Argentina's credit model provides an interesting alternative for financing expansion during a credit crunch.
Its soybean saga is amazing. Beginning with almost negligible production, Argentina has become the third-largest producer of soybeans in a little under 30 years. Between 1979 and 2008, production grew by a staggering 2,230%. An impressive feat, indeed, considering its frequent credit shortages.
“The technological changes of the 1990s, such as direct sowing, genetically modified soybeans and cheaper herbicides, combined with the development of outsourced farm labor, created the formula for expansion,” says Rafael Delpech, a former Argentine secretary of agriculture.
But credit was required to benefit from the technological changes and this was often a problem. What's remarkable is that the two main phases of growth occurred when access to credit was at its tightest — in 1997 when the country suffered from the Asian financial crisis and after the 2002 economic collapse.
Tight Argentine ag credit was solved by pooled investment funds known as sowing pools (pools de siembra). They have changed the face of Argentine agriculture. It's estimated that the pools cover between 5 million and 7.4 million acres of productive land. (This is roughly 18% of Argentine soybean acreage. About 82% is still farmed by independent growers.)
While there are many variants of sowing pools, the most common form is where the organizer, typically an agricultural consultancy, develops a business plan and offers it to potential investors. The land is then leased from a third party. The work is contracted out to local third parties who plant, spray and harvest; and the crop sale is managed by the pool organizer through pre-chosen buyers, processors or exporters.
POOL INVESTORS SHOULDER all crop risk. The investor only provides the cash; everything else is the responsibility of the pool organizer.
“Typically the minimum investment is $10,000 (U.S.) and the maximum $100,000,” says Willy Villagra, director of Openagro Consultants, a pool organizer.
The pools' success results from a number of factors: greater use of technology and information systems and greater scale, lower unit costs and increased professionalism. Risk is managed through diversification of products and locations.
“The returns in recent years averaged 15-20% annually except for last year due to extreme drought,” says Villagra. Such high returns have proved very attractive for the Argentine investor. “Generally the investors are professionals such as doctors and lawyers,” according to Villagra. Returns have been higher than the stock market and real estate, which is low risk. Argentina was not subject to the property boom and bust seen elsewhere.
An Argentine farmer typically just owns the land, renting it to pools but not working the land. Farm owners are essentially CEOs/managers and usually have an agronomy degree. For most of Argentina's history, the concept of a family farm didn't exist. Homesteaders only got land rights in the 1950s, and these are ironically the people who now rent the land.
Pools' critics say that pools have created a soybean monoculture, caused environmental damage and displaced rural workers. José Garrahan, an independent producer in Carmen de Areco in Buenos Aires province, adds that, “The pools are a good thing from a technological perspective, but local independent producers cannot compete to lease the best land to expand production.”
With the tightening of credit globally, more farmers may look to the Argentine system as a means of expanding soybean production.
Editor's note: This is part of a series on agriculture in Argentina by John Kennedy, a writer and economic consultant. You can contact him at [email protected].
This is part of a series on agriculture in Argentina by John Kennedy, a writer and economic consultant. You can contact him at [email protected].