the government's efforts to
broaden school feeding programs that currently include over one million
children. However, we are looking at an overall 10 percent contraction
this year unless the government of Ecuador continues to subsidize
production of wheat flour for human consumption.

Demand of wheat for feed is also expected to decrease as aquaculture
production and exports have slowed down during the past year. In MY
2008, approximately 40,000 MT of wheat will be directed to feeding
purposes. Shrimp and tilapia farms have been main users of wheat for
feed. However, falling shrimp exports (down 17 percent last year) and
higher international prices will lead to a contraction in the use of
imported wheat. Therefore, aquaculture users are likely to absorb the
increased local production of wheat and replace the rest of their demand
with other inputs.

![](media/image5.wmf){width="4.322916666666667in"
height="2.8854166666666665in"}

![](media/image6.wmf){width="4.302083333333333in" height="2.6875in"}

## 

## Trade 

Ecuador's wheat imports are expected to decrease from our previous
estimation of 515,000 MT in MY 2007 to 470,000 MT in MY 2008. This
forecast is only 2.6 percent over the average of the period 1997-2007.
Reduced imports are explained by high international prices and a
contraction of local demand for bread and pasta.

The United States continues to lose its market share in Ecuador. On
average, U.S. wheat exports to Ecuador in the period 1997-2007 were
157,000 MT/year, while Canada exported 281,000 MT/year (or 79% more).

Since Ecuador basically uses wheat for bread and pasta, imports of hard
wheat are, on average, higher than soft wheat by a 6 to 1 ratio (4.5 to
1 in 2007). According to buyers, hard Canadian wheat is more reliable
for milling and slightly lower in price than comparable U.S. wheat. For
the same or lower price, Canada ships wheat with higher protein and
gluten, as well as lower dockage, thereby explaining Ecuador's
preference for Canadian wheat.

Argentina also registered significant exports (82,000 MT in 2007),
becoming an important competitor for both Canada and the United States.
Millers have imported Argentine wheat mainly because of its slightly
lower price.

## Policy 

In order to address rising bread prices, the Government of Ecuador (GOE)
proposed lowering tariffs for wheat and flour, and providing subsidies
to wheat millers starting in October 2007. Local flour prices (averaging
\$22 per 50-kilo bag in 2006) rose to \$26 and \$30 in July and
September 2007. Increased bread prices, a staple for Ecuadorians, pushed
the government to threaten the local milling industry with importing
flour at reduced tariffs. After intense negotiations, wheat millers and
the GOE agreed to a subsidy of \$3.50 per hundredweight sack paid in
cash to millers with the condition that they maintain a price to the
baker of \$22 per hundredweight. Millers expressed their concern with
the proposal, notionally because the total price of \$25.50 per bag was
lower than the current market price. Nevertheless, the subsidy was
implemented and remained in place through the end of 2007. Both parties
are currently negotiating its continuity.

Wheat is a marker product under the Andean Price Band System (APBS),
with basic duty of 10 percent plus an additional variable levy,
depending on international reference prices. In July of 2001, the
Government of Ecuador phased--out wheat from the price band system as
part of its WTO commitments. However, Ecuador re-included wheat in the
price band in August of 2003 arguing an obligation to do so by Andean
Community commitments. For the period April 2007-March 2008 the variable
levy remained zero because of high world prices, thus average final APBS
tariffs on wheat were 0% for most of 2007.

In addition, Ecuador has bilateral trade agreements with Peru and Chile,
and multilateral trade agreements with ALADI (Latin American Association
of Integration). In 2004, Ecuador reached a tariff liberalization
agreement with Mercosur (Argentina, Brazil, Paraguay and Uruguay).
Implementation of these agreements in Ecuador started in April 2005.
Wheat has special treatment under the agreements with Mercosur, thus
tariff preferences are granted over the total duty, which is comprised
of the ad-valorem (basic) duty plus the Andean Price Band variable levy.
In 2007, trade partners have the following tariff
[reductions]{.underline}:

