Emphasis on exports
September 01, 2007
by Sue Robinson
Because Argentine farmers export 75% of what they grow, they pay close attention to the world market.
In the 2006-07 growing season, Argentine farmers produced 44 million tonnes of soybeans and exported about 100% of that total, either as whole beans (7 million tonnes) or crushed (37 million tonnes). Of the 17.5 million tonnes of maize produced, they exported 66% along with 64% of the 13.5-million-tonne wheat crop, according to the U.S. Department of Agriculture.
"Argentina has captured 95% of the increase in world demand for soybean oil and meal in the last six years," said Pablo Andreani, a consultant with AgriPac in Buenos Aires. Argentina is the number one exporter of soy oil and meal in the world.
By comparison, the U.S., which exports mainly whole beans, captured only 5% of the increase in the oil and meal export market. It should be noted that the U.S. has a much stronger domestic market, thanks mainly to the country’s fastgrowing biofuels industry. In 2006-07, U.S. farmers grew 87 million tonnes of soybeans, exported 35% as whole beans, oil or meal, and consumed 65%. They produced 267 million tonnes of maize, exported 20% and consumed 80%.
CASH CONTRACTS Argentine farmers market most of their grain based on the cash price either at the time of delivery or when they negotiated the forward contract with their elevator. About 70% of the grain is sold through a cash contract while the other 30% is priced using futures and options traded on the Chicago Board of Trade (CBOT).
However, since Argentine farmers work in a cash economy, they sell 90% of their grain when they need cash, said Enrique Erize, a grain marketing advisor with Novitas in Buenos Aires. "They try to negotiate for the highest price possible on only 10% of their grain," he said. "There is a lot of room for improvement in local grain marketing strategies and getting farmers to sell their grain in advance at the market highs."
However, grain prices in Argentina are less transparent than they are in the U.S., where the spot price is figured using the futures price and basis, which is a measure of local demand.
If an Argentine farmer has a cash price of $200 per tonne of soybeans for delivery to an elevator, crusher or port, that final cash price reflects (though it doesn’t necessarily follow) the CBOT price, local demand and basis at the point of delivery, though basis is not a term used by grain merchandisers or farmers in Argentina.
Here’s a general explanation of how that price in that scenario would be figured:
• The eight or 10 major exporters sell grain contracts on one of Argentina’s two commodity exchanges (there’s one in Buenos Aires and one in Rosario).
• A grower or elevator, through a broker, then buys the contract.
Though only 10% to 20% of the grain is actually traded this way, it sets the cash price for the entire market that day.
Shane Romig, a Dow Jones correspondent in Buenos Aires, said weather, competition between exporters and crushers for whole grain and government interference also influence prices. The weather market in Argentina affects the local spot price and the weather elsewhere in the world affects the CBOT price.
"The government interferes in grain markets to depress local prices," Romig said, mentioning the recent example of the government’s ban on wheat exports that was implemented to increase local supply and keep flour prices low.
WHO BUYS THE GRAIN? Argentine farmers sell their grain directly to local elevators (private or
cooperatives) or directly to processors, multinational exporters such as Archer Daniels Midland Co., Bunge, Cargill and Louis Dreyfus, or local exporters such as Toepfer, Nidera, A.C.A., A.G.D., Noble Argentina and others.
Argentina has 500 elevators, including 350 that are privately owned, 100 owned by multinational companies and 50 owned by national companies, said Andreani. While this does offer a lot of capacity, farmers can only store about 60% to 70% of their grain. "A production-to-storage ratio of 1.5 to 1 means a lot of grain has to be exported at harvest and farmers are at the mercy of fall harvest price lows. However, silo bags have helped a lot."
Silo bags, which cost only about $300 per bag and can store from 200 to 300 tonnes of grain, were introduced in Argentina about 10 years ago as an alternative to permanent storage. They are seamless and airtight when sealed and stretch to form a smooth surface that sheds precipitation and makes it difficult for rodents to get a foothold.
Alejandro Hellman, director of Invegra and a specialist in grain marketing, said about 20% to 30% of the soybeans produced in Argentina are forward contracted at a cash price for harvest delivery. "About 50 to 70 percent are sold on a cash basis and only perhaps 10 to 20 percent are sold on a futures contract," he said.
Brokers advise farmers on selling strategies and they buy contracts on the commodity exchanges to get the best spot grain price. Farmers like to sell soybeans to port crushing facilities to get the spot cash price, said Alejandro Larosa, general manger of FYO.COM, a brokerage firm in Rosario.
FINDING THE COMPETITIVE ADVANTAGE Farmers in Argentina focus on crushing their soybeans to capture the crush margin of $10 per tonne, said Alberto Rodriquez, executive director with Camara de la Industria Aceitera de la Republica Argentina (CIARA), the national oilseed association.
In the 2006-07 season, Argentine farmers produced 44 million tonnes of soybeans, exported 7 million tonnes, or 16% (mainly to China), and crushed 37 million tonnes. Of that, all 7 million tonnes of oil and 29 million tonnes of meal were exported, with only 1 million tonnes kept back for domestic feed use.
Currently, local crushers are working at 70% of capacity, said Santiago Sanchez with A.G.D., a local crushing company and exporter. "Crush capacity is 46 million tonnes but the country only crushes about 37 to 38 million tonnes.
There is a current excess (capacity) of around 7 million tonnes, and Argentine crushers want to expand to 50 million tonnes, importing soybeans from Paraguay and Brazil to crush them locally."
The competition for soybeans in Argentina is intense, which is good for farmers, Sanchez said. In fact, Argentine farmers would get the best soybean prices in the world were it not for the heavy retention tax of 27.5%.
"We are competitive and farmers want a free market so we can compete openly with a subsidized U.S. and Europe. However, farmers have to be innovative to stay ahead of taxes both in terms of scale and productivity," said Federico Landgraf, agricultural policy adviser with the Sociedad Rural Argentina. WG
Dan Davidson is an agronomist for DTN, Omaha, Nebraska, U.S., who recently visited Argentina to report on Asian soybean rust. He can be reached at Daniel.firstname.lastname@example.org.