A combination of bigger global supply, strengthening of the US dollar in the world while locally AR peso gain value relative to the dollar and the improved attractiveness of alternative financial collocations pressured down soybean prices at the international market. In Argentina, soybean price in AR peso is at the same level it was at this point last year, while inflation has climbed to 40% since then, further deteriorating soybean’s purchasing power.
For producers in our area, wheat has probably left them with some cash to cope with short-term expenditures, so they still have some time before it becomes essential for them to sell the beans.
On the opposite side, gross margin for both crushers and exporters has been very tight so far this season. After problems with the supply of substitute products and heavier feed consumption boosted prices of soybean oil and meal last year, they lost momentum. Today, the price of soybean oil is 15% below the relative maximum of US$ 831.6/mt reached on December 7th, while the value of soybean meal is 25% below the relative maximum of US$ 461.1/mt of June 2nd, 2016.
In this context, soybean farmer selling for the new marketing season 2016/17 at middle-April, as reported by the Ministry of Agriculture, clearly reflects the very scarce willingness to fix its price at the current level, and the volume traded with delayed pricing contracts outstands, as it is shown in the table below.
The following conclusions emerge:
a) Delayed Pricing contracts set a record
From the 15.9 million tons bought by crushers and exporters, 67% were made under the system of "delayed pricing" contracts, the highest proportion of the last 15 years and 53% above the average of the last decade.
With the strengthening of the AR peso relatively to the US dollar, which makes argentine goods more expensive for foreign importers and lower soybean prices, there are few incentives to sell at a firm price. In this context, although the seller may handle the beans, he prefers to retain the possibility of fixing its price sometime in the future, under the expectative of a depreciation of the local currency or a recovery of soy market. In addition, the government has committed to the progressive reduction of export taxes from January 2018 onwards, giving more reasons for not selling the grain.
On the other hand, in the midst of the uncertainty over effective yields that reigned during a rainy April, buyers are willing to offer this kind of trading to ensure the provision of grain, essential for the development of their activity.
b) Price risk has exacerbated as the lowest volume of new soybean in the last 15 years was sold with a firm price
The volume of trades done with a firm price by exporters and crushers is the lowest in the last decade and a half, with only 5.3 million tons. This amount represents less than one-tenth of the estimated total production for the crop season.
In other words, the amount of soybean production that is not hedged against the risk of falling prices in the cash market is a record for the Argentine Republic. In a context where our neighbors’ countries are beating all records in soy production and the United States is set to sow the largest area in history with the bean, this fact is alarming.
c) Current prices are not attractive for exporters to buy grain
Exporters gross margin are below zero at the current prices, as the FOB soybean price is cheaper than the sum of the FAS price and the fobbing costs. This explains why the 5.3 million tons exporters have bought is among the lowest volume in the last decade for this time of the year. According to our own projections, gross exporters margin averaged US$ (-7)/ton during April 2017.
d) The ratio "total buying" to "estimated production" seems to indicate a structural change
In the last 5 years, less than 30% of the estimated production was already bought by crushers and exporters for mid-April, when the decade before it was common to see this ratio above 35%. In this case, this can sign a structural change in the trading motivated by a combination of factors, among which we highlight the generalization of the use of silo-bag, with the greater margin of action this gives to the producer to decide the moment to sell; the professionalization of the commercial strategy of local producers; changes in lending conditions by local banks; and the possibility of buying beans to neighbor countries where harvest takes place earlier in the year, which was facilitated by changes in the legislation as well as the extended use of the water-way that goes from Brazil and Paraguay to terminal elevators in Rosario, Argentina. As a reference, between February and March 2017 Argentina’s imports of soybeans totaled 600,000 tons).
Notwithstanding all of the above, the retention of grain is linked to the crucial role soy plays as a vehicle of savings for producers. Increasingly, soybean fulfills the three basic functions of money for them: unit of account (for example, rural rentals are fixed in terms of tons of soy per hectare rented), mean of payment (barter operations are very common in our country and work as the main way of financing production) and reserve of value (they came out relatively unscathed from the recurring Argentine economic crises, while bank savings were blocked and currency markets over-controlled in the last years).