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Biofuels and Argentina

When it comes to alternative energy generation Argentina is no beginner. According to some experts in the field, the country will produce twice as much biodiesel by the time 2010 is over compared to what the production was in 2009. In addition, it is estimated that exports of biofuels in general would increase over 35% y-o-y. It is important to note that Argentina began its domestic production very recently, 2007, and by 2009 was among the main exporters of the energy compound. These figures have been confirmed by AABH, the “Asociación Argentina de Biocombustibles e Hidrógeno” who has also estimated the 2010 production to be close to 2 million tons.

Argentina exports almost all of its production at a clip of 1,5 million tons. In numbers this represents u$d 1.3 billion, a considerable amount. Some of what is produced is also targeted to the domestic market as the government has been advancing legislation that favors the mix of biodiesel to gasoil in about 7% of the total output. This would impact local consumption in about 1 million tons a year for 2011, which will support and sustain production going forward. Specially since that ratio will increase to 10%.

The President of “Cámara Argentina de Biocombustibles (Carbio)” told a selected crowd in a recent interview why the country was making such a stride in regards to biofuels and in particular to biodiesel. The answer: Argentina has great processing infraestructure, abundant raw material and vast experience in the production of the needed crops. These benefits extend to the production of other crops such as “cártamo,  jatropha o camelina”, all of which would not compete for land with traditional crops destined to food such as soybeans. Analysts believe the prospects and the outlook for Argentina are great given the international trend of developing alternative energy sources to combat global warming as well as the recent oil spills / accidents both in GOM and Dalián, China.

There are 23 industrial processing plants devoted to the production of biodiesel, ten of which are “next generation”. Combined, they are able to produce as much as 2 - 1/2 million tons a year and there are already plans to increase capacity to 3 – 1/2 million tons a year in the near term. Still, locals continue to rely on fossil fuels being natural gas the preferred one with 49% of the market and oil with 41%.

Argentina can be criticized for many things but alternative energy production is not one of them.

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Bright future?

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Orlando Ferreres has written recently about the bright prospects for Argentina for the next decade, after a brief transition period in which some kind of readjustment must take place, namely during the second half of 2011 until the second half of 2012. Mr. Ferreres -a graduate from the Advanced Management Program at Harvard- is a renowned economist who can be considered -in a distant way- our local Robert Rubin. Having worked for more than 20 years in one of the biggest argentine multinationals “Grupo Bunge & Born” between the years 1966 and 1989 (BG stock symbol in NYSE) and after a stint at the government as Vice-Minister of Economy he has amassed  a formidable experience both in the public and the private sector which makes him a somewhat local Guru. Whenever he speaks, it is worth paying attention.

But with Argentina, it is also worth considering a possible “question mark” just as an insurance policy.

Mr. Ferreres analysis is pretty much based on the micro-macro conditions from which the country has been benefiting for the last 3 to 5 years. During this time, Brazil as well as other latin american economies have seen an enormous boom helped and sustained by a torrid bull market in commodities. Take the case of Chile and copper, or Brazil and iron ore, or Mexico and oil to name few. Granted, Mexico could be facing a “peak oil” problem down the road and other latin american economies could be suspect for many different reasons. But is undeniable that the growth of the mentioned economies has been real, strong and to this day sustainable.

Within this frame, Mr. Ferreres believes Argentina will chug along for the next 6 to 9 months with the soft commodities wind at its back. International prices for soybean, corn, wheat and even cotton have skyrocketed (again) and the country will be showing expanded GDP numbers and a strong fiscal surplus while growing at a rate of 7.5% annually. After this, he believes the accumulated structural problems in the economy will make themselves heard. Either by its own volition or by having no choice, the government will have to address the aspects of the economy that have been swept under the rug, such as subsidies in almost anything that affects the average Joe: natural gas, power, water, phone services, transportation, etc.

In his estimation, the period after the elections and for the span of 2 presidential terms should be of tremendous growth most likely spurt by the same conditions that have already benefitted the country in the last 5 years… but this time on steroids. Although there are certainly plenty of reasons to be optimistic -there is so much talk about super emerging countries building one new city per month and how India, China and to a smaller extent Brazil and Russia are going to take over the world- his analysis isn’t thoroughly comprehensive and definitely does not consider a black swan, something that by definition cannot be conceived anyway. But other darker alternatives can and must be taken into account as they can completely derail the path of growth of the emerging economies. And this darker scenario mostly resides in the Persian Gulf with a potential devastating war that can engage more than one superpower.

Finally, it is worth noting that he himself raises one alert: Argentina has already seen a few trains leave the station. And he would not be surprise to see argentines mess up this last call one more time.

For now, we would prefer to keep the “question mark” in place. In the title of this essay, that is.

