Photo: Casa Rosada
Let’s assume that Argentina absolutely will not pay the “vulture” hedge funds that just successfully (for now) sued the country for $1.3 billion in sovereign bonds.That could mean that the country would be considered in default, and that could result in calamity.
We’ll know by December 15th, because that is when a New York Court ruled that Argentina must pay all parties that hold its sovereign debt dating back to 2001. For the past decade, it has only been paying those that restructured their debt in 2005 and 2010.
This ruling is the culmination of a decade-long legal battle spearheaded by billionaire Paul Singer, and if Argentina defies it, it could mean “game over.”
And the terms that the Court has laid down for payment leave little room for funny stuff, though Argentina maintains that it will not pay.
So the worst could happen. But if it does, there is something that could ensure that the Argentina carries on.
The country’s former Central Bank Chief, Martin Redrado, was ousted from his post in 2010 for not setting aside funds from the bank’s reserves for President Cristina Fernandez de Kirchner to use to pay off debts.
He told the Financial Times a few days ago, that the country could get through default, but it would depend on the its soy crop.
“There’s a very simple answer,” says Martín Redrado, a former central bank chief. “It depends on the [soya] crop. Given that international prices are strong and will continue to be . . . you can muddle along. But with low growth and high inflation.”
So how is the soy crop?
This summer Argentina suffered a debilitating drought that had its grain exchange trimming its forecast for 2011/2012 soy output by 4 million pounds.
Bad luck struck again this fall, as excessive rain showers (about 4x the normal amount) delayed planting. So far, only about 37% of their crop has been sown.
“The planting delays in Argentina are a growing concern and leading to consumers buying ahead in case the situation continues to deteriorate,” Mark Schultz, the chief analyst for Northstar Commodity Investment Co. in Minneapolis, said in a telephone interview. “The Chinese economy is showing signs of improvement and should increase soybean imports.”
Now soybean stocks are very tight, according to the USDA. To make sure global demand is met, farmers in both North and South America need to ramp up production. Those that don’t, could miss a serious opportunity while prices are highest.
The USDA also believes that production will recover in the next 10 months and recover global stores of the commodity. That, of course, means lower prices.
From a Raymond James note:
Finally, the projected figure for global soybean production in 2012/13 was rather surprisingly increased by the USDA, to 268 million tons from 264 million in October, with the forecast of demand also revised upward to 261 million tons from 259 million tons a month ago. As initial stocks were also raised, ending inventories were revised up, and are now expected to recover 7% over the next 10 months. With these estimates, the global stock-to-use ratio for soybean should recover from 16% to 17% next year, although we are sceptical about this projection, and expect the USDA to revise its soybean production figures downward for the Southern Hemisphere in its next report in December.
That downward revision for South America, of course in part, depends on Argentina. And for its part, the country’s ability to rebound depends entirely on the the weather.
Morgan Stanley has a good rundown of El Nino and La Nina activity and how it impacts Brazil and Argentina, and they think things should have calmed down now:
- The National Oceanic and Atmospheric Administration (NOAA) released its monthly report on the status of the El NiñoSouthern Oscillation (ENSO) pattern on November 8, 2012, which produces El Niño and La Niña weather anomalies. In the report, the climate prediction centre forecasts that the El Niño anomaly experienced over the past four months has dissipated, and the El Niño and La Niña weather phenomenon remains neutral for the moment.
- El Niño’s Southern Oscillation is a weather pattern that originates when sea surface temperatures in the equatorial Pacific Ocean diverge from historical averages. Basically, if sea surface temperatures in this specific region of the Pacific Ocean are above historical averages, this produces an El Niño weather pattern, and there is a La Niña effect if the opposite occurs. And these divergences produce above or below average rainfall, respectively, in the Southern Hemisphere during its summer (from November through March).
- Although recent excessive rains have delayed planting activities in the Southern Hemisphere, which should have an impact on potential and final crop production, rainfalls are expected to be stable in the upcoming months, although there is a forecast for a recovery in El Niño and above-average rains during March and April 2013, which may once again affect harvesting activities in the 2012/13 crop season in South America.
So there’s the rub. In the event of default, Argentina could be saved by soy, but they’d have to bounce back from some serious setbacks…. pronto.
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