Sowing the seeds of growth

As other sectors wilt around them, Argentina’s grain, oilseed and by-products industries are flourishing, and yielding bountiful export-finance opportunities. Ricardo Passero provides an overview.

Within Argentina’s gloomy macro-economic environment, the grain, oilseed and by-product market, as with all export-oriented industries, has never been so buoyant. With an extremely favourable exchange rate and, in the case of the oleaginous industry, an exceptional geographical location and rising output, the Argentina crushing industry has become a dynamic sector. Argentina boasts the most modern oleaginous industry installations in the world, which operate under strict national and international quality controls.

At present, vegetable oils are produced in 47 plants, in the hands of national and multinational companies, which are located in the rural areas of seven provinces: Buenos Aires, Santa Fe, Córdoba, Entre Ríos, La Pampa, Misiones and San Luis. Most of them are located in areas close to shipping centres in Rosario (Santa Fe province).

In less than 30 years, grain cultivated for oil has grown from 3,200,000 hectares to over 12,000,000, which represents about 45% of the land on which grain is farmed in Argentina. Argentina produces over 4.5 million tonnes of vegetable oil per year, which, taking a global average consumption of 16 kilograms per capita per year, means it meets the needs of 300 million people in more than 80 countries. With an average annual value of US$5000m, the oleaginous industry ranks first in the Argentina exporting sector. This is because the industry produces and exports not only oil but also protein meal, another sector in which Argentina is a world leader. The exporting profile of the Argentina oil industry is shown clearly by its high export rate of 95%.

A combination of a 40% reduction in production costs for soya and an increase in the amount of land switched from cattle to arable crops has meant that Argentina’s farmers are experiencing a boom. Farmers growing soya in Argentina have switched en masse to using genetically modified (GM) seed that allows production costs to be reduced by 40%. GM soya is sown immediately after the previous crop, usually wheat, corn or sunflower, has been harvested. Sowing is done directly, without the land having been ploughed; one application of Roundup herbicide is made to kill all the weeds, and then the GM soya seed is drilled into the ground. The main reason for the lower cost using GM soya seed is that much less fuel has to be used. Tractors do not have to plough the land, which also means it is not compressed, nor do the crops have to be sprayed several times during the growing season.

In Argentina, soybean harvesting is nearly three-quarters complete, with a forecast production of 35 million tonnes. Producers are likely to postpone sales a bit longer to let prices strengthen before the next US harvest becomes available. The US Department of Agriculture reduced its 2002/2003 forecast of Argentina soybean exports from 9.5 million to 9.1 million tonnes. On the other hand, the Argentina domestic crush was forecast 0.3 million tonnes higher to 24.5 million tonnes, which also enables an increase of the export forecast for soybean meal from 18.7 million to 18.9 million tonnes. Argentina’s 2003/2004 wheat production is estimated at 14.5 million tonnes, up 2.2 million or 18% from last year’s disappointing output of 12.3 million.

Argentina is an important competitor to Australia, Canada and the United States in world wheat markets.

It has recently developed a high-quality wheat standard, and trigo plata production and exports are expected to continue to increase throughout the baseline period. Argentina should easily maintain its place as the fifth-largest wheat exporter in the world, with Brazil likely to remain the major export destination. Regarding corn, the production for 2003/2004 is estimated at 16 million tonnes (15.5 million tonnes in 2002/2003). Argentina is the world’s second-largest corn exporter after the United States, but its yields are still much lower than those of the United States. Some analysts believe it is Argentina’s corn crop that holds the most potential for expansion via higher yields. In the baseline forecast, corn exports expand rapidly throughout the period as production far outpaces consumption growth.

Cultivating export finance

During the 1970s and 1980s, financing of foreign trade was completely regulated and under the supervision of the Central Bank. Exporters had to present documentation to banks (bills of lading and other documents) proving that the export had actually been carried out. If the documentation was not presented in time, banks had to denounce the exporter to the Central Bank. Tenors of pre-export financing and post-export financing were specifically regulated and varied according to the type of merchandise, while payments had to be channelled through the Central Bank.

From 1991 until the end of 2001, as a consequence of the deregulation process, tenors of pre-export financing were freely agreed between parties, with no intervention of local authorities. Payments were made directly abroad and banks no longer had to control effective shipments of pre-export financing. It was a period of balance-sheet relationships between exporters and banks; pre-export financing transactions were on a corporate-transaction basis. Meanwhile, many European banks that finance commodities worldwide started to work through structured transactions, looking for assignments of contracts between exporters and importers, collections accounts, control of shipping documents and flows, and repayment offshore.

In early 2002, as a consequence of the economic crisis, new rules were established: export collections, net of advances, had to be settled in the single and free-exchange market within terms fixed by the secretary of industry and commerce in accordance with the type of product. In addition to the fixed terms, sale-of-dollar proceeds to the Central Bank could not exceed ten working days. Today, the number is 90 days and exporters are no longer required to liquidate a portion of the foreign-exchange earnings with the Central Bank. Previously, exporters earning more than US$1m could only sell to the Central Bank, but recently the Central Bank further eased exchange controls, lifting the approval requirements to obtain foreign currency to make repayments on outstanding foreign debt and imported goods.

During the last year, due to the political and economic crises in Argentina, the traditional financing of national and multinational companies suffered significant changes. Many foreign banks decided to freeze their exposures to Argentina, while many others left the country. On the other hand, a small group of banks decided to spur growth within the soft-commodities financing activity, focusing on benefits of the devaluation for this sector and the position of the country in the world market. During 2002, a US$60m International Finance Corporation (IFC) AB loan was executed for one of the top national crushers. In addition, different exports-securitisation programmes for small and medium-sized companies were started by local banks. The lack of liquidity in the sector was tempered by the fact that farmers’ debt contracted in US-dollar terms by two-thirds. Having assets in dollars and liabilities in pesos, farmers have limited financing needs. For this reason, they retained a high level of grain stocks, reducing the level of exporter purchases and, in turn, financial needs.

Another government decision was to re-implement export taxes in April 2002 (20% for many agricultural products, including wheat, feed grains and vegetable oils and meals). Soybeans are still assessed a 3.5% surcharge, making the export tax 23.5%. Major exceptions to this tax structure include a 5% export tax on meat and a 10% rate for fruits, cotton and rice. A major uncertainty clouding the export picture is the government’s failure to comply with contractual commitments made to major grain and oilseed export companies. For example, a steep 21.5% value-added tax (VAT) applied to all domestic sales was traditionally reimbursed to companies that subsequently exported domestically produced agricultural products. (VAT was recently lowered to 10.5% for all grain and oilseed transactions, and should not be confused with the export tax mentioned above.)

In December 2001, the government stopped VAT reimbursements to export companies, which were left with nearly US$700m in outstanding payments. After protracted discussions with major export companies, the government agreed to repay VAT reimbursement for exported goods in a series of 19 monthly payments that began in March 2002. A similar situation is happening now: farmers retaining a high level of grain stocks, while, on the other hand, bilateral credit relationships between foreign banks and exporters have been re-established on a structured-transaction basis, with higher interest margins and tenors between 90-120 days. The IFC closed two new AB loans, again in favour of two national companies, for US$60m each.

Today, the grain, oilseed and by-products sector presents an interesting financing opportunity based on a total harvest between grains and oilseed of nearly 70 million tones; the export performance and track record of national and multinational traders and crushers; the further easing of exchange controls by the Central Bank; and the natural competitive advantages of Argentina and its privileged position in the grain, oilseed and by-products world markets.

Ricardo Passero is vice president, commodities and trade finance for Société Générale Argentina in Buenos Aires.