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---------- Forwarded message ---------- From: Citation <citation...@yahoo.com> Date: 2009/2/11 Subject: [stockinvestorsforum] WSJ: Latin America hit by commodity deflation To: "citation . citation 502" <citation...@yahoo.com> FEBRUARY 11, 2009 Latin America Gets Squeezed By Dive in Commodity Prices - By MATT MOFFETT<http://online.wsj.com/search/search_center.html?KEYWORDS=MATT+MOFFETT&ARTICLESEARCHQUERY_PARSER=bylineAND> CARLOS CASARES, Argentina -- Gustavo Grobocopatel is called "the Soybean King" here because he oversees a farming empire the size of Luxembourg. Nowadays, that distinction brings more grief than glory. Soybean prices have plunged about 40% since last July amid a global commodities crash. For Argentine growers, the pain has been especially acute. Leftist President Cristina Kirchner, who once disparaged soybeans as "practically a weed," taxes them heavily and maintains a heavy hand in the economy. On top of that, the worst drought to hit Argentina in 70 years is scorching the fields during the growing season. "All of our worst nightmares are happening, one after another," says Julio Mayol, an agronomist employed by Mr. Grobocopatel's privately held company, Grupo Los Grobo SA. Argentina Cries for Rain View Slideshow<http://online.wsj.com/article/SB123430877724170335.html#> [image: [SB123375957121347977]]<http://online.wsj.com/article/SB123430877724170335.html#> Hernan Zentenoo for The Wall Street Journal In Argentina's northeastern Entre Rios province, rancher Humberto Baez watched helplessly as his fields dried up. For almost six years, rising commodities prices and favorable weather were a boon to corporations and governments throughout Latin America. Natural-resources tycoons were born, Andean mining towns and coastal oil towns boomed, and foreign investors piled into Latin stocks whose names they could barely pronounce. Governments paid off debts and spent freely on social programs. Economic growth averaged 5% between 2003 and 2008, up from 3.5% over the prior three decades. But that cycle has taken a sudden, vicious turn. Prices of soybeans, copper and oil -- the region's meal tickets -- have tumbled as the global economic crisis undercuts demand. Big natural-resource investments, including a $1 billion refining project in Peru and a $2 billion mining expansion in Brazil, are being reviewed or shelved. Farmers who bet that grain prices would continue rising are seeing their tractors and harvesters repossessed. The International Monetary Fund projects the region will grow just 1.1% this year, insufficient for its burgeoning population. Brazil is paying a steep price for relying on natural resources such as iron ore and soybeans for 40% of its exports. Eike Batista, who emerged as the country's richest man amid the boom, with a mining and energy empire he said was worth $16 billion, has seen its value cut in half. Brazil's once hefty trade surplus swung into the red in the first month of this year. With corporations like mining giant Cia. Vale do Rio Doce cutting workers, Brazil lost more jobs at the end of last year than at any time in 16 years. The region's big oil and gas producers -- Venezuela, Bolivia and Ecuador -- have also been hit hard. Ecuador, for example, recently defaulted on some of its foreign bonds, partly because its leftist president considered them "illegitimate," and partly because lower oil prices will mean less revenue to pay debt. Its economy is projected to contract by 3% to 4% this year. In Argentina, the Peronist government of President Kirchner has come to rely on globally competitive agriculture companies such as Los Grobo as an important source of revenue. Last year, soybeans and their byproducts accounted for about 25% of Argentina's exports. The government taxes soybean exports at 35%, which generated around 10% of its tax revenue last year. The U.S. and Europe, by contrast, support their agriculture industries with heavy subsidies. Commodity Meltdown View Interactive<http://online.wsj.com/article/SB123430877724170335.html#> <http://online.wsj.com/article/SB123430877724170335.html#> See how countries in South and Central America have been affected by falling commodities prices. As a result, the problems facing companies like Los Grobo could indirectly sow political unrest. Soybeans have been a backbone of Argentina's economy. The $7 billion generated by the soybean tax last year was roughly equal to the subsidies the Kirchner government doled out to keep