South America is really shaking up the global economy while working on rebuilding its own. News of presidential scandal in Brazil and current elections in Argentina and Venezuela are plaguing an already deteriorated market.
As current Argentinean President Cristina Fernandez de Kirchner’s 7 year term comes to an end, the world awaits a possible revival of Argentina’s political and economic system.
Since 2001, Argentina has seen an economic meltdown, and a $100bn (£66bn) debt default, and so many feel that the existing policies have long expired.
The two front running presidential candidates, Daniel Scioli and Mauricio Macri, have opposing approaches toward Argentina’s problems.
Daniel Scioli, who represents the incumbent party, has been quoted as saying “We do not want a fiscal paradise, but rather a productive paradise.” It is statements like these that affirms voter’s beliefs that a vote for Scioli would not bring enough change, the country so desperately needs, rather continue along the beaten path towards further economic downfall.
While under Kirchner’s presidency Argentina has exercised greater control over the nation’s economy. This often has meant heavy taxes on agricultural exports, which has certainly not been popular with famers. Those monies were used to pay for social programs. However, long gone is the global commodity boom its economy thrived on.
As it stands today, economic slowdowns in Brazil and China, an ongoing battle with a group of U.S.-based hedge funds over a share of its remaining sovereign debt, which Argentina defaulted on in 2001, and isolation from international markets are all key issues the new president will have to address immediately for Argentina to gain a stance in the global market.
The grain markets are not only concerned about what a shift in political policy would do to commodity prices, but also what new fiscal policies will be initiated particularly to help boost the devalued currency of both countries. Both Argentina and Brazil currency evaluations are in play – a somewhat scary scene for these two emerging countries.
Since 1993 the Brazilian real has averaged 1.90, closing at 3.72 to the dollar today. Brazil is due to release its third quarter GDP on December 1st and the numbers aren’t promising. As the ripple of gloom spreads from a collapse in global commodity prices, Brazil’s economy is expected to contract by 3.1% this year and 2% next year.
According to the USDA, U.S. exports of food and farm products to Brazil reached a record of nearly $1.7 billion in fiscal year 2014. Brazil has long been one of the world’s largest wheat importers but has generally been able to source most of its requirements from neighboring Argentina. However, because of export restrictions imposed by the Argentine government in 2013 due to a reduced wheat crop, U.S. wheat exporters took advantage and, as a result, U.S. wheat sales to Brazil soared to more than $1 billion in 2014, compared to $31 million just two years prior.
Mauricio Macri, promising great change to Argentina, is expected to lower existing export taxes further opening up agricultural exports. By pulling restrictions, and possibly allowing the currency to devalue by making Argentina’s various rates of exchange unified, the official rate of the peso would weaken, but he has said Argentines would still prosper.
Scioli, who represents the incumbent party, would also loosen government control that was implemented by the outgoing president but at a slower pace. In a note posted on the Buenos Aires Herald, Scioli had this to say before Sunday’s runoff with Macri, “There are two ways, the one of inclusion or the one of exclusion; I want to safeguard from savage capitalism.”
Expect the grain and currency markets to be on point Sunday evening and Monday with a swift move in currency evaluation from Argentina and maybe even Brazil having impact on prices. December grain options expire tomorrow, Friday the 20th. Traders will be very cautious to increase option risk at tomorrow’s close which may encourage prices to pin at major strikes. Stay tuned.