Category: Latin America relations

Categories
Agricultural Investing Brazil farmland crops Investing Latin America relations market research

Brazilian Farmland – Is the Risk Worth the Reward?

Brazilian Farmland – Is the Risk Worth the Reward?

By Michael DeSa, Founder of AGD Consulting, and Monica Ganley, Principal at Quarterra

Click here to view the article on Global AgInvesting’s website

In recent years, Brazil has solidified its role as a global agricultural powerhouse. It has become the world’s largest exporter of soybeans, coffee, and sugar, as well as the second largest overall food producer on the planet. Over the past 15 years, Brazil has increased agricultural production by 156 percent with overall Gross Domestic Product (GDP) from agriculture reaching an all-time high in the first quarter of 2017.1 The agricultural sector as a whole accounts for nearly 6 percent of Brazil’s total GDP and employs nearly 16 percent of their total labor force.2 It is also the only sector that has continued to grow despite the current recession.3

Brazilian GDP from Agriculture

Is this enough, however, to draw investors into a country and an economy in the midst of economic and political discourse? The economic crisis, which began in early 2015, coupled with the ongoing political turmoil, have forced Brazil into difficult times. In 2015 and 2016 Brazil’s GDP declined – the first time since 1931 that the country’s GDP has fallen for two consecutive years.

Brazil's Struggling Economy

Figure 1: Brazil’s GDP (2010 – 2016)

However, the World Bank expects Brazil to slowly emerge from the recession by the end of 2017; restoring investor confidence and recovering lost ground could take much longer.

Brazilian Farmland – Is it Still for Sale?

While Brazil has begun in earnest to develop its frontier farming regions, there still remains millions of hectares left to be developed. Brazil’s total arable land area nears 600 million acres with only 170 million acres presently cultivated. One side of this coin seems to indicate that there is more than ample room for the development of viable agricultural land to meet a growing demand. With the world’s population expected to reach nearly 10 billion people by 2050, Brazil’s millions of hectares of undeveloped land could become the southern hemisphere’s next bread basket.

Farmland prices are also an attractive part of this equation, and is the primary reason for foreign investment by groups such as the Brazil Farmland Development Fund. According to Matthew Kruse, President of the fund, their land appreciated at nearly 3x within a ten-year timeframe in their previous investment.  According to Kruse, “we can purchase land at less than U$1,000 per acre.  That is a fraction of comparable land costs in parts of the Midwestern United States.  We are confident that we are purchasing land with the same productivity potential but at one-tenth the cost.” Given that the average price for an acre of U.S. farmland is US$7,183, according to the 2016 Iowa Land Value Survey Results, farmland in Brazil is presently some of the most affordable in the world.

World Farmland Prices Per Acre

The other side of the coin begs the question – if land is so plentiful and affordable, and it’s the only sector in Brazil’s economy that is presently growing, why hasn’t this development happened yet?

Financing in Brazil is neither common nor readily available, thereby limiting the average Brazilian’s ability to purchase and develop raw land. There are no government subsidies for agriculture in Brazil either. Land development can be very expensive, requiring either independent wealth, foreign investment, or debt financing to accomplish, the latter of which is largely not an option. Wealthy Brazilians do not account for a sizable enough population to make a substantial impact in development statistics.

These factors have resulted in a much smaller pool of available capital capable of developing Brazilian farmland, leaving foreign investment as a significant source of land development capital in Brazil. This pool of capital has been growing during the last couple of years, making Brazil the world’s eighth largest destination for Foreign Direct Investment (FDI) in 2015,4 and could indicate that investors are again ready to take the plunge.

In spite of a growing agricultural sector, attractive farmland prices and increasing foreign investment flowing into the sector, the decision to invest in Brazilian farmland is still very much a risk versus reward consideration.

Understanding the Risks

While Brazil offers a compelling opportunity for agricultural investors, operating within the country carries unique challenges. To be successful, investors must be cognizant of these risks and become either comfortable with the potential impacts, or confident that they have a robust mitigation strategy in place. Although agricultural investments worldwide are subject to volatility stemming from a variety of sources, including weather and fickle commodity markets, investments in Brazil are subject to unique idiosyncratic risk as well, particularly due to the political environment, foreign exchange fluctuations, and liquidity issues.

