Saturday, January 25, 2014

Argentina's Ag Drag

As Argentina devalues its currency and it and other emerging markets put in place currency controls, Michael Shedlock looks at how plunging commodity prices impact Argentina:
Argentina gets what little foreign reserves it has, being the number 3 soybean and corn supplier, as well as its top provider of soymeal animal feed and soyoil, used in biofuels.

Soybean Monthly Chart

Corn Monthly Chart

Soybean prices are still well above the 2009 lows, but are also far below the highs of a year ago. The price of corn is far below the highs of a year ago, and nearing the 2009 lows.

These trends are heightening the already huge problems of emerging market exporters.
Considering that the corn belt is a massive exporter of grain and livestock, should it be looked at as an emerging market?  Much like Argentina and other emerging markets, the recent crop price-induced boom supercharged the rural economy as hot money came in looking for returns on land investment.  One of the few advantages the corn belt has compared to Argentina is the ethanol mandate, which artificially boosts demand for corn.  However, the mandate is a monopolistic tool to break into another monopolistic market, the oil industry. 

The problem for ag is that cars are only set up to run on ethanol blends, generally low percentage ones, and they have to depend on the oil industry for the petroleum to blend with the ethanol, the facilities to blend them, and the distribution network to deliver it to the customers who have no other options than to purchase the blended fuel.  What makes that risky is the shale oil boom, and the pressure these new supplies put on oil prices.  That shale oil isn't cheap to produce, and lower oil prices squeeze margins.  Meanwhile, in another market restriction, crude oil is barred from being exported, and U.S. oil demand is decreasing.  This leads to export of refined petroleum products, which isn't as efficient as exporting crude, due to refinery gains.  It also leads to pressure to scrap the mandate and the crude export ban.  Of these two measures, the export ban is much more popular than the ethanol mandate. 

If the mandate goes away, I would expect some economic pain in rural areas which reflect some of the problems in places like Argentina.  The flows of hot money will stop.  Price deflation will make incomes much lower, and land values which backstop loans will fall, increasing debt to assets.  Values of all the new iron in tool sheds will fall as the white hot equipment market cools when there isn't any need for depreciation to reduce tax liabilities.  The reverse wealth effect will cascade through the corn belt economy.  Actually, that may happen even with the mandate, but taking the mandate away will make it that much worse.  In other words, if you look at the charts above, grain farmers have had seven years of plenty.  I'm not a bible scholar, but I seem to remember something about that in there somewhere.  I think it was toward the front.  If I remember correctly, it was important to live within your means and save during the good years, because you'll need it to make it through the bad ones.  Hopefully, most everybody in the corn belt has followed that advice.

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