High grain prices give Argentine economy some breathing room

RIO DE JANEIRO, BRAZIL – The current high international grain prices represent a balm for Argentina’s complex monetary and fiscal situation. This year will benefit from millions of extraordinary revenues from its agricultural exports.

Although Argentina’s harvest for the 2020-2021 crop year will be smaller than in the previous cycle, the country is benefiting from an upward cycle in international grain prices, which have been rising steadily since last July.

With a projected harvest by the Buenos Aires Grain Exchange of 46 million tons in Argentina, corn, the country’s main crop, was this month quoted on international markets at around US$300 per ton, a value that it had not reached since 2013 and that almost doubles the quotation of  a year ago.

Soybeans, with a projected harvest in Argentina of 43 million tons, reached US$610 per ton in the middle of this month, a value that had not been recorded since 2012 and that is close to 80% above the price of a year ago.

The reasons for the rise? A global demand that remains firm combined with climatic factors that cut harvests in the main producers, including Argentina, the world’s leading exporter of soybean oil and meal and the third-largest exporter of corn.

“We remain short on supply, at least in the short term. In July and August, the weather in the United States will determine the price trend,” said Catalina Ferrari, agricultural market analyst at AZ Group consulting firm.

EXTRAORDINARY INCOME

The sharp increase in prices translates into higher income for Argentina from agricultural exports. This brings some relief to the country, suffering from 3 years of severe recession and macroeconomic imbalances.

According to calculations by the Institute of Studies on the Argentine and Latin American Reality (IERAL), at current prices, Argentina could ship US$35.9 billion worth of grains and their derivatives this year, which implies about US$9.6 billion more income than in 2020.

The additional inflow of foreign currency will help strengthen the Central Bank’s ailing reserves -which stand at around US$41.5 billion-, and could reduce expectations of devaluation of the Argentine peso, thus becoming a calming influence in a highly restricted exchange market.

“We estimate an extra income from exports of between US$8 and 10 billion. This will increase the reserves and generate an umbrella so as not to have to intervene so much in the exchange market to control the price of the dollar,” said Leonardo Piazza, director of the consulting firm LP Consulting.

The effect is already visible: in the first four-month period of 2021, the income of foreign currency from exports of grains and derivatives amounted to US$9.7 billion (US$4.7 billion more than in the same period of 2020), a period in which the Central Bank managed to increase its reserves by about one billion dollars.

MOMENTARY RELIEF

In addition, an increase in foreign sales will increase the Treasury’s income from collecting export duties on grains and derivatives.

According to IERAL’s calculations, the Treasury would collect US$8.6 billion this year from export duties, about US$2.8 billion more than in 2020.

“It is fiscal relief”, observed Piazza, who anyway warned that “all this is circumstantial and momentary, until commodity prices stabilize and loosen”, and warned about the inflationary effect on foodstuffs exerted by the current high grain prices.

These extraordinary revenues come at a time when the country intends to reduce its primary deficit to 4.5% of GDP -from 6.5% in 2020-, a complex task given the expenditure demanded by the pandemic scenario, the lack of external financing, a delayed agreement with the IMF, all in an electoral year not very favorable for adjustments.