How to Profit from Argentina's Next Crisis

By Tom Dyson, publisher, The Palm Beach Letter
Wednesday, June 18, 2008

This week, Buenos Aires supermarkets may not have any fruit, vegetables, or meat for sale... And ships in Rosario – Argentina's busiest port for produce – "drift idly" according to the International Herald Tribune.

Argentina is one of the "breadbaskets" of the world. It exports more soybean oil than anyone else. It's also the second-biggest corn exporter (after the United States), the third-largest beef exporter, and the fifth-biggest wheat exporter. Argentina's farm exports have risen 48.2% since 2003. Farm exports were the main reason Argentina was able to rebound so fast from its economic meltdown in 2002.

With the bull market in commodities making farmers rich, you'd think Argentina would be one of the most prosperous countries on Earth right now...

Unfortunately, when the Argentine government saw how much money farmers were making, it slapped an export tax on food products. Farmers pay 46% to export soybeans right now... And if soybean prices keep rising, the tax will jump over 50%. The government has banned beef exports.

In Argentina, farmers are the upper class. The people there think of farmers as rich landowners. By taking the farmers' money with these export taxes and giving it to poor people in the cities, the Argentine government figured it would gain popularity. The politicians also figured the taxes would reduce exports, keep food in the country, and drive down prices... They'd win popularity that way, too.

They didn't count on the farmers.

In the last three months, farmers have gone on strike four times. Now the truck drivers have joined in. The truckers lose millions of dollars every time the farmers strike. So the truckers are protesting against the farmers by blocking all the highways.

According to political polls, the Argentine president's popularity has collapsed in the last three months. But her government is sticking to its position and won't negotiate. Argentina's politicians argue the tax policy is the key to alleviating poverty and have called the farmers greedy. Last week, Interior Minister Florencio Randazzo said farmers were "intolerant, ungenerous and anti-democratic." He called them "coup-mongers."

Now there isn't enough food in Argentina. And without the billions of dollars in foreign-exchange earnings the country gets from exporting food, the government is going bankrupt. According to an article by the Financial Times, Argentina now has more debt than when it announced the largest-ever debt default in 2001.

You have a couple ways to profit from the impending collapse...

Last month, I met an Argentine farmer in Paraguay. Paraguay is Argentina's neighbor. The farmer had come to buy millions of dollars worth of Paraguayan farmland on behalf of a small farming village in Argentina. This village used to be one of the richest farming towns in northern Argentina, he told us. But the government's new laws are ruining the way of life. So the town's farmers pooled their money together and sent this guy to Paraguay to buy up as much land as possible.

Paraguay's land is just as fertile... it's cheaper than Argentine land... and the political risk there is a mere fraction of Argentina's political risk. This is why Paraguay's farmland is about to soar and Paraguay's currency – the guarani – is one of the top three best-performing currencies in the world so far this year.

I also like Brazilian meatpackers. Brazil's food industry is stealing Argentina's market share. Meanwhile, the shortage of Argentine food in world markets is supporting prices... and Brazilian meatpackers are earning higher profit margins.

Good investing,

Tom

Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

Further Reading:

How to Invest in the Most Efficient Way to Feed the World

Potash $10,000: How to Profit Safely

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ATLAS SHRUGGED AND DUMPED THE ARGENTINE STOCK MARKET

One casualty of the Argentine crisis is the stock price of IRSA – the most prestigious real estate developer in the capital, Buenos Aires.

IRSA is managed by one of the smartest investors in the world, Eduardo Elsztain. You could call him the "Donald Trump of Argentina." Shares in his company have fallen 41% in the past year.

Investors can learn a valuable lesson from this meltdown: Sure… you can make quick money trading blow-ups like this, but long-term investments are treated far better in free market bastions like Hong Kong and Singapore.

These two Asian city-states "get it." They keep taxes low and encourage entrepreneurs to hire new workers and take on risk. Stocks and prosperity are rising in these places. Argentina taxes its most productive citizens to death. Stocks and prosperity there are declining.

This is the lesson learned by anyone who has read Atlas Shrugged. This is the lesson being learned by Argentine stock investors right now. Argentina is a beautiful country blessed with awesome natural resources. This shouldn't be happening. Shame on the buffoons in La Casa Rosada.

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