Wednesday, October 06, 2010

Agroisleña is even bigger than what you thought

Since last Sunday people have been looking closely at Agroisleña that in a fit Chavez has decided to confiscate.  confiscate is the word because by now the practice of the regime is to pay part only, when it pays anything at all.   I need to update what I already wrote yesterday because the editorial of Veneconomia today shows that the Agroisleña take over could actually wreck the banking system of Venezuela.  Even though Miguel already posted this editorial a couple of hours ago I thin that people interested in Venezuelan economics cannot miss it.  At the end, some additional comments of my own.

Destructive Spiral

The decree officially announcing the expropriation of Agroisleña was published in Gaceta Oficial [official journal] on Monday, as ordered by the President in a nationwide networked broadcast last Sunday when he said “Agroisleña is expropriated; come to me, I’ve got the winning hand,” the phrase with which he seals all his revolutionary death blows.

This lapidary phrase puts an end to an agro-industrial company that has operated for more than 52 years in Venezuela to become its biggest supplier of inputs for the agricultural sector.

This expropriation of Agroisleña will have far greater consequences than any of the hundreds of expropriations already carried out by this confiscator government. [1]

Agroisleña is a company with Spanish capital [2] that has 90% of Venezuela’s agricultural market and covers a wide range of agricultural activities, among them supplying 70% of the sector’s agricultural chemicals; supplying seeds, in particular for the cultivation of 80% of the vegetables in the Andes, Lara, and Guárico; the supply of farm machinery and equipment; technical consulting services for farmers; and storage services in eight silos belonging to the company. In addition, it finances 90% of the inputs it supplies.

Equally important is the fact that Agroisleña has stood as direct guarantor to some 18,000 domestic producers engaged in producing a wide range of products that are of fundamental importance for Venezuela’s food security. In this cycle alone, it backed the planting of 235,000 hectares of cereal and oil seed crops. It is currently carrying out a special program with some 3,000 agricultural producers, for whom it is standing guarantor for the harvesting of 800,000 tons of a variety of crops, including corn, rice, and sorghum. [3]

It should be remembered that Venezuelan banks are being forced by the present administration to allocate 21% of their loan portfolio to agriculture. Agroisleña has facilitated those loans and has been an ally of small producers by standing as their guarantor, which gives them access to credit that they would have found it difficult to obtain otherwise. [4]

What will happen to those loans now? Who will stand as guarantor? Will this be yet another blow for the banks?

Another sad fact is that the expropriation of Agroisleña will result in a large number of these producers being left up in the air. Who will now stand as their guarantor? A government that has been proved to be in default?
Apart from the perverse effects that this measure will have for these producers, there are the impacts it will have on the country’s already shrunken productive capacity. There are reasons for thinking that the future holds more acute shortages, higher unemployment, and greater dependence on imports. [5]

The government, exasperated by its defeat at the polls and seeking to achieve total control of the productive sector, is once again fueling its destructive spiral to continue swelling the company cemetery with industries that were once in full production.

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1) Exactly what I wrote yesterday, taking over Agroisleña is in fact taking over the agricultural system of Venezuela.  Few escape one way or the other the long reach of Agroisleña.  That is not necessarily bad since the regime has been unable to create a substitute for Agroisleña and through its policies in the past ten years has unwillingly made sure that no one could rise to compete against Agroisleña.  We are in fact lucky to still have them working because otherwise our grocery store selves will be depleted of greens, vegetables and other stuff.  If it were not for the resilience of Agroisleña and Polar we would be already reduced to Cuban like food levels.

2) Labeling it as a company of Spanish capital is misleading.  The main shareholders of Agroisleña are also holders of a Spanish passport because they either emigrated from Spain more than half a century ago or where the descendants of these original owners.  As such it is a Venezuelan company which happens to be owned majority by Spanish nationals.

3) In spite of creating all sorts of bank who run into the red real fast (Banco del Pueblo, Banco del Tesoro, Banco de la Mujer, etc, etc...) of taking over private banks (Venezuela, Canarias, Federal, etc...)  the regime has been ABSOLUTELY UNABLE to create a cheap credit system for the country side producers, be they pro Chavez to whom land was given or the still existing ones.  There is nothing in Venezuela like an ubiquitous agency of the French Credit Agricole, and forget your local friendly bank US style.

4) These forced loans are not only useless in the end but unjust.  Any business in agribusiness or agriculture which is moderately solvent and who has some collateral will find the banks lining up at its door to offer them loans.  Besides forcibly distracting funds from other credit worthy issues and depressing potential banking earnings, they have not helped much the Venezuelan agriculture and even less the new producers without collateral.  In other words, in the worse cases it has favored a system of cronies who see their credit renewed easily as long as some minimum payment is made and in the best cases it has favored the already established folks who had a tool to grow faster than their starting competition, without improving necessarily their productivity due to the relatively cheap loan money when compared to the real inflation.  What the government should have done, to create a state bank for specific small starting loans has never happened.  in fact many companies without credit needs still went ahead and borrowed using that loan to buy dollars and hold them while inflation in fact paid the interests on those loans.  The perfect legal scam!!!!! 

