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September 7, 2011

Government Policies Dictates Crop Mixture in Argentina

In recent years it's been the government policies in Argentina and not the prices of the commodities that have dictated to the farmers in the country what crops to plant. After Argentina defaulted in the early 2000's, half of the country's population was driven into poverty and tax revenues crashed. Desperate for money, the federal government turned to the agricultural sector and what they called the "windfall profits" that resulted from the country's default. They started to impose export taxes on agricultural products and they also started to limit agricultural exports any time high commodity prices appeared to threaten domestic food inflation. The government had no qualms about taking money away from a few hundred thousand farmers if it meant holding down food prices for millions of voters.

Export restrictions were used by the government to flood the domestic market with a given commodity in order to hold down domestic food costs. The most frequent export restrictions were placed on beef, corn, and wheat. The last time commodity prices spiked in 2008, the government saw an opportunity to increase revenues even more, so they increased soybean export taxes to 35% and corn export taxes to 30%. The farmers of course howled in protest and took to the streets, but they only managed to keep the Kirchner administration from implementing even more draconian measures that could have increased soybean export taxes to as high as 90%.

The farmers in Argentina realized the enviable so they sold off their cattle herds and they plowed up their pastures and their alfalfa crops and they planted more soybeans. They cut back on their corn production because the government could restrict corn exports and they planted more soybeans. They chose soybeans because nearly all the soybeans produced in Argentina are exported and the government has no incentive to keep more of the soybeans within the country because that would have little impact on domestic food prices.

The government forced the farmers of Argentina into a monocrop culture of only soybean production. In recent years the farmers in the country were planting seven or eight times more hectares of soybeans than corn even though they realized that was not a sustainable agricultural practice. They did what they had to do to survive.

Now that commodity prices are spiking again, it appears that the farmers in Argentina will take the risk and plant more corn. The last time commodity prices spiked the country's corn supply had dwindled due to an historic drought. Corn supplies are much higher now and the country is not in the midst of a drought, so farmers feel there is less of likelihood that the government will restrict corn exports in 2012, but nothing is certain with the Kirchner administration. Mrs. Kirchner is expected to easily win reelection in October, and if she does, she has promised to "deepen her economic model", but no one knows exactly what that means.