Brazil’s chaotic political machine has been thrust into the international spotlight repeatedly in recent years as widespread corruption scandals have led to the indictment of one former president, the impeachment of another, and have left the current president with dismal approval ratings. Just a decade ago, Brazil was the darling of Latin America, posting GDP growth that frequently topped 5 percent. However, the prevailing concern, given the country’s poor economic performance during the last couple of years, is that these ongoing political scandals will inhibit the country’s recovery, thus impacting investment performance.5

In addition to impeding overall economic performance, an unstable political system can introduce additional risks that must be considered with any potential investment in Brazil. One poignant example is the regulation of foreign land ownership – an issue that carries particular socioeconomic sensitivities throughout resource-rich Latin America. In 2010, over concerns that land purchases by international investors were leading to disproportionate foreign control of Brazil’s agricultural resources, then President Luiz Ignacio Lula da Silva restricted purchases of farmland by foreigners. This move resulted in the area of agricultural land bought or leased by foreigners not being able to account for more than 25 percent of the overall land area in a given municipal district, according to the National Land Reform and Settlement Institute (INCRA). Additionally, no more than 10 percent of agricultural land in any given district may be owned or leased by foreign nationals from the same country.6

While the rules still allowed access after clearing a number of bureaucratic hurdles, this greatly increased transaction costs associated with these investments. Although these rules have since been adjusted, smart investment managers have developed ways to overcome these hurdles, such as the Brazil Farmland Development Fund (www.brazilfarmlandfund.com), who have developed a strategy to allow for foreign investment into Brazilian farmland. However, the political risk here still goes to the heart of the viability of these investments. If the political winds shift, it could affect a factor as fundamental as an investor’s legal claim to their asset.

Political risk also can manifest at a more granular level. Many of Brazil’s institutions are weak by Western standards and it is no secret corruption exists in many corners of the country. For a reminder, one needs to look no further than the ‘Weak Flesh’ sting that devastated the country’s meat packing industry in March 2017. This police investigation into the industry found widespread food safety offenses and bribery, resulting in the indictment of 60 individuals and the loss of an estimated $1.5 billion USD in export revenue for the beef and poultry sectors.7 Understanding that these risks are pervasive and having the ability to build operational mechanisms to prevent them where possible, and implement strategies to identify and address them where not, will be critical for investor success in Brazil.

Closely tied to political and economic evolution, and a critical factor in calculating investor returns, is the value of the Brazilian real. The real, as we know it today, was introduced in the mid 1990s and since then has fluctuated with the fiscal and monetary policies of the government.

Real Value (1997 - 2016)

While the currency had been experiencing a period of relative strength in late 2016, the resurgent corruption issues led to its rapid devaluation in June 2017.

Currency movements can impact investments in a number of ways, which can be either favorable or unfavorable to investors. Most obviously is that the relationship between the real and an investor’s base currency can influence the value of an investment. Currency risk comes into play when its change affects the underlying price of the asset in the period between the initiation and the retirement of the investment.

Currency risk plays another role, especially with respect to agricultural investments. In many cases agricultural investments are attractive, not only for the underlying asset, but also for the operating income that the asset creates. For example, in the case of a farm that produces soybeans, not only is the value of underlying farmland important, but also the value of the annual soybean crop. In this case, the value of the Brazilian real has an important impact on the value of the annual soybean crop. Since many agricultural goods are traded on global markets, they are denominated in U.S. dollars. As a result, a weak Brazilian real will encourage additional export demand as the crop will be artificially inexpensive in global terms. A strong real will have the opposite effect. Depending on the nature of their investment, investors may be able to manage some currency risk using financial tools such as those available through futures markets.

While many investors who choose agricultural investments are looking for long-term opportunities, sooner or later they may want to exit the investment. At this point, liquidity concerns with farmland assets can come into play. An asset is only worth as much as someone is willing to pay for it, and particularly in the case of larger farms, the pool of potential investors may be limited. To limit the impact of this risk, investors will be wise to maintain the value of their investment by performing necessary maintenance and making improvements to protect the operation. In addition, for an investor with flexibility of timing, staying close to the market can help identify the ideal moment to sell.

Is Now the Time?

The decision to invest in Brazil’s agricultural sector requires investors to strike a balance between opportunity and risk. While Brazilian farmland prices are more attractive now than they’ve been in years, owning land as a foreign investor in Brazil is still difficult and highly regulated. The agricultural sector as a whole has seen continued growth in spite of an economic downturn, but a continued slide toward slower growth or further political turmoil will inevitably begin to affect the sector. There are currency factors at play that can be either a hindrance or a help, depending on your base currency and the type of investment. For every positive, there is a direct counter-point that must be considered.

The rewards are promising for bold, first movers, but every investor must carefully weigh each risk before jumping into the murky agricultural investment waters of Brazil.

ABOUT THE AUTHORS:

Michael DeSa is the founder and CEO of AGD Consulting, a U.S.-based, veteran-owned firm offering strategic advisory services and customized due diligence trips for investors seeking exposure to Latin American agriculture. DeSa is an experienced LatAm land owner, former Marine Corps Officer, and family farmer. He has years of technical management experience with the Marine Corps from his assignments in Djibouti, Jordan, Afghanistan, and throughout Latin America. DeSa can be reached at michael@desaconsultingllc.com.

Monica Ganley is the principal at Quarterra, a boutique consulting firm offering international strategic planning, research and business development services to organizations and individuals in the agriculture and food space. Ganley is passionate about the food and agricultural industries and has pursued a dynamic career with experiences ranging from agricultural production to consumer products spanning many geographies. She holds an MBA from the University of Chicago Booth School of Business and currently resides in Buenos Aires. Ganley can be reached at monica.ganley@quarterra.com.

