All eyes remain on South America, as weather, currency issues influence soybean output and trade.
World soybean production for 2001-02 was estimated in mid-January at a record 182.8 million tonnes, up 8.6 million from last year, according to the U.S. Department of Agriculture. Although USDA unexpectedly cut its estimate of 2001-02 U.S. soybean production to 78.7 million tonnes, down about 880,000 from its previous figure, USDA said soybean output in South America was expected to surge to record levels — if the weather cooperated.
Brazil’s soybean harvest projection in January increased by 1 million tonnes to a record 42.5 million tonnes, while forecast Argentine soybean production remained at a record 28.75 million tonnes. USDA’s increase in Brazil production was based on an increase in planted area and on improved yield prospects through end-December.
But by mid-January, markets had begun to express some concerns about a developing drought in the southern state of Rio Grande do Sul. Soybean futures prices rallied from historical lows to post six-month highs, pulling up the interior U.S. cash price to well above its U.S.$150-a-tonne seasonal low.
Estimates of crop losses caused by the drought varied greatly, ranging from 1% to as much as 15% in Brazil’s No. 3 soybean state. As of mid-January, problems were restricted to isolated regions within the state, but losses were expected to become more uniform and widespread if the drought persisted, observers said.
As for soybean trade, exchange rate changes for several major exporters and importers will influence patterns through the marketing season, USDA said.
In Argentina, economic turmoil resulted in default on public debt in December and a controlled peso devaluation of 28.5% for export and import transactions (the exchange rate was allowed to float for other transactions, which depreciated to 1.7 pesos per dollar in initial trading). The devaluation instantly improved Argentina’s competitiveness.
In the resulting economic climate, producers saw dollar-based soybeans as a hard asset with a superior store of value. Many Argentine farmers likely anticipated the probability of a devaluation and planted as many soybeans as they could; about 94% of farmers’ intended soybean acreage had already been sown before the official devaluation date in early January. Prior to devaluation, forward marketing of new-crop soybeans was negligible, and there was little old crop left to sell.
Government officials indicated that the peso might be allowed to float uncontrolled for foreign trade within four to five months, approximately when farmers will harvest their new crops. Even if Argentina is able to defend the new exchange rate in the interim, farmers may be encouraged to postpone marketing. Many small farms will be insulated from the need to immediately service debt because the government is converting dollar-based bank loans of less than U.S.$100,000 into pesos at a one-to-one rate.
The fallout in Brazil from Argentina’s default so far has been less severe than previously expected. The real as of mid-January had recovered some strength against the U.S. dollar since November, although it remained 22% less than a year ago. However, farmers had locked in favorable domestic prices before currency rates softened with a large amount of forward sales, so they were not deterred from planting a record 2001-02 soybean area.
The economic strength of the major agricultural importers of Europe and Asia will help determine the level of Argentine and Brazil exports. On Jan. 1, 12 countries of the European Union fully replaced their national currencies and made the euro legal tender for all commercial transactions. However, since its introduction in 1999, the euro has depre-ciated about one-fourth against the dollar, making imports of foreign soybeans and soybean meal relatively more expensive.
The Japanese yen also had weakened as of January to its lowest level against the U.S. dollar in three years. That worsened returns for Japanese livestock producers, who were already burdened by higher costs because of the ban on feeding meat and bone meat imports.