Right on time to celebrate the 30th anniversary of the United Kingdom’s triumphant liberating of the Falkland Islands from Argentina, Argentina has decided to sink its own economy. Its creative re-enactment of the sinking of the General Belgrano – one of the most dramatic events of the war as a British sub sank an Argentine cruiser – was announced yesterday by its populist president Cristina Fernandez de Kirchner. It will take the form of Argentina nationalizing the biggest oil company in the country – Spain’s Repsol-owned YPF.
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This follows the recipe lain down by Venezuela’s Hugo Chavez, who nationalized and seized control of some of his nation’s oil companies and operations a few years ago. And has led to the dramatic shrinkage of Venezuela’s oil production – in the middle of the most significant oil price boom since the 1970s. Not surprisingly, domestic investors, domestic oil companies, foreign oil companies and foreign investors pull their money back when governments start nationalizing industries. And socialist bureaucrats and politicians aren’t very good at making exploration and investment decisions, as well-intended as they might be.
While it’s fun to mock and ridicule the buffoonish Argentine and Venezuelan leaders (I’m enjoying japing them, certainly) there actually is a significant impact for prairie farmers, even if it’s indirect. These kinds of activities affect the likely production of Argentine crops in the long run, and demonstrate a part of the equation that will eventually produce the end of the long-term commodity bull market that prairie farmers have been enjoying for most of a decade now. As anyone who reads this space knows, I’m a believer in investor Jim Rogers’ theory that commodity booms alternate with stock market rallies, with each lasting about 18-20 years. That gives us a few years left with this boom, which would be good for farmers. If I had to guess – which I don’t but do anyway – I’d put 2018 as the likeliest ending of this present commodity boom. That is obviously just a guess, but that’s all we get with the future.
Anyhow, what this little Argentine decision brings up – as does the Harper government’s decision to fast-track environmental approvals for some resource proposals – is the means in which commodity booms end, according to Rogers. The guru explained, about a decade ago in his Hot Commodities tome, why commodities booms last so long, and what causes them to eventually end. One reason they last so long is that it is incredibly hard to establish new commodity extracting and producing operations, such as mines, smelters, etc. Just imagine the set of approvals you’d have to complete to get a new lead mine, or lead smelter, approved. That’s the example – a lead smelter – that Rogers uses in his book. Even if it gets approved, and prices are sky-high for an extended period, it will take many years to get a new operation in production. The same goes for oil exploration and extraction. How long does it take to discover, explore and extract new undersea oil supplies? Post-BP-oil-spill, I imagine the answer is “considerably longer than before.” So prices can rise, but supplies have trouble catching up.
How long does it take to establish new oilsands operations and get the oil from northern Alberta to markets in the U.S. and Asia? As well all know, the answer is “a long, long time.” Look at the politics around the Keystone XL pipeline. Supplies have trouble catching up with demand when more than economics applies to investment decisions. Some countries answer the supply-lag situation by trying to refine the process the make approvals come more quickly. That’s exactly what the Harper government is doing right now with its fast-tracking of enviro approvals. So that increases the speed of new supplies hitting the market and hastens the end of a long term commodity booms. By the end of a boom, lots of places have figured out how to get lots more production to the market to cash-in on high prices, thereby bringing low prices. (Demand destruction and substitution caused by long term high prices are also a part of the equation: look at the evolution of fracking tech and the ocean of energy it’s produced.)
But sometimes, like now, the same high prices bring a response that has the opposite effect, even if that is not intended. That’s what’s happening in Argentina and happened in Venezuela. Central planning types hijack resource production in order to grab all the profits for themselves, and assume they can be equally profitable. So it’ll be a win-win. They don’t take seriously the impact of their action on everyone else’s investment decisions or their own abilities to finance, manage and benefit from production. So they actually set back the ability of the world to produce more resources. That keeps prices high.
Ironically, farmers will benefit if more Argentinas happen, and fewer things like Harper’s enviro fast-tracking. The longer the world is short of resources, the better for farmers.
An added benefit for farmers of Argentina’s move is that it makes it likely less money will be invested in Argentine farms and its ag industry. These kind of actions spook everybody. Last decade the country put export taxes on some of its crop exports. That doesn’t encourage farmers to invest in new equipment or management. And it probably spooks all the other companies that invest in ag supplies, production and infrastructure. A couple of months ago a senior fertilizer company manager told me his company is scared to invest in many countries around the world because of things like this: they need to invest hundreds of millions of dollars in new facilities, but don’t dare do it where the government might step in and snatch it, or kill its profitability by fixing prices. So they avoid some good markets just because of the danger of expropriation of facilities or returns.
So Argentina, one of our biggest competitors, is no doubt producing significantly less than it could be, and will continue to lag behind. That’ll probably change when the commodity boom is over, and the chance for profits has faded.
If I had any advice for a prairie farmer today, it would be: Don’t sell the farm and move to Argentina. And especially: Don’t join the Argentine navy. You don’t need to volunteer for a Belgrano.