 

SOURCES:

1Yara International. “Agriculture in Brazil – Vast Resources.” YouTube. 13 June 2014. 28 August 2017. https://www.youtube.com/watch?v=KlI2JwhI1JU.

2World Bank. “Global Economic Prospects – A Fragile Recovery.” World Bank. June 2017. 28 August 2017.

3“Brazil Farmland Development Fund Pitchbook, (www.brazilfarmlandfund.com) 01 August 2017.

4Export.gov. “Brazil – 1- Openness to and Restriction on Foreign Investment.” State Department’s Office of Investment Affairs’ Investment Climate Statement. 31 July 2017. https://www.export.gov/article?id=Brazil-openness-to-foreign-investment. 28 August 2017.

5“How to Cope with Brazil’s Political Crisis.” The Economist. 25 May 2017.

6Ibid.
7Welshans, Krissa. “JBS SA Resuming Operations as 60 Indicted in Brazilian Meat Scandal.” Feedstuffs. 21 Apr 2017.

 

 

Categories
Agricultural Investing biotechnology Latin America relations market research

AgriThority® Grows Strategic Services with Experienced Project Manager

Pleased to announce that I am now formally an associate with AgriThority. Excited to be part of such a respected and well recognized team! Check out the press release below:

————————————————————————————————————–

AgriThority®, an agricultural science consultancy focused on accelerating new technologies to commercialization in markets around the world, welcomes Associate Michael DeSa to expand strategic and product development services.

DeSa will lead account and project management activities in North America and Latin America, with strategic advisory services for customized investor initiatives. His leadership and agricultural investment experience is an asset to clients as they navigate the economic aspects of developing and commercializing new technologies.  His activities will include project sourcing, risk mitigation, market/commodity analysis, boots-on-the ground due diligence, risk assessment/mitigation and land management. DeSa’s technical background, years of leadership/project management experience with the United States Marine Corps and extensive travels and investment experience throughout the Latin American region (Ecuador, Peru, Colombia, Chile, Argentina, Uruguay, Panama and Mexico) make him uniquely qualified to advise and guide investors and companies.

A seven-year veteran of the U. S. Marine Corps, DeSa is recognized for his leadership, management and training achievements in humanitarian and combat situations. While deployed to Afghanistan, then Captain DeSa served as the Chief of Staff for a 250-personnel organization, accounted for $35 million in itemized assets and supervised a geographical area of nearly 350 square kilometers.

“Mike is an initiative-based leader with a proven record directing large-scale operations to resolve complex issues. He knows how to maximize organizational performance that positively impacts the bottom line,” says Jerry Duff, AgriThority President and Founder. “His first-hand experience as an international agricultural land owner and foreign investor raises the level of strategic counsel he provides clients when navigating market access opportunities or building investor relationships.”

DeSa has guided investors in every aspect of foreign land investments from project sourcing and risk assessment/mitigation, to boots-on-the ground due diligence, overseas land management and ownership structuring.

DeSa graduated from Texas A&M with a Bachelor of Science in agricultural engineering.

Categories
Argentina Due Diligence Tours Latin America relations Veteran Entrepreneur

Top 5 Fears Facing First Time Veteran Entrepreneurs and How to Combat Them

All too often, transitioning veterans seeking to become entrepreneurs never take the first step in pursuing their dreams because of perceived insecurities.  They prematurely assume failure by telling themselves they’re not qualified to compete in the business community. This couldn’t be further from the truth.  The leadership, confidence, and problem-solving skills veterans bring to the corporate sector are precisely the type of intangible skills sets needed for success.  As a veteran entrepreneur, I’d like to share my experiences by highlighting five fears facing many first-time veteran entrepreneurs and methods I’ve used to help combat these fears.

  1. Lack of Business Experience

When I left the Marine Corps in July 2014, I knew I wanted to work for myself doing something I loved.  Yet, as I began to put together a plan for AGD Consulting, a US-based agricultural investment advisory company, I couldn’t help but feel like I was woefully lacking in experience.  What business experience could I bring to this type of venture, having spent the last seven years as a Marine Corps infantry officer?  What I was failing to consider was the sum of all my life experiences, not just my Marine Corps service.  Throughout college, travels in Latin America, and my time as an infantry officer, I developed sound leadership and management experience through years of exposure to uncertain and rapidly changing environments.  My degree in Agricultural Engineering has served me well in managing our family’s agricultural investments in Latin America and the US.  A previous investment in Ecuador and a current one in Argentina taught valuable business and investment management lessons.

Family Farm in Argentina
Family Farm in Argentina

 

Last year, my family and I set off on a 6-month, 6-country investment research trip to Latin America to gain first-hand experience about local agricultural and financial markets in the region.

