Argentina s Presidential Election - Implications for Argentine Agriculture Sector and Dry Bean Industry

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1 Argentina s Presidential Election - Implications for Argentine Agriculture Sector and Dry Bean Industry By Randy Duckworth US Dry Bean Council Representative December 3, 2015 Ask 10 Argentines and you will likely get 10 completely different answers as to what the future holds with new President-Elect Mauricio Macri. I ve spoken with a few industry people about it and read some articles but I certainly do not claim any particular expertise. What follows are my personal views regarding recent Presidential election in Argentina and its likely impact on Argentina s economy and Agricultural sector.! 1

2 Background On 22 November 2015, after a tie in the first round of presidential elections on 25 October, Buenos Aires Mayor Mauricio Macri, beat Buenos Aires province Governor Daniel Scioli to win Argentina s Presidency. On December 10 Macri will take office and be the first democratically elected non-leftist or peronist president since Cristina Fernández de Kirchner, the outgoing president, and her party maintained high export taxes (35% for soy). They also implemented strict export controls for corn, wheat and meat with stated intention of protecting consumers from food price inflation (not surprisingly these did not work). Prior to the election Mr. Macri made some campaign promises that could have important implications for Argentina s agricultural sector. He promised to dismantle the country s currency controls, reduce export taxes and remove export restrictions (e.g., corn and wheat) that have crippled Argentina s agricultural sector. Elimination of Export Restrictions Macri promised to eliminate export restrictions. One likely short-term impact of Macri s promise to eliminate export restrictions is likely to be a near term boost in corn plantings (December). The reason is simple. Prior to Macri s election, the general impact of Argentina s export restrictions on corn and wheat was that instead of rotating crops like U.S. farmers many Argentine farmers planted almost entirely soy where they could (even with 35% tax on soybean exports it was better option than being forced to sell within Argentina). Implications There is little doubt that Argentina s farmers want to move away from current monoculture practices, which they know are unsustainable. With export restrictions removed many believe corn (and possibly wheat) will become more viable alternatives for some farmers. The main dry bean production regions of Salta, Jujuy and Tucuman are not the major corn and soybean production areas. Having said that, bean producers are sitting on huge stocks of dry beans and will be happy to have any alternatives to planting dry beans in If export restrictions are eliminated and export taxes are reduced corn, soy and wheat will undoubtedly become more attractive in traditional bean areas where they are viable alternatives.! 2

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5 Currency Controls and Exchange Rates Past and Present The present currency controls essentially exist to prevent $US from being pulled out of Argentina and allow the government to maintain foreign currency reserves. When an Argentine company exports agricultural products it must provide a copy of contract to the government which shows the $US value of the contract. Then within specific time (if I recall correctly its 90 days of ship date), the contract payment in $US must be deposited into Argentine national bank. The $US deposit is then converted to pesos at official government rate and credited to exporter s account. This matters greatly because Argentina presently has two exchange rates the official government exchange rate and the unofficial (blackmarket) rate. On December 2, 2015 the official government rate for the peso was 9.69 per US$1. However, the black market rate (aka dollar blue) on December 2 was per US$1. If the Argentine company does everything by the book (contract matches actual invoice and there are no secondary deposits in external banks) this difference between official and unofficial exchanges represents a 52% to the exporting company. Foreign Denominated Savings Beginning in January 2014, the government of Argentina allowed residents to purchase a limited quantity of foreign exchange for savings depending on the person s declared income. To the surprise of some, the Argentine government continued to honor requests to purchase foreign exchange for savings right up until the election (these requests diminish the the government s much needed foreign currency reserves). In the month prior to the election such requests reached record levels, which resulted in the market being flush with $US at the same time as the candidate Macri was promising to eliminate the dual exchange rates. The net result was that the unofficial exchange rate dropped by over 12% in the 2 weeks leading up to the election (from 16 pesos per $US1 to as low as 14 ARP per $US1). The Future of Currency Controls Shortly before the election Macri promised to end currency controls saying that there could only be one rate moving forward. Around same time, in an effort to keep unofficial rate from raising too high at election time the government sold $600+ million in $US reserves and permitted Argentines to request US$700+ million for personal savings (also coming from foreign currency reserves).! 5

