Brazil and Argentina: Coffee and Oil - Term Paper Example

Brazil and Argentina: Coffee and Oil The purpose of this paper is to identify two countries and analyze two products traded between them. The two countries that will be the focus of this paper are Argentina and Brazil, and the two traded products that will be analyzed are Brazilian coffee exports to Argentina and Argentinean oil exports to Brazil. The paper will have a format that first identifies the oil demands in Brazil and contrast that with the production capacity of oil in Argentina. Next the paper will examine production capacity of coffee in Brazil then examines the coffee consumption patterns of Argentineans. This paper will draw on a number of other factors such as the effect that Mercado Comun del Sur (Southern Common Market) or Mercosur has had on the on the market structure and trade patterns between the two countries and by extension what effect the organization has had on regional integration. Furthermore this paper will examine how improvements in infrastructure technology may have a positive effect between the two nations and ultimately how all the factor endowments make each country a more favorable location for their exports. Lastly this paper will have a brief examination of what effect the exchange rate regimes employed by both nations has had. When examining the oil demands of Brazil it is important to take into consideration that the country does produce a tremendous amount of oil and has proven reserves that according to the CIA World Factbook are more than ten times that of Argentina. Brazil produces 1.797 million bbl/day (Barrels per day) and exports 278,400 bbl/day. This may sound impressive but it must be taken into consideration that the country currently consumes far more than it is able to produce, with consumption at approximately 2.1 million barrels bbl/day and imports totaling 674,500 bbl/day. While it is clear that the country does have the capacity and possibility to meet its own oil needs it seems that importing oil has become a more favorable option perhaps owing to difficulties along the domestic supply chain. When examined as one market it becomes clear that Brazil’s oil supply is not able to meet its oil demand without looking abroad. It could be argued that the marginal cost for domestic oil may also make importing oil a more favorable option. It could be the case that Brazil is currently producing the most efficient amount of oil given existing technology and equipment. To expand domestic production of oil may prove financially unfeasible owing to additional property, plant and equipment requirements. The decision to source oil from abroad would be logical in this circumstance. Argentina is unique in that the country has a tremendous amount of proven oil reserves of over 2 billion Barrels and according to the CIA World Factbook (2008) Argentina produced an estimated 730,000 bbl/day in 2007. It was also estimated by the CIA World Factbook that Argentina consumed 480,000 bbl/day, imported 21,650 bbl/day and exported 367,600 bbl/day. The Energy Information Administration (EIA) Country Analysis Brief on Argentina (2008) indicated that the country is a net energy exporter and the main export destination for Argentinean oil is Brazil. The summary of oil production and consumption trends for Brazil and Argentina are highlighted in table #1 Table #1 Brazil Argentina Proven Oil Reserves 11,720,000,000 2,086,000,000 Oil Production 1,797,000 730,000 Oil Consumption 2,100,000 480,000 Oil Exports 278,400 367,600 Oil Imports 674,500 21,650 Source Data: CIA World Factbook (2008) It should be reflected on that although the oil production capacity of Brazil far exceeds that of Argentina the consumption patterns for Brazil indicate that even though they have the proven oil reserves they simply cannot extract (Or perhaps even refine) enough oil to meet their growing demand. It is the case that Argentina with a far lower overall production capacity than Brazil is able to extract more than enough oil to meet their domestic needs and as such is capable of exporting enough oil to cover a significant portion of Brazil’s oil demand. It is likely that Brazil addresses their oil importation needs from a number of oil producing countries such as Venezuela with whom Brazil shares a border and Nigeria; listed on the CIA World Factbook as one of Brazil’s major trading partners. According to the EIA, Argentina has two domestic oil pipelines which both start in Puerto Hernandez but finish off at a refinery near Mendoza (In the West part of the country) and to Puerto Rosales a major shipping channel for the country near Buenos Aires. This latter destination may help oil reach its final destination in Brazil by means of sea transportation in a much more inexpensive manner than domestically (Brazilian) produced