electricity and public transportation cheap. Over the past couple of months, as the soybean collapse hit home, Mrs. Kirchner has started raising power and subway rates, triggering lawsuits and sporadic protests. With big payments on Argentina's debt coming due, Mrs. Kirchner is scrambling for dollars to replace the declining soybean windfall. One result: Argentina's tax agency is considering sending letters to renters of 500,000 safe-deposit boxes, advising them of an amnesty program for those who pay back taxes on previously undeclared money. Emergency Measures Some of the government's emergency measures could make life harder for Los Grobo. In October, Mrs. Kirchner nationalized private pension funds holding $26 billion in assets, including most of the $20 million in debt that Los Grobo issued in 2007. "Argentina basically destroyed its capital market," says Pablo Giorgi, Los Grobo's planning director, who worries that the nationalized funds now will focus more on holding government debt than the private sector's. The government says the private funds did a poor job of managing Argentines' savings. [image: [food chain]] So far, the government has refused to lower its tax on soybean exports. "In this scenario of low prices and drought," predicts Mr. Grobocopatel, many farmers will go bankrupt. In recent weeks, there have been scattered rural protests over the tax. Some farmers in the town of Tornquist dragged two dried-out cow carcasses to a clearing near an intersection and erected a large sign reading, "Today it's them. Tomorrow?" Farm leaders have threatened bigger protests in the future. Agriculture Secretary Carlos Cheppi says the government has provided tens of millions of dollars in aid. He has suggested that farmers exaggerate their problems and always complain about the government. The setbacks have been humbling for Los Grobo, which is located in the windswept town of Carlos Casares, a few hours southwest of Buenos Aires. Los Grobo owns only a tiny bit of the land it farms. It rents the overwhelming majority, paying owners a flat fee or a part of the crop. This year, the company is farming 670,000 acres, including land in Uruguay, Paraguay and Brazil. In addition to soybeans, it grows corn and wheat and provides farming services. It has projected sales of about $800 million this year. Prices of soybeans peaked about $600 a ton last July, then began falling as the global financial crisis took hold. Traders worried that the recession would slow soybean demand; selling by commodities speculators further depressed prices. Prices have rebounded a bit from their December lows, and are currently around $365 a ton. In Argentina, the drought is only making matters worse, scorching Los Grobo's acreage on the pampa. In a field the company farms in Tornquist, the scrawny plants are wilted and yellowing. Grasshoppers have attacked. Meteorologists say the drought stems from the La Niña effect, in which cooler surface water temperatures in the Pacific Ocean lead to dry weather in the southern regions of South America. Marcelo Rey, who oversees three dozen Los Grobo agronomists, says that in some soybean fields plants are producing only a fraction of the normal number of seed pods, portending lower yields. [image: [harder times]] Soybeans are a resilient crop, and additional rains, like the ones falling over part of the farm belt on Tuesday, could salvage the harvest. But some damage is irreversible by now. And much of Los Grobo's farming territory is especially vulnerable because it received below-average rains during the past 12 months, which left little residual moisture in the ground. "A little rain isn't enough at this point," says David Esevich, who rents 1,500 acres to Los Grobo and says his stricken soybeans are "sad to look at." In the town of Salliqueló, where Los Grobo's crop is imperiled, the local Roman Catholic parish has taken to saying prayers for rain to Saint Joseph, the town's patron. Mr. Grobocopatel, who is 47 years old and a trained agronomical engineer, says the blistering weather portends "a great deterioration in production." Argentina's soybean crop, which had been expected to surge this year, will instead fall by more than 10% from last year's levels, according to the Agritrend SA, a consulting firm in Buenos Aires. The wheat and corn crops also are projected to fall this year by 45% and 35%, respectively, according to Agritrend. Besides drought damage, the decline reflects reduced planting of those two crops, which are subject to