South America Calling

Argentine farmers' attention was drawn from the showers that have been providing vital moisture to soybean and corn fields over the last couple of days to news that the government will allow a devaluation of the official peso exchange rate.

Finance Minister Axel Kicillof announced that, as of Monday, individuals will be allowed to buy dollars once again and the tax on exchange transactions into greenbacks would be lowered from 35% to 20%.

It's a move that will cause the official peso rate, which stood at 7.75 to the dollar last night, to slide towards the black market rate, which currently stands at 13 to the dollar.

Argentina's government had run out of foreign reserves and therefore could no longer artificially prop up its currency. But the lack of measures to accompany the devaluation left economists with many unanswered questions. What does the government plan to do about inflation, which is already out of control and will surge further when the peso weakens? What does the government plan to do about its foreign debt and what about controlling government spending?

In short, what is the wider plan? The lack of answers is making everybody nervous.

In theory, the devaluation is good for Argentine farmers, who have long suffered because local prices are not only capped by export taxes, which are levied at 35% on soybeans and around 20% on corn and wheat, but also by the compulsory conversion of export dollars to pesos at the official rate, which meant they received as little as half the open market rate for their beans in recent years.

With the policy change, the official exchange rate will in theory converge with the black market rate, offering better grain prices. Also, farmers can, from Monday, convert their revenues back to dollars, should they wish.

In practice, farmers will likely continue to hold on to soybeans in silo bags for the time being. The fact is that holding beans is the best hedge against the further volatility that is almost certainly ahead.

Further rule changes must come in the next few days and they may not be favorable to grain farmers. One of the possibilities on the table is a further increase in grain export taxes. Farm leaders are already organizing pre-emptive protests against such a move.

Meanwhile, local inflation could skyrocket from its current elevated level -- the precise number for which is elusive because the government doctors the figures, but economists estimate around 25%.

Grain exporters could also benefit. With greater convertibility, the forex risks of trading Argentine beans and grains are reduced. It could also improve their relationship with the government, which says exporters evade taxes on international grain deals by not bringing all export dollars into the country.

It really is too early to see what the future holds for the Argentine grain industry as this morning's announcement merely marks the start of something new.

(AG)

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