+------+----------+---------+--------+---------+------+-------+-----+
| **H  | ######## | **Parag | *      | *       | **Br | **    | **U |
| TS** |  Product | uay**/4 | *Urugu | *Argent | azil | Mexic | .S. |
|      |          |         | ay**/2 | ina**/3 | **/3 | o**/1 | and |
|      |          |         |        |         |      |       | Ca  |
|      |          |         |        |         |      |       | nad |
|      |          |         |        |         |      |       | a** |
+------+----------+---------+--------+---------+------+-------+-----+
| 1001 | Wheat,   | 42%     | 99%    | 15%     | 15%  | 8%    | 0%  |
| 1090 | durum    |         |        |         |      |       |     |
+------+----------+---------+--------+---------+------+-------+-----+
| 1001 | Wheat,   | 42%     | 99%    | 15%     | 15%  | 8%    | 0%  |
| 9020 | other    |         |        |         |      |       |     |
+------+----------+---------+--------+---------+------+-------+-----+

**/1** Under ALADI.

**/2** Uruguay will have reached zero tariffs on wheat by January 1,
2009

**/3** Argentina and Brazil will have reached zero tariffs on wheat by
January 1, 2018

**/4** Paraguay will have reached zero tariffs on wheat by January 1,
2015.

# CORN

![](media/image7.wmf)

![](media/image8.wmf)

## Production

Post estimates that corn production will increase by 10 percent to
440,000 MT in MY 2008. This level of production is the third highest of
the period 1997-2007. The growth is explained by continued increases in
world corn prices, which have been seen by farmers as an opportunity to
produce and sell more corn locally. In addition, the Government of
Ecuador and certain feed meal compounders have made efforts to motivate
production of corn and other commodities whose prices continue to
increase.

Since 1995, corn production has shown a very unstable behavior with a
record high of 638,000 MT in 1997 and a record low of 107,000 MT the
following year. However, in the last three years, production has shown a
sustained growth that can be explained by two key factors: the
government's effort to require purchase of local production before
imports are allowed and a guaranteed purchase price at least equal to
the corn CIF import cost. These programs will continue to be enforced by
the current Government of Ecuador, and the Ministry of Agriculture has
pledged additional support with credits and other forms of assistance.

Yields remain low with an average of 3 MT per hectare. This is because
the winter planting and harvest season (80 percent of the annual
production) is highly dependent on rainfalls during November through
January. If rainfalls are too scarce or too abundant, large cultivated
areas are lost to droughts or floods in the lower altitude production
areas. Another factor is the lack of irrigation systems and very limited
access to credit for inputs such as certified seeds and agrochemicals. A
number of initiatives by the poultry industry are supporting efforts to
improve yields by providing certified seeds, extension services and
inputs to a growing number of farmers in return for the purchase of
their production at market prices. In the long run, this will support
the improvement of corn production yields.

![](media/image9.wmf){width="4.864583333333333in" height="3.03125in"}

## Consumption

Ecuador's corn consumption continues its sustained 10 percent average
growth rate since 2002, and is expected to reach 912,000 MT in MY 2008
(90 percent of which is used by the animal feed industry). The increased
demand is explained by the feed industry's 6 percent annual growth rate,
along with significant annual growth in the poultry and egg industry (8
percent) and higher per capita consumption of poultry meat in Ecuador
(20 Kg/year). Feed meal production had an important growth in the past
12 years, from 576,000 MT in 1995 to 1.9 million MT in 2007.

The poultry industry, with a total population of 125 million chickens
per year, and an annual sales growth rate ranging from 5-10 percent,
consumes 80 percent of the feed corn every year. This industry produces
200,000 MT of poultry meat, and approximately 75,000 MT of eggs per
year. Another sector showing interesting growth is pork, with a
population of 1.7 million pigs per year, and which now consumes 110,000
MT/year of corn.

![](media/image10.wmf){width="3.53125in" height="2.03125in"}

## Trade

In CY 2007, total corn imports reached a record of 552,500 MT.
Ninety-nine percent of these imports came from the United States, with
the remainder provided by Argentina. Ecuador's feed industry prefers
U.S. corn to others because of its lower foreign material content,
faster delivery to Ecuadorian ports and lower transportation costs.
Imports for MY 2008 are expected to remain constant at 500,000 MT.
Although consumption continues to grow, the greater demand is likely to
be met by increased local production.

Our prior estimation of 360,000 MT corn imports from the US was based on
a growing trend of imports from Argentina. This trend, plus higher corn
prices in the U.S. lead us to believe that Argentina would keep gaining
market access as our sources confirmed that Argentine corn had been
showing lower prices than its American counterpart.