You borrow 100 at 14%.  You buy 20 dollars at 1 USD for 5.  You hold them in dollars in Miami at 2% for one year so you have 20.4.  You buy back 114 Bsf but after 30% inflation the currency is now at 6 so you need only to spend 19 USD.  Your total gain is 1.4 USD or a 7% return on your USD instead of the 2% you had originally.  Now, look at this with a loan of 1.000.000 Bsf and you made at the end of the year 14,000 USD without having planted a single seed or milked a single cow.  And with a GREAT credit rating!!!!

5) What Veneconomia does not say is that without Agroisleña the banks will not be able to meet their 21% quota and the government will not allow this.  So, either these banks accept to increase their risk and accept more dubious loans and weaken their return, a very dangerous gamble in an economy with no hope of getting out of recession any time soon.  Or the banks will refuse to do so and risk heavy fines and even governmental take over if politically convenient.  Which is what I suspect is the final aim of the regime, to find excuses to take over the banks, a threat long brandished but unpopular that could become less unpopular if the regime can tie the banks to poor agricultural results and food scarcity.

The regime does not care, by the way, about bankrupt banks, as it is a convenient propaganda when Chavez  himself hands out the checks to small saving account holders whose money was "rescued" thanks to Chavez.

10 comments:

  1. The silver lining is that now the rural areas which have been one of the last bastions of popular support for Chavez, will start feeling the full blow of govermental ineficiency and start leaving Chavez in droves.

    Daniel, how long do you think it will take before the problems of govermental administration start being felt by the agricultural comunity?

    ReplyDelete
  2. Actually, it is a shame that it is not a Spanish company.

    At least, by treaty, they would be compensated in convertible currency and at a fair price too. It is ironic that Venezuelan companies have no such protections, but Spanish ones do.

    ReplyDelete
  3. moochele obama6:02 AM

    well you should do some research and post your results on the many different ways of preparing grass and dirt as workable alternatives to food......

    sorry....no pity or sympathy here....you people keep voting for this clown, you deserve the results....and please dont flee to the US...we have enough out of work latins as it is sucking the life out of our social services system...

    ReplyDelete
  4. Venezuela is beginning to look a whole lot like Zimbabwe.

    How did you do that?

    ReplyDelete
  5. "you people keep voting for this clown, you deserve the results....and please don't flee to the US"

    For those of you who did NOT vote for the clown, please do come to the USA. We need more hard-working, educated immigrants.

    I am sorry that my government won't welcome you (unless you have a Cuban passport), but down deep we value your contributions and your children born on US soil will automatically be US citizens.

    ReplyDelete
  6. Dear Moochele:

    Thanks for such a witty, enlightening comment. I'm sure you feel proud of yourself, and have already patted yourself on the back for advancing your bigoted agenda.

    ReplyDelete
  7. Kenneth Price5:01 PM

    I lived and worked (for 40+ years) in the agricultural sector in Mexico. Until recently they had the "ejido" system, where the land was owned by the state, and the farmers could "use it", but not sell it, or borrow against it. The state was the supplier of most supplies needed, if and when the needed items were available. They seldom were! The result was that the majority of staple supplies, primarily corn needed for tortillas, was imported from the USA. I suspect that food in Venezuela will follow the same pattern- more and more will have to be imported, at greater and greater cost. Another "success" of the Bolivarian revolution!

    ReplyDelete
  8. Michael7:45 PM

    What kind of name is Moochele any way? These are comments of a stupid cow so the name is very fitting. Stupid american dairy cow no doubt.

    ReplyDelete
  9. So it turns out that Agroislena IS a Spanish company after all.

    I really hope that this stupidity can be stopped, but after watching the Agriculture Minister broadcasting from Agro's headquarters in Cagua yesterday, I'm afraid there is no turning back now.

    The only thing left for the owners of Agroislena is compensation. Because of the nature of treaties between Spain and Venezuela dictate what happens now, the owners will receive payment in convertible currency at somewhat fair market value.

    The employees are going to get the shaft, big time.

    This is no consolation to the farmers and people of Venezuela, however, since less food security is on the horizon.

    What we are seeing now is the pedal descending towards the floorboards. Hang on, it's gonna get rough between now and Jan 4th, 2011

    ReplyDelete
  10. Moochele,

    As an American, I cringe when I see comments such as your un-educated (and poorly punctuated) little rant.

    Please keep your small-minded and bigoted opinions in check, lest civilized people throughout the world get the impression that such narrow-minded petty thinking is the norm amongst Americans.

    ReplyDelete

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