Paraguayan drought likely to keep Argentinian soy crush underutilized in Q1

The ongoing drought in Paraguay is expected to keep the Argentinian soybean crush well below capacity in the first quarter of 2022, analysts told S&P Global Platts, which could possibly support prices in near term.

Severe drought in parts of South America, especially Paraguay, Argentina, and Southern Brazil, has stoked raw beans supply concerns for the local crushers in the region. As a result, the prices have spiked over 45% on the year.

S&P Global Platts assessed Soybean Oil Argentina FOB Up River Feb. 14 at $1521.41/mt for March loading, 45.5% higher year on year. While, Soybean Oil Brazil FOB Paranagua was assessed at $1528.03/mt, up 47% on the year.

Paraguayan supply slump

The Argentinian crushing sector depends heavily on its Mercosur trading partner Paraguay for raw soybean supplies between January and April. Since the drought-stricken Paraguay is very likely to see heavy cuts in its soybean output this year, the Argentinian crushers could remain short-supplied in the first quarter, analysts say.

The Paraguayan soybean is highly sought-after by the Argentinian crushers as not only is the oilseed price-competitive, but also high in protein content, an essential requirement for manufacturing soybean meal-based livestock feed.

Typically, the Argentinian soybean harvest begins in April every year and its burgeoning crushing sector – one of the world's biggest -- absorbs most of domestic raw beans supplies by the year end. That leaves the country's crushing industry short on the oilseed stocks and heavily dependent on Paraguay's soybeans in the first quarter every year.

On average, Paraguay produces a little over 10 million mt of beans in its crop year (September-August) and exports almost 6.5 million mt of it, with Argentina accounting for 75% of the shipments every year.

Keeping up with the trends in recent years, Paraguay was expected to produce at least 10 million mt of beans in 2021-22 and supply most of it to Argentina, but drought since late November means the local farming groups are now staring at possibly the worst harvest in 25 years, with almost 60% slump in the output.

For 2021-22, Paraguay is now forecast to produce 4-4.5 million mt of beans, compared with 9.9 million mt last year, Eugenio Irazuegui, head of research at agro-financial company Zeni, said. Consequently, its exports are likely to reach 1 million mt, down 85% on the year, he said.

The Paraguayan crushers have so far bore most of the brunt of the drought as its crush industry reported the lowest utilization rate since 2013, at the end of November, according to oilseed crushing chamber Cappro.

At 62%, capacity utilization is 11 percentage points lower compared with November 2020, Cappro's report said Feb. 11.

In fact, the situation is so dire in Paraguay that the local crushers are seeking the Argentinian beans, which is unprecedented, market sources said.

Argentinian crush to stagnate

Given the significant harvest slump in Paraguay, the Argentinian crushing sector, which is the world's biggest soybean meal and oil exporter – could be short on beans by 3-4 million mt in the first quarter of 2022, analysts say.

Argentina won't receive sufficient beans supply from Paraguay this year, Irazuegui said. Rather the Argentinian crushers will have to wait for domestic soybeans harvest to begin in April, he said.

Mirroring the sