Argentine Bean-Hoarding Epidemic Building After Default

Adrian Radnic is preparing for the worst.

The 61-year-old Argentine farmer, who owns enough land to cover half of Manhattan, isn’t willing to sell as much of his bumper crop of soybeans this year. As Argentina’s default in July sinks the nation deeper into recession and fuels the worst peso rout in more than a decade, Radnic is opting instead to hoard the harvest, which is priced in dollars.

“These beans are the only thing calming me down since it’s the closest thing I have to a dollar,” said Radnic, who also grows wheat and corn on his farm in the town of Laprida, 244 miles (393 kilometers) southwest of Buenos Aires.

Radnic’s pessimism is also an ominous sign for Argentina’s overseas bondholders, who have been stuck in limbo for the past month as a result of the nation’s decade-long legal standoff with unpaid creditors from its debt crisis in 2001.

While they’ve avoided the steep losses of typical defaults on speculation a settlement will let Argentina resume payments currently blocked by U.S. court order, fewer tax dollars from agricultural exports risks starving the country of its main source of hard currency. Firms from Bank of America Corp. to Jefferies Group LLC have already warned the government may soon start running out of cash as the economic fallout worsens.

Falling Reserves

Across the nation, farmers have sold just 55 percent of their record 55 million-ton harvest through Aug. 20, according to data compiled by Enrique R. Zeni & Cia. That compares with 64 percent in the same period a year ago.

The $1.5 billion of grains sold in August was the least for the month since 2009 and 38 percent less than a year earlier. More hoarding means less revenue for the government, which uses the 35 percent export tax to finance public spending.

Argentina’s foreign-currency reserves have already fallen 6.7 percent this year to $28.5 billion. That’s close to its lowest level in eight years. The world’s largest exporter of soybean oil and derivatives depends on agricultural commodities for 37 percent of export revenue.

“The surplus you get on the agricultural side allows you to finance energy imports and other obligations,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. said in a telephone interview from New York. “In a situation where the level of reserves is far from comfortable, this adds pressure for further declines.”

Failed Talks

The country’s benchmark dollar debt due in 2033 fell 0.27 cent to 82.95 cents on the dollar at 4:12 p.m. in New York.

Argentina’s current crisis stems from its record $95 billion default in 2001. While the country renegotiated terms with holders of 92 percent of the bonds in 2005 and 2010 and reduced obligations by 70 percent, hedge funds including billionaire Paul Singer’s Elliott Management Corp. sued in U.S. court and eventually won full repayment.

U.S. District Judge Thomas Griesa blocked the nation from making payments on the restructured bonds until it also pays the hedge funds about $1.6 billion, causing Argentina to miss a July 30 deadline on $539 million in interest.

The government has repeatedly refused to offer the holdouts, as Singer and the hedge funds are known, better terms than those accepted in the prior restructurings, and negotiations between banks, investors and the holdouts since the default have failed to yield an agreement.

Argentina’s growing isolation from international markets has exacerbated its economic weakness, causing individuals and businesses to dump the peso and accelerating inflation.

Prolonged Default

The Argentine peso has weakened 22 percent this year to 8.4029 per dollar, making it the world’s third-worst performing currency after the currencies of Ghana and Ukraine. Argentines are dumping pesos to buy dollars in the black market, where the currency has weakened 27 percent to 14 pesos, to shield their savings from inflation of 38 percent.

Although the government has vowed to keep paying its bonds by depositing money in a new trustee account in Buenos Aires and circumvent the U.S. court order, its capacity to pay is now being called into question as the default becomes prolonged.

Argentina has about $10 billion of debt due in 2015, which would exceed central bank reserves on a net basis by the end of the year, according to Bank of America’s estimates. Net reserves, which strips out gold, foreign-currency deposits by individuals and special drawing rights, could tumble to $8.8 billion, based on the firm’s forecast.

Jefferies estimates the nation’s benchmark bonds could plunge to 60 cents on the dollar from 82.50 cents yesterday as central bank reserves the government uses to pay debt erodes.

Harvesting Delays

Last month, no developing nation’s bonds lost more value than Argentina’s, according to a JPMorgan Chase & Co. index of dollar-denominated debt.

Many soybean farmers will be compelled to sell some of their stock in coming months to finance future operations, said Gustavo Grobocopatel, chairman of agricultural company Grupo Los Grobo LLC. Harvesting delays caused by heavier-than-normal rains have contributed to the lack of sales, he said.

The tax agency is stepping up efforts to monitor grains, using GPS coordinates on where farmers keep crops under silo bags, Clarin newspaper reported Sept. 3.

In January, before the government devalued the peso by the most since 2002, Economy Minister Axel Kicillof accused farmers of hoarding $4 billion worth of soybeans to reap greater profits and of running a shadow central bank.

“Out of pure necessity, we’ll see more sales in September and October,” Grobocopatel said by telephone.

Radnic’s strategy of hoarding comes with its own risks. He said he worries that while he waits for a devaluation, soybean prices could fall, eroding the value of the crops from his 3,000-hectare (11.6-square-mile) farm. Soybean futures traded in Chicago already have fallen 18 percent this year.

“At any moment this situation can explode,” Radnic said.

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