 

The Day We Left for Latin America
The Day We Left for Latin America

During that trip, I conducted over 100 unique agricultural site visits in six countries.  The point here is to draw on all your experiences, not just your time in the service, to showcase your full range of talents.

 

  1. No Business Contacts or Network

 

You might also be thinking, “I’ve heard networking is one of the most important parts of starting a new business, but I don’t have a single business related contact.  Where do I begin?”  Family is always a good first step.  Start with your immediate family and extend out as far as you can.  Social media platforms, phone calls, and personal visits serve as effective ways to reach distant relatives.  Explain to them what you’re trying to do and ask if they know anybody in that field willing to help.  Remember, you’re not asking for money or a great deal of their time; only contacts to build your own network.  Next, reach back to your military contacts.  Find a Bunker Labs group in your area as they can be a tremendous resource for linking veteran entrepreneurs to the business community.  Contact American Corporate Partners and have them match you with you an experienced mentor in your field.  Bottom line: don’t narrow your scope of support because you think you don’t know anybody who can help.  It never hurts to ask.

 

  1. I Have No Means of Financial Support While I Build My Business

 

This one requires some preparation.  If you’re considering entrepreneurship after the military, start planning for it well before you leave the steady income it provides.  My family and I started saving for an entrepreneurship venture in 2007.  While in the Marine Corps, we tried to be responsible stewards of our money by living within our means, keeping a detailed budget, taking advantage of tax-free benefits offered deployments, and tucking away money every month.  As a testament to what’s possible, our family of six left active duty service in September 2014, and aside from a few odd jobs, have not had a source of income since.  As I write this article nearly two and a half years later, we still have enough in savings for two years of living expenses and capital to continue to grow our business.  Anything is possible with a little preparation and a lot of passion.

 

  1. How Much Time Do I Have? How Do I Manage it?

 

Start by creating a detailed budget.  You need to be meticulous about keeping track of all money expenditures; everything from gas and groceries to larger expenses like house payments, medical costs, and business improvements.  Build a reasonable miscellaneous fund into your budget to cover the unexpected.  If you don’t use it all during a particular month, roll it over into the next month in order to extend your timeline a little further.  Once you’ve determined your monthly expenses, take the amount of money you’ve set aside to launch your business and divide it by your monthly living expenses.  This will give you an approximate timeline for how long you can build your business without seed money.

Managing your time is where the discipline you learned in the service is vital.  At first, set a daily schedule that resembles the schedule you had in the service as a way to slowly transition into life as an entrepreneur.  Each night, create a bulleted list of tasks you want to accomplish for the next day.  Stay focused on those tasks throughout the day and don’t let the freedoms of your new work environment pull you off task.  Work until your daily tasks are complete.  If it’s a multi-day project, set aside a certain numbers of hours on that project per day and stop when you’ve reached that time limit.  Work in time blocks that fit your daily schedule and biological clock. If your kids have an event at school, take advantage of your new found flexibility; just make up for lost time by working later at night or waking up earlier the next day.  These are just a few examples of how a detailed budget, disciplined schedule, and strong work ethic can be the start of a successful transition into life as an entrepreneur.

 

  1. What if I Fail?

 

Failure is never far from a new entrepreneur’s mind.  Even with a solid base of business experience, a developed network of contacts, and sufficient funds, many more new businesses fail than succeed. However, veteran entrepreneurs have a distinct advantage when it comes to dealing with fear and uncertainty.  Their leadership experience and disciplined nature give them an advantage when walking a path less traveled.  Being an entrepreneur is about leaving the familiar behind and taking on the challenges that many do not.  As a veteran entrepreneur, you are equipped with a set of skills that allow you to rationally weigh the risks, understand consequences, and develop solutions in short periods of time.  As counterproductive as it might seem, part of that pragmatic solution should include a contingency plan.  Once you’ve laid the mental and financial framework for Plan B, put it completely aside and focus 100% of your effort on the success of your business.  Ruthlessly run down every lead, learn to embrace the uncertainty, and let your intuition tell you when it’s time to pivot.

Categories
Agricultural Investing Due Diligence Tours Latin America relations

Top Five Reasons to Walk the Ground Yourself

In an age of market volatility, diversification is increasingly recommended.  Investors bold enough to expand into international agriculture can find stores of untapped opportunities, strong upside potential, and an industry poised to profit from the coming rise in global population. As the Founder/CEO of AGD Consulting, a US-based, veteran-owned firm offering advisory services and due diligence trips for investors seeking experience in international agricultural investing, we believe overseas agriculture is an excellent way to achieve these goals.  It’s imperative that investors walk the ground, experience the local financial and agricultural culture, and build trustworthy relationships with managers and communities before investing.

Below are the top five reasons investors need to walk the ground themselves.

