South America Calling

With the economy in disarray and the country in default, Argentine grain farmers are looking for defensive plays for the 2014-15 season, which begins in October.

In these parts, that means planting soybeans.

Analysts expect Argentine soybean planted area to stand pat at around 50 million acres in the upcoming season, while corn planting area drops as much as 20%.

It's not that gross margins on Argentine soybeans are much better than for corn. But, as I have talked about here before, soybeans are much more liquid and aren't subject to export controls. At a time when inflation is surging and a devaluation of the peso is almost certain over the next year, liquidity is king.

Inflation is raging at over 30%, according to private estimates, which is pushing costs such as freight and labor sharply higher. That means corn probably won't be planted in more marginal regions.

With financing costs on the rise, cash flow has become an issue. Government-subsidized farm loans are a thing of the past. This year, rates will range from 20% to 35% and terms will be reduced.

That is important as only 9% of large farms can self-finance planting and 18% have operating cost debts hanging over from the year before, according to the CREA farm organization.

Meanwhile, land rent costs have fallen, but only on average 1.3%, according to CREA.

Given this financial pressure, farmers will seek the flexibility of soybeans.

While corn fertilizers and seed are expensive, and have to be bought in advance, the initial outlay of soybeans is low, although chemical purchases come later, explains Dante Romano, a grains analyst at the Alabern Fabrega brokerage in Rosario.

With an export tariff of 20%, plus delays in reimbursement for 10% VAT on shipments, corn is a tough sell for next season.

Land that can be switched from corn, will be.

"On rented land, corn will only be produced to fulfill contracts," noted the Rosario Cereals Exchange in a research report.

The decline in soybean prices has made margins wafer thin. But many farm costs are fixed and farmers in the grain heartlands will probably sow anyway.

They will plant with costs in pesos and hope for a devaluation of the local currency during the season to raise profits, notes Romano.

(AG)

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