Drought in Paraguay is likely to result in underutilization of the Argentine soybeans in Q1

Analysts told S&P Global Platts that the ongoing drought in Paraguay would leave Argentina's soybean production well below capacity in the Q1 2022, which could possibly support prices in near future, oilworld.ru reported quoting S&P Global Platts.

Severe drought in some areas of South America, especially in Paraguay, Argentina and southern Brazil, worsened soybean supply problems for local processing companies in the region. As a result, the prices grew by more than 45% during a year.

On February 14, S&P Global Platts valued Argentine soybean oil FOB upstream at $1,521.41/ton for March loading, which was 45.5% up year-on-year. While Brazilian soybean oil FOB Paranagua was valued at $1,528.03/ton, 47% up year-on-year.

Supply drop in Paraguay

Argentina's processing sector is heavily dependent on Paraguay, Mercosur's trading partner, in terms of raw soybeans supplies in the period from January to April. According to analysts, as drought-stricken Paraguay is likely to experience a steep decline in soybean production this year, Argentinean processing companies could suffer short supplies in Q1.

Paraguayan soybeans are in great demand of the Argentinean processing companies since they are not only price competitive, but also high in protein, an important requirement for the production of soybean meal-based livestock feed.

Generally, Argentina's soybean harvesting begins in April, and the country's growing processing sector, being one of the largest in the world, by the end of the year, takes most of the domestic supply of raw beans. This leaves the country's processing industry short of oilseed stocks making it highly dependent on Paraguayan soybeans in the Q1 of each year.

On average, Paraguay produces a bit mote than 10 million tons of soybeans per a crop year (September-August), and exports almost 6.5 million tons of soybeans, with Argentina accounting for 75% of shipments every year.

In 2021-2022, according to the recent years trends, Paraguay is expected to produce at least 10 million tonnes of soybeans, shipping much of it to Argentina, but a drought that has been persisting since late November, means local farmer groups are now expecting perhaps the worst harvest in 25 years with almost 60 percent production drop.

Paraguay is forecast to produce 4-4.5 million tons of soybeans in 2021-2022, compared to 9.9 million tons last year, according to Eugenio Irazuegui, head of the research department at Zeni agro-finance company. Consequently, its exports are likely to reach 1 million tons, which is down 85% compared to last year, as he said.

Paraguayan processing companies have so far borne the brunt of the drought as in late November their processing industry reported its lowest capacity factor since 2013.

According to Cappro's February 11 report, capacity factor is 62%, down 11 percentage points from November 2020.

In fact, the situation in Paraguay is so terrible that local processing companies are looking for Argentine beans, which is unprecedented, market sources say.

Argentine processing industry in stagnation

According to analysts, given Paraguay's significant crop drop, the Argentine processing sector, being the world's largest soybean meal and oil exporter, could face a 3-4 million ton bean shortage in Q1 2022.

Argentina won't get enough soy from Paraguay this year, Irazuegui said. According to him, Argentine processing companies will have to wait until the start of the soybean harvesting in the country in April.

Reflecting the sentiment, CEO of Bunge, global commodity trader, Greg Heckman, expects Argentina's soybean processing to remain lower than expected due to a continuing drought in the region.

On February 9, Heckman said that Argentina's soybean supply cuts would likely to affect supply cuts in Paraguay. Nearly 50% of the Paraguayan bean crop is likely to be lost due to drought, he said.

The problem for Argentinean processing companies is even worse due to the lack of alternative bean suppliers.

"In terms of alternative sources, Argentina imports soybeans from Brazil and Bolivia, but due to logistics and pricing issues, they are sold in smaller batches in tons," Irazuegui said.

Since Argentina itself is experiencing significant crop losses due to the La Niña drought, the country's overall harvest remains well below expectations for the beginning of the season.

Most agricultural advisors and agencies forecast Argentina's 2021-2022 soybean production in the range of 40-42 Mt, far from the early-season euphoria of nearly 50 Mt.

Growth is also expected to stagnate in 2022 due to a significant drop in supplies in the country's processing sector.

Soybean processing volume in Argentina is expected to reach nearly 40 million tons in the 2021-22 crop year (November-October), down 3 million tons from USDA pre-season estimates made in August 2021, according to Platts Analytics.

MERCOSUR is an economic and political bloc consisting of Argentina, Brazil, Paraguay and Uruguay.

Source: oilworld.ru
Image source: photogenica.ru