A picture is not worth a thousand words

In my experience, online photos or reports can over or undersell an asset’s potential.  Investment managers and syndicates tend to only present the best possible front for the project they’re promoting, therefore, it’s imperative for investors to see what they’re not showing you.  Often times, these sites and experiences do not negatively impact the project, rather they add context and breadth for an investor to more fully understand what they are involved with.  Find a company or expert to help you organize a research trip and perform your own due diligence before investing.  As an example, AG DTours, a division of AGD Consulting, is providing customized expeditions to Colombia in partnership with Farmfolio as way to provide investors a richer understanding of their investment opportunity.

Meet the management

An experienced, well balanced management team who believe in what they’re doing is one of the most important indicators to investors on whether or not a project will succeed.  If the project manager and his team don’t truly believe in the opportunity, it will be evident when you talk with them face-to-face. If you’re traveling to a country where you don’t speak the language, have your research trip provider arrange for interpreters to meet you at the project site.  Talk to the local workers, ask what they think of the project, and watch how the investment manager interacts with his team.  Listen and observe how the workers respond to your questions and watch how they perform their work; it will speak volumes as to how much they believe in what they’re doing.

Experience the geopolitical and economic climate

Potential investors need to experience the current geopolitical and economic climate of the country their investing in and/or what it could become during the investment’s lifetime.  Talk with the locals about the current political administration, ask them what they think of foreign investors, and get a sense of how important agriculture is to their local economy.  Talk to local street vendors selling agricultural products and ask them where they get their supply from, how business is going, and what would make their lives easier and more profitable.  Learn how to convert money back and forth between currencies in order to get a sense for how easy or difficult it is. Go to a local bank and see if American citizens can open bank accounts.  While you may never need to do this as an absentee agricultural investor, it will provide you with contextual and fundamental understanding of the geography and economic climate you’re investing in.

The right legal assistance

Understanding a country’s legal framework is crucial to protecting and insulating your investment as much as possible.  This is where sound legal advice is an absolute must.  If the investment opportunity you’re pursuing already has an embedded legal team with experience in the country you’re operating, great, if not, then you need to find one.  The right representative can provide you with advice concerning titling issues, cultural differences, and connect you with governmental agencies to apply for special investor programs.  Investors should seek counsel from someone with international investment experience as local advisors may tend to favor loyalty to their local network more than providing you the best advice that suits your needs.

Understand the culture

One of the most common misconceptions foreign investors have regarding international investments, especially in the agricultural sector, is the assumption the processes move at the same speed as the Western world.  The Latin American way of life is generally slower-paced than many Americans are used to.  Foreign investors need to experience this culture for themselves and determine if it suits their personality and investment needs.  If you try to force your cultural expectations onto the local management team and the surrounding community, you will struggle.  As an absentee investor, you are asking the community and team on the ground to watch over your investment while you are away.  This is simply not possible without an understanding and appreciation for the local people and their culture.

Categories
Agricultural Investing Articles Latin America relations Uncategorized Veteran Entrepreneur

Our PodCast with Cigars and Sea Stories

AG DTours Featured on Cigars and Sea Stories

Cigars and Sea Stories

We were recently featured on Cigars and Sea Stories, a Podcast for Veterans who want to make a difference in the world. Enjoy as we talk about our current endeavors with AG DTours, my service in the Marine Corps, and our experiences traveling throughout the region.

http://www.cigarsandseastories.com/146-michael-desa-ag-dtours/

 

Categories
Argentina Cattle Investing Latin America relations South American Agriculture Uncategorized

Argentina Wants to Recapture Global Beef Market Share

An opinion piece about Argentina’s efforts to return to their former beef market glory days.  My emphasis is in bold with my comments in italics.  

Argentina Wants to Recapture Global Beef Market Share

November 30th, 2016

The current wave of agricultural reforms in Argentina could help the country recapture the global beef market share it has lost in recent years, says Valoral consultant Roberto Viton in an interview with Agrimoney.

Viton sees a brighter future for Argentine beef since the election of Mauricio Macri in 2015. Still, the process will take significant time and effort (I recently talked about the need for patience in Argentina in a recent blog post.  Bottom Line: it will take time to change many years of poor economic management, so patience is in order) among producers who are looking to first improve their margins before expanding their production. In the first half of the year, there was much greater retention of cattle by Argentine producers with the goal of building back their herds over time (This is an indication that the local farmer sees future value in cattle and therefore is willing to forgo the immediate revenue in order to build equity in their farms through larger herds.  This is a good sign).

Recovering market share lost to neighboring countries like Brazil, Uruguay and Paraguay will take time in terms of volume, price and quality. At the same time, Argentina will have to regain the confidence of foreign investors and prove to them that “the reforms are truly hear to stay.”

In summary, “I would say that the history of cattle is a history of patience,” says Viton. (I couldn’t agree more).

