Populists Governments are reforming Latin America Agribusiness but uncertainties persist

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Key View

• The recent wave of anti-establishment governments across Latin America could result in significant structural changes to the agricultural sectors in these countries.

• The agribusiness sector played a key role in providing support to these ‘outsider’ political campaigns, and we believe agricultural reform will continue to dominate political discourse over the next few years.

• We believe that the production of soybean, grain and livestock, mainly in Brazil and Argentina, is most likely to accelerate as a result of the supportive policy environment.

• Although Latin American governments are likely to maintain support for agricultural production, regardless of political leaning, exogenous macroeconomic factors will slow reform momentum, particularly in Colombia and Mexico.

With the recent wave of right-wing (or in the case of Mexico, left-wing) populist and anti-establishment governments across Latin America, the agricultural sectors in these countries could see significant structural changes over the coming years. The collapse of the commodities boom between mid-2014 and early 2016, coupled with the broad austerity drive and a series of reforms that Latin American nations subsequently underwent, triggered the first shift from the left of the political spectrum to the centre-right. 

Leftist administrations in commodities-dependent economies of Brazil and Argentina were supplanted by the centre-right governments of Michel Temer in 2016 and Mauricio Macri in 2015 respectively.

n 2018 the combination of high oil prices, inflation, a strong US dollar and a hawkish US Federal Reserve prompted the unwinding of the carry trades that fuelled destabilising capital outflows and currency corrections that centred on some of the most macro – economically imbalanced emerging

Market economies – including Argentina, Brazil and Mexico – resulting in slowing or contracting economic growth. 

Against this backdrop, endemic corruption, crime and violence exacerbated voter dissatisfaction with the established political parties and politicians. This disruption provided the second catalyst for political change with right-wing populist President Jair Bolsonaro of Brazil, left-wing populist President Andrés Manuel López Obrador (AMLO) of Mexico and centre-right President Iván Duque of Colombia being elected in 2018. Interestingly, the rural and farmer community played a pivotal role throughout the presidential campaigns of Latin American countries and continues to underpin political discourse.

2014 Collapse in Commodities Prices Sparks Shift To The Right

Political leaders in Latin America strongly campaigned on agribusiness reform, which will likely remain at the forefront of the political agenda over the next few years. We, therefore, expect to see increasing changes to the agricultural policy from countries on both the left and right side of the political sphere.

On the right, policies tend to centre on market liberalisation and the winding down of bureaucracy and obstructive regulations. For example, in 2015 in Argentina, Macri campaigned on cutting restrictive agricultural export taxes, lifting currency controls and settling with holders of the national debt. 

In 2018 Brazil’s Bolsonaro promised to reduce or eliminate excessive environmental restrictions that limited arable land expansion, and Duque in Colombia vowed to cut corporate taxes, ease regulations and incentivise foreign investment. 

The farm lobbies in each country publicly backed their respective candidates on the back of this campaign promise. On the left, in Mexico, despite being a net importer of agricultural goods, the rural sector still makes up large proportion of the population, and AMLO thus espoused a pro-farmer rhetoric during his campaign (albeit in favour of smallholders over the large-scale commercial farmer sector), promising to implement transformative agricultural reform 

Although broader macroeconomic policies focus on alleviating budget deficits, agricultural policy, for the most part, will continue to prioritise expanding rural support. For instance:

• Agriculture Minister for Brazil, Teresa Cristina, has announced plans to amplify the country’s rural subsidised loan program to BRL1.0 bn from BRL440.0 mn currently.

• In Colombia the government continues to offer financial assistance to coffee growers through its Rural Funding Incentive programme which provides loans with favourable interest rates and maintains a COP45 bn fund for coffee replanting initiatives.

• Mexico has similarly announced multiple support programmes, mainly subsidies for smallholders and price floors for strategic commodities, such as grains and beans.

• Argentina, while offering minimal support for crops and livestock production in terms of subsidies, emphasises the importance of funding research through institutions such as the National Institute of Agricultural Technology.

Latin America Lags Behind Internationally On Agricultural Support

But the impact of these agricultural policies on production growth will be mixed. We see Brazil as the outperformer, followed by Argentina, Colombia and Mexico. Specifically, a supportive policy 

Environment in Brazil in terms of land expansion and rural credit will be conducive to soybean, grain and livestock production, therefore posing upside risks to our forecasts. 

Moreover, Brazil being an agricultural powerhouse, benefits from a first-mover advantage that makes it difficult for other agricultural exporters to compete despite our Country Risk team’s relatively downbeat outlook on the country as a whole. Argentina also holds strong potential to expand production as Macri continues to maintain an agribusiness-friendly profile while continuing to push for more market-friendly reform although weak economic growth and strict austerity conditions imposed by the IMF are currently weighing on the industry. 

In Colombia, Duque’s hesitation with moving forward on peace deal negotiations with the Fuerzas Armadas Revolucionarias de Colombia (FARC), much of which centre on reforms to rural development and land policies, and Mexico’s reliance on agricultural imports will pose as much stronger headwinds than issues facing Brazil and Argentina (see ‘Modest Growth In Mexican Grains As AMLO Amplifies Support To Farmers’, March 15; ‘Competition Between Argentine Soybean Producers And Crushers To Intensify’, March 20).

Brazil an Agricultural Powerhouse

In any case, exogenous macroeconomic issues will continue to slow reform momentum in agriculture. For example:

• Continued domestic economic weakness in Argentina has already forced Macri to retreat from campaign promises by reintroducing export taxes on primary products as one of the conditions of its IMF bailout deal.

• In Brazil we remain skeptical Bolsonaro’s capacity to implement structural reform over the long term (see ‘Brazil’s Bolsonaro Unlikely to Make Quick Progress on Economic Reforms’, January 4). His ability to forge a broad legislative coalition, given a poor track record in political office previously, remains uncertain, and his attempt to please his various constituencies will likely create strategic incoherence in economic policy. 

• Should investor sentiment weaken and the real depreciate further, global sugar and coffee prices are likely to drop even more (see ‘Coffee Forecasts Lowered amid Supply Surge and Weakened Currencies’, March 8, 2019).

• In Colombia, Duque’s partial veto of legislation authorizing the Special Jurisdiction for Peace, one of the key components of the 2016 peace deal with FARC, will make policymaking more difficult in the coming months and increase uncertainty.

• The new United States-Mexico-Canada Agreement (USMCA) will maintain zero tariffs on all food and agricultural products agreed under the previous North American Free Trade Agreement (NAFTA), which will continue to give the US preferential trade access to Mexico. 

• The continued influx of US agricultural imports into Mexico means domestic producers will struggle to compete.

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