Investment Themes Tie Together In Argentina

By Chris Mayer

If you were shown pictures of the street scene here, your first guess would probably be a European city. Many of the older buildings display European influences, with their spires and decorative frameworks.

Actually, I’m in South America, in its most European and cosmopolitan city, Buenos Aires. In the wake of a nasty crisis, Argentina is well on the road to recovery and that creates opportunities for investors. Many global investment themes come together here. And, it is also one of those places in the world where the dollar still goes a long way.

Real estate is still cheap here. That’s why Americans and Europeans have been among the most active buyers of property in Argentina. They are real estate bubble refugees, you might say. They cashed out of their expensive and inflated properties in the U.S. and Europe, and then they came down here to live like kings. It’s also a cash market, so you don’t have the speculation you have in hot U.S. markets where mortgages vastly increase people’s purchasing power (and raise the risk of a meltdown).

Apartments here go for about what they go for in Lagos, Nigeria or Dakar, Senegal. One paper here refers to Buenos Aires as the “It’s so cheap I’ll take two” city.

The remaining developable land in the city is shrinking fast. There is a large parcel still left, just 5 minutes from downtown. This must be some of the most valuable raw land in South America.

Here, you can see Greg Grillot (editor of Whiskey & Gunpowder) and I standing with Buenos Aires in the background. In my latest letter, I show readers how they can nab a piece of this property practically for free.

Besides having some good buys in real estate, other global investment themes come together here in Argentina. There is no escaping the high cost of energy or the growing scarcity of traditional fossil fuels.

You can see it in the local paper. Reading the local newspaper is always a good way to get the pulse of a city. In reading the Buenos Aires Herald, you can get a sense for what worries the Argentines. There are growing concerns over possible energy shortages and blackouts.

Argentines pay one-third of what their South American neighbors pay. This has stifled investment in new power generation, as you might imagine. Who wants to spend a bunch of money building new and better power generation plants when the government won’t allow you to charge a market rate?

Still, there is change here, too. And in the upcoming issue of Mayer’s Special Situations, I show a couple of safe ways to capitalize on Argentina’s potential electricity crisis.

Then there is the issue of finding reliable sources of water…

One week, I traveled around the rural areas in Salta. I spent some time at a ranch and also viewed properties owned by American and European investors seeking to develop them into residential communities, golf courses, vineyards and more.

So it was interesting to hear them talk about water rights and energy issues. In the fertile valley of Cafayate, there is plenty of water. In some other areas, there are worries of polluted water supplies. Energy is also an important issue. Farmers complain of diesel shortages. While I was in Salta, the regional government reportedly signed a contract with a firm to construct 130 miles of gas pipelines in the area.

Cafayate is wine country. The weather is pleasant, with 320 days of sunshine a year. There is plenty of water. We visited a vineyard and plucked juicy flavorful grapes right off the vine. They were delicious. I’ve never tasted grapes with so much flavor.

Development is still in the planning phases. Ultimately, Cafayate will have a golf course, hotels and more to cater to a growing stream of tourists and snowbirds. And why not? We had a dinner party of eight one night. We drank wine and ate appetizers and steak. The bill was almost laughably low, about US$70. Later, we had six beers and coffee for a total of $7.

We also spent some time at an Argentine ranch in Salta. There are some 60,000 acres here at this ranch. It has livestock and grows alfalfa, tobacco and corn. This place, too, was owned by a group of overseas investors who have plans to carve off lots and develop the property, while maintaining it as a working ranch.

Besides the potential for development, the agricultural lands out here should grow increasingly valuable. There is the push for more biofuels, which results in increased consumption of the basic feedstocks used to produce alternative fuels – such as corn, sugar, palm oil and more. There is increased prosperity in China, India and other emerging markets. This leads to greater demands for meat in particular, which also fuels the boom in demand for grains (crucial in feeding livestock).

Argentina, and South America generally, should prosper from these trends. The area has long growing seasons and rich arable land. Argentina is one of the great food-producing countries in the world, with cereal, sugar, fruit, wine, tea and cotton among the crops grown here. Argentina is also a big producer of beef, for example. And Brazil is among the largest exporters of a long list of agricultural goods.

This also creates opportunities through the back door – like in fertilizers and farm equipment. We couldn’t help but notice the ranch’s small fleet of John Deere tractors.

Basic infrastructure is also important. Water resources are critical for any kind of agricultural concern. As I wrote above, there is plenty of water in Cafayate. The owner of the property proudly told me several times about the abundance of water on the property and his ownership of the rights.

In other places, clean water is a concern. In San Rafael, for example, a region that produces 70% of Argentina’s wines, as well as olives and other fruit, there has been concern recently over pollution affecting the water and soil. The chief concern: A dormant uranium mine and plant that the government wants to reopen to turn the ore into yellowcake. (Argentina is pushing to increase its production of nuclear power to offset growing energy shortages.)

Argentina has other worries, too. As in the U.S., there is growing inflation. Unlike the U.S., Argentina already suffered through a recent ugly monetary meltdown. As late as 2002, the peso was on par with the dollar, 1 for 1. Today, that exchange rate is more than 3 pesos for $1. Put another way, the peso has lost about two-thirds of its value in about five years.

Yet somehow people slog through it. Just as in the U.S., despite numerous problems and issues, the economy manages to make headway in certain areas. Markets, I’ve come to appreciate, are durable things. Leonard Read, founder of the Foundation for Economic Education, would use the analogy of a sponge to describe an economy. It could absorb a lot of mess before it ceased to function and had to be wrung out.

The Argentinean economy got a serious wringing out in the meltdown of 2001-2002. But, governments around the world can’t help but make new messes. The basic problem with government here, and everywhere, is that there is too much of it.

Be that as it may, the economy has grown briskly here in recent years. The commodity bull market has also been good to South American commodity producers rich in iron ore, copper and more.

Recently, Argentina implemented a national biofuel law. It has the usual trappings — a minimum fuel content requirement and tax breaks for biofuel producers. Already in 2006, agricultural companies poured more than $285 million into biodiesel projects. Over the next four years, estimates put investment in biofuels at more than $1 billion. Argentina should produce 1.5-2 million tons of soy-based fuel in the next two-three years.

It’s all part of an interesting montage, is it not? I’m always fascinated by how all these themes come together, how all these moving parts impact companies and industries. And of course, I love the challenge of finding great investment ideas. In Argentina, there are at least a few of those.

Editor’s Note: Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Daily Article series to here in The Daily Reckoning. He is the editor of Mayer’s Special Situations and Capital and Crisis – formerly the Fleet Street Letter.