Corn imports represent a high percentage of Ecuador's total consumption.
In the period 2000-2007, Ecuador imported, on average, 52 percent of its
corn needs with a minimum of 150,000 MT and a maximum of 552,500 MT. The
animal feed industry considers that Ecuadorian corn is of better quality
than imported corn. However, Ecuador is obliged to import large
quantities of this product for two reasons: the local product is more
expensive than its imported counterpart and Ecuador's production does
not meet demand. In fact, corn production registers a deficit since
1997, and the demand is not likely to be met in the near future. Imports
will continue with variations depending on local conditions and prices.

![](media/image11.wmf){width="5.041666666666667in"
height="2.8229166666666665in"}

Ecuador exports corn to Colombia in order to satisfy that country's
southern border demand of corn for human consumption. Most exports are
made by land, in trucks, and at high prices usually paid to farmers in
cash. In the past ten years, exports averaged 64,000 MT and have taken
place during the peak of the winter harvest season (May-June).
Ecuadorian corn is used in Colombia to make "arepas" due to its
suitability for such purpose. Total year exports to Colombia in CY 2007
decreased to 17,000 due to increased local absorption and higher corn
prices paid locally. Exports are likely to recover to 35,000 MT in MY
2008.

![](media/image12.wmf){width="4.59375in" height="2.59375in"}

## Policy

Corn imports are assessed 15 percent ad-valorem duty (over CIF), plus a
variable levy applied under the Andean Price Band System (APBS). Under
this system, the ad-valorem tariffs are adjusted (increased or reduced)
depending on the correlation between international reference prices at
the time of import, and set floor and ceiling prices. The Andean
Community set floor and ceiling prices of corn for the period April 2007
to March 2008 at \$133 and \$145 per MT. During this period, because of
high international prices, the variable levy for corn has remained at
-15%, thus import duties for corn have been zero during this period.
Upon accession to the WTO, Ecuador bound its tariffs (including the
additional APBS levy) for corn at 45 percent. In addition, Ecuador
maintains a worldwide TRQ of 19,600 MT of corn at a set tariff of 25
percent. This TRQ is filled when international corn prices drop and the
APBS increases corn duties beyond 25 percent (15 percent ad-valorem + a
variable levy over 10 percent).

The Government of Ecuador does not provide any formal subsidy or
economic assistance program to promote yellow corn production. However,
the Ministry of Agriculture usually encourages corn production by
implementing absorption programs and import bans during the corn harvest
season. These absorption programs guarantee the complete purchase of
local production at high prices

Under the CAN-Mercosur trade talks, Ecuador has negotiated bilateral
tariff reductions with Argentina, Brazil, Paraguay and Uruguay. These
tariff reductions apply only to the ad-valorem duties as the Andean
Price Band System is maintained for corn. The Ecuador--Mercosur
agreement entered into effect in Ecuador on April 1, 2005 and has
liberalization schedules of 14 years for most cereals, including corn,
as follows:

  ----------------- ------------------------------ -----------------------
  **Country of      **First Liberalization**       **Full Liberalization**
  Origin**                                         

  Argentina         3 year grace period 2005-2008, In 2018, 100%
                    10% reduction starting in      liberalization
                    January 2008.                  

  Brazil            In 2008: 10% reduction. 15% in 5% yearly reduction
                    2009.                          from 2009 to 100% in
                                                   2018.

  Paraguay          In 2007, 40% reduction until   In 2018, 100%
                    2012.                          liberalization

  Uruguay           In 2007, 50% reduction until   100% reduction in 2018.
                    2013.                          
  ----------------- ------------------------------ -----------------------

## 

## 

## 

## 

## 

# RICE

## 

![](media/image13.wmf)

![](media/image14.wmf)

## Production

Rice production will increase by 5 percent to 520,000 MT in MY 2008
(Jan-Dec). Despite high international prices and sustained demand for
Ecuadorian rice by Colombia, post estimates small growth in production.
This is due, for the most part, to adverse climatic conditions during
the first two months of 2008 and the disincentive of export bans in
place since late 2007. The planting season started normally this year
and Ecuador is expected to have a first harvest in May.

Production of rice takes place in the lowlands of the coastal region, in
areas that flood during the rainy season (November through April) and
remain somewhat humid during the summer (May-September). Therefore, lack
or excess of rainfalls are a determining factor for the volume of
production. The largest harvest registers at the end of the rainy season
(May through June). During the summer, in turn, only a third of the
available area is planted because irrigation is expensive and limited to
large farms and very specific areas. The majority (80 percent) of rice
producers in Ecuador are poor, small farmers that own and plant less
than 5 hectares with yields below 3 MT per hectare.

