In Argentina’s soy stand-off, US rivals emerge as winners

Argentina’s tightening currency restrictions are wreaking havoc in everything from corporate debt to Netflix subscriptions. But there’s one unintended beneficiary: US soybean crushers.

The Central Bank is trying to stem a fall in hard-currency reserves by restricting access to dollars. At the same time, authorities have allowed multiple exchange rates for the peso to proliferate, with the official, controlled rate far stronger than others.

All that means soy farmers are likely to hang on to their crops in a bet that the official rate will weaken, giving them more pesos for their beans priced in dollars. It’s a waiting game that will deprive Argentina’s crushing industry of feedstock, sending buyers of soy meal and oil to US processors. Partly as a result, Chicago soy-meal futures extended a rally Wednesday to the highest in more than two years.

“Argentina has some challenges with farmers holding back the soybean crop as a hedge against a devaluation of the currency,” ADM Chief Financial Officer Ray Young said at a conference this month. “And so the global meal buyer will be coming to the US in the fourth quarter.”

Raw soybeans have rallied in the past several weeks and are trading near the highest prices in more than two years. But it’s not enough in peso terms for farmers who are yet to sell or price contracts for 52 percent of the harvest that finished in June.

For the upcoming season’s crop – which hasn’t been planted yet and starts to be collected at the end of March – there were sales for less than half a million metric tons through September 16, or around one percent of expected production. At the same stage last year, the figure was 4.6 percent.

“There have been very few sales in the last few months and the new season is slow,” said Agustin Tejeda, chief economist at the Buenos Aires Grain Exchange. “The price incentive is there but the exchange rate is holding farmers back.”

Tight supplies are bad news for Argentina’s oilseed crushers – Glencore Plc, Bunge Ltd. and Cargill Inc. among them – whose export plants dot the Paraná River. Soy processing will probably decline by three million tons in the 2020-21 season while net exports are expected to drop by four million tons, according to Hamburg-based researcher Oil World.

The poor outlook was compounded on Wednesday, with a prediction by the Buenos Aires exchange that dry conditions will produce a fall in next year’s soy harvest of 5.1 percent.

Argentina ships the most soy meal for livestock feed and soy oil for cooking and biofuels. But after a tax change two years ago, crushers have already been ceding market share to raw-bean operators in the country like Archer-Daniels-Midland Co and China’s Cofco. Idled crush capacity is about 50 percent.

Competitors in the United States, where the same trading giants – Bunge, Cargill and ADM – crush beans, are set to benefit. They, too, have been struggling of late because higher soy prices have eroded profit margins.

Cheap loans in pesos, with rates below inflation, are exacerbating the hoarding trend. Farmers prefer to use the loans to finance planting and hold onto soybeans, waiting for the peso to weaken. “Credit these days is very tempting at 30 to 35 percent,” said Ariel Striglio, a farmer in Santa Fe Province.

There’s a certain irony to the currency restrictions. They’re designed to put the breaks on dollar outflows – one of whose chief drivers is imports – while the government wants inflows from exports more than ever at a time the Central Bank’s net reserves have dropped to about US$6 billion.

But since the controls keep the official rate artificially strong, they actually discourage exports and promote imports, which will become more expensive when there’s a devaluation.

“A good strategy now is to bring forward purchases of imported inputs,” like agricultural chemicals, said Francisco Perkins, a farmer in Buenos Aires Province. “The government’s cure just makes the disease worse. More dollars will leave than come in.”