South America Calling

Argentine Soy Farmers in a Tough Spot

Argentine farmers are stuck at the horns of a dilemma.

News of a record U.S. soybean crop, underlined by the latest USDA crop report, is weighing on prices and the wide spread between old- and new-crop futures indicates that farmers should sell.

On the other hand, the possibility of a maxi devaluation of the peso offers the promise of substantial future gains for farmers who continue to store soybeans. Holding beans also provides protection should the local economy descend into crisis.

According to the latest Argentine government figures, farmers are holding for the moment. As of July 18, they had sold just 23.6 million metric tons (mmt) of the 55.6 mmt produced in the 2013-14 season. That represents 42% compared with an average of 56% at this time of year over the last five harvests.

But the ongoing debt crisis means devaluation becomes more likely by the day.

Argentina technically defaulted on its sovereign debt Tuesday for the fourth time in 40 years. The government has a 30-day grace period to negotiate payments with investors before a formal default, but time is running out.

As I explained in a blog post two weeks ago, the issue derives from the $95 billion sovereign debt default in 2001. Some 92% of investors adhered to the restructuring of that debt in 2005 and 2010, but the rest chose to hold out.

Those holdouts have obtained a New York court order preventing Argentina from making a repayment to holders of restructured bonds on June 30, without settling with them.

Of course, if Argentina pays the holdouts the face value of their bonds, those who accepted the restructuring would also demand face value. With Argentine foreign reserves at a precarious $28 billion, they don't have the cash to do that.

The government might simply opt to slide into default. That would solve the immediate problem but would be disastrous for Argentina's medium- to long-term economic prospects.

A default would lock Argentina out of international financial markets for years at a time when the economy is stumbling, possibly precipitating a major crisis.

That would lead to a devaluation but also create huge economic instability, which is bad for farmers.

The other choice is to find a way to settle with the holdouts. Given Argentina's attempts to patch things up with international investors over the last year, this would appear to be Buenos Aires' preferred option. That could be done through a separate bond issue for the holdouts.

That would avert an immediate crisis, but wouldn't discount the possibility of devaluation at a later date given foreign reserves are so thin and the black-market dollar rate is nearly 50% above the official rate.

July promises to be another tense month for Argentine farmers.



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