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Soybean Prices Rise as South American Drought Reduces Harvest

Changing soybean market dynamics in South America may lead to higher U.S. soybean production in 2022

Soybean harvest VIA PIXABAY July 2021

Brazil, Argentina, and Paraguay, which account for more than 50% of the world’s soybean supply, are expecting smaller harvests this crop season.

Major agricultural agencies and consultancies have already slashed their forecasts for the soybean output in 2021/2022 as a result of severe drought since November.

As a consequence, the U.S. Department of Agriculture has also reduced its estimate of global soybean production. And soybean futures on the Chicago Mercantile Exchange have reached a nine-year highs levels in February on concerns about the more unfavorable crop weather in South America and the recent Russia’s invasion of Ukraine.

Production Losses in Brazil, Argentina, and Paraguay

In a monthly crop report in February, the National Supply Company (Conab) pegged Brazil’s soybean crop at 4,610 million bushels, down from the January projection of 5,162 million bushels.

Compared with the last harvest (5,076 million bushels), the current projection would be a reduction of 9.2%. If the forecast is correct, the crop still would be the second largest in history.

The losses in Brazil, the world’s largest producer and exporter, are concentrated mainly in the southern states, such as Rio Grande do Sul (RS), Paraná (PR) and Mato Grosso do Sul (MS) – where the La Nina phenomenon caused drought during the summer.

The situation in Argentina, the world’s top soybean oil and meal exporter, is not ideal either, with almost the entire country suffering from a drought since November, again as a result of La Nina. The most recent forecast from Agritrend, a private consulting firm in Argentina, indicates that Argentina will harvest 1,470 million bushels this season.

That represents a 7.2% reduction from last year’s crop (see Figure 1). According to Rosario grains exchange (BCR), the situation is still worrisome, with soil conditions ranging from scarcity to drought in the provinces of Santa Fe, Cordoba, and Entre Rios.

In Paraguay, the world’s fourth-largest soybean exporter, the situation is even more dramatic. Paraguay’s soybean harvest could fall by as much as 50%, to some 165 million bushels in what would be the lowest level in the last decade. In the previous cycle, according to data from Dasagro, a private consulting firm in Paraguay, the nation produced 378 million bushels of soybeans, 56% higher than forecast for this year (see Figure 1).

The last time Paraguay produced less than 160 million bushels of soybeans was in the 2011/2012 cycle, also as a result of a prolonged drought. Paraguay exports over half of the soybeans it produces, and its economy depends heavily on shipments abroad of raw materials, according to data from the Paraguayan Chamber of Soybean Exporters.

Soybean Prices Elevated

With all indications pointing toward a tightening of global supply in the first half of 2022, in addition to the impacts from the Russian military attack on Ukraine, soybeans futures traded in Chicago in February have been the most expensive since 2012, surpassing $16/bushel.

As a consequence, soybean prices continue to hit new records in the Brazilian market. Prices in the port of Paranaguá (PR) closed on February 24 at BRL 201,35 ($39.35) per 60-kilogram bag (2.2 bushels), according to data from the Center for Advanced Studies in Applied Economics of Luiz de Queiroz College of Agriculture at the University of São Paulo (Cepea/Esalq/USP). This is the highest value in Cepea’s history.

The average monthly cash price in the port of Paranaguá for soybeans increased 17,3% from November 2021 to February 2022. Depending on the weather and international market, soybean prices in Brazil could continue to rise.

The changing soybean market dynamics in South America may have bullish implications on exports of the upcoming U.S. soybean crop and may lead to higher U.S. soybean production in 2022. In response to climbing soybean prices in South America, U.S. soybean export prices are up 25% since December (USDA, 2022).

Citation: Colussi, J., G. Schnitkey and C. Zulauf. "Soybean Prices Rise as Drought in South America Reduces Harvest." farmdoc daily (12):26, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February 25, 2022.

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