6 Implications If Macri follows through as expected this will certainly benefit Argentine farmers and exporters. The effect of a single peso exchange would be to boost the returns of farmers selling dollar-denominated commodities (the amount deposited into account of exporter will reflect real world exchange rate). However, it remains uncertain how the new Macri administration will implement export tax reductions. The administration may roll back taxes gradually. Others suggest that the administration is considering opening a duty-free export window (e.g., for 90 days) in order to clear existing high stocks. Either way, when the changes are implemented there will certainly be a strong push by Argentina s exporters to sell stocks particularly of soybeans and corn, which have larger international export markets than dry beans. Fearing further currency devaluations and the impact of inflation will undoubtedly spur Argentina s dry bean exporters to try hard to move excess dry bean stocks as early as possible. It will not be easy, however, due to the problematic quality of the 2015 crop and high world stocks of most dry bean classes. As every dry bean exporter knows, dry beans have relatively low substitutability across classes and relatively low demand elasticity in comparison to other major commodities (for example, corn has greater demand elasticity due to much wider range of potential uses such as in feed and production of ethanol).! 6

7 Other Considerations Government Revenues Macri promised that he is going to eliminate taxes on agricultural exports. Many experts question how he will be able to accomplish this because current estimates are that at least 10% of government revenues are derived from these agricultural export taxes.! 7

8 Foreign Debt Argentina s refusal to comply with a U.S. court ruling ordering the GOA to pay a group of U.S. creditors who sued the country for the full value of their defaulted Argentine bond holdings continues to restrict Argentina s ability to service some of its sovereign debt both at home and abroad. Argentina s limited access to international financial markets will continue to discourage investment until the issue is settled. Macri has promised to reach agreement with Argentina s creditors so that Argentina can once again access international financial markets. There is little doubt Macri wants and needs to address this issue. But the question is how Macri will accomplish this while there is increasing pressure on Argentina s foreign currency reserves. Shadow of 2019 Elections While markets have responded optimistically to election of Macri he has a very difficult path in front of him. The outgoing President stacked the deck early by passing a budget under which the new President will be constrained. And she and her party effectively limited the ability of the new President to negotiate debts with foreign entities. In Argentina the President is constitutionally limited to two consecutive terms in a row but may run for more than two terms in a lifetime. The shadow of Cristina Fernández de Kirchner potentially running again in 2019 will likely loom large as Macri tries to implement necessary reforms in 4 short years.! 8

9 (See, Inflation Many economists predict that a currency devaluation would have negative impact on already high inflation rates. Argentina s inflation rate is already amongst the highest in the world. If the past is any indication, a significant worsening of inflation and increase in cost of living in Argentina will likely lead to mass protests and increased civil unrest. Conclusions We should not expect the poor economic situation in Argentina to change rapidly. It took Argentina years to dig the economic hole it finds itself in and it will likely take years to fix it. No matter how well intentioned, the new President faces a number of significant obstacles including dropping foreign currency reserves, high domestic inflation rates, limited ability to renegotiate debt and politicians within the country that are firmly aligned with the outgoing President.! 9

10 If Macri follows through with his campaign promises to eliminate export restrictions, reduce export taxes and devaluate the currency (eliminate dual exchange rate) there will undoubtedly follow a major push into international markets by Argentine commodity exporters including dry bean exporters. This push will likely put additional pressure on already anemic world soy, corn and dry bean markets. In my opinion (and the opinion of some Argentine industry members I ve spoken with), if export restrictions are eliminated and export taxes are lowered it will very likely result in trend of fewer dry beans being planted in Argentina in favor of alternative crops such as corn, soy and wheat.! 10!