Oct. 1 (Bloomberg) -- Argentina President Cristina Fernandez de Kirchner in March derided the soybean plant as ``a weed,'' suggesting its spread was boosting food prices by displacing wheat, beef and milk production. Now, she may need a record crop of the oilseed to help finance spending and pay government debt.

The country's worst drought in four decades probably will reduce the wheat harvest by 22 percent, corn output may fall for a second year, and cattle herds are shrinking as pastures dry up, threatening to reduce agricultural income and a trade surplus that fueled Argentina's recovery from a 2002 recession.

Farmers need rains by November, when they will begin planting soybeans, the country's biggest source of export revenue. For the government, a bumper harvest is needed to maintain dollar inflows and export-tax revenue as shipments of other commodities decline, said Daniel Kerner, an analyst at Eurasia Group in New York.

``If it's not well managed, you will have a run on the currency and a change in inflationary policy,'' Kerner said. ``You may actually have a very rapid deterioration in expectation of economic dynamics in general.''

Argentina's peso gained 0.5 percent this year to 3.1345 per dollar, outperforming all other major currencies in Latin America except the Peruvian new sol.

Increased Output

Since 2003, Argentine farmers increased output of soybeans by 46 percent, helping fuel annual economic growth of more than 8 percent. The country is the world's third-largest soybean grower and exporter, behind the U.S. and Brazil, and is the biggest shipper of soy-based vegetable oil and animal feed.

The inflow of dollars enabled the peso, which lost as much as 70 percent of its value in 2002, to stabilize at about 3 pesos a dollar since 2003 and helped the central bank increase reserves threefold to $47 billion.

In the first eight months of this year, soybeans and related products generated $11.5 billion of overseas sales, the largest single chunk of Argentina's $47.7 billion exports at 24 percent, government data show. Corn was second at $2.9 billion.

Despite the boost to growth and trade, Fernandez in March sought to slow the spread of soybeans by raising export taxes on the commodity to encourage farmers to grow other crops. Cooking oil and animal feed made from soybeans are rarely consumed in Argentina, and the president wanted more farmers focused on beef, wheat and corn as domestic prices rose. Inflation reached 9 percent in August, up from 8.2 percent in January, government data show.

`Practically a Weed'

``Soybeans are, in scientific terms, practically a weed that grows without any type of special care,'' Fernandez said during a speech March 31 in Buenos Aires. ``It's not to the liking or in the diet of Argentines.''

Her increased export levies sparked a nationwide farm strike that created food shortages and paralyzed deliveries of produce to processors and exporters. In July, Congress voted down Fernandez's tax changes.

Now, lower commodity prices, including a 36 percent drop in soybeans from a July record, slowing economic growth and higher government spending may erase the 11 billion-peso ($3.6 billion) budget surplus Fernandez forecasts for 2009. That would make it harder for the government to make payments on maturing guaranteed loans that will triple next year to $4.3 billion, Morgan Stanley analyst Daniel Volberg in New York said by e-mail Sept. 23. Total financing needs will be $12 billion, he said.

``Questions about sustainability of the fiscal surplus are adding to the concerns that the authorities may not be prepared to deal with next year's rising financing needs,'' Volberg said in an Aug. 25 report.

Renewed Protests

Farm groups also are threatening to disrupt food shipments for the first time since July because they say government policies continue to restrict exports. Growers voted yesterday to begin six days of demonstrations on Oct. 3, said Eduardo Buzzi, head of the Argentine Agrarian Federation.

The yield investors demand to buy Argentina's 5.83 percent peso bonds due 2033 rose to 11.08 percent today from 8.91 percent at the start of the year, according to prices from Citigroup Inc. The cash price of the bonds fell to 96.5 percent of face value from 115 percent.

More Dependent

Argentina's drought has made the government more dependent on soybeans than ever before, Hugo Biolcati, president of the Argentina's Rural Society, said in a Sept. 4 interview.

The drought is the worst since 1968, leaving Argentina's richest farming provinces without soil moisture, said Stella Maris Carballo, a government weather forecaster. Rains that fell between Sept. 27 and Sept. 29 only partially improved conditions in the Pampas region, the Rosario Board of Trade said Sept. 29.

As a result, the wheat crop that farmers will begin harvesting in November will plunge 22 percent to 12.5 million tons, the U.S. Department of Agriculture said Sept. 12. That would be the biggest drop since 1996 and erode exports that were the world's fourth largest this year, the USDA said.

Production of corn, which farmers started sowing in August, will fall 7.3 percent, the second straight decline, the USDA said.

Dying Cattle

``This is the worst drought I have ever seen in my life,'' said Johan Rode, 64, a rancher in Chaco, a northern province where there has been no rain from February to late September. Rode said the drought has killed 80 of his 150 cattle.

The Rural Society estimates more than 120,000 cattle have perished in the Chaco, and losses are greater in provinces such as Cordoba and Santa Fe, which have larger herds.

The drought is forcing ranchers to send more animals to be slaughtered at younger ages, boosting beef production to a record 294,136 metric tons in July, data from the Office of Agriculture Commerce Control show.

Shrinking herds will begin to increase beef prices in the next two years, said Ernesto Ambrosetti, chief economist of the Rural Society. Argentina's beef exports may drop to 350,000 metric tons for the first time this year, according to a Mercosur report, dropping below neighbor Uruguay.

Shift to Soybeans

A decline in the cattle herd and parched wheat and corn fields probably will force growers to shift more land to soybeans, said Ricardo Baccarin, a Buenos Aires-based grains trader at Panagricola SAFICI.

Production probably will jump 8.6 percent to 50.5 million tons in 2009, the fourth record in five years, the USDA said.

Still, that doesn't mean government revenue will increase. Soybean futures for November delivery closed at $10.45 a bushel yesterday on the Chicago Board of Trade, down from a record $16.3675 on July 13, partly because of a jump in production expected from the U.S. and the prospect of weaker demand as the global economy slows.

``If soybean prices fall more than 25 percent, then we have fiscal problems,'' said Jorge Todesca, a consultant and former deputy economy minister. ``Imagine Saudi Arabia without revenue from petroleum.''

To contact the reporters on this story: Matthew Craze in Santiago at mcraze@bloomberg.net.

Last Updated: October 1, 2008 18:46 EDT