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Can soaring soybean prices ease Argentina’s FX crisis?

Banking on high soybean prices has never been a good idea

By | [email protected] | October 22, 2020 3:12pm

Alberto Fernández en Agronomia.07.10.2019Foto Maxi FaillaAlberto Fernández en Agronomia, Photo Maxi Failla, Clarín.

The most ardent enemies and long-time critics of the Kirchnerite decade sometimes used to explain its endurance by citing two factors: “soybean and luck”. It was a reductionist view of why the Kirchnerite economy went 12 years without a massive crisis like those that Argentines are used to, but there was something to it: particularly during the Cristina Kirchner years, soaring prices for soybean (Argentina’s main export) often helped paper over the cracks of an economic model that was starting to show inconsistencies.

Other presidents were not as lucky. Members of the failed Fernando De la Rúa administration often complain that soybean prices were at their lowest in the last 30 years during his 24 months in charge, while Raúl Alfonsín in the 80s and Carlos Menem in the 90s also never came close to the peaks seen since 2007.

Starting in mid-2014, a drop in Chinese demand meant that those peaks of the late Kirchnerite years were gone, and Argentina had to deal with values closer to the historic average for its main sale abroad, at a time when it was in desperate need for US dollars. But the massive stimulus packages from the US Federal Reserve and other central bankers across the world after the March 2020 coronavirus crisis, combined with climatic fears over the effect of La Niña, have caused food commodity prices to soar over the last few months, taking soybean back to a 4-year high and, according to some, putting it on its way to reclaim prices not seen since the start of its bear market 6 years ago.

Soybean future prices at the Chicago Board of Trade since mid 2019

(Source: Trading View)

Although that alone won’t be enough to save Alberto Fernández’s administration from its current economic crisis, the news is definitely a welcome one, as it could bring some relief for 2021, when the new harvest is sold abroad. If Argentina’s chaotic foreign trade and balance of payments situation is not solved, however, it is unlikely that the government will manage to take full advantage of these improving conditions.

Not only soybean

It is not only soybean prices (up 31 percent over the last 6 months) that are rising at the moment. The other two main cash crops of Argentina have seen a similar evolution over the same period.

Wheat prices at the Chicago Board of Trade

As the graph above shows, wheat futures soared by 32 percent since June. They have also already reached the six-year high from 2014, which soy-bean is still challenging.

As for corn, the graph below shows a similar surge of 32 percent since April, but perhaps not that impressive in terms of re-taking previous highs, as in the case of wheat and soybean.

Corn futures at the Chicago Board of Trade

According to the FAO food price index, cereals were the most bullish sub-sector among food-related commodities over the last year, with its cereal basket averaging 104.0 points in September, up 5.0 points (5.1 percent) from August and 12.5 points (13.6 percent) when compared to the corresponding month last year, although other primary products also sold by Argentina, such as meat, have gone down.

Not everyone is blessed

Argentine writer Martín Caparrós, author of a book on hunger and adviser to an Alberto Fernández-formed committee to attack the problem of malnutrition in Argentina, often states that what’s good news for Argentina –the rise of commodity prices, especially food exports- can also be a curse for others across the world who will struggle to afford some basic products.

But these paradoxes do not only affect foreigners. In Argentina, some sectors also typically suffer with higher prices for its largest commodities. One of them is cow and poultry feedlots, which are currently reportedly under high stress to sustain production due to higher costs and supply shortages of corn, their main input.

Another problem is that high prices are partially explained by climate issues, of which Argentina is unlikely to come unscathed. So far, wheat production has been the most affected of the lot, losing almost one fifth of its expected output for the year.

Estimates from Rosario’s Board of Trade for this year’s wheat harvest have fallen from 22 million tons earlier this year to 17 million, after 8 months without significant rains in the Argentine north and 6 months in the Pampa’s west and central regions. According to the Board’s report, “the lack of water is at its worst at the most critical time of the year, and rains are needed urgently to complete the development of crops and stop the fall in yields that has been recorded week after week.”

FX system still needs to change

Alberto Fernández’s economic cabinet repeatedly states that the country will need more exports in order to come out of its crisis, similarly to what Mauricio Macri’s government did during its four years in charge.

Macri managed to see some growth in agricultural sales abroad after it eliminated restrictions on agricultural exports and cut export duties in the sector immediately after his inauguration in 2015, while Fernández’s government has so far failed to achieve significant export increases in any area.

Despite the multiple incentive programs for exports that the current administration is looking to launch, those efforts are unlikely to go very far until the country’s chaotic foreign sector is re-organized and reaches a semblance of normalcy, radically different from the current system, which features multiple exchange rates and a 100% spread between the official value of the peso and that of black markets.

Higher prices can help compensate lower quantities up to a point, but a recovery can only be expected when exporting through official channels becomes a profitable and attractive business for most producers. Instead, exporting today can barely be sustained by the minority of farmers who manage to swim against the current by owning land in the most fertile areas of the country, in spite of the massive FX distortions.

A simple exchange-rate regime, with a sustainable exchange rate, a sustainable Central Bank balance sheet and sustainable tax levels, are ultimately more important than commodity prices.

Indeed, Argentina’s recoveries after its massive 1989 and 2001 economic crises came amid modest prices for its main exports. Soybean, as the long-term chart below shows, averaged similarly low prices during the recovery of the early 90s than in the crises of the 80s and 70s, and Argentina was already back on a path of strong growth in late 2002, well before the explosive rise in commodity prices seen due to rise of demand from China later that decade.

Long-term price of soybean futures since the 1980s show Argentine recoveries have not necessarily coincided with its highs

Don’t bank on high prices

The other risk portrayed in the graph above is one that is well-known for countries that make a lot of its international revenue from one or a series of highly-volatile commodities, as is the case of most in Latin America: banking that good price trends will continue, as Kirchnerism did during the 2007 and 2013 peaks in soybean, can be a fatal mistake.

Governments that start to count on massive foreign revenue for higher fiscal spending and abundant imports can be blindsided by shocks to prices, and led straight into a crisis. If COVID shows a second wave, the recovery of demand from China subsides, or the global economic recession turns into a longer-term depression, finding enough buyers for Argentine products will continue to be troublesome, so the reasons to fix the country’s foreign sector are still urgent despite the relief brought by this price rally.