 

Categories
Agricultural Investing Argentina Argentina economy Articles Latin America relations Uncategorized Uruguay

Argentina and Uruguay Agree on How to Approach Trade with China

Earlier this month, we talked about Uruguay’s trade dealings with China.  Today, we’ll look at how Uruguay and Argentina have come to a consensus on how to approach future trade deals with China.  My emphasis is in bold with my comments in italics

Macri and Vazquez agree that the trade approach to China should be done from Mercosur

Tuesday, October 25th 2016 – 10:29 UTC by Merco Press
Macri said that his government understands Uruguay´s need to have access to other markets and open to the world's second largest economy.

Macri said that his government understands Uruguay’s need to have access to other markets and to be open to the worlds’ second largest economy.

Argentine president Mauricio Macri promised his Uruguayan peer Tabare Vazquez to look into the draft of a Uruguay/China free trade deal, and expressed their deep concern about political events in Venezuela suggesting that under the current circumstances the Nicolas Maduro government cannot be considered a member of Mercosur (Things in Venezuela are not looking good.  Drastic shortages of food, medicine, electricity and other necessities are causing small riots. Organized crime and extrajudicial police killings have given the country a frighteningly high rate of murder and violence.  Runaway inflation means that from March 2015 to 2016 a basket of basic goods for a family of five became 524 % more expensive).

During a meeting on Monday midday at the Olivos presidential residence in Buenos Aires, Macri said that his government understands Uruguay´s need to have access to other markets and open to the world’s second largest economy.

“China is an option for Uruguay. With Vazquez we ratified the need to speed up this deal, in principle from inside Mercosur, but anyway I promised an open attitude and to look into what Uruguay is requesting”, said the Argentine leader. (Mercosur, which translated means Southern Common Market, was created in 1991 as a trade agreement aimed at providing free circulation of goods, services, and productive factors within member countries (Brazil, Paraguay, Venezuela, Uruguay, and Argentina) through the elimination of obstacles to regional trade).

“We understand that Uruguay produces food for ten times their population (A population of only three million people currently feeding 50 million) so it is only natural they should look for markets, but the ideal situation would have been for the issue to have been presented by Mercosur as a block, as we are doing with the European Union” emphasized Macri (Earlier this year, the EU Trade Commissioner and the Foreign Minister for Uruguay, who currently holds the rotating presidency of Mercosur, discussed the next steps in the negotiations on an EU-Mercosur trade agreement. The EU and Mercosur agreed to exchange market access offers specifying ways to increase mutual openness to each other’s goods and services, including access to public tenders. Those discussions also resulted in the adoption of a road map for talks during the rest of the year). 

Vazquez underlined the very generous attitude of Macri and thanked Argentina for having such consideration.

“We coincided in advancing in a free trade agreement with China through Mercosur. But [we need to take] into account that Beijing came up with the possibility of such a deal six years ago and Mercosur did not reply, it would be positive that at the next Mercosur meeting we address the issue”, indicated Vazquez.

“In the meantime Uruguay will continue to explore the way to advance in a free trade project with China. We’ve already presented the road map for such a treaty and the extent planned. China has not replied yet but when they do, it will be shared with all Mercosur members”, he added.

Regarding Venezuela, both presidents agreed that under the current situation, “we are deeply concerned with the political problems, and we shared the opinion that under these circumstances they can’t be members of Mercosur. The Maduro administration must be condemned and disavowed by all American countries since there is no respect for human rights” (As another point of context, in May of this year, Uruguay prepared to pass the president-pro-tempore seat to Venezuela by the end of June.  However, Argentina, Paraguay, and Brazil fiercely opposed this. Their arguments against Venezuela’s new role cited the country’s failure to follow the union’s rules as well as concerns about the government’s stance against its opposition).

Vazquez went further and said concern, regrettably, grows by the minute and “we are looking forward to a peaceful solution to the controversy, to dialogue between the Venezuelan government and the opposition. We also talked about the mediation from Pope Francis”.

Macri and Vazquez added that during the next Mercosur meeting whether to apply or not the democratic clause on Venezuela will be considered, since that is the correct place to consider such option.

“Uruguay will be attending the meeting and demand respect for peoples’ right to express their opinions and be respected. That is the essence of democracy and the direct participation of peoples”, added the Uruguayan leader.

Other issues considered by the presidents were drugs and crime, pollution in shared rivers and water ways, natural gas sales and the possibility of building another bridge across the River Uruguay that acts as a natural border between the neighboring countries.

Finally Vazquez, who never had a good relation or chemistry with the Kirchner couple, was most grateful with Macri and his hospitality. “I am profoundly grateful for his hospitality and friendship, with the Argentine president we have found ample paths of understanding”.

 

 

Categories
Argentina Argentina economy Articles Latin America relations Uncategorized

A Call for Patience in Argentina

An excellent article about the need for patience with the unfolding political and economic situation in Argentina.  My emphasis is in bold with my comments in italics

Herd Behavior: Why A Lack Of Patience Could Spark Argentina’s Next Crisis

President Mauricio Macri is making the right economic moves, but that is hardly enough to prevent the next crisis.

