In Argentina, soy is far more than a dietary staple. Soy is a political battleground that pits farmers and producers against the administration of current President Cristina Fernandez de Kirchner. And currently Ms. Fernandez is going to war with soy farmers for “hoarding” their product. Her weapon? Requiring the tax agency (AFIP) to report sales of silo bags used by these farmers to store grain.
When Argentina defaulted on its sovereign debt back in 2001, it became extremely difficult and costly for the country to raise money by selling bonds. These bonds received a low credit rating because the market views them as risky; consequently, they aren’t purchased by large mutual or pension funds and they must pay higher interest rates. The recent technical default has exacerbated this international capital market lockout, and the holdout “vulture” funds are deftly blocking attempts to circumvent the ruling.
Argentina’s inability to access foreign currency via capital markets necessitates that it rely on exports for foreign currency. More simply, Argentina can’t sell bonds to get dollars so it has to sell the stuff it produces. But there in lies the rub – Argentina has this inconvenient parallel currency problem that becomes most poignant when something, be it money or a good, crosses the border.
Argentina requires exporters to repatriate ALL revenue from sales abroad and convert these funds into the local currency at the official rate. So when soy farmers sell their soy overseas for US dollars, they have 90 days to bring these funds back into the country via the central bank, where they are converted into Argentine pesos at the official ARS $8.73 rate rather than the ARS $13 and up currently being offered on the parallel market. In case you’re a millennial and doing a bit of math bores you, that’s about a 33 percent difference exporters lose in an implicit tax.
On top of that, there is a 35 percent tax on soy exports, so for every dollar worth of soy that exporters sell, they only receive ARS $5.58 in Argentina. That’s a 58 percent effective tax, or more than half of the value of the product exported in the first place.
Not only that, but then those funds are pretty much stuck in Argentina unless the exporter uses bonds to move them back out, whereby they are effectively re-purchasing dollars at the ARS $12.50 and up mark. Not exactly an attractive situation.
Globally speaking, soy exporters everywhere are hurting from the recent across the board slump in commodity prices. As a world we’re in a bit of a deflationary situation where prices of and demand for everything from oil to copper to soy are falling. As the graph below shows, soy prices have dropped from a high of about US $550 in April to current low prices below US $400 per metric ton.
Even in less economically interesting countries, soy producers are looking for ways to protect themselves against this downfall, and one of the most basic ways to do this is to hold your product and wait until prices are higher to sell. Soy can be stored for up to three years by farmers in silo bags like the ones pictured above. Each bag (which look like giant sausages) is 3.4 meters in diameter and 60 meters long and holds 325 metric tons.
Cristina’s presidency is like a ticking time bomb to capital markets, with investors snapping up Argentine debt with the understanding that come hell or high water, Cristina is gone in December 2015 and her replacement will repay the holdouts and continue servicing existing debt. Physical soy isn’t exactly like a financial instrument. It it is bigger, more costly to store and can rot, but the same idea exists that it will be worth more after this presidency ends. Farmers have hit a point when they can wait – and they will.
Cristina’s conflict with the agriculture industry was front page news for weeks in 2008 when the two squared off and ground the country to a halt. In March 2008, the government decided to raise export taxes on soybeans and sunflower to effectively 44 percent, and the farmers retaliated with roadblocks and thousands of protestors wielding pots and pans that shut down the country. This is essential to understand because it exposed the first fracture in the administration and caused a split between Cristina and her then Vice President Julio Cobos from the Radical Party.
When Cristina ran for reelection in 2007 she chose Cobos as her running mate as a show of bipartisanship and inclusion. When she tried to raise export taxes even higher and the farming sector erupted, the split in the government was exposed for all to see. The bill passed the lower house but when it came to the Senate it was tied 36 votes in favor and 36 against, leaving the final decision to the president of the Senate – Vice President Julio Cobos. Cobos holed up in his office until late into the night while protests thronged the streets, and emerged to say, “may history judge me, my vote is not positive”.
This division dealt a devastating blow to Kirchnerism, marking the first public failure since Cristina’s late husband, the former president Nestor Kirchner, took office in 2003. It also marked the birth of Cristina’s brand of Kirchnerism and an era of harsh capital and import/export controls that arguably to blame for ripping apart the country’s economy.
There have been reports of graffiti encouraging people to slash open silos and punish these hoarders, and reports have emerged of multiple attempts to destroy these farmers’ crops. Cristina’s administration has not spoken out against these attempts, and has furthered the pressure to force growers to export their crops and put dollars in the government’s coffers by requiring sellers of these silo bags to report their monthly sales to the AFIP, or tax agency. The government’s argument is that these growers have received state assistance and by hoarding they are undercutting the purpose of these programs.
At the end of the day this is simple. Soy growers see a light at the end of the tunnel and will wait as long as they can. This administration needs dollars and selling soy abroad would achieve that end.
But for Cristina the clock is ticking. She is leaving behind a divided population and a disastrous economy, but will pull out all the stops to limp across the finish line with at least a few dollars left in the bank.