South America Calling

With economy slowly slipping deeper and deeper into crisis, Argentine farmers are keeping hold of the one thing that they know will maintain value -- their soybeans.

This is causing the country's governors sleepless nights as they badly need the dollars generated from bean exports to fund their spending.

As a result, the farm industry is concerned that Buenos Aires may find a way of stopping them from stocking old-crop soybeans and the coming crop.

One rumored possibility is the government announces that the already-punitive soybean export tax will be raised from 35% some time  after July, creating an incentive to sell beans now.

An alternative option would be to restrict the sale of silo bags, the ubiquitous low-cost storage solution that Argentine farmers use to keep grain on the farm for up to a year.

This would force them to sell to exporters as investment in permanent on-farm silos has been low for years.

It sounds a little crazy, but this is Argentina, and the government does partially control the importation of the plastic used in silo bags via the oil firm YPF.

According to local sources, silo bag makers are seeking to deliver product as quickly as possible so that any nasty surprises don't leave them with huge stocks at distribution depots.

Another rumor doing the rounds is that the government will set up a grains board, essentially centralizing the marketing of all crops. Yet another is that the government will offer a subsidized exchange rate as a way of convincing them to sell.

I must emphasize that the government has not indicated it will take any of these steps. These are just rumors that I am sharing as an indication of how jumpy the Argentine grain business has become. 

Farmers here have been stocking defensively for some time, initially to try to counter the impact of runaway inflation, which the government attempts to hide but private forecasters estimate skips along at over 20% per year.

But a new factor has come into play in recent months, the deterioration of the Argentine peso. Officially, the peso has devalued a little over 10% in the last year, but on the parallel market it has nosedived, losing nearly 50% of its value.

The problem for Argentine farmers is that they only get the official rate for the beans they export.

"Exports are taxed at 35% and then the exchange rate offered is nearly 50% lower than the floating black-market rate. Farmers are left with just 15% of the real value of the soy. Given such a bad deal, they chose to hold on to it," explains Alejandro Hellman of the Invegra farm consultancy.

They plan to continue this policy, only selling what they have to cover bills and looking to sell corn first, he explains.

But the government doesn't like the fact that Argentine farmers are still stocking around 3 million metric tons (mmt) of old-crop beans into the eleventh month of the season and only 5 mmt of new-crop beans have been committed.

You would have thought that something has to give in this situation and that is why the rumors start.

But the government also has to be careful. By hiking the soybean export tax or restricting silo bag sales, they would court mass farmer protest.

Those protests could be quite vociferous as the measures potentially gouge deeply into margins and the Kirshner administration could do without strikes up country in this, a Congressional election year.

On the other hand, the farm sector is not as unified or radical as it was in 2008, when farmers embarked on their last major strike. Meanwhile, urban support for the farmers is not as strong as it was back then.

The other option of offering farmers an exchange rate that is halfway between the official rate and the black market rate has political ramifications. By creating multi tier exchange rate,  the government implicitly admits that it is running an unsustainable economic model. Something it is loathed to do. 

 Argentine custom authorities are currently conducting a survey of soybean stocks on farms, further raising concerns that some big announcement is around the corner. 

Meanwhile, uncertainy abounds 

 (CZ)

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