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Veteran Advisor

Argentina Default-Agriculture Style

Pablo Fraga is a market analyst in Argentina. He shares these thoughts on the debt default impact on agriculture. Notice that he says that a lot of those soybeans in on-farm storage are not owned by farmers, rather landowners. Hmmmm......

 

Here it is in his own words:

 

"Well, let's start with a small review about Argentina´s economy. In Dec 2001, we defaulted part of our foreign debt. It was u$s144 billions (nine zeros) and we defaulted u$s 86 billions
In Jan 2002, we devaluated our currency. Until that time, it was a fix exchange rate $1=u$s1. After that, it started to be floating exchange rate.
Farms earned lot of money because they planted $1=u$s1 and the harvested $3=u$s1.
all debts were changed to Pesos, no matter if your debt was originally in US dollars. But, that is old story, let's go to the point.
In 2005, Argentina offered the first debt exchange and 76% of creditors accepted.
With soybeans, corn, oil and many commodities going up, our economy began to grow and we did not have to pay as debt as we did in the 90s
In 2002, we had 9 billions dollars in the Central Bank reserves and in 2011 we had  55 billions. However, many of our neighbors (Uruguay  Colombio, Brazil, Chile, Peru) did better than us during those years
But, our currency started to be overvalued (inflation rates up 20% with devaluation rates above that (5%/10%)
In 2010, we offer a second chance to enter the debt exchange (in the same conditions as 2005 did), and we reach 93%. However 7% (holdouts) did not accept those conditions and some of them started legal actions against the country.
In 2011, Judge Thomas Griesa from New York ruled against Argentina ,but Argentina appealed up to the Supreme Court.
On June 16, 2014, the US Supreme Court decided not to take the Argentine case and our country had to pay to the holdouts if it wanted to keep paying its performing debt.
On July 30, Argentina could not reach an agreement with holdouts so Griesa did not allowed Argentina to pay a maturity interest (u$s 500 millions), that is way the country is in default, not because Argentina doesn't want to pay (as 2001), but because the Court doesn't allow the payment if we don't pay the holdouts as well.
The trial is for only $1.3 billion but there are many legal ramifications that make everything extremely difficult to resolve.
Farms see this situation as a risky one adding our inflation problems and currency problems, farmers tend to hold soybeans on farm
We lost millions of dollars because Chicago fell down the last 2 months, but no one pay attention to that. All farmers see soybean as a safety value. There are 30 millions tons in on-farm storage.
The only reason that we have so many stocks is because farmers don't have other alternatives to invest their money. They don't trust this gov to make huge investments in machinery, buildings, etc
Everybody expect that when this gov had left ( Oct 2015), the next one will be better.
Argentina needed to solve the problems with holdouts to start borrowing money from the international market. With the defualt, fresh cash looks difficult. We don't have many dollars in the Reserve (29 billions vs 55 in Jan 2011)
With no dollars in reserve, everybody is expecting currency devaluation, especially farmers.
This is the third year that the economy didn't grow and we keep having more problems than solutions. In that context, farmers only plant, invest as less as they can, harvest, pay debts and then wait sitting on the soybeans bags.
WHEN WILL ARGENTINA FARMERS SELL WALL OF SOYBEANS?
Well many farmers think the worst has happened. But maybe Chicago still has some bearish tendency, if the crop is really a record one.
But, we have an other point I did not mention. In Argentina, 60-65% of land is rented and the rent is payed with soybeans.
So, a big part of those soybean tons are not owned by farmers. Those tons are the ones of the land owners (what is not the same)
Since 2011, we can't buy dollars freely, so we have a black market that is 40% more expensive than the official one.
Owners tend to be people with not economical issues, so they can wait.
Before 2011, land owners sell soybean and by US dollars or or they buy flats in big cities (Rosario, Buenos Aires, Cordoba).
We don't have a big capital market where people can invest their savings. If you have money, you travel abroad, you buy flats or you buy dollars. You don't take your Pesos to a bank.
So, is anybody projecting how long the landowners will hold onto the beans?
They are selling now, but at a slow peace. And, if US reach a great crop, I don't think the market will care about all this soybean in Argentina.
And I don't know what the Government will do with the currency.
But, for sure, we will have 7-8 mill tns when the new crop comes in Apr 2015."

 

 

Alright, your turn to weigh-in. What do you think?

 

Mike

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5 Replies
Senior Advisor

Re: Argentina Default-Agriculture Style

Argentina was the poster child for what many thought our country should have done in 2007-8. Nothing. Let the economy tank and then the story line was that we would recover faster after going deeper. Wishful thinking. The generals and others took the richest country in SA, mismanaged the economy (and the society) and then became adventuresome and engaged in a war with Britian that toppled everything.

 

The World Bank would not loan the new civilian governments money unless they essentially went cold turkey. The country had a choice between draconian requirements by the Bank to impoverish their country and then be at the mercy of the Bank of default and go cold turkey on their own terms. They decided on their own terms. Immediately more than 50% of the population descended to into poverty. They've been fighting the battle ever since to relieve the poverty and make deals with their creditors. Obviously going cold turkey is the slow path. And vulture funds are still getting their pound of flesh.

 

Since farming is one of the few economically productive sectors it's carrying the country. Their products is priced in $US and they get paid pesos which gives them a good price relative to other Argentinians.

 

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Frequent Contributor

Re: Argentina Default-Agriculture Style

As Paul Harvey used to say "It's not one world". Wow thats quite a story, makes a person glad to live where we do.

Thanks Mike.

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Honored Advisor

Re: Argentina Default-Agriculture Style

It is really hard to compare the two since one is being required to live by some rules and the other writes it's own.

 

note the one factor mentioned that seems to inspire long term grain ownership ---------- Lack of confidence.

 

I don't see that "wall" of soybeans going anywhere if it is stabelizing a country.  It is the reserve currency.

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Honored Advisor

Re: Argentina Default-Agriculture Style

I have talked about the "currency"  of grain before.

 

Argentina is not the only one that unofficially has two currencies.

 

Land in Brazil is priced in bags of beans per acre. Has been for a long time.

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Senior Advisor

Re: Argentina Default-Agriculture Style

Argentina is living by rules. It's called survival. And keeping food prices in reach of much of it's people even though it's an exporter.

 

They weren't allowed to go bankrupt. We used bankruptcy and bailouts to rebuild an economic foundation, such as it is. Argentina couldn't so were cut off from world credit.

 

But the different paths should be an object lesson.

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