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September 4, 2018

How might the "Financial Meltdown" in Argentina impact Ag?

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

Last week was a very bad week financially in Argentina. Last Wednesday, President Macri said that the International Monitory Fund (IMF) had agreed to expedite cash payments to Argentina as part of a $50 billion line of credit. That resulted in a 20% plunge in the value of the Argentine peso over a two-day period. Last Thursday, the Argentine Central Bank increased the prime interest rate by 15% to a world-high 60% in an effort to stabilize the currency. The government now says that inflation is running at 30%, but most people think it is higher than that.

When the IMF agreed to the line of credit, it stipulated that one of the conditions for the loan was that the government either reduce expenditures or increase revenue or do both. The increase revenue part is what could have a major impact on Argentine agriculture. The question for us is how all of this might impact the agricultural sector in Argentina just as farmers are preparing for spring planting.

The Argentine President went on TV on Monday, September 3, to announce a revamp of the export taxes on commodities. The new taxes will be floating based on the value of the commodity. The export tax on soybeans, which currently is 25.5% will be cut to 18% and the export tax on soybean meal and soybean oil, which currently is 23%, will also be reduced to 18%.

But, and this is the kicker, a new tax of 4 pesos per U.S. dollar of goods would be added to all primary exports. At the current exchange rate, this would amount to a new tax of 10.5%. Non primary exports, which probably includes soybean meal and soybean oil, would have a new tax of 3 pesos per dollar or about 7.8% at the current exchange rate.

The bottom line is that corn and wheat exports will be taxes at 10.5% compared to the 0% export tax on those two commodities which has been in place for approximately the last three years. Soybeans will face an export tax of 28.5% and soybean meal and soybean oil will face an export tax of 25.8%. These taxes will remain in place until 2020.

This is not good news for Argentine farmers. There were currently no export taxes on corn and wheat and now both products are taxed at 10.5%. The export taxes on soybeans, soybean meal, and soybean oil were scheduled to be reduced 0.5% per month until the end of 2019 and now the export taxes will no longer decline and the taxes on all three of those products have marginally increased.

History Lesson - The reason why the current scenario in Argentina sounds familiar is because it happened once before in the early 2000's. In 2001, Argentina defaulted on $90 billion which resulted in a plunge in the peso driving millions of Argentines into poverty. Farmers at the time actually came through the crisis in pretty good shape because their assets, which was grain, were priced in dollars.

The government at the time claimed that the farmers were making a "windfall profit" due to the plunging currency and that they should "share those profits with their less fortunate countrymen", thus the start of the export tax program on agricultural commodities. The export tax started small and continued to increase over the years until it reached 35% on soybeans. In 2015, newly elected President Macri eliminated the export taxes on corn and wheat and lowered the export tax on soybeans to 30%. In January of 2018, the taxes on soybeans, soybean meal, and soybean oil started to decline 0.5% per month, but now that program has been eliminated.

The rhetoric used by the President and the Economic Minister are almost identical to what was said 17 years ago to justify the start of export taxes on agricultural commodities - share your profits with the less fortunate.

How might all of this impact the 2018/19 acreage mix in Argentina?

That is a question that is hard to answer right now, but below are some of my thoughts.

  • Several months ago, I thought the situation favored more corn acres in Argentina due to the trade issues between the U.S. and Chine and the potential impact on soybean prices.
  • When the Argentine government increased the prime interest rate to 45%, I thought that might favor more soybean acreage because soybeans are much cheaper to plant than corn.
  • When the Argentine government suspended the monthly reductions on the soybean meal and soybean oil export taxes, I thought that might favor more corn acreage.
  • Now that the prime interest rate is 60% and the value of the peso dropped approximately 20% just last week, I thought again that might favor additional soybean acreage.
  • Now they have reinstated an export tax on corn and wheat, increased the tax on soybeans, soybean meal and soybean oil and frozen the taxes in place for maybe two years.
  • The only "winners" here, if you can call it that, are the crushers who have their margins back due to the tax differential on soybeans vs meal and oil.

With all this just being announced, it is hard to say what the impact might be on the crop acreage in Argentina. It might take a few days to sort it out.