Argentine Political Changes

Wednesday, November 25, 2015

Argentina elects a new President
By Dale Durchholz

“And everyone is making policy changes even before he takes office!” 

If nothing else, the stories that floated to the surface in the grain market this past week have been nothing short of amazing in the wake of the surprising election results in Argentina.  President elect Macri barely had time to celebrate his victory before stories hit the wires about the coming changes, some of expected immediately.

And even though going into the election there was more talk about possible downside price risk for soybeans given possible changes, in the wake of the elections, there was more talk about downside risk for the corn market.

To be sure, the new President, and his staff, have a lot of challenges invigorating the Argentine economy, the agricultural sector in particular.

The biggest issue discussed during the campaign was the 35 percent export tax on soybeans, with hopes a reduction or elimination would encourage producer sales.

But the export taxes on wheat and corn, 20-23 percent, may be equally as important, along with the export quotas for both. The combination stifled production of the two crops over the last 8 years, shifting land into soybeans. Some economists believe lifting the quotas alone could nearly double the per acre income for corn and wheat.

In the wake of the election, there was talk producers would shift acreage from soybeans to corn to take advantage of coming changes.  But with 30 percent of the soybeans already planted, the window to shift significant acreage is rapidly closing. And, there’s no certainty on what the immediate policy changes might be.  Hence, we think any acreage shift will be modest this year.

Another rumor floated a couple of days after the election was that President-elect Macri was going to eliminate the soybean export tax altogether for a period of 90 days to encourage producers to sell remaining old-crop inventory.  It’s thought to be as large as 17 mmt. 

However, with the export taxes on the grains, soybeans included, accounting for 10-11 percent of the government revenues, it was swiftly denied.  During the campaign, Macri had indicated an initial reduction of 5 percentage points on the soybean tax was possible, with the remainder phased in over time. We’d expect the same pattern to come for corn and wheat export taxes. 

The other big issue is the differential between the official currency exchange rate and the “black market” rate.  The official rate is 9.68 pesos to the Dollar.  The most recent reading on the unofficial rate(the blue dolar) is 15.25 pesos to the Dollar. 

Again, a rash move is unlikely, as moving to the unofficial level would only add to inflation, with the current rate already near 25 percent.  Like other policy changes that will come, look for an attempt to phase in a migration over time to mitigate disruption. 

But there’s little doubt changes are coming to unravel the policies put in place by President Fernandez and her husband over the last 12 years.  The outcome is hopeful, but not altogether clear at this time.  But some believe grain output could jump 30 percent over the next 4 years to 130 mmt.