The agricultural industry in Argentina has undergone a profound transformation in the past forty years, a process termed by some analysts the “Second Pampa’s Revolution”. This development also had an impact on the country’s commodities markets.

Key to the transformation of the Argentine agricultural sector was a paradigm change in production. By 1970, farmers in Argentina lagged far behind more advanced markets in terms of technology. Forty years later Argentina has introduced the green revolution technologies and achieved the standard of the most developed countries. This transformation involved changes in many production dimensions such as new legal framework, inputs, processes and new dynamics derived from net externalities among the participants of the industry. Nowadays, production is characterized by the broad use of fertilizers and agrochemicals, by the spreading of no-till farming through subcontractor networks, and by GMO seeds, approved in 1995 by the Argentine Government and quickly adopted by most producers.

In the present days, almost 70% of the agricultural area under production uses no-till farming, and 95% of seeds are GMO. Soybean production grew from almost nonexistent in the mid-1970s to more than 48 million tons in 2007/2008, turning soybeans into the country’s most harvested product and representing more than 50% of total production.

As a result of these developments, Argentina today plays an important role in the international markets. It is the third largest world producer of soybeans and has the largest crushing cluster in the world, positioning the country as the world’s main exporter of sunflower complex, soy meal and soybean oil. In 2007 soy meal exports represented 52% of total world exports and soybean oil 61%.

Argentina has always been a prominent player in international agricultural markets and the futures markets have been key instruments in the commercialization chain. There are two futures exchanges in the country: Mercado a Término de Buenos Aires (MATba), founded in 1907, and Mercado a Término de Rosario (ROFEX), founded in 1909. These markets were created as a response to the increasing growth of grain production that generated an exportable surplus, and to the lack of a price reference.

Trading in these exchanges was quickly adopted and for some agricultural products Argentina’s market prices became An world reference. The traded volumes reached 21 million tons in the 1920s, exceeding the harvest at that time of 13 million tons. Traded volume did not follow the same ascending line as harvests experienced through the years. On the contrary, they endured big swings. In the 1930s, the Government introduced regulations that limited the exchanges’ trading capacity and affected the normal game of supply and demand. From the mid-1940s to mid- 1950s the Government established a monopolistic market, acting as the only buyer of crops, thus eliminating free market transactions. Volumes sank and did not recover until half a century later, having gone through periods of high inflation, high interest rates and frequent changes in the institutional environment. In the late 1980 and early 1990s, with the authorization to quote products in US dollars, a fixed exchange rate that pegged the peso to the dollar, improved market regulations and a foreseeable economic and legal framework, the volumes soared again. The stability achieved with the economic plan provided an appropriate context, by offering clear guidelines for traders to plan their business without fear of unexpected events. In 2002, Argentina went through a profound crisis that included default of the sovereign debt, a devaluation of 70% and massive breaches of contracts. In 2008, the government introduced a new sliding-scale taxation system for agricultural exports, raising levies on grains and oilseeds, reducing the variation of domestic prices and dramatically reducing the volatility. Both futures and spot transactions were affected by these and other measures which restricted the grain commerce.

This situation and the drought eventually brought about a decline in the planted areas and harvest for this year. The total production dropped 35%, going from 96 million to 62 million tons. Nevertheless, for the next cycle a record soy harvest is expected, and, with an improved institutional environment and good climatic conditions, the country could exceed the 120 million tons in the coming years.

Today, MATba and ROFEX list the most produced commodities in Argentina: soybeans, wheat, corn and sunflower. MATba offers its contracts with physical delivery and ROFEX offers the same products with cash settlement referenced against spot market prices. Futures and options of these products are quoted in US dollars and are traded both electronically and in open outcry. The world market conditions and the similarities between the two exchanges have led them to start analyzing potential benefits that could be achieved by some form of trading integration, including those derived from larger volumes, improved liquidity and costs synergies.

The Argentine markets have gone through a wide variety of situations, but have proven to be very resilient in the face of adversity. In spite of the challenging atmosphere created by the current government, the derivatives markets remain strong. Both Exchanges have vast experience, a solid structure, and efficient clearing houses. This gives us confidence that the industry in Argentina will regain its strength, providing an atmosphere for continued growth of futures and options markets.

Por Araceli Basurto, responsable de Marketing y Relaciones Institucionales de MATba, e Ismael Caram, gerente de Operaciones de ROFEX.