The Global Pond

Kids in the country learn early that a stone skimmed across a pond creates ripples that can travel far. In today’s global agricultural markets, one country’s problem can directly impact many other countries. Losses to the Australian wheat crop sharply boosted our exports two years ago and in 2008 the Former Soviet Union’s bumper wheat crop crushed the U.S. soft red wheat basis. In 2009 it’s South America that will affect us next.

Losses in South America mean overseas importers of its soybeans, soymeal and corn can face potential import disruptions as far afield as Iran to Indonesia. It’s a small world after all.

Late 2008 and early 2009 were not kind to Argentina, Paraguay and to far-southern Brazil. That region received below average precipitation over most of their crop area during October through December with minimal improvement during January for much of Argentina. Precipitation improved in early February but damage is done.

Most of the Argentina soybean crop flowers in February, with second-crop soybean planting getting underway and its corn crop is in the fill stage. Estimates of soybean losses in South America were as high as 10 million tonnes in early February, or 367 million bushels, equivalent to 20 percent of Argentina’s expected crop!

February production estimates are preliminary at best, but futures were already pricing the impact of reduced crops. Soybeans reacted swiftly in January, surging higher, with the July09/November09 future spread racing from a 6-cent carry in late December to more than an 80-cent inverse by late January on ideas of tighter U.S. supplies.

The United States typically starts losing soybean export business to South America by early spring. That picture is changing quickly. Barring a late season recovery in Argentina’s soybean crop, U.S. soybean and soymeal exports will almost certainly exceed USDA’s current projections.

Assume that just 5 million tonnes of South America’s soybean production is lost, with most of it from Argentina. In a ‘best case’ scenario, South America might still meet projected exports by drawing down its ending stocks slightly.

Some portion of any South American shortfall will likely be covered by increased U.S. soybean and soymeal exports. A loss of 5 million tonnes equates to 184 million bushels, or 82 percent of the U.S. projected carryout this summer. Shipping that many more soybeans would create a very big ripple in our cash markets. U.S. soybean stocks would be nearly depleted and basis could reach extreme levels by summer in some parts of the United States.

Realistically, U.S. soybean stocks will decline from the current 225 million bushel USDA projection, but our cookie jar won’t be emptied. Ending U.S. stocks of 150 million bushels of soybeans, however, would equate to less than 5 percent of disappearance, about the same as in 2008 and historically tight.

An interesting aspect is that Argentina exports virtually 100 percent of its soy production, with over two-thirds of it going out as soymeal. Brazil exports about one-quarter of their soy production as meal and around 40 percent as raw soybeans, and uses the balance domestically. The United States on the other hand, exports less than 10 percentof our soybean crop as soymeal.

Several scenarios could unfold for the United States:

• South America’s shortfall is small enough it can meet all export demand from their remaining soybean stocks. The United States sees little additional business.
• Some part of a 5 million or so tonne shortfall could bring new soybean export business here, but no additional demand for soymeal.
• Argentina’s problems could worsen and U.S. soybean inventories could become essential to meet world demand. The United States could end up with very low soybean stocks this summer, and see greater demand for both soymeal and raw soybeans for export this summer.