Economic Storm Batters Argentina's Breadbasket

ALFONZO, Argentina (By Juan Forero, Washington Post) January 2, 2009 — "Sharp Price Drop Brings Sudden End To Good Times. The fall in prices has been huge, 30 to 35 percent," says farmer Héctor Farroni, left, shown with agronomist Walter Guillaunmet. "The months ahead will not be easy."

 When Héctor Farroni married a few years back, he took his new bride for a swing through Iowa. The silos and windmills, the spider-like combines, the wide, flat fields all reminded him of this region of eastern Argentina, part of a fertile farm belt that has propelled the country's economy since the 19th century.

The two regions have seemingly infinite potential and serve as breadbaskets to the world. But the similarities end there. While subsidies and low-interest loans sustain American farming, Argentina's government raises export taxes and calls the country's farmers greedy traitors out to topple the state. Now Argentina's heartland is being lashed by an economic crisis that has come in like the winter storms that blow off the Andes and across the pampa.

The crisis, which began in American financial institutions and has hobbled economies worldwide, is slowing demand for Argentine wheat, corn and soybeans — and that is hitting this country's export-dependent economy especially hard. A report issued last week by New York-based DBRS, a credit rating agency that specializes in Argentina, predicts the economy will contract by more than 1 percent next year — a sharp downturn for a country accustomed to posting annual growth rates approaching 9 percent.

"The fall in prices has been huge, 30 to 35 percent," said Farroni, 43. "The best thing we have going for us is hope. The months ahead will not be easy, they will be very hard."

In recent years, spurred by technological advances and policies favorable to farmers, Latin America has become one of the world's main centers of agricultural production, its fast-growing exports helping to feed China and India. The growth has been particularly pronounced in the Southern Cone countries of Argentina, Brazil, Uruguay and Paraguay, where soy is the cash crop but producers churn out a diverse yield that includes orange juice and beef.

Here, the farm sector that helped put Argentina among the world's richest countries a century ago rescued it from economic collapse in 2001. Over the past six years, commodity prices increased 343 percent. Grain production in the 2006-2007 growing season was 23 percent higher than the previous season.

The good times have been apparent here in Alfonzo, population 1,100, located northwest of Buenos Aires. Alfonzo's producers put all available land to work. Warehouses and silos were quickly filled, and Norberto Forti's small farm-machinery factory ran nonstop.

The prosperity could also be seen at Alfonzo's Argentine Club, this country's answer to the VFW post.

Celebrations became bigger and more elaborate, and workers were hired to expand the club's facilities, said Walter Martinez, a manager. Martinez proudly showed off a 20-foot-long grill, a necessity for the big barbecues that embody the Argentine soul, and the dance hall, frequently packed for weddings and graduations.

But he acknowledged that good times can be fleeting on the pampa. Looking pensive, he explained the link between the boom-bust cycle of farming and the cycle of rains that sweep across the plains. "It rains, the club fills with people," he said. "Doesn't rain, the spirit in the club falls."

In recent months, it has rained sporadically on the pampa, wilting crops and turning fields as hard as concrete.

In fact, after years of bumper crops, 2008 has proved tough for farmers — and not just because of bad weather or the global financial crisis.

Vowing to curb poverty and redistribute wealth, President Cristina Fernández de Kirchner increased export taxes to fund popular social programs — a policy initiated by her husband, former president Néstor Kirchner. In March, the government tried to raise them even higher. Under a proposed plan, the taxes on soybeans, for instance, would have risen from a fixed rate of 35 percent to a floating rate of about 44 percent.

Already facing rising costs for fertilizers and pesticides, tens of thousands of farmers protested, putting up roadblocks that crippled commerce and halted exports. Prices shot up. Fernández de Kirchner denounced the farmers as coup plotters and oligarchs.

Only when the vice president, Julio Cobos, voted against the proposal in July was the tax shelved. But the damage was done — Argentina had lost $6 billion in export earnings at a time when commodity prices were high. Agripac, a Buenos Aires policy group that consults for agribusinesses, projects that export revenue from farm products will fall to $25 billion next year, down from close to $40 billion this year.

"The crisis in the countryside affected the government greatly, and it will pay for it in the future," said Pablo Adreani, an economist at Agripac. "It will not pay for it today. It will pay in 2009, in 2010."

Among those who have been hard hit is Néstor Forti, 71.

Like many others here in Alfonzo, Forti is a descendant of poor Italian immigrants who arrived in this region in the 19th century. On 321 acres, small by local standards, Forti grows soybeans, corn and wheat. He said the combination of taxes, high prices for supplies and the credit crunch is hammering him.

He explained that the cost of planting corn on a hectare — nearly 2 1/2 acres — runs about $600, and earnings fall just below that. "There have always been highs and lows in Argentina, but a fall like this I do not think I have ever seen," Forti said. He blames the worldwide financial crisis, in part. But he directs much of his ire toward Fernández de Kirchner's government.

"They say they want to redistribute wealth, but they do not redistribute anything," he said. "The only thing they are redistributing is poverty."

The government and its allies reject such criticism. Héctor Recalde, a lawmaker who supports the president, remains optimistic about the farm sector and its role as an engine of economic growth. "There will always be demand for what we produce — unless the world is no longer hungry," he said.

The government responded to the crisis this month by announcing plans to use $3.9 billion drawn from state-run banks and newly nationalized pension funds to provide low-cost loans to farmers and industry. Fernández de Kirchner said the government would reduce export taxes on wheat and corn by five percentage points, to 23 and 20 percent, respectively.

"It's a policy to spur these two products that are fundamental, not just economically, but culturally," the president said.

But even if output expands, economists believe a recession is on the way in Argentina.

"In my view, the announcements will be ineffective because the government is underestimating the damage to confidence, evident in capital flight, dollar demand and pressure on the peso," said Fergus J. McCormick, senior vice president at DBRS.

Here on the pampa, everyone is feeling the contraction, from farmers to shopkeepers to the local John Deere dealers.

Juan Carlos Digilio, who has sold farm equipment for 26 years, recalled how, back in February, a ton of soybeans sold for $368. Now Argentina's principal cash crop fetches less than $200 a ton. The result is that sparkling new harvesters that go for up to $420,000 sit in Digilio's parking lot, with no buyer in sight.

"The sales here have dropped by 60 percent, to give you a figure," Digilio said.

Just outside Alfonzo, Farroni gives two visitors a tour of his corn and wheat fields. A barn holds an aging red tractor, and the farmhouse where he raises four children could be straight out of the American Midwest. With the sky a bright blue and a brisk wind turning an old windmill, it is a bucolic scene.

But all Farroni thinks about now, he said, is how to stay afloat financially.

"We are among the most affected, and facing a high probability of disappearing, unless there are some big changes," he said. "We are at the point where we cannot be competitive here in these fields."