How the Argentine Drought is Affecting the Commodities Market

Carolyn Franks/Adobe Stock

Spend Matters welcomes this guest post from Verity Michie, market analyst at Mintec.

Over the past few months, Argentina has been hit by what could be its worst drought in 30 years. The effects of the extreme dry spell has reduced Argentina’s GDP by 0.5% compared with the previous year, where agriculture accounted for 7% of the country's GDP.

Although this could have a large impact on Argentina’s economy generally, this isn’t the only concerning factor. The agricultural market in Argentina makes up around 25% of exports and accounts for 7% of all employment. The main agricultural commodities in the country are grains and oilseeds, with peanuts being a large export market too. Let’s see what effects the drought has had on commodities.

Maize

Argentina is the second largest exporter of maize, accounting for around 20% of global exports, just behind the U.S. Prices in Argentina have risen 26% since November, peaking this year in mid-March at a near two-year high. Production in Argentina for the 2017/2018 season has been revised to 36 million tons, down 8% month-over-month in March, and 10% since the 2017/2018 figures were first released in May 2017. In addition, yields have been revised down 8% month-over-month to 6.92 tons per hectare.

But this has not only affected the domestic market; the global market has also come under strain. Prices in the U.S. have risen 14% since December, as demand has increased and supply has tightened. As the Argentine crop has been diminishing, U.S. exports have been rising to cover global demand that Argentina would normally provide. Accordingly, U.S. exports have been revised up 9% month-over-month and ending stocks have been revised down 10% month-over-month.

   

Soybeans

Argentina is the third largest producer and exporter of soybeans, behind the U.S. and Brazil. Prices for soybeans in Argentina have risen 11% since the lows in mid-January. Domestic production has been revised down 13% month-over-month in March for 2017/2018, driven by lower yields, which have been revised down 11% month-over-month.

This has had a similar effect on the global market to that of maize. Soybean prices in the U.S. have risen 8% since mid-December, and prices in Brazil have risen 10% since January.

Peanuts

Argentina is the third-largest exporter of peanuts, accounting for around 10% of global exports. The drought has caused Argentine prices to rise 9% month-over-month in March, as production and yield potentials weaken. As a result, global demand is turning to the U.S. and Brazil to supply the market. It is believed that if the weather does not improve, losses of around 50% of the crop could occur.

Is there any chance that Argentine crops could still recover from the effects of the worse drought in decades? The full extent of the damage will not be known until the end of the season, but experts believe that it may be too late for the crops, and not even rainy weather will be able to save them. Fortunately, though, high carry-over stocks from a near-record 2016/2017 season have kept the maize and soybean situation more under control, lessening the price effects that could have occurred.

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