April 25, 2012

Argentina's Nationalization of Repsol YPF and Its Impact on Ag

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

In a surprise action last week, President Kirchner of Argentina moved to start the process of nationalization the Spanish oil company Repsol YPF. Most view this move as another attempt by the government to tap into the money generated by the company in order to fund the government, very similar to what she did with the pension funds and banks. It's also viewed as an attempt to try and hold down inflationary pressures within the country.

Her rationale for taking this action was that the company was not doing enough to develop its proven oil reserves in order to supply more energy for Argentine consumers at a lower cost, and most Argentines agree with her action. The company used to be state-owned until the 1990's when a wave of privatization swept the country.

Spain has since responded by saying they will restrict biodiesel imports from Argentina, which seemed like a half-hearted response after they nationalized one of the largest companies in the country. Spain may still take additional action to limit the imports of other Argentine products.

President Kirchner has been following a course very similar to what Hugo Chaves has done in Venezuela. After Argentina defaulted in the early 2000's, Chaves helped to keep Argentina afloat through various loan programs. She has already nationalized the pension systems in the country and if this ends up being the only company she nationalizes, I would be very surprised. This action will probably bring in enough revenue to fund the government's shortfall through the remainder of 2012, but then she might start looking for other sources of additional revenue in 2013.

The question now is how might this action affect agriculture in the country? After her reelection last fall, President Kirchner had backed off somewhat in her confrontational attitude toward the farming community. Instead, she seemed to now be directing more of her actions toward the agribusiness community, especially Bunge. In two recent actions, the government accused the grain company of trying to avoid paying export taxes by routing sales through its Uruguay subsidiary. The government has also become rather stingy once again in issuing export licenses for corn exports. This could signal renewed interest on the part of the government to take a more active control of grain exports from Argentina.

If that is indeed the case, then farmers in Argentina would probably cut back on their corn acreage in 2012/13 in favor of increased soybean production. Farmers in the U.S. make their planting decisions based primarily on market conditions, but in Argentina, farmers must take into account potential government interference in the export market when they are deciding on what to plant.

During the Kirchner administration, the government has routinely restricted corn exports any time high corn prices threatened to increase domestic meat and food prices. They have not taken similar action concerning soybeans. The government in fact wants the most soybean exports possible because the soybean export tax is higher at 35% compared to 30% for corn and there is no reason to keep soybeans within the country as far as domestic food prices are concerned. As a result, farmers would prefer to plant soybeans in order to avoid these potential export restrictions.

Additionally, soybeans are cheaper to plant, have a high liquidity within the country, are based on dollars, are the current price leader, and are not subject to export restrictions. Corn producers are coming off a very tough year and it remains to be seen if they will have the wherewithal to plant as much expensive corn as they did last year.

Her actions could also cause potential investors to rethink any plans they had on investing in new plant construction such as ethanol plants or crushing facilities as well as investing in land purchases in Argentina.