Don’t Be Afraid Of Inflation! Embrace It

With private analysts saying prices are rising at a 25 to 30 percent clip, doing business in Argentina can be a risky proposition, right? Not necessarily, say businessmen large and small.

“Don’t be afraid of inflation, embrace it,” suggests Alexander Hotz, Central and South America CFO at Kuehne + Nagel, a global shipping and logistics company with some 63,000 employees and more than $20 billion in revenue.

–Come again?

–“Dealing with inflation is very simple: just increase your prices faster than your costs,” he tells Latin Trade.

At the other end of the business spectrum, Ricardo Friedenthal manages Laboratorios Gaudium, a maker of disposable medical supplies. His company has 10 employees, but he sounds a similar chord.

Increasing prices in Buenos Aires. Photo: Simon Chavez/picture alliance/dpa/picture/Newscom

“Business is like waltzing,” he reasons.  “If prices stampede, it’s as if the band suddenly switches from waltz to rock ‘n’ roll. First you’re in shock, but after a while everybody adjusts to the beat and keeps dancing. Sway with the tide and you won’t even notice there was a change.”

Contrary to common wisdom, Hotz insists, inflation can create business opportunities. For one, when prices become a moving target consumers lose track of what the right price might be, giving savvy businessmen more room for, well, adjusting prices faster than costs.

“In inflation-ridden Argentina, the market doesn’t care about prices, it cares about avai-lability. Here availability rules, price is a pure function,” he says. Plus, with pesos melting in their pockets, people rush to buy consumer goods pronto. When they’re in that frame of mind, “people are prepared to pay double so at least they can save something.”

Add to this scenario import curbs, like the ones imposed by the government recently in a desperate attempt to halt dollar outflows, and the result is a bullish market where he who delivers the goods can make a mint, Hotz posits.

And at a time of looming stagflation, producers’ labor costs also shrink. “Now that the economy is not growing anymore… the labor market tends to value job security more than full inflation adjustment.”  Tough, maybe, but in Hotz’s words: “You have to play the game because the rules you cannot change.”

One more tip: “Make sure you don’t have debt—debt kills you, especially if it’s denominated in hard currency.”

Friedenthal recalls the chaotic situation in 2002, when prices climbed by 41 percent and the whole economy imploded. That was a more hostile environment, he says. Back then, he was running a similar operation at another lab and used to spend every morning, Monday to Friday, racing between financial agencies that would exchange his checks for cash, minus a huge haircut.

How big a haircut would depend on several factors, but a 30 percent, even a 40 percent reduction was not unusual. Then he’d rush to the bank to cover short term liabilities, and back to the lab, where much of the business was conducted in pesos.

In normal times employees have their wages deposited monthly into a bank account; back then the company had to pay its staff weekly, in cash. “It was crazy,” Friedenthal recalls.

Yet, his business thrived. Why?

Friedenthal comes back to the waltz-to-rock ‘n’ roll metaphor, where everyone ends up dancing to the same beat. “We all know this is an inflation-prone country. Everything goes up: the electricity bill, fuel, transportation, freight, packaging, labor costs, supplies, you name it. In this scenario, everybody will expect you to up your prices too.”

Besides, Argentina, like several other Latin American nations, has a long history of prices careening skyward, so it’s become a familiar phenomenon, he argues. And volatile prices give you plenty of chances to get it right. You failed to increase prices fast enough? Not a problem, says Friedenthal. There’ll be a new chance in just a few days.

Another way to protect a business is stockpiling like crazy. Having lots of production or packaging supplies on hand is guaranteed to help you preserve your capital. Plus, buying in bulk can always get you discounts, he says.

Government in denial

Yet this time around there’s a new twist. The government is in denial, and official statistics show inflation at just 10 percent.

This adds an extra challenge for some, especially in the key agricultural industry, where producers are tied to futures markets, annual crop planning and other factors that force them to think long term, says Alfredo Rodes, executive director of CARBAP, an umbrella organization representing more than 34,000 planters, ranchers, and dairy farmers in Argentina’s fertile Pampa region.

Food production, like imports and exports, is generally highly regulated, which means producers have to use the official inflation rate and also the government-mandated exchange rate in their dealings.  Both differ dramatically from market figures.

The government has slapped fines on private economists issuing their own inflation statistics, and has leveled criminal complaints against two consultancies. The issue is so sensitive that about a dozen producers from different sectors declined to discuss the statistical discrepancies with Latin Trade.

But Rodes, like Hotz and Friedenthal, stands firm. “Inflation is a fact that is being denied by the government,” he protests.

Food producers’ domestic prices are monitored and regulated based on rigged numbers, he says. This means that cost increases have to be absorbed by farmers and ranchers. Those planting soybeans or maize for export are lucky to have strong international prices to help cushion the impact. But beef, wheat, and dairy producers are in dire straits, he says.

On one hand, global prices are not terribly solid right now. On the other, authorities are keeping a tight cap on domestic prices of staple foods like bread, steak, milk, and cheese.

“How can we plan future investments when we know that inflation will take a big bite out of our profit margins?” Rodes says.

“We are in deep trouble.”

 

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