Profiting from Argentina's Big Policy Mistake

Includes: ADM, BG, CRESY
by: Otto Rock

Latin America is a region that has always suited the trader, as the fluidity of political and social events down here is always likely to throw up a trade or two for the nimble investor. Yesterday presented another, as the Argentine agro stoppage moved from a secondary issue to a main issue to the biggest story in Latin America in the space of a few hours, thanks to an enormous gaffe by its President.

Firstly a bit of background. The whole bust-up started when Martin Lousteau, the soon-to-be former Finance Minister, announced early March that the gov't was raising export duties on soybeans from 35% to 44.1%, as well as similar hikes for other grains and derivative products. The agro sector went haywire and roads began to be blocked. The strike has picked up momentum in the last week or so, and it has gradually taken the front page in all local news media.

Cristina Fernandez de Kirchner (CFK to her sycophants, or Klishtina to those who have picked up on that speechy thing she doesh… sorry, does) had been getting flak for not commenting on the strike, now in its 13th day. So she stood up in front of a roomful of her party faithful this afternoon and came out blazing, both barrels hot. The speech was half an hour long, but some of the phrases worth translating include calling the strikers , "the pickets of abundance", people from "sectors who neither think, nor change nor understand", "violent picketers from the most profitable sector of the last 4 1/2 years", and the money line that's already making early headlines, "I won't allow myself to be extorted". All this was greeted with cheers and applause from the roomful of faithful, and Klishtina must have felt that her strongwoman approach would make the strikers think twice. Big mistake. Big big BIG mistake.

Not only did her speech go down like a lead balloon with the agro-workers, but the city Buenos Aires has also shouted her down tonight even though they are the very people facing supermarket shelves empty of meat, dairy and cereals in the next few days due to the roadblocks out in the sticks.

Taken today at Buenos Aires provincial town of Pergamino

Tonight, a reported 10,000 porteños have descended on the Plaza de Mayo, the scene of famous crowd gatherings at historical moments*, to protest against what they heard from their President. Cacerolazos (people banging on kitchen pots with spoons...don't worry 'bout was fashionable in 2001) were heard even in the most uptown of city neighbourhoods (Imagine a anti-war march in The Hamptons...that's where we're at here).

Source: La Nacion, 25th March 2008

The Cristina administration has already tried to blame the protests on the same old bunch of anarchists, subversives or opposition politicos, but take a look at the above photo of the protests published by La Nacion tonight. That’s Joe Public, not the FARC with ski-masks.

At the same time as the Prez was speechifying today, Finance Minister Lousteau (he of the 44.1% tax idea) came out with his own version of events after his own long period of roaring silence. His part of the doubleteam act was to say "There is no plan B" and that Argentina's soybean sector is 15% more profitable than that of Brazil's, and that the famers were acting like spoiled brats, and they were making loads of money etc etc. This, he reasoned, because the government protects its currency with a weak Peso policy while Brazil has been naive enough to let its currency float to R$1.75 vs the greenback. Well, as I wrote here, the arch-idiots are the Argentines when it comes to monetary policy, not the Brazilians. Let the currency float, you fool!

As for all these profits, the land owners are doing just fine, but most farmers rent the land from owners, then work the land and pay a certain amount of the crop as rent. Then these guys have to give 44.1% of their production straight to the state. Then they have to pay for expensive machinery, fertilizers that have doubled or tripled in price in one year, labour costs that have risen 20% in one year, and so on and so forth. Agro unions estimate there are 200,000 farmer workers with families living on the edge of poverty in rural Argentina. There's more to it than this potted resumé, of course, but the 9.1% the gov't has slapped (or at least tried to slap) on their goods is the straw that broke the camel's back.

As it turns out, it may even be that this tax hike is against the Argentine constitution and will get thrown out by the courts, because of clauses in the local magna carta about anti-gov't abuse and how single taxes can't go over one third of gross revenues in the country. If that happens, this Lousteau dude is buttered toast, marmalade and edges cut off and everything.

Back to the strikers, and now they have the clear support and sympathy of the general population they are playing a very strong hand (tonight, I've seen three of those unscientific newspaper internet straw polls that count 80% of people saying "Cristina wrong"....16,000 voters and counting, by the way). They've already made it clear they're going to stay out until the tax is revoked, and I'd bet my C-note to your Washington that the government backs down.

So from here we'll have a weakened President, a Finance Minister who'll be counting his tenure in days, not years (one must always have a sacrificial lamb to make headway in Argentine politics), and a government that'll have to think of a different way to raise funds to keep the economic expansion going. It's all getting rather messy.

The final words are on how to trade the situation. Goldman Sachs pointed out the weakness in a note yesterday morning, and today soybeans traded limit up on the CBOT. This might sound big, but the limit is 50c on a U$13 contract so you can bet there's more upside to come. Another idea would be Bunge (NYSE:BG), the grain processor with Argentine soybean exposure that may be adversely affected by the reported zero stocks at its Ramallo processing mills. A similar play (which might be used as a trade-off arbitrage with a BG short) would be a long on Archer Daniel Midland (NYSE:ADM), with less local exposure levering against the gain from any large price hike in grains. Selling Argentine sovereign bonds is a trade to consider, as might shorting local agro play Cresud (NASDAQ:CRESY) which is an investor-unfriendly beats even at the best of times.

*Examples: Perón and Evita victories, bombings from gov't jets that kill hundreds, Falklands war jingoism, Argentina wins World Cup, Argentina overthrows yet another government, etc.

Disclosure: None