strict government export controls that farmers don't like. Drought's Devastation Mr. Giorgi, Los Grobo's planning director, says the drought's impact on the company's bottom line could be "devastating." Los Grobo's planting costs -- land rental and fertilizer -- remain exceptionally high this season, he explains. They were set in the middle of last year, near the peak of the global commodities boom. Fitch Ratings recently lowered its rating on the debt of Los Grobo's unit in Argentina, home to 45% of its farmland. It cited the erosion of the company's margins due to a mismatch between boom-era expenses and bust-era revenues. Mr. Giorgi says the industry's cost structure tends to realign quickly, and land rents and fertilizer prices are already falling back in line with crop prices. Mr. Grobocopatel says he is optimistic about soybeans long-term, and that he anticipates continued growth from China, Argentina's main market. "The Chinese aren't going to stop eating," he says. Farmers note that soybean prices didn't skyrocket until late in 2007, so currently they aren't as far out of line with historic norms as those of some other commodities. Mr. Grobocopatel, whose great-grandfather was part of a wave of Eastern European immigrants known as the "Jewish Gauchos," helped create the modern Argentine soybean industry in the 1990s with his land-rental-based business model. Renting land allowed him to operate on a scale big enough to compete internationally, without huge outlays of capital. He uses contractors for planting and harvesting. The spread of the rental model has helped make Argentina the world's third-largest soybean producer, behind the U.S. and Brazil, and the low-cost producer among the big three. Last February, an investment fund launched by Brazilian financiers Gilberto Sayão and André Esteves, who sold the Banco Pactual investment bank to UBS of Switzerland for around $2.6 billion in 2006, bought a 21% stake in Los Grobo for $100 million. The Grobocopatel family continues to hold a controlling stake. Los Grobo didn't anticipate the growing tensions with Mrs. Kirchner and her husband and political partner, Nestor, who preceded her as president. Farmers have grumbled about bankrolling the Kirchners' brand of populism, which involves a heavy state role in the economy and wariness of foreigners and free markets. Soybean Export Tax Mr. Kirchner paid off Argentina's entire $9.8 billion debt to the International Monetary Fund in 2005, and told it to keep its nose out of the country's business. Mr. Grobocopatel pointed out that the payment was nearly equivalent to what the country brought in from soybean exports that year. The biggest irritant has been the soybean export tax, imposed as an emergency measure during a crisis in 2002. The Kirchners have steadily increased the tax to 35%. Last March, Mrs. Kirchner tried to impose a new system of assessing the tax, which would have meant a nine-percentage-point increase. That sparked months of protests by farmers. The Argentine Senate voted down the tax increase in July. The tax dispute was "an exemplary lose-lose situation," Mr. Grobocopatel says. Mrs. Kirchner lost standing in the polls. Local futures markets where shut down during the tax fight, so Los Grobo and other farmers lost the opportunity to hedge against a soybean slump by selling some of the 2009 crop in advance. This year, the unusual weather is creating big problems. In Tornquist, the wheat harvest that came in last November was paltry. The soybeans in one field are about half as high as they ought to be by now. In a nearby field, Los Grobo couldn't even plant a crop in the hard, dry soil. Argentina's farm export revenue is projected to decline this year by 38%, or some $12 billion, according to Agritrend, the consulting firm. Mrs. Kirchner waited weeks before finally declaring a state of emergency in the countryside last month. That will allow farmers to defer some taxes -- though not the crucial export tax -- and to receive other benefits. Some government officials had argued that if the situation were really critical, growers wouldn't still have an estimated eight million tons of soybeans, about 15% of last May's harvest, stowed in their silos. Fernando Miguez, a professor of agrarian science at Argentina's Catholic University, says the hoarding is partly Mrs. Kirchner's fault because producers are "afraid that if they do sell, this government will confiscate their money." Farmers say the government's actions so far are too little, too late.