By Bianca Fernet – Oct 26, 2016 at 12:29

It’s been almost one year since President Mauricio Macri shocked the world by winning Argentina’s presidential elections, and the country is in a state of flux — hovering in an uncertainty characterized by hope, anxiety, fear and just a few whiffs of the dreaded stench of failure.

Besides displaying a shocking lack of political PR and taking on a few petty wastes of time, this government is doing most things within its power correctly to right the course of a vessel that seemed destined to crash. (This includes eliminating a parallel exchange rate from the previous administration, completing an oversubscribed bond sale, and eliminating export taxes on many agricultural commodities like corn and wheat).

Despite these positive steps, one sinister question looms: Has the Macri government managed to avert the looming economic crisis entirely, or is it merely kicking the can down the road? It’s scary, but Argentina is in uncharted territory. Rather than boom, the economy is in a prolonged recession that could be heading for an all too familiar outcome — bust.

Yet this time, the question really isn’t about economic fundamentals. The real variable threatening Macri isn’t economic at all — it is time. (To me, this says that many potential foreign investors recognize Macri’s attempts to repair some of the underlying fundamental economic issues facing the nation.  I believe, based in part on the oversubscribed bond sale, that there are many more foreign investors waiting on the sidelines to see if a resilient Macri administration and patience from the international community can allow these economic changes to positively affect the foreign investment climate of Argentina)  Time, that fickle mistress, is persistently stalking Macri’s administration and is not on his side. And Argentines aren’t exactly famous for patience.

Now that Argentina is back on the world stage, there seem to be no shortage of Argentina investment-themed symposiums, conferences, forums, delegations, road shows, panels, seminars, and other names they give to the indistinguishable gatherings of hundreds of white men in suits assembled in windowless spaces to watch powerpoints and exchange business cards over mediocre coffee and stale snacks. (While I don’t necessarily agree with all of the author’s points here, I appreciate both her sarcasm and perception, especially the part about windowless spaces and mediocre coffee).

In the past, representing Argentina at these business rituals meant repeating some variation of the tagline, “Argentina: it’s not so bad!” Now the conversation invariably veers first to new opportunity, but then quickly pivots to the question of Argentina — same old risk?

People love to say that “Argentina has a crisis every ten years.” A nice round number, except it is 2016 and the country’s last real crisis was in 2001 (no, the 2009 global downturn doesn’t count). The truth doesn’t follow simple formulas. (This saying may actually be more applicable to the US market with the collapse of the dot com bubble in the early 2000s, the Great Recession in 2008/2009, and the unstable economic times of today.)

To understand the situation, let’s think of economies like dinner plates, spinning atop sticks. Balance is essential.

iStock_000012016504_Medium
A balanced, diverse economy leads to stability

 

A poorly balanced plate will wobble dangerously and even crash to the floor from external conditions. Take a look at Argentina’s neighbors. Chile was thought to be as stable as they come, but a sudden drop in world copper prices have caused the country to wobble. Brazil was the next big thing in biofuels, technology, renewables — you name it. But a plunge in oil prices spun out the endemic corruption and tipped that plate right over.

So what do spinning plates and susceptibility to external crises have to do with Argentina?

From a purely economic standpoint, Argentina is just about the most stable, well-balanced, solid plate there ever was. The economy and the geography are large and diverse (One of the few countries in the world with the ability to be completely self-sustaining, hosting an abundance of natural resources, an educated population, and of course, famed agricultural land covering nearly 55% of the country).  Argentina was resilient through the global economic crisis of 2009. Sure, soy is important piece of the pie but even when soy prices took a nosedive in 2014, Argentina’s plate wobbled a bit but kept on spinning. The good news is that despite more than a decade of Kirchnerism, during which Cristina Fernández de Kirchner and her band of merry thieves administration carried out a heist worthy of its own Netflix series, the plate was somehow able to keep spinning.

Macri’s government has acknowledged systemic flaws and is leading the country to come to terms with uncomfortable and unpopular realities, such as that 30 percent of Argentines live in poverty. The administration has acknowledged persistently high inflation and taken painful steps to bring it down. It has dismantled the capital controls that created a de-facto dual currency system (RIP Blue Dollar), settled with the holdout creditors (aka “vulture funds”) and are setting clear rules for doing business (To further highlight the points I made earlier).

Sad Aranguren
Aranguren’s sad face 🙁

Perhaps most laudable, the administration has forced the population to acknowledge that energy subsidies for both electricity and gas are unsustainable and has launched a clear plan for prices to rise to meet generation costs. It’s not easy being Energy Minister Aranguren, the public face of these unpopular hikes. The man basically looks like he needs a hug all the time.

Yet that analysis misses a fundamental point of Macri’s challenge: to succeed, he won’t just have to right a plethora of economic distortions and rise above a mire of tragicomic corruption, he must also change a culture (This will take time, patience, and resilience on Macri’s part, but I think it can be done).