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New challenges

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This week we may have a chance to see how well the President is coping with the aftermath of her husband’s death. There is to consider the federal budget as well as the coming G-20 meeting in Seoul this Wednesday. The two fronts were battles may occur are plagued with dilemmas. On the one hand, Argentina as a priviledged member of the G-20s will look to push forward its stance of negotiating with the “Club the Paris” the remainder of 6,700 billions owed outside of the realm of the IMF. However, this presents in itself a contradiction given that G-20 members must abide to the rules of the organization which preclude a certain and dominant relationship to the IMF. No one understands what Argentina’s administration message will be, neither if it will make much sense. As part of the bylaws countries are subject to revisions and audits by the same organization Cristina and her cohorts are trying to play games with. And as it is public knowledge, data that relies on government figures has been thought to be fraudulent for some time.

One thing is for sure, the government will spin any possible news such as bilateral meetings with powerful countries in the best possible light trying to make it sound like other members are being responsive to Argentina’s allegations.

Meanwhile, this same Wednesday kirchneristas will try to make a successful move at the House of Representatives in order to setlle matters with the 2011 federal budget. Problem is they can hardly reach the needed number of votes. Here too, we may see the official spinning machine at work looking to blame the opposite party (parties) for getting to 2011 without a budget. It is very unlikely that we may see officials change their unyielding attitude as they have been recently emboldened by a new public opinion poll that shows that over 60% of interviewees think Cristina Kirchner will be able to continue and complete whatever changes had been initiated by her husband during his presidential tenure.

Interesting times!

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A toast to mendocinos

I propose a Malbec glass of wine toast to all mendocinos entrepreneurs who are making this miracle a reality!

In spite of the horrendous US recession which was extended to many corners of the world, Mendoza and its wineries keeps crashing its own exports benchmarks when it comes to varietal wines. A recently published article in a main argentine journal mentions that fine wine exports are growing at an annual rate of 17%. This is not the case of other types of wines, namely the ones that are less sophisticated. Although a good chunk of the rise in exports relates to Spain, Brazil seems to keep expanding their taste for the good life.

According to the “Ministerio de Desarrollo, Industria y Comercio Exterior de Brasil”, imports have grown close to 33% in dollar terms in the first 8 months of this year. More than half of this increase was due to higher volume. Lucas Lowi with Bodegas Chandon believes that growth is happening around the high end products and not so much at the lower end. The immediate conclusion is that brazilian consumers are willing to pay up to drink it in. And this trend towards more sophisticated product lines can be seen in other segments and in different brands as well. Evidently, Brazil’s continued economic growth has been good to an ever expanding middle class.

Alejando Panighini, export manager for Bodegas Norton, also remarked that about 60% of business with Brazil is based on wines that are FOB priced in the range of $26, completely changing the trading style of prior years. He then mentioned that Norton Malbec DOC and Perdriel were seeing renewed growth as brands in the brazilian market.

According to a research conducted by the Oficina Económica y Comercial de la Embajada de España en Brasilia imports are tagged at around u$d 165 millions a year and about 50% of this represents imports from Argentina and Chile. Not a surprise, considering a population of 190 million in a country that continues to offer great growth prospects going forward.

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Now in the US

The world boom in wine tourism will have you believe that this is a surging and innovative field where fortunes are being created daily. However, at least in the US, any resemblance to such scenario is purely coincidental.

A recent article in Businessweek (October 25/31) details the adventures -and struggles- of more than a few smaller wineries and vineyards. The essence of the article seems to be that this activity is being promoted by local governments with the hope that they can create a small niche industry that revolves around tourism. That is, wine tours that supposedly help create -in turn- more jobs, support local farming and eventually also help increase tax receipts.

The unaware visitor would happily walk the trails of these beautiful vineyards without ever suspecting that sustaining such venture is the invisible hand of the government which keeps sweeping under the rug whatever red is found in the wineries/vineyards’ accounting books.

Some quick stats look impressive: all 50 states now have wineries. Alaska 13 of their own and even Hawai has 5. Since 1975 the number of wineries has grown from a mere 574 to 6,500 today. What is even more impressive is that very few make money. Some wineries interviewed for the piece stated they have never seen a profit in over 2 decades or more. Such commitment to the land is hard to explain unless receiving a check from the government as an aid becomes the ultimate experience.

Which brings me to Argentina and Mendoza wineries. There was a time when -on site- you could just ring any winery to see if there was anyone at the local office, jump on your bicycle and ride to the nearest one for a short FREE visit. It is all organized tours now. I would not say “big business” but business nonetheless. Here, I hardly doubt that this segment is in the same disarray as in the US although I am pretty sure that somewhere, somehow local government aid also falls through the corporate cracks.

Or are these government cracks?

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