A broad ranging discussion I had with the Ambassador at his office in Buenos Aires last week.
A broad ranging discussion I had with the Ambassador at his office in Buenos Aires last week.
In the just released, OECD agro outlook report, thru 2019, Latin America is projected to be the fastest growing agro production region.
I spoke about the opportunities for investing in various aspects of agribusiness value chain- encompassing contract farming, logistics, food processing in South America – specifically the Mercosur countries (Brazil, Argentina, Uruguay and Paraguay), at a recent CII Indo-LAC Conclave in New Delhi.
I also emphasized that the entrepreneur-driven, private-sector led agribusiness model, with little to no government subsidies in the the Mercosur countries is a safer long-term bet for Indian investors, who need to follow in the the footsteps of their American and European counterparts.
The FAO estimates that in the next 40 years 120 million additional hectares need to be brought under cultivation to feed the increase in world population to about 9.2 billion by 2050. Much of this will be in the Mercosur countries where currently about 1/3 of potential farmland is being utilized.
Speech in 2 parts below:
These are generalizations I think that would help to give some business context. As they say, for everything you say about India the opposite is also true.
1. Resiliency / Resistencia. Both India and Argentina have enough citizens who are resilient, having collective memory of crises from – wars, foreign occupation, inflation, going from riches to rags, social unrest, political mismanagement of the economy – and have the experience and strength to manage ambiguous situations.
2. Family. Both cultures place an emphasis on family bonds. Immediate family and extended family are usually geographically close. In Argentina, the asado (or barbeque) is sacrosanct; every Sunday the extended family comes together to enjoy a long, leisurely meal and time with family. In both India and Argentina, sons and daughters typically live with parents till before marriage. The number of family controlled businesses are high in both countries, especially in small and mid-size businesses.
3. Colonial Legacy. Spanish empire in the case of Argentina and the British empire in the case of India. Remnants include institutions that are extractive/exploitative in nature and give ordinary citizens the run around for doing simple things. Powerful bureaucracy. Restrictive economic freedom. Transaction-slowing paperwork.
4. Corruption, cronyism. Licenses and permits are required for starting, operating businesses. Rent-seeking behavior by businesses to compete for the market instead of in the market.
5. Sporting Heroes. Crickets stars in India and football stars in Argentina are divinity. Tendulkar and Maradona head up the pantheon.
6. Socialism. Over the last 60 years, government has run many businesses that would be better left to the private sector like telecom, airlines. Politicians talk of helping the poor, but implement policies that wallop them instead. For politicians, business is a dirty word, except when they or their cronies are involved in it. Idea that State is supreme, and knows best. Manufactured scarcity – ‘waiting in long lines/queues’ is considered normal.
7. Agriculture sector’s importance. Occupies a strong place in national imagination. Agriculture as a source of previous national wealth and economic success/could be again. Government interference distorts incentives and gives farmers a hard time and has resulted in a sub-par peformance for the sector.
8. Hierarchy. Both societies are class-conscious, respecting high status and privilege. In business, knowing the right people, especially at senior levels is important. Also, decisions are made at the top and trickle down.
9. A lot of talk accompanied by little action. High GDT (Gross Domestic Talkativeness) per capita. Truly, there is a love of talk, discussing philosophy, sharing opinions, badmouthing politicians and engaging in lively debate. Follow-up and execution is often lacking.
10. Patriarchal. India and Argentina are patriarchal cultures. Pater familias typically wielded considerable influence, though weakening in recent times. At the same time, especially in political and business settings, women are in key positions of power.
The agricultural output of India over the next 3 decades could be severely curtailed if water shortages are not addressed. The populist measure of giving Indian farmers free power has resulted in rapid depletion of groundwater supplies for agriculture. I saved Andy Mukherjee’s Bloomberg columns from 2 years go where he wrote about problems created from lack of wastewater treatment/underpricing of piped water and from a switch to biofuels.
The recent monsoon which has been below normal in India (June precipitation was the lowest in 80 years), have not only caused heartburn in agricultural circles, but also have led to fights breaking out in urban areas over access to reduced water supplies.
Going forward, India faces 2 serious challenges with water supplies for agriculture, both beyond its control:
1) Climate change is causing rapid melt in the Himalayan glaciers “suggesting that the Ganga, Indus, Brahmaputra and other rivers that criss-cross the northern Indian plain may become seasonal rivers in the near future as a consequence of climate change with important ramifications for poverty and the economies in the region.” At least 400 million farmer livelihoods are at risk.
2) Plans to divert water from the Brahmaputa by the Chinese government to feed its parched western/northwestern regions. Even though this is denied in official circles, there is little doubt that this will not be carried out knowing the CCP’s penchant for grandiose-projects like Three Gorges and preventing rain from falling during the Olympic opening ceremony. Moreover, Tibet – China’s Water Tower
is also the source for the Ganges river’s 2 major tributaries – the Kosi and the Gandaki. Attempts to “bottle those rivers” by official apparatchiks cannot be ruled out. The consequences for Indian agriculture are too staggering to contemplate.
