The nationalization would be carried out by way of presidential decree and would create a single state entity to buy all the country’s grain, flour and oil production. Once domestic demand is met, the government would then export the remaining stores of grain, according to AFIP chief Ricardo Echegaray.

The announcement comes at a time when the Argentine government is negotiating with the agricultural sector over export taxes and domestic price caps. Commodity export taxes are an important source of revenue for the fiscally overextended Argentine government (total export taxes were about 13 percent of government income in 2008). For the farmers, however, the taxes impede revenue generation. With the domestic market price-regulated, the international market offers the only real profit-making option.

The debate over the export tax rate has generated enormous turmoil between the government and Argentine farmers over the past year. Though partial accords were reached on Feb. 24, the farmers are pressing for more concessions, particularly on the issue of soybeans.

If Argentina goes through with the idea of nationalizing the grain industry, it will effectively short-circuit these negotiations. The government would become the only buyer of agricultural products and would be able to set prices for those goods. The farmers would be completely cut off from international trade, and revenue flow would be determined by the Argentine government.

This will allow the government to ensure that there are no serious food shortages at a time when the Argentine crop has been devastated by the country’s worst drought in 50 years. Even before the drought, however, plantings in Argentina were down 25 percent due to the poor investment climate. With nationalization, the government would also pocket the export profits that the farmers used to get.

The government might have thrown the possibility of grain distribution nationalization as its trump card in the ongoing negotiations with the farmers with the intention of forcing the farmers to back down. But the threat is credible enough. The government needs the cash, and Argentine President Cristina Fernandez de Kirchner could easily enact the change through her emergency presidential powers, avoiding a legislative brawl.

If Fernandez follows through on the threat to nationalize Argentine grain distribution, the net effect will be of establishing complete control over Argentina’s exports. Depending on where the purchase price is set, it could have the same effect as raising the export tax across the board. In that event, the farmers would lose all incentive to produce. Farmers were already operating at or below their costs, and this could very well put them out of business — which not only ensures more civic protest from the farmers, but also makes the possibility of food shortages increasingly real.