Farmers Hope to Break Argentina’s Economic Drought

Farmers Hope to Break Argentina’s Economic Drought

A farmer is plowing a field with a horse drawn plow near Tilcara in the valley of Quebrada de Humahuaca (UNESCO World Heritage Site) in the Andes Mountains, Jujuy Province, Argentina.

SourceWolfgang Kaehler/LightRocket via Getty

Why you should care

A bumper crop in Argentina is sparking hopes of an economic turnaround. 

The huddle of weather-beaten farmers gathered at the bustling El Tokio bar in San Antonio de Areco, the cradle of Argentina’s gaucho, or cowboy, culture, agree on one thing — this year’s harvest could be as good as last year’s was bad.

After suffering the worst drought in half a century last year, favorable weather conditions since the end of 2018 in the fertile Pampas plains have led many to predict that 2019 will be a bumper year. That would be good news for President Mauricio Macri, who is seeking re-election in October polls.

“This year is exceptional. It has been raining about once a week. That never happens,” says Diego Kelly, a veteran farmer from the picturesque town. “If this rain continues and they manage to harvest everything, farmers will be rolling in it.”

Macri is relying on Argentina’s pivotal agricultural sector — which accounts for about half of the country’s exports — to hoist the country out of recession just in time to boost his chances of staying in power after the economy shrank by more than 2 percent last year.

Gustavo López, director of Agritrend, a consultancy in Buenos Aires, expects Argentina’s grain production this year to reach 128 million to 133 million metric tons and exports to reach a “historic record” of about 93 million metric tons. That would mean export revenues of about $28 billion, of which some $17 billion is accounted for by soy products.

What worries us is that we will be forced to export more raw materials than refined products, which means lower revenues.

Gustavo López, director, Agritrend

That would be about $5 billion more in export revenues than last year, helping the government balance the country’s trade deficit. Tax income from farmers would almost double to $5.7 billion after the government increased export taxes last year as part of its effort, backed by the International Monetary Fund, to eliminate the 2019 fiscal deficit.

The fortunes of Argentina’s farmers will partly depend on how trade tensions between the U.S. and China play out. Argentina is by far the world’s largest exporter of soybean meal and oil, and the trade war could increase Chinese demand for its crop. But China also has a large soy processing industry and is only interested in buying lower-value unprocessed beans.

“If the U.S.-China conflict continues, what worries us is that we will be forced to export more raw materials than refined products, which means lower revenues as there is less added value,” López says. In contrast, the benefits for Brazil, the second-largest exporter of raw soybeans after the U.S., are clear.

But if the trade war dissipates, it could present a different challenge for Argentina. The country would be forced to compete with Brazil for other markets where prices are lower, warns Dan Basse, president of AgResource, a commodity research company in Chicago.

“It is [going to be] a fistfight between Argentina and Brazil for other markets,” says Basse, who believes there is a 70 to 75 percent chance of a deal between the U.S. and China by April. “That’s why you see the price of Brazilian beans falling dramatically, as they are looking for other markets outside China,” he adds.

Whatever happens between the U.S. and China, the impact of the new right-wing government of Jair Bolsonaro in Brazil — Argentina’s greatest competitor — will be crucial.

New markets for Argentina’s beef farmers, which account for about 3 percent of the country’s exports, worth around $2 billion, could open up if relations worsen between Brazil and Arab countries after Bolsonaro promised to move his country’s embassy in Israel to Jerusalem. They have already benefited from the reopening of the U.S. market after being shut out for 17 years due to American concerns about an outbreak of foot-and-mouth disease.

Further new markets could open up if, as many expect, Bolsonaro helps free up the Mercosur trade bloc, enabling its members — Argentina, Brazil, Paraguay and Uruguay — to pursue trade agreements outside the group.

But perhaps what matters most to farmers in Argentina is the domestic political backdrop. Many fear a return to Argentina’s populist past after the elections and prefer Macri’s government. That explains why most accepted “with resignation” the surprise increase in export taxes last year, says Martin Vivanco, a prominent farmer in San Antonio de Areco.

Export taxes for soy were raised to about 28 percent after the government cut them to 18 percent from the 35 percent under the previous administration of Cristina Fernández de Kirchner. Taxes for other grains that had been scrapped altogether when Macri came to power were reinstated, at a level of about 10 to 12 percent.

“There was no alternative .… If this government fails, that means a return to the previous model,” Vivanco says.

For him, the relationship between Fernández’s administration and farmers was like that of a negligent and aggressive parent. While Macri’s government may also be negligent, “at least it tells us it loves us,” Vivanco adds.

But throughout Argentina’s ups and downs over the past century, its farmers have remained the economy’s powerhouse — despite, according to Kelly, being “real moaners, whether things are going well or badly.”

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By Benedict Mander

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