Bottomline: Lower riparian states like India, and Iraq as mentioned in a recent NYTimes article, besides various countries in the Middle East and Africa, are almost guaranteed losers in the coming wars over water.
And the, Winners: Fresh Water paradises like Brazil, Argentina, Uruguay – perfect candidates for being India’s Agricultural Outsourcing providers. South american rivers like Amazon, Orinoco, Sao Francisco, Parana, Paraguay and Magdalena rivers contain more than 30 percent of the earth’s surface water. Add to that the Guarani Aquifer – the world’s single biggest groundwater source.
It is worthwhile for executives in India’s food and agriculture sector to keep these considerations in mind as they make plans for future growth and business contingencies.
Just like in harvests, severe economic and political limitations restrict the income of individuals around the world, as well.
Case in point:
Within India – $1trillion economy 1billion individuals – $1000 per capita
Overseas Indians: $350 billion annual income 20 million individuals – $17500 per capita
(rough figures, not adjusted for PPP)
As far as I know, there has been no large-scale blood transfusion/brain transplant in Indians overseas. It’s the institutions and policies for the most part that account for the staggering difference in per capita incomes/output.
From the Argentine pampas to western Ukraine to central Illinois, the topsoil is flat, dark and deep. It retains moisture but drains well. It can be tilled without forming a crust or blowing away on the breeze. More often than not, it gets favorable weather. And it recovers quickly from the abuses of mankind.
If the world is going to grow enough food to meet rising demand, these acres must produce more. Yet in many countries where the blessings of sky and earth combine, farmers labor under severe economic and political limitations. Crop yields vary drastically even with identical weather and soil conditions. So Ukrainian farmers produce a fraction of what their U.S. counterparts grow on comparable land.
Argentina will produce massive wind power turbines. This country of South America is using some of the biggest generators with de Eolis-15, that has 1,5 megawatts of power and almost 80 meters tall.
Río Negro and Neuquén, two of the southeast provinces in Argentina, along with the Science and Technology Department from Cutral-Có and Plaza Huincul-both municipalities with oil royalties- have joined each other to develop the wind turbine Eolis-15, designed by Invap to make the most of high speed winds.
This ambitious project is being financed by Rio Negro, who has already invested almost a million dollars in the project.
Argentina also faces the challenge of convincing buyers of its grains, especially in Asia, that it is a reliable supplier. Nearly 60 ships were waiting at Argentine ports on Monday to finally receive soybeans and grains. Many had been waiting to load for many days, with delays costing as much as $60,000 a day.
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AE Biofuels, Inc., (OTCBB: AEBF) a vertically integrated biofuels company, today announced that it has signed a joint development agreement with DS Development, a subsidiary of DS Group, to build, own and operate a 75 million gallon per year production biodiesel plant near Rosario, Argentina. Soy oil will be the primary feedstock as Argentina is one of the world’s largest producers and exporters of soy oil. Construction of the biodiesel plant is subject to obtaining necessary project financing.
The biodiesel facility will be built by De Smet Engineers & Contractors, a recognized global leader in the construction of biodiesel plants. Technology and engineering will be provided by Desmet Ballestra, which has operated in Argentina for 28 years. Desmet Ballestra is also the technology partner for AE Biofuels’ current palm oil and glycerin refining projects and 50 million gallon biodiesel plant in Kakinada, India.
The tax system Argentina announced March 11 levies soybeans and sunflower seeds at variable rates that can exceed 40 percent, depending on market prices, compared with a previous fixed rate of 35 percent. The top tax rate is 95 percent.
President Cristina Fernandez de Kirchner, whose public support has plunged during the dispute, has defended the increased export tax. She says it will curtail inflation and let the government redistribute wealth to poorer regions and people.
President Felipe Calderon announced on Monday that the government will give small monthly cash subsidies to 26 million poor Mexicans — about a quarter of the population — to compensate for rising food prices.
The first one has created shortages and fueled further food price inflation, the second has caused no such disruption.
From a sound economic point of view, it is more effective for governments to make direct cash transfers or provide vouchers to the poor than to mess with the price mechanism this way. Government-induced price distortions always end in more tears for the poor. Politicians around the world seems to have trouble with the concept of opportunity cost.
So far, the strikes have cost Argentine farmers US$2.3 billion in missed soy, wheat, corn and sunflower seed sales, said Pablo Adreani, an economic analyst with AgriPAC Consultores, a Buenos Aires consulting firm.
“The fact that we’re even considering a crisis amid this historical commodities boom makes no sense,” said Gabriel Torres, a senior analyst at Moody’s Investor Services in New York. “It tells you how incredibly self-inflicted this is.”
Had the government taxed rising farm income at its previous rate(35% instead of the current 46%), the windfall could have financed needed utilities and energy sector infrastructure or funded programs for the country’s 10 million poor, analysts said.
“The opportunity cost of this paralyzed economy is huge,” said Ricardo Baccarin, chief analyst at Paniagricola S.A., a Buenos Aires grain brokerage. “There’s practically a complete paralysis of commercial activity.”