Historic drought to put Argentina's soya stocks to test

The size of Argentina's soyabean stockpile has been hotly contested in recent years, but it has not really mattered all that much - until now. The South American country, world leader in soya product exports, has put together a string of record soyabean harvests in the past three years. This, along with bumper crops from Brazil and the United States, has driven year-end soya supplies to all-time highs in Argentina.
But Argentine farmers will not be so lucky this year as one of the worst droughts in several decades has set in across the country's corn and soyabean belt, quickly deteriorating the condition of the crops. Market participants are expecting a sharp decline in soyabean production this year relative to years past, potentially falling as much as 15 million tonnes or 26 percent from a year earlier.
The volume of soyabeans Argentina can actually afford to lose based on its supply levels is just as important to evaluate as its likely production outcome. But this task could result in a faulty judgment if the underlying data is misunderstood.
STOCK CLARIFICATION
The US Department of Agriculture's monthly supply and demand report might be one of the first places one would look to check on Argentina's soyabean inventory. USDA publishes two different Argentina ending stock numbers. One is on the global balance sheet and reflects September supply. The other is tailored to Argentina's crop season, referred to as the local marketing year, and reflects March supply.
USDA's latest estimate for Argentina's 2017-18 ending stocks on its global balance sheet is 35 million tonnes compared with 14.4 million slated for the United States. This figure suggests Argentina could easily handle a sub-40 million-tonne soya crop since it is awash with beans. But that is not the case. USDA's local marketing year prediction for 2016-17 places 18.1 million tonnes of soyabeans in Argentina on March 31, 2018, just prior to the start of harvest on the 2017-18 supply. For comparison, Argentina's agriculture ministry last month pegged 2016-17 ending stocks at 12.8 million tonnes.
Both of these estimates reflect record-high inventory for the country, but the production expectations are not so hot. Initial crop estimates for 2017-18 ranged from 55 million to 57 million tonnes, so a final harvest in the low 40 million-tonne range would certainly tighten things up over the next year, even with a dial-back in use.
But just how much is highly debatable based on the stock forecast disparity between USDA and the ministry. According to USDA, Argentine ending stocks have been north of 10 million tonnes - at record-high levels - since early 2015.
OUTCOMES
When a country has a bad harvest, the cut in carryout is almost never equivalent to the production loss as use is generally scaled back. Annual crushings of soyabeans in Argentina are expected to be smaller than in the past two years, but the pace has dropped off dramatically in recent months - to a much larger degree than what forecasts suggest.
Between November and January, Argentina soyabean crushers processed 8.26 million tonnes of the oilseed, which is down about 15 percent from the same period in the previous two years. It is unclear whether this is intentional in anticipation of the upcoming harvest shortfalls, but it also could be a reflection of the country's stocks situation - perhaps it is not as large as industry estimates suggest.
Judging by historical USDA data, raw bean exports are usually first on the chopping block whenever Argentina has a production decline since the country is much better known for supplying the soya products. USDA's latest 2017-18 export estimate of 8.5 million tonnes surely has some room to spare, especially since this projection has barely moved since last May. Neighbor and lead exporter Brazil also will have a bumper crop to help pick up some slack.
USDA's data also does not suggest overly dramatic drawdowns in Argentine carryout in years following a poor harvest, as exports and crush had been whittled appropriately. Within the last 12 years, the largest year-on-year decline in ending stocks after a disaster harvest was 30 percent in 2008/09.