If Argentina’s economy is a plate, its next crisis won’t be caused by an external shock that throws an overweight area off balance. Argentina’s next crash will be caused by its people, who run from one side of the plate to the other, like an emotionally charged herd. Call it passion, color, soul, whatever you want — but we in Argentina are opinionated, loud, and most importantly impatient.

And without political patience, Macri will fail.

The key test will come next year, when the midterm elections will serve as a de facto referendum on his policies, many of which while are unarguably necessary albeit damningly unpopular.

Macri’s real challenge is not only to convince the world that Argentina can change; rather, he must lead his own people through a painful recession and politically maneuver entrenched powerful interests to restore an attractive labor market and an unsubsidized energy matrix.

(image/finedininglovers.com)
(image/finedininglovers.com)

There is no doubt he is dedicated, but the question looms as to whether it is possible to convince a country of fiery, passionate Argentinos to endure a recession without throwing a tantrum and inexplicably sprinting off the edge of the plate (It is easy to understand that Argentines are looking for quick evidence of progress, as I’m sure many Americans will on the heals of our US elections, but after over a decade of systematically taking apart the economy, it will take time to fix the country’s inflation and poverty problems).

 

Categories
Agricultural Investing Argentina Articles Latin America relations Uncategorized Uruguay

Uruguay’s Controversial Trade Dealings with China

An article from the China Daily about recent trade discussions between Uruguay and China and how these discussions are impacting neighboring countries in LatAm.  My bold and comments in italics:

China, Uruguay establish strategic partnership

China, Uruguay establish strategic partnership

Chinese President Xi Jinping (R) shakes hands with his Uruguayan counterpart Tabare Vazquez during their talks at the Great Hall of the People in Beijing, capital of China, Oct 18, 2016. [Photo/Xinhua]

BEIJING — Chinese President Xi Jinping and his Uruguayan counterpart Tabare Vazquez on Tuesday agreed to establish a strategic partnership based on respect, equality and mutual benefit. (Vazquez also signed infrastructure investment and technical agreements that will pave the way for greater agricultural exports to China)

The two heads of state made the decision during talks in the Great Hall of the People in Beijing following a red-carpet welcome ceremony.

Xi urged China and the Latin American country to maintain high-level exchanges and enhance communication at all levels to promote mutual understanding and trust. (Uruguay’s bid for a free trade agreement, however, is not without controversy.  Uruguay is one of the five full members of MERCOSUR, along with Argentina, Brazil, Paraguay, and Venezuela.  Argentina’s President, Mauricio Macri, said on Oct 20th that any China-Uruguay free trade agreement negotiations should be conducted through MERCOSUR.  According to the bloc’s rules, full member states cannot negotiate free trade agreements with non-members without consent of their MERCOSUR peers.  Vazquez responded to Macri by saying that Argentina and Brazil have been pushing for more flexible rules that would allow members to negotiate bilateral trade agreements)

China appreciates Uruguayan support for the Belt and Road initiative, and hopes both sides will strengthen integration of development strategies to upgrade economic and trade ties, said Xi.

China is willing to encourage more investment in Uruguay, channelled toward infrastructure projects, Xi stressed, adding that the country is also looking forward to expanding cooperation in agriculture, clean energy, communications, mining, manufacturing and finance.

In addition, Xi called on both sides to promote people-to-people exchanges and lift ties in culture, education, science and technology, Antarctica, tourism as well as football sport.

As for global affairs, Xi said that China is ready to strengthen collaboration with Uruguay in climate change, economic governance, UN’s 2030 Agenda for Sustainable Development, peace-keeping and South-South cooperation.

On China-Latin America relations, Xi stressed that China is a strong supporter for Latin American stability, unity and development. China is ready to work with Latin American countries to forge a community of shared future. (The other side of this argument was articulated by Argentina and Brazil when they voiced that China was the major exception to their pro-trade rhetoric.  Both governments are under pressure at home that a China-Uruguay free trade deal would exacerbate their manufacturing sectors, particularly that Chinese imports could outcompete their local products.  For example, Brazil wants to negotiate a trade deal that makes it easier to export the higher-value goods it produces, such as aircraft, but is reluctant to allow more Chinese imports into its borders).

Echoing Xi’s remarks, Vazquez said that the establishment of a strategic partnership will begin a new chapter of Uruguay-China ties. Uruguay welcomes more Chinese investment in the country and is willing to negotiate a free trade agreement with China.

Uruguay supports the one-China policy and backs China’s reunification, according to Vazquez.

Speaking highly of China’s significant role in global affairs, Vazquez stressed that Uruguay was ready to work with China to push forward Latin America-China relations and enhance coordination on international and regional issues.

Macri and Vazquez met on Oct 24 in Buenos Aires to further discuss Uruguay’s potential deal with China.  More on that shortly