![](media/image15.wmf){width="4.572916666666667in" height="2.75in"}

## Consumption

Rice is a staple food of Ecuadorians for at least one meal a day and the
majority of Ecuador's production is consumed locally. Monthly
consumption is estimated at 38,300 MT, roughly 460,000 MT in MY 2008.
Current per capita consumption is calculated at 40 kg per month, but is
likely to decrease as rice prices increase in the local market.

Rice sales are traditionally marketed through wholesalers in one hundred
pound sacks (45 kg) or in small stores by the pound. Prices vary
depending on the marketing channel. For example, the official wholesale
price of the 100-pound sack is \$26, while sales by the pound can make
the price grow to \$34 per sack. Approximately 80 percent of rice sales
are made in sacks or by the pound. In addition, as a result of
supermarket expansion in the main cities of Ecuador, purchasing habits
have shifted towards buying branded bags of 2 or 5 kg. It is estimated
that 15 to 20 percent of total rice sales are now made trough
supermarkets under these presentations.

## Trade

## 

Ecuador has imported minimal quantities of paddy rice in the last ten
years since 1995, except in 1998 where weather-related losses caused
imports to grow to 140,000 MT, mostly paddy. If Ecuador's production
capacity were to continue at its current pace, it is unlikely that
Ecuador will need to import rice in the future.

Milled rice exports to Colombia maintained a high level in 2007 at
100,000 MT. This level of exports is the second highest of the last 12
years, and is explained by two factors: increased demand of rice in the
southern regions of Colombia and low prices paid by Ecuadorian
intermediaries to the farmers during 2007 (approximately \$22 per cwt).
When this happens, both producers and traders in Ecuador prefer to
export than to supply the local market. This situation triggered the
government's response to ban exports of rice to Colombia in September
2007. Also, the farmer price of rice was set at a minimum of \$24 per
cwt.

## 

## Policy

## 

## 

Rice imports are a very sensitive issue in Ecuador. The Government of
Ecuador is pushing a self-sufficiency program for rice by continuing to
implement the Andean Price Band System (APBS) and by controlling
imports. APBS floor and ceiling prices for the period April 2007-March
2008 have been set at \$275 and \$315 per MT. The final tariff during
the majority of 2007 was 0%.

In addition, higher demand for Ecuadorian rice in Colombia, and higher
prices paid in that market, created a shortfall of this commodity in
Ecuador. This situation and higher production costs raised the price of
rice from \$26 per hundredweight at the end of 2006 to \$38 in October
2007. The GOE instituted an export ban on rice in October 2007, which
remains in place to date.

In addition, the Ministry of Agriculture's Consultative Committee on
rice, consisting of producers, millers and government officials, decides
on the timing and quantity of rice imports. The ad-valorem duty for
paddy rice is set at 15 percent, and 20 percent for all other types of
rice. Andean Community Nations (CAN) are assessed zero tariffs and are
not assessed the Andean Price Band. Other Latin American countries have
been granted ad-valorem tariff preferences under ALADI, but they still
are assessed the Andean Price Band, as follows:

  ---------- ----------------- --------- --------- ---------- ----------- -------------- ------------- --------------- ------------ ------------
  **HTS**    **Description**   **U.S. &  **CAN**   **Peru**   **Chile**   **ALADI \***                                              
                               World**                                                                                              

                                                                          **Paraguay**   **Uruguay**   **Argentina**   **Brazil**   **Mexico**

  10061090   Rice, Paddy       15%       Zero      Zero       15%         15%            7.5%          15%             15%          15%

  10062000   Rice, Brown       20%       Zero      Zero       20%         20%            10%           20%             20%          20%

  10063000   Rice, Milled      20%       Zero      Zero       20%         12%            10%           20%             20%          20%

  10064000   Rice, Broken      20%       Zero      Zero       20%         20%            10%           20%             20%          20%
  ---------- ----------------- --------- --------- ---------- ----------- -------------- ------------- --------------- ------------ ------------

\* ALADI stands for Latin American Integration Association.

[Note:]{.underline} Although Peru is part of CAN, Ecuador has a
bilateral agreement with that nation, which includes preferences on
rice. Chile also has a bilateral trade agreement with Ecuador.

##