No Relief In Sight for Argentina’s Drought-Stricken Soybean Crop
So far in 2018, the soybean complex has been the leader of the CME Group’s ag commodities markets.
The No. 1 factor backing the rallying soybean market is the worst drought in 10 years that has hit Argentina’s soybean crop.
Year to date, the soy meal market is up 20%, while the soybean market is up 8.4%.
On Thursday, Agriculture.com visited with Pablo Fraga, research specialist with BLD, a grain marketing firm located in Rosario, Argentina. Fraga lays out the significance of the drought and the outlook for Argentina’s 2018 soybean output.
SF: How little rain have you had this February vs. the average rainfall?
PF: Rains accumulated less than 2 inches between January 23 and February 22 in the most important regions of Argentina. That’s far less than average, which is around 6 inches by this time of the year. At this stage, soybeans need between 4½ and 5 inches of rain, as soon as possible.
SF: What was the highest soybean production estimate this year, and what is the new estimate? Where does BLD think the Argentine soybean output will come in when the season is over?
PF: The first estimate this year was given by the USDA. It started with 57 million metric tons (mmt), just 1.3% less than 2016/2017. That number was hard to fathom, considering that acreage was going to fall from 19.2 million hectares to 18 million hectares. USDA is now estimating Argentina’s soybean output at 54 mmt, but the bullish market is certainly trading something less than that. The Buenos Aires Cereal Exchange estimates 47 million metric tons, in today’s report. Its first estimate was 54 mmt. Only 20% of the soybeans are good/very good. According to the Rosario Cereal Exchange. In Januar, the estimate was 53 mmt, but two days ago it revised the figure down to 46.5 mmt. The Rosario Cereal Exchange reported that 440,000 hectares of soybeand couldn’t be planted and 700,000 hectares were lost because of lack of rain. Compromised by the lack of water plus the heat and dry wind, soybeans in the core area (S Santa Fe, N Buenos Aires, SE Cordoba) are in the middle of setting pod stage in the worst condition in the last 10 years.
In BLD, we have many advisers who travel around the country meeting with farmers to talk about market and selling strategies. They have the input of talking with farmers, but also they can see the fields by the road. Things are not good at all, with just a few areas in good condition (mainly first-planted soybeans). A lot of farmers have said they never have a big rain event. Maybe a farm received 1½ inches in the last 10 days, yet a farm a mile away didn’t receive anything. At this stage, we can’t expect more than 50 mmt, and time will tell how much lower we can go.
SF: Yield-wise, what are some of the projections for this year’s crop right now?
PF: The national yield is estimated at 39.4 bushels per acre, below 47.5 bushels per acre last year. We know that in 2016 and 2017 yields were well above average, but this year will be impossible to reach average in most of the growing areas.
SF: How widespread is the drought in Argentina?
PF: In the maps (from Rosario Cereal Exchange) we can compare the soil moisture situation between January 10 and yesterday. It is very clear how bad the situation is and the lack of rain we suffered last month. Until February 21, the drought was very widespread all around the growing areas. Some lucky areas benefitted from light rains 10 days ago. Northern growing areas are good to very good (Salta, Santiago del Estero), but area is just about 2.3 million hectares (5.680 mill acres) and soils are far from being the best.
(Left map shows January rainfall, while the right map shows February rainfall)
SF: Do you see the drought lasting longer? What do the forecasts look like for the rest of the month of February?
PF: This week’s forecast doesn’t look very promising. We don’t have a drop of water for the rest of the month. Hopefully, temperatures are not as high as they used to be. March looks like it could start turning around the situation, shifting from La Niña scenario to neutral. Unfortunately, it will be very late for most of the soybean crops that are setting pods now.
SF: When do Argentina’s farmers hope to harvest this crop?
PF: At the middle of March, we should start having the first harvest from the north, but we expect the main production to come in April. With the lack of rains, flooded rural roads will not be a problem this year helping soybeans to reach up-river ports more fluently. We don’t rule out a truckers’ strike as always.
SF: What is the biggest fear coming from this short crop? Is it more about the lack of soy meal that the country will have for export?
PF: Argentina still has nearly 10 mmt stock that farmers are not selling in order to see how high the soybean price can reach. If they are suffering crop losses, any stock available will be sold to pay bills. Prices for that stock are extremely good. In addition to market increases in Chicago, Argentina’s currency (peso) has devalued 17% since December. For the new crop, we don’t expect that better prices can compensate the yield lost. After three great years, this will be one for farmers to be as efficient as possible.
We believe that crushers are having big difficulties in buying soybeans and probably they have export commitments for April, May, and July they must fill. We don’t think they have bad crush margins because although they are paying a great price for soybeans, soybean meal has been going up more than soybeans in Chicago. Dry conditions and prices going up every day is the worst combination to convince farmers to sell.
SF: What’s the soybean price, right now, that farmers can get from the end users?
PF: Remember that farmers pay export taxes for soybeans. They used to be 35% but the new government set a new policy of reducing them 0.5% per month. For May, the export tax will be 27.5%. The May price is $303 dollars per ton ($8.24 per bushel), 80% of Chicago May price! It is very good, but the secret is that buyers don’t export soybeans, they export soybean meal, and soybean meal FOB prices are very strong.
SF: When was the last time Argentina had a drought this bad?
PF: In 2011/2012 campaign, Argentina suffered a big drought which reduced soybean yields near 20% and corn yields 23% vs. the national average. This was before the U.S. big drought. Before that we have to go to the 2008/2009 season, when soybean crop was 32 mmt.
SF: What’s the beef with truckers? Why are they striking and how is this interrupting soybean crush and exports?
PF: The problem was that many farmers were not paying the official trucking rate for trips. Here rate-per-kilometer is regulated, but in the real-world things are different. Out of season, when many trucks are available, farmers pay less than the regulated rate, so many truck drivers started the strike. Many drivers were not striking, but they couldn’t drive freely through the roads. It is something unusual for this time of the year. Most of the strikes occur between March and April because crusher workers ask for better salaries in order to compensate for inflation.
There were some problems with crushing, but usually this time of the year is when plants are closed to do repair and maintenance for the coming season.
SF: What are you telling your farmer-customers about selling their crops?
PF: Most farmers are focused on crop production right now and don’t want to make moves in selling forward. However, with the jump of local prices some of them are tempted to secure new level prices at around $300 dollars per ton, that’s $30 more than a month ago. In either case, they want to be cautious in order to have a better estimate of the final crop, not to compromise a higher volume than that first calculated.
In general, farmers in Argentina don’t use (and many of them don’t even know) futures and options markets. They feel secure looking at their soybean bags as the price goes higher.
SF: What’s the outlook for Argentina’s corn crop?
PF: Corn perspective is not so good at the moment. High temperature and lack of rains in the bloom period resulted in the potential loss of 7 million tonnes, according to the Rosario Grain Exchange. Near 60% of all corn (including first and second/late crop) are in bad/regular condition right now and there are still a few weeks to go before the crop reaches its maturity stage. Near 100% of farmers do not plant corn after soybeans, so this is it.
SF: How long will this soybean market trade Argentina’s short soybean crop?
PF: I think the next two weeks will be defining, in order to see the final damage of drought in soybean crops. Until then, we believe traders will still have to consider and, therefore, trade the shortage in Argentina soybean crop. Brazil’s great crop will help make up for Argentina’s short crop, but it cannot help too much with the soybean meal situation.
Ignacio Fernandez, a BLD research specialist contributed to this story.