By Chris Ries
NOTE: Chris Ries of Ries Ag Marketing is a private market analyst in northeast Iowa. He can be reached at 563-932-2646 or [email protected]
Argentina's government decided to end a multiyear effort to intervene in the currency market last week, which has led to sharp losses in the value their currency, the peso. In early December it took five pesos to equal one dollar, but by late January the exchange rate had jumped to over eight. Farmers in Argentina are faced with a difficult decision ahead of this year's harvest: sell a sharply inverted market or hold their commodities into lower priced delivery periods to avoid what could become even larger inflationary losses.
Since 2003 the Argentine government has been moving toward more populist policies under the direction of President Nestor Kirchner and his wife, Cristina Kirchner, who succeeded her husband following his 2007 death. The duo successfully pushed a left-wing platform, increasing government spending in an attempt to eliminate the gap between rich and poor. Just last year, Kirchner increased government expenditures by more than 40% in the run-up to last fall's congressional elections. Over time, sharp increases in spending have led to an oversupply of money and seemingly uncontrollable inflation.
Argentina's government puts the official inflation rate at 10.9%, but most economists agree the figure is closer to 25%
In turn, the peso has been losing value at an astonishing pace. From 2011 to 2013 the currency fell 23% against the dollar, followed by a 32% drop in 2013 and another 23% in the first few weeks of 2014. The government had been trying to slow the rate of inflation in recent years by using foreign currency to buy pesos off the market, but as reserves of U.S. dollars and other foreign currencies began to dwindle, economists feared the government would run out of options.
Then, in late January, the government unexpectedly announced it had stopped buying pesos, opting instead to allow the currency to trade on its own accord. The market responded by posting an 18% decline for the week -- the largest loss since the government defaulted on its debt in 2002.
Shunning cash, stashing soy; they like to deal in "real assets"
Since Argentina's farmers deal in real assets like corn and soybeans, their income is insulated from rising inflation as long as it remains unsold. Once the grain is sold for pesos, inflation begins to take its toll.
Over the course of the past few years, the falling peso has made Argentine farmers increasingly reluctant sellers. As of mid-January, Argentine farmers were reportedly holding onto 8.4 million ton of soybeans -- nearly one fifth of last year's total production and 425% more than what farmers had in storage a year ago.
With permanent grain storage in short supply, soybeans are the crop of choice to hedge inflation risks. Corn takes up more space and usually doesn't keep as well.
As the new-crop soybean year approaches, producers are considering whether to sell remaining old crop supplies at higher current prices or continue storing beans into new-crop delivery months. Spot prices for soybeans are about $1.00 per bushel or 13% higher than prices offered for May (new crop) delivery, but in the face of such high inflation, the most profitable choice isn't clear.
In the next couple of months farmers will need pesos to pay for inputs and taxes, forcing many hoarders to market their beans. And a new harvest, beginning in March, will resupply the Argentine market. But once near-term expenses are met and the combines are put away, farmers fearful of inflation may be very reluctant to sell.
How does this affect demand for U.S. soymeal and soybean oil?
The pesos outlook for the rest of the year may prompt farmers to become even more cash averse. Moody's said this week that it sees inflation rising to 30% and Argentina's own Econometrica predicts inflation will reach upwards of 50% this year. Econometrica said it predicts a year-end exchange rate for the peso of 9.80 pesos per dollar, an annual loss of 55%.
This year Argentina is expected to export about 18% of its soybean crop. By comparison, neighboring Brazil exports about 50% of its beans. A 35% tax on soybean exports keeps most of Argentina's crop off the world market. The result is a large soybean crushing industry that leads the world in both soymeal and oil exports. Argentina is expected to export about twice as much meal and three times more oil than Brazil this year, despite producing 39% fewer beans.
Sluggish farm sales following this year's record harvest may slow Argentina's output of meal and oil when the world needs it most. If Argentina's crush can't satisfy that demand, crushers in the U.S. stand to benefit.