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ANALYSIS: Time to shed some tears for Argentina, beset by problems on all sides

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Argentina, the world’s biggest exporter of soymeal, used to fatten hogs and poultry from Europe to Asia, is in deep trouble. It is heading for its seventh currency devaluation in 20 years, despite protestations to the contrary by the country’s President, Alberto Fernandez.

 

A devaluation of the Peso will make all exports, priced in US dollars, cheaper, and imports more expensive, risking a ratcheting-up of inflation. On the official exchange rate $1 buys 77 Pesos, but on the thriving black market $1 buys more than double that, a record gap. The official Peso has lost 22% against the US dollar so far this year.

 

The Argentine central bank is believed to have just $1bn in liquid reserves, and the shrinking reserves will force the hand of the government to tighten restrictions on imports and re-set the exchange rate at a much lower value. Farmers get paid at the official rate but their expenses are usually levied at the black market rate.

 

As a consequence they have been drip-feeding their products into the export markets, despite the government lowering export taxes on soybeans and their derivative products by 3% to 30% last month.

 

Oilseed workers’ strike

 

This week the government ended a 24-hour strike by the Federation of Oilseeds Workers, which temporarily halted soybean processing at major plants owned by Bunge, Cargill, Dreyfus and Glencore, and which interrupted operations at Rosario, a major grains location.

 

Striking workers have been told that negotiations with the government will be held on 20 October.

 

Inflation is officially running at around 50% annually, although the government expects it to fall to 29% in 2021. Argentina imposed tighter capital controls last month; it imposed a 35% tax on dollar purchases of $200 per month and said that credit card purchases abroad would be included in that allowance.

 

The country is on course for a 12% contraction this year, making the third successive year of recession. It is only just emerging from its ninth sovereign debt default, after restructuring almost $110bn in debt.

 

High soy prices

 

Argentine soy farmers face a double dilemma this season. Planting of soybeans should get underway this month but dry weather and macro-economic uncertainties may reduce the overall planted area.

 

High international proces for soybeans and meal should tempt them to plant more soybeans this season, particularly given the obvious strong and continuing demand from China and other Asian markets. In late 2019 Argentine signed a deal with China opening the path for the former to export soymeal to the latter. This deal was seen as signifying China’s determination to diversify its soymeal imports from the US and Brazil.

 

In September the Rosario Grains exchange forecast that the 2020-21 soybean harvest would be around 50m tonnes, on a marginally increased planted area of 17.3m hectares. This would be close to the 2019-20 crop of 50.7m tonnes.

 

Inflation anxieties

 

Many Argentines remember 1989’s hyperinflation, when it soared to above 3,000%.

 

Soybeans are the country’s cash crop cow; a devaluation would make them more competitive against those of Brazil and the US, although input costs (fertiliser and pesticides) would rise as they are priced in dollars.

 

Time is running out for the government - but a chunky devaluation, probably combined with some measure to restrict imports, is more likely than not before the end of this year. That would no doubt induce greater soymeal exports, currently being held back by uncertain farmers.

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