Many participants in the world soybean market see supplies from the three largest producing countries, the U.S., Brazil and Argentina, as being equally driven by market forces.  That has been increasingly not true for Argentina and will be even more so as the country holds elections this fall.  Farmers are hoping a new government takes over in December 2015, with a quick change in export policies.

Soybean production in Argentina for the crop now being harvested (the 2014/15 October-September marketing year) is now estimated at 57.0 million metric tons (MMT) by the Foreign Agricultural Service (FAS) of USDA based on a favorable growing season, up from a record 54.0 MMT last year and 49.3 MMT in 2012/13.  That compares to the U.S. at 108.0 MMT and Brazil at 94.5 MMT for 2014/15.  Acreage of soybeans in Argentina is about unchanged a 49.0 million acres.  According to the U.S. Agricultural Attaché in Argentina in a report dated April 1, 2015, producers are considering alternate crops, such as sunflower seed, due to market conditions and the need to rotate crops, but continue to grow soybeans because of their low production costs compared to other crops and as a store of value with a devaluing currency.

Export taxes are 35 percent on soybeans and 32 percent on soybean oil and soybean meal to encourage crushing within the country.  Soybean and product export taxes are the government of Argentina’s largest source of U.S. dollars and a major contributor to central bank reserves.  In an economy where the government controls foreign reserves and overvalues the peso by roughly 30 percent, land holdings and soybeans have proven to be viable alternatives for holding savings in the country.  Since the county’s worst financial crisis in 2001, when bank accounts were frozen and withdrawals prohibited, producers put their money in anything other than banks.  The official inflation rate is 25 percent per year, with the unofficial rate estimated at close to 40 percent.

Producers are not getting input cost breaks with lower petroleum prices like in the U.S.  The petroleum industry is controlled by the national government and lower international prices are not reflected at the pump for consumers or for farmers.   Approximately 60 percent of the area farmed in Argentina is rented and requires a substantial yearly cash outlay.  Land owners are now becoming aware of lower soybean prices for the 2015/16 crop to be planted later in the year.  Land rents continue to shift to pounds of soybeans per acre from fixed amounts of dollars per acre to reduce cost uncertainty for growers.  Farmers will still be in a cost squeeze in 2015/16.  The U.S. Agricultural Attaché believes agricultural input suppliers will gain market share for financing producers.

Over three-fourth of soybean production in Argentina is crushed in the country and according to reports from the U.S. Attaché the country has the capacity to crush over 60 MMT annually.  The trend is for crush to increase when production increases, so the larger crop could possibly be crushed if producers sold the crop.  The crush for 2014/15 is now projected by FAS at 39.850 MMT.  Farmers are expected to sell at harvest to pay bills from growing the 2014/15 crop and store the rest of the crop.  According to the Attaché, as of late March 2015, only five percent of the 2014/15 crop had been sold.   Producers sell wheat and corn, which have government set export quotas, first to pay their costs for the next crop year. Soybeans are easier to store and easier to sell for export since there are no export quotas.

Some soybean oil is used to make biodiesel, two-thirds of which is exported, but the majority of Argentina’s oil and meal is exported.  Argentina dominates the world market as the largest exporter of soybean oil, with China the largest buyer.  The European Union accounts for about one-third of all soybean meal exports.  Nearly all of the remaining whole soybeans (almost 80 percent) are exported to China.  Soybean exports for 2015/16 are expected to increase based on higher production and high carryover stocks from farmers holding more of the 2014/15 crop.

Plastic silo bags provide Argentine producers the opportunity to store as much or as little soybeans as necessary and can vary greatly from year-to-year. Each bag can store between 60 to 250 tons of soybeans.

Carryover soybean stocks have become a controversial issue.  At the beginning of 2014/15 crop marketing year they were estimated by the Argentine government at 5.3 MMT and by USDA at 18.6 MMT.  The Attaché acknowledges that the industry consensus is that the Argentine government number is closer to right, but explains, “However, when one analyzes production, exports and crush, which are generally known and accepted statistics, it is difficult to arrive at stocks much lower than the official USDA estimates.”

Some private U.S. analysts lean towards the USDA.  They are estimating 2014/15 production at 58-60 MMT compared to the FAS number at 57 MMT.  If farmers sell slowly as expected, Argentine carryover stocks in September 2015 as the 2014/15 marketing ends and the 2015/16 marketing year begins in October could be as much as an incredible 35 MMT.

As noted earlier, farmers are speculating that the October election will result in a new government taking power in December 2015 and currency devaluation and export policy changes occurring immediately.  Given the role that export taxes play in the country’s finances that may not happen overnight.  All the economic policy issues about inflation and the peso value may drive markets regardless of the desires of the new government.

The Attaché summed up the soybean stocks debate, “For 2015/16, Post anticipates that the stocks bubble will begin to break due to a conflation of factors: currency devaluation pressure, farmer indebtedness, and a surging industry demand. Producers, crushers, and the government can only play the game of chicken so long before someone will have to cave.”  The rest of the world will feel the impact of 15 years of economic policy mistakes.  This situation requires more than casual watching.

Ross Korves is a Trade and Economic Policy Analyst with Truth About Trade & Technology (www.truthabouttrade.org/). Follow us: @TruthAboutTrade and @World_Farmers on Twitter | Truth About Trade & Technology on Facebook.