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Argentina Farmers Struggle to Finance Crops After Default

After Argentina failed to reach an agreement with 7% of the U.S. creditors that did not accept a debt restructure plan introduced in 2005, New York arbitration judge Thomas Griesa ordered that the country pay a total of US$ 1.3 billion to all creditors in the case. The South American country did not accept the order because it could bring a precedent for new claims from the other 93% creditors, and that could lift the total debt up to US$ 17 billion. Therefore, since July 31 the country went into a technical default - the second default in 13 years.

As a result, Standard & Poor's downgraded Argentina from CCC- to SD (which stands for Selective Default). This means that the country will have even less access to international markets. And what this would mean for grain farmers?

In an environment of an annual inflation of 30% to 40% and a government entering a default, interest rates are likely to go up, and farmers tend to have difficulties financing the next crop, according to most experts.

The Argentinian Association of Experimental Regional Agricultural Consortium (CREA) says that the farm business in the country already pays an average of 40% annual rates. CREA also forecasts that the corn acres would fall up to 25% in the next season from the current 10.62 million acres. Corn is the most expensive crop, while the current price does not seem to be attractive.

As an alternative to banks, nearly 50% of Argentina's farmers use the local stock exchanges and about 25% use grains as currency and the "silo-bags as savings accounts" - keeping most of the grain in the field until it reaches the highest price, according to the Rosario Board of Trade.

Approximately 39% of grain farmers in Argentina will need to finance the next crop. The trend is that soybean stocks start to be sold faster soon, so that they get can the money to buy inputs.

"The indebted farmers and the least capitalized would sell it soon. Just the most capitalized would still keep waiting for the best soybean price," explains to Lorena D'Angelo, an independent analyst from Rosario, a port city in the Northeast of the country.

D'Angelo also said that the harder access to credit combined with lower commodity prices and input inflation are a growing problem. "This is a ticking bomb," she concludes.

Sales of inputs in the province of Buenos Aires, one of the major producing regions in Argentina, plummeted 30% in the year so far compared with 2013, according to the Chamber of Agrochemicals and Seeds Businesses of Buenos Aires. The chamber says that the low is related to commodity prices, climate factors, and higher costs in the country.

Government help does not seem to be on the way. Argentina's government did not give any sign that the policy of a delayed dollar value would change anytime soon. On exports, farmers have received the official dollar value (AR$ 8.30 as of today), while the parallel dollar is worth over AR$ 13, and have been taxed at rate of 20% for corn and 35% for soybeans.

As Argentina's government does not consider itself in default, the Ministry of Agriculture declined to speak with on future perspectives. But situationist representative Luis Basterra, president of the Agricultural Commission of Argentina House of Representatives, revealed that he would fight for lower taxes on corn exports.

"I would like to protect our land. One of the ways I can do it is to fight the monoculture of soybeans. I think that, as the value of corn is so low, we could lower the retentions [taxes] on it. I will fight for that," he told after the Congress of the Association of Non-Tillage Farmers of Argentina.

Brazilian machinery

Brazil is seen as not having as harsh an environment for the farm business as Argentina. However, credit issues were seen this year. The Brazilian National Bank of Economic and Social Development (BNDES), which subsidizes bank loans for machinery purchases in the country, have pumped less money for those purposes this year.

From January to April of this year, the bank loaned R$ 3.7 billion (US$ 1.64) billion approximately) for the purchase of agricultural machinery made in Brazil, while in the same period of 2013, BNDES have pumped R$ 5.7 billion in the financial sector for the same purposes. An official statement sent to by the bank says that the reduction happened because it "was the final stretch of the crop at the time."

Earlier in the year, the long wait for credit approval surprised a lot of farmers that used to access those funds without a meticulous background check. Those difficulties, on the other hand, were denied by financial institutions such as Banco do Brasil.

As a result, machinery sales in Brazil plummeted 20% in the first semester compared with the record of 41,100 unities sales in the same period of 2013. Porto Alegre newspaper Zero Hora reported recently that some John Deere dealerships reduced profit margins to attract more buyers.

Agricultural machinery produced in Brazil with 60% of the components coming from domestic manufacturers are financed through interest rates of 4.6% to 6% a year. BNDES finances the other financial institutions who offer the credit lines.


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