I feel like I keep saying it is hard to believe how quickly this last quarter has passed but here we are having suddenly reached my last “Sunday Scaries” of 2023. Coming into this week I had figured I would write the typical “Year in Review” or “What I am Watching in 2024” style article, summarizing some of the biggest fundamental stories and calling it a year.
However, when I started to put together a list of the major factors likely to influence the grain markets in the months ahead—of which there are many—I found myself stuck on the potential for a major shift in market dynamics over the next few months with all the changes happening in Argentina.
The situation in Argentina is an incredibly interesting one, as we are not only watching a significant recovery in production potential after years of La Nina-influenced drought has reduced crop sizes; we are also seeing a possible fundamental shift in how the country approaches agriculture and its farmers.
While it sounds trite, I am old enough to remember Argentina’s return to the world export market after the election of Macri. While there were some other contributing factors, an over 50% jump in wheat production after changes in export tax rates and other policies was not a coincidence. Long known as one of the world’s top exporters of soybean products, like meal and oil, corn, and wheat, it has been sad to see Argentina’s farm economy nearly decimated by poor weather and even worse policies.
While I am not going to pretend I am an expert in all the inner workings of Argentina’s economy, or the issues they are facing, the response from those who are seems promising. Ahead of winning the election, Milei was seen as a bit of a loose cannon. Known first as a TV pundit, he launched his political career in 2020, promising to ‘blow-up’ the country’s political and economic systems. With Argentina facing inflation nearing 150% and a recession expected as they enter 2024, it seems citizens felt his promise to take a chainsaw to the country’s budget was what they needed, even if it was viewed as radical.
Post-inauguration Milei appears to be very different from pre-election Milei though, with a far more measured approach to fixing what is broken in the country’s economy at first glance. According to experts, Milei’s decision to name Luis Caputo as his economic minister is a solid start.
Caputo has a Wall Street background, having worked for JP Morgan and Deutsche Bank before starting his own investment firm in Argentina. He was an active participant in the Macri administration’s finance ministry and is credited for getting the country access to some much-needed credit in 2018. Caputo has maneuvered a changing guard in economic policies previously and is said to be well-liked throughout some of the country’s political circles.
On Tuesday, just two days after his inauguration, Milei had Caputo announce the base for their new economic platform. While many of the cuts to hiring, spending and government ministries were expected ahead of the announcement, traders were uncertain on what we would see when it came to the administration’s approach to the country’s official exchange rate.
The previous administration had refused to change the country’s official rate, leaving it pegged at around 350 pesos for every dollar. This, even in the face of the unofficial rate or the country’s Blue Peso sliding to below 1000. Caputo announced a significant cut to the country’s official exchange rate this week, taking it from 350 to 800. In addition, the administration announced they would put together a new exchange rate to be applied to agricultural sales.
While drought has been a major limiting factor in production the last few years, poor economic policies have limited agricultural growth and kept farmer supplies out of the pipeline nearly as much. Farmers in the country have been forced to use the unofficial exchange rate when it comes to buying products, getting paid the official exchange rate when they sell and then getting taxed to boot.
The growing chasm between the official and unofficial exchange rates left Argentina’s farmers with no other choice than to hold onto supplies as much as they could, limiting sales to only when they needed to generate cash. This tight holding of on-farm supplies had prompted the previous administration to announce policies like the “Soy Dollar,” where farmers were offered access to an artificial exchange rate, generally in the 500-600 peso range, to encourage selling.
This week the administration announced a combo rate of sorts, reportedly made up of 80% the new official exchange rate and 20% of the unofficial rate. This new rate would put the farmer conversion closer to 900 pesos per dollar, a sharp increase in the cash received for their bushels almost overnight.
I talked about the length of farmer holding in corn weeks ago here. The uncertainty over production potential and the unknowns when it came to the election and how Milei would approach policy, left Argentina completely out of that conversation. However, with an estimated 5 mmt of old crop corn left in the hands of farmers, and only an estimated 4.4 mmt of what could be 55 mmt of corn produced this year sold, Argentina now needs to be included when discussing the world’s corn supply.
When it comes to soybeans, traders estimate there are around 2 mmt of beans in the hands of Argentine farmers. The change in policy and a bit more confidence in production potential has pushed more beans into the pipeline recently, with a Brazilian brokerage firm, Agrinvest, saying Argentina is offering beans that would be competitive with offers out of the Pacific Northwest landed in China. They report competitive corn offers out of Argentina for March forward exist as well.
Bottomline, while it is far too early to sing the praises of Milei or even remotely call what he is doing a success--his more measured approach to governing so far is a positive sign, and his efforts could work to make Argentina a formidable competitor in the world export market once again.
Other things I am watching this week:
--Brazil’s weather. There are calls for a shift in their weather pattern mid-week forward to a wetter than normal trend. While the damage has been done to many of the earlier planted beans, an increase in rainfall would be beneficial for a whole host of reasons.
--Soybeans getting ready for delivery. How deep recent demand truly is may start to show as traders get ready for the January board to head into delivery. This marketing year has been marked by widening carries as we approach first notice day, with many waiting to see what happens in the Jan/March spread this week into next.
--Logistics. The logistical snarls plaguing the world’s shipping is a whole article in and of itself. Much of the grain traffic having been diverted from the Panama Canal has been sent to the Suez Canal. With traffic being slowed by an increase in aggression from the region’s terrorists, many shippers announced they will be seeking alternative routes instead of heading into the Suez. This will likely further limit Gulf demand or push sellers to cheapen offers to compensate for increased freight costs.
As always, please don’t hesitate to reach out with any questions. I appreciated all our interactions this year and am looking forward to 2024! Have a safe and happy rest of the year. Happy Holidays from my family to yours.
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