oil. It may be the case that the government of Argentina instituted a policy of ‘pushing exports’ in the short term. The logic being that the country may have noticed that Brazil had an oil production glut and tried to capitalize on the relatively high price of oil over the last few years. Now that energy prices are falling it could be that Argentina scales back its oil extraction and distribution operations but that remains to be seen. The idea of deregulation in the oil sector may play a big role in the market for Argentine oil. According to the EIA (2008) in Argentina the oil industry is open to private companies in all aspects of the oil industry (Extraction, exploration, distillation etc.). Although the most important producer was identified as Repsol-YPF which is according to its website (2008) an integrated Spanish oil and gas company with significant assets in Argentina. It should be noted that there is a state owned energy company called Enarsa, however according to the EIA (2008) the company does not currently have production assets. When put together this could represent a serious factor endowment in the oil sector for Argentina, in that the country has generally speaking favorable infrastructure, and proven exploitable oil reserves that gives the country a competitive edge for oil exportation. When examining the production capacity for coffee in Brazil one must take stock that Brazil is a major player in the coffee industry. Furthermore it has been identified by International Market Insight Reports that Argentina is Brazil’s most important regional trading partner (1998). The article went on to further outline how Argentina represents 27.4% of export sales and also accounted for over 13% average annual trade growth, Argentina specifically brought in 31% more imports from Brazil in 1997 than in 1996 totaling U.S.$6.8 billion in sales and according to the CIA World Factbook accounts for 9.2% of all exports in 2007. It has been estimated by the US Department of Agriculture as espoused by Promar International (2001) that Brazil accounts for nearly 30% of the total world crop and produces annually approximately 33.7 million bags of coffee making it the worlds single largest producer both in volume and per capita. The situation is slightly complicated by the different varieties of coffee mainly Arabica and Robusta but for the purpose of argument this paper will focus on gross wholesale coffee production and exportation. Brazil is in a unique situation in that it simply has one of the world’s best climates for producing coffee which gives the nation a comparative advantage over Argentina for coffee production. It is the case that Brazil is able to produce more coffee than any other country in the world and it is likely that this is owing to the unique climate, soil quality, worker experience, and established distribution channels which give Brazil a comparative advantage over Argentina in coffee production. It could be argued that with this expertise in the coffee industry, Brazil may be enjoying economies of scale in that new investment in growing technologies may theoretically be producing significantly more coffee. It is the case that many coffee producers in the past were on very small farms but from the research it would appear that coffee industry in Brazil is moving towards much larger coffee plantations with higher yields per acre. According to the international coffee organization historical coffee statistics, Argentineans consume approximately one kilogram per capita annually in 2003 (ICO, 2008). Although this is not an extremely high coffee consumption by contrast to some other nations it still represents a large overall number. According to the CIA world Factbook, the population of Argentina is 40.482 million (July 2008 est.) and as such would represent more than 40 million kilograms consumed annually. Furthermore although it is possible to possibly produce a small amount of coffee in Argentina it is the case that the climate in Argentina is not best suited for the production of coffee and as such falls south of the major coffee producing regions of the world see Appendix #1. Although there is not much reliable information indicating how much coffee is imported directly from Brazil to Argentina, one could assume that the close geographic proximity and the consumption patterns of Argentineans would make the country a favorable destination for Brazilian coffee. It is important to highlight that both countries are full members of Mercosur which according to Lane (2006) is a regional trade agreement that promotes free trade and economic cooperation among member and associate member states. Lane (2008) went on to further argue that there are economic incentives of this level of regional economic integration in addition to other incentives such as national security and promoting peace. It is possible that the provisions of this trade agreement have significantly reduced if not eliminated import/export tariffs in the oil sector between Brazil and Argentina and thus facilitating trade. Economic incentives are obvious such as the provisions of Mercosor which identify the member states as being part of a customs union. Ultimately, almost all trade between the two nations enjoys duty free status. There was no mention of oil or coffee specifically having any duties, so for the purpose of this paper we can assume they have duty free status. One factor that may have had a big effect on trade between Argentina and Brazil is the exchange rate regime employed by both nations. According to Fraga (2000), Brazil employed a fixed rate exchange system for many years until 1999 when the decision to float the ‘Real’ (The currency of Brazil) was made. Argentina is pursuing a policy of traditional macroeconomic frameworks specifically including upholding a floating exchange rate regime according to Country Monitor Magazine (2004). By both nations employing floating exchange rate regimes there is the potential for increased transaction risk, in that an agreed upon price for a traded product may change with swings in the exchange rate between the Argentine Peso and Brazilian Real. However it has been argued by the OECD (2002) that in Latin America (Specifically Brazil and Argentina) that under the former fixed exchange rate regime under the law of one price, tradable goods producers were faced with a situation where they had to stem price increases, the end result was a steep rise in the price of tradables. Although it was further argued by the OECD (2002) that with the elimination of the fixed exchange rate regimes the currencies sharply depreciated in the short term, it was the case that in the long term this positively affected the trading of goods between the two nations. Lastly given that Coffee and Oil are both products where there is not much differentiation from one producer to another (Oil from Saudi Arabia is not much different from Argentinean Oil for example) one could argue that this is a case of near perfect competition. The close geographic proximity of the two nations may make it cheaper and easier to trade in these two commodities. In conclusion it is the case that both nations have a comparative advantage in the production of these two goods. Brazil has a climate that is better suited to growing coffee and Argentina is able to extract more domestic oil than it needs for its domestic market. The massive investment in Brazilian plantations and Argentine oil infrastructure could lead to economies of scale in both countries and definitely lead to massive producer surpluses. It has been argued that the implementation of a flexible exchange rate regime in both countries has made the trading of goods more favorable for Latin American countries. Furthermore the reduction of trade barriers between Argentina and Brazil specifically Mercosur has made trade between the two nations much easier. References: CIA World Factbook (2008) Argentina [online] Available at https://www.cia.gov/library/publications/the-world-factbook/geos/ar.html CIA World Factbook (2008) Brazil [online] Available at https://www.cia.gov/library/publications/the-world-factbook/geos/br.html Country (2004, March). Monitor Latin America: 2003-08. 12(12), 7.  (EIA) Energy Information Administration (Feb, 2008) Argentina Energy Data, Statistics and Analysis- Oil, Gas, Electricity and Coal Country Analysis Briefs [online] Available at http://www.eia.doe.gov/emeu/cabs/Argentina/pdf.pdf Fraga, A. (2000, March). Monetary policy during the transition to a floating exchange rate. Finance & Development, 37(1), 16-18. International Coffee Organization (ICO). 2005. Historical Coffee Statistics. London : ICO. Available online at: http://www.ico.org/historical.asp. International Market Insight Reports, (1998) Brazil 1997 Trade. (1998, February). (Document ID: 26928533). Lane, J. (2006). The Regionalisation of Government: A Comparison of Regional Groups of States. Aussenwirtschaft, 61(3), 329-356.  OECD (2002) Trade and Competitiveness in Argentina, Brazil and Chile: The impact of exchange rate regimes on real exchange rates in South America, 1990-2002 [online] Available at http://www.oecd.org/document/43/0,3343,en_2649_34601_34038507_1_1_1_1,00.html Promar International (2001) Brazil Coffee to 2010 Implications for Global Coffee Players: Management Summary [online] Available at http://www.promarinternational.com/pdfs/IndustryStrategicStudies/AgriFoodAgriInputs/Brazil%20coffee%20management%20summary.pdf Respol YPF (2008) Company profile website international English [online] available at http://www.repsol.com Appendix #1 Source: http://www.coffeebeans.ie/about-coffee-page34052.html Read More