Argentina’s next president, Javier Milei,’s plan to reorganize the country’s economy depends on one key element: rain. For dollarization to go ahead without excessive problems and the recession that analysts predict is not catastrophic, everything depends on the weather being favorable and that a drought like the one that has ruined agriculture this year, the main source of income, does not occur again. country’s currencies. Because, Until the reforms that the libertarian intends to implement do not take effect, he will be risking everything on the soybeans.
The importance of agriculture in the Argentine economy is stratospheric. The sector accounts for 17% of GDP, 24% of employment and 65% of exports. Two out of every three dollars that enter the country do so in exchange for soybeans, corn or wheat, either raw or in prepared products, such as feed or oils. And Milei is going to need every one of those dollars if she wants to abandon the peso and close the Central Bank without unleashing chaos.
In fact, much of the severe crisis that the country is experiencing this year is due to the enormous drought that has ruined a huge percentage of the crops. Tax collection from the sale of agricultural products has collapsed from 57,000 million dollars in 2022 to only 24,200 million for the entire year, according to estimates from the Buenos Aires Grain Exchange. And the most worrying thing for the country is that, despite this collapse, the agricultural sector continues to be, by far, the country’s main source of foreign currency, with exports close to 33,000 million until October.
If the harvest falters, Buenos Aires suffers a double blow. On the one hand, exporters do not bring the dollars that the Central Bank needs to import goods from abroad and pay their million-dollar debts in US currency, forcing the Government to restrict imports to save the precious ‘greenbacks’ that enter. And, given that the State keeps more than 60% of the income from cereal sales in taxes, drought leads to the collapse of tax collection. And the Government has responded to this hole in its accounts by printing new banknotes, one of the key reasons why inflation has skyrocketed to more than 140%.
Thus, Milei is in the hands of the clouds to make her program work. The more grain grows these years, the more dollars it will have available and the more easily it will be able to cut the exorbitant issuance of pesos by the Central Bank without having to make draconian cuts to the budgets (more than 15% that it already intends to save from the start). AND For your dollarization plan to work, you need stable income in foreign currency that gives confidence to citizens and investors. and that prevent budgets from going up and down crazily every year.
Milei’s wish is that, if the theory works, a couple of years of recession and brutal reorganization of a closed and inefficient economy will allow the country to close or sell the sectors that give the least returns and focus on those with the best prospects. Ideally, a new restructured Argentina, open to imports and foreign investment and focused on producing the goods and services in which it is most efficient, would stop depending so much on crops. But until then, the importance of each grain will be capital.
A “reasonable” harvest in 2024
The Buenos Aires Grain Exchange hopes that the next harvest will be “reasonable”, although “it is not going to be the best because we have a whole macroeconomic environment and so on that has caused many not to deploy their potential”, in the words of its president, José Martins, in the presentation of the forecasts for next year this past July. In numbers, They expect the collection to be 36,000 million, 50% more than in this year’s failed harvest but still far from the 57,000 million of the last good year.
One of the measures Milei is expected to take is to undo the confusing list of different exchange rates created by the outgoing Peronist government and reduce heavy taxes on grains. The result would be encourage farmers to sell the tons of grain they have stored in silos and that they only withdraw when they need income, to prevent the pesos they receive from being devalued. The more they are paid, the less they will need to store crops. But that would only serve to obtain a temporary extraordinary income, since inventories will return to normal sooner rather than later.
But without knowing the fine print of the president-elect’s plans, what is clear is that he and the Argentines will be praying to the ‘Virgin of the Cave’ for the coming years. Every day that it rains, the recession that is presented as an inevitable toll to reform the country will be a little less harsh.