The post-pandemic economy: good and bad of rural dollars

In Argentina, one out of every three dollars that comes from exports is generated by soybeans and corn. If wheat and other grains, such as barley and sunflower, are added, more than 40 percent of the currency comes from the agricultural harvest.

In addition, it is the sector with the most surplus in the Argentine economy: it not only produces more dollars than the demand for imports, but with that positive balance it finances the rest of the items, most of which are deficits in the trade balance.

For this reason, the evolution of the grain markets and the climate projections are a variable that is followed in detail, in addition to the producers, the private economic analysts and the Government in order to project the performance of the Gross Domestic Product (GDP).

What is the current situation in the field and what are the prospects for the coming months? Can it be the key actor expected for post-pandemic recovery?

An analysis of the indicators allows projecting both positive and negative aspects for the immediate future of one of the main engines of the Argentine economy.

Green lights

In the case of soybeans, in mid-April, a month after the effects of Covid-19 began to be felt strongly, it fell in the Chicago market to touch $ 300 per ton, in the midst of the crisis due to the collapse of the oil that led to a collapse of biodiesel (fuel that is made from oilseed oil).

In recent days, it is trading above $ 320: a low value in historical terms – during the two presidencies of Cristina Fernández averaged over $ 500 – but it is on the rise and has a bullish horizon, according to the Stock Exchange of Cereals of Córdoba.

A key driver of the market is the strong growth of imports from China, which set a record of 11.2 million in June, as reported by the Reuters agency.

The fundamental tailwind is the recovery of international prices.

As if to have a parameter, of the 50 million tons that were produced this year in Argentina, approximately half remains to be commercialized.

A rebound of $ 20 a tonne means that soybeans recovered a theoretical gross value of $ 500 million.

“For Argentina, which still has a significant volume of unmarketed soybeans, capitalizing on better export prices may mean an additional (and much-needed) injection of income in the current context of crisis,” economist Juan Manuel mentioned in a recent report. Garzón, from the Ieral-Fundación Mediterránea.

Corn, being one of the origins of bioethanol, is another grain whose evolution depends largely on the fluctuations of oil and has also improved in recent months: after hitting a floor of $ 120 a ton in late April, it is now located around 130 dollars.

This constitutes an endorsement for a very good production campaign for the cereal – the second best in history, behind that of last year -, which has brought exports to record levels, according to data collected by the Bolsa de Comercio de Rosary beads.

Wheat, meanwhile, had a strong rise as soon as the pandemic began, due to the greater world demand for the production of flour, and came to exceed $ 200. It then dropped to $ 174 at the end of June and is now $ 195.

“Agricultural raw materials continue to show a stock abundant; however, the improvement in the price of oil gave air to those that correlate in price, as is the case of corn and soybeans. And wheat, in a world with more hunger, will be more in demand and its upward trend will hardly stop in the short term ”, summarized the economic analyst specialized in agriculture Salvador Di Stéfano.

In parallel, there is another market factor that cannot be ignored in the case of the internal market: the mini-devaluations that have been applied in the official exchange rate favor merchandise that is sold in pesos but at a “dollarized” value.

Yellow and red lights

This push from the markets, however, could find a ceiling in the not too long term. The first storm cloud is the new cooling of relations between the United States and China, after President Donald Trump denounced “oppressive actions against the people of Hong Kong” and that the Asian giant accused him of “serious interference in affairs internal ”.

The other aspect is the march of the climate in the United States, which appears favorable for its crops, and that could generate an abundant harvest that increases the world grain supply.

At the same time, another issue that is not favorable for Argentina is that the “primarization” of soybean exports grew. According to the Rosario Stock Exchange, while sales abroad of raw beans grew 50 percent, those of flours – a product in which Argentina is the world leader – fell 10 percent.

This is bad news because it means lower-value merchandise is being exported, which means less foreign exchange earnings and less tax resources.

However, the main warning signal for the Argentine economy is the a drought that has been ravaging much of Argentina’s productive heart since autumn began.

In Córdoba, for example, 200,000 fewer hectares of wheat were planted than those projected in March, according to the provincial Cereal Exchange. And the implanted lots show a scenario of scarcity that will affect yields.

The Rosario Stock Exchange, for example, has already reduced its national harvest projection from between 20 and 21 million tons to between 18 and 19 million tons. At the current value of the cereal, two million tons less means a loss for the economy of 400 million dollars.

In parallel, 2020/21 maize will begin to be planted in September and the climate outlook gives more than 50 percent chance that the campaign is affected by the “La Niña” phenomenon, which in Argentina means a below normal rainfall regime.

For the entity from Rosario, the corn surface could fall by seven percent, which means 500 thousand hectares less after five years of expansion. Assuming average yields, it would mean dropping from a harvest of almost 52 million tons to one of 46 million in 2021.

“Over Argentina is the specter of drought for this campaign. It has not been raining for months in many areas of the country. If it is a girl year, it would be a tragedy for the country; the soybean and corn harvest would decrease between 10 percent and 15 percent in the best scenario, there would be less foreign exchange and less tax collection, “said Di Stéfano.

And he recalled in this regard the impact that the greatest drought in half a century had in 2018: “it was the beginning of the economic debacle, another drought in less than two years would be very difficult for the local economy.”