January 28, 2014

Argentine Economy on Accelerated Downward Spiral

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

The economic situation in Argentina accelerated its downward spiral last week with the Argentine Peso devaluing more than 16% for the week. The central bank, fearing that its international reserves are getting precariously low, stopped defending the currency late last week. The devaluation of the peso is just the latest event in a series of actions that the government has taken in an attempt to control the deepening economic crisis.

The government also announced last week a more relaxed policy toward the purchase of dollars by Argentine citizens, but on Monday they capped the monthly purchases at $2,000 per month. This is better than what it had been for the last two years, but it is certainly far from what farmers would like to see.

President Kirchner has rarely appeared in public since her brain surgery last October and it is becoming painfully clear that she and her advisors have no clear plan to control the economic "train-wreck" in Argentina. The Kirchner administration has fundamental differences with the capitalistic system and they have been unable to chart a successful path forward. After all, it was her and her late husband's policies of defaulting on the nation's debt in the early 2000's that started all the problems.

Where it goes from here is anybody's guess, but there is going to be a very painful adjustment to the new economic realities in Argentina. For our purposes, I am going to focus on what it might mean for the agricultural sector.

Slow farmer selling - Farmers had already been very slow sellers of the grain even before the collapse of the peso last week and now they will hold onto their grain even tighter until the devaluation of the currency has run its course. They still have an estimated 8 million tons of last year's soybean crop in storage and they will not sell any more of those soybeans any time soon. The stored grain is their hedge against soaring inflation and a devaluating currency.

Forward contracting of next year's crop in Argentina has also been very slow and farmers are only going to sell grain to satisfy their immediate cash flow needs. Once the devaluation of the peso appears to be complete, farmer selling will resume. The complete devaluation could take weeks or months, no one knows for sure.

The soybeans and corn will all be harvested and stored either at the local grain elevators or on farm in silo bags. It costs approximately $5.00 per ton to put the soybeans into the bags and to extract the soybeans at a later date. If the soybeans are put in the bag at 13.5% moisture or less, they can remain in the bags indefinitely, or at least 12 months or longer. When the grain will be marketed will depend on the economic situation in the country which seems to be changing by the day.

Farmers fear increase in soybean export taxes - The Argentine government has not indicated that they are considering an increase in soybean export taxes, but they are desperate for revenue and there are rumors in Argentina that they may increase the soybean export tax from 35% to 40%. They could justify the increase based on the devaluation of the peso which they would consider "windfall profits" for farmers. The export tax was originally initiated after the peso was unpegged from the dollar about a decade ago. At that time they said the action resulted in "windfall profits" for farmers, so they started taxing grain exports. I would not be surprised if they tried something similar once again. If they increase the tax, farmers will certainly launch protests against the action.

Crushing operations down to 60% of capacity - The crushing industry in Argentina slowed its operations to only 60% of capacity due to the unavailability of soybeans. The industry will probably continue to reduce operations until the new crop soybeans start to become available in late February or early March. If the currency devaluation is still ongoing at that point, it remains uncertain how much of the new crop (if any) the farmers will sell. Crushers may be hard pressed to obtain enough soybeans, at least initially, to ramp up their operations.

Labor unrest to follow devaluation - During the months of February and March the labor union at the crushing and port facilities will certainly stage a series of work stoppages demanding wage hikes of at least 30% or more to compensate for their eroding purchasing power. There was a short-lived strike last week that lasted for only several hours before the government ordered the workers back to work while negotiations continued for another ten days. The labor unions indicated that the strike was just the first salvo in what is sure to be contentious wage negotiations.

These yearly labor issues have been common in Argentina for many years, but the economic situation is now much worse than it has been in over a decade. The first labor action will probably be taken by the truckers, but every other union in Argentina will demand hefty wage hikes. As a result, we should expect disruptions at the crushing and export facilities in Argentina as their new crop starts to come onto the market.

The labor issues could make the upcoming harvest season very complicated for farmers who do not have on-farm storage or the ability to transport their crop to nearby grain elevators or export facilities. On the other hand, it could be a real boom for the silo bag business!