Epic drought pushes economic crisis to new extremes

Argentina’s record drought is worsening inflation and sending the peso to new lows, undermining the ruling Frente de Todos coalition ahead of October presidential elections that could portend a dramatic swing in the country’s political direction.

The International Monetary Fund slashed its growth outlook for the economy Tuesday as private analysts warn the drought will cause a deep recession. Millions of acres of maize, wheat and soy — Argentina’s biggest exports and a key driver of jobs and tax revenue — will be ruined this year, sapping some US$19 billion of inflows, according to one estimate.

The drought is worsening an economic situation that was already untenable. Amid rapid money printing, political infighting and the government’s inability to tame deficits, annual inflation has shot up past 100 percent. The peso has lost two-thirds of its value since the onset of the Covid pandemic, and that’s even with a myriad of currency controls.

The failed crops are likely to trigger economic effects far beyond the country’s borders, from the world’s feedlots, where pigs eat more soy from Argentina than any other country, to the grain-trading markets of Chicago. Domestically, the resulting dollar shortage will likely limit imports for manufacturers, require new currency controls and fuel even more inflation through soaring food prices — meat costs jumped more than 30 percent in February from the prior month. The country’s overseas debt trades deeply distressed at some 25 cents on the dollar.

Political upheaval

The calamity has fed predictions for political upheaval. Outsider candidate Javier Milei is gaining in the polls as voters grow frustrated with the established parties, particularly the governing Peronist coalition, before the presidential ballot.

Vice President Cristina Fernández de Kirchner, herself a two-term president, and her longtime conservative rival, Mauricio Macri, both said they won’t run. President Alberto Fernández hasn’t said whether he’ll seek a second term, but is unlikely to win if he runs.

Fernández’s government has responded to the unfolding economic disaster with desperate manoeuvres to stave off implosion, including forced bond swaps and the creation of multiple exchange rates. Analysts warn that the strategy is stockpiling problems for the future, increasing the risk of a massive one-time currency devaluation that would fuel even faster inflation and increase poverty.

“You’re not really kicking the can down the road,” said Alberto Ramos, the head of Latin America research at Goldman Sachs Group Inc. “You’re kicking bars of dynamite down the road. It’s a very dangerous game.”

The Economy Ministry declined to comment.

Extreme drought

Ariel Striglio has a front-row seat to the drought from the 700 hectares (1,700 acres) of soy fields he leases near Chabas, northwest of Buenos Aires. In a normal year, he expects to grow 4.5 metric tons (10,000 pounds) of soy per hectare, but this month’s harvest will yield less than half that amount. With his income slashed, it will be tough to repay his bank loan and landlord.

“I’ve never lived through a drought this extreme,” said Striglio, 57, a farmer for 25 years. “The landlord wants to be paid, the bank wants to be paid, and my family has to live. I’m left deeply indebted.”

Striglio is right: These are unprecedented times in Argentina, the world’s largest exporter of soymeal and soy oil. Fernández told US President Joe Biden at the White House on March 29 that it’s the worst drought in Argentina since official records began in 1929.

The Buenos Aires Grain Exchange says this year’s soy harvest of 25 million metric tons will be the worst on record. At the start of the season, fields seeded with soy had the potential to produce 48 million tons.

The scope of the destruction is grim on the vast plains known as the Pampas, a 300,000-square-mile fertile expanse that stretches from the Atlantic Ocean to semi-arid plains in the west. Local media showed photographs of bloated, rotting corpses of cattle that died from dehydration earlier this year. Irrigation canals are dried up, lagoons are empty and bone-dry fields are completely stripped of vegetation.

‘More challenging’

As consumer prices skyrocket and the Central Bank spends precious hard currency to prop up the peso, its easily accessible cash reserves stood at just US$2.7 billion at the end of March, down about US$6 billion since the start of the year. While Central Bank coffers would usually get a boost from soy exports at harvest time, the diminished crop will dampen inflows this year.

That will strain the government’s ability to pay back its US$44.5-billion debt to the IMF. On Tuesday, the lender cut its 2023 growth forecast for Argentina to 0.2 percent from two percent previously. Private economists in Buenos Aires expect the economy to shrink by about four percent.

“The economic situation has become more challenging since the beginning of this year in light of the increasingly severe drought and policy setbacks,” IMF First Deputy Managing Director Gita Gopinath said in a statement April 1. Tighter monetary policy and “modifications” to currency policies “may be required to safeguard macroeconomic stability.”

Economy Minister Sergio Massa is turning to elaborate, complex measures to stave off a collapse of the peso, including multiple, temporary exchange rates. For now, soy exporters can sell their product at a rate of 300 pesos per dollar, far better than the official rate at 211 per dollar that’s clamped down by currency controls. The better terms should encourage more exporting.

Approach to debt

On the debt side, Massa said he would compel state-run companies to sell their dollar-denominated bonds for pesos, a measure that would give the government some short-term firepower to put a lid on volatility in Argentina’s exchange rates.

Massa also swapped 4.3 trillion pesos (US$21.7 billion) of debt that was coming due to give the government more breathing room, forcing Argentina’s state-run companies to participate. The involuntary nature of the swap caused S&P Global Ratings to declare Argentina in default on its local debt. Massa also tied the notes’ interest rates to inflation, likely ballooning the debt load down the line.

That could end up being the burden of one of the candidates building momentum ahead of October’s vote. Milei, who calls himself a libertarian, is gaining in the polls on rage-filled rhetoric that includes a plan to swap out the peso for the US dollar as Argentina’s official currency. Patricia Bullrich, the most conservative candidate from the opposition coalition, pitches a business-friendly, tough-on-crime message.

Augusto Mc Carthy, a fourth-generation farmer, is considering voting for Milei or Bullrich. He wants to see the next government fix structural problems, such as high public spending, and help farmers.

Until then, Mc Carthy, 39, is dealing with the drought’s fall-out. He sold about 200 of his 800 cattle to market this year because there wasn’t enough grass to feed them. Some of his soy is in such bad condition he won’t even harvest it. Instead, he’s letting his cattle roam the fields to eat what remains of the shrivelled plants.

“There’s a lot of farmers that won’t make it after this drought,” Mc Carthy said. “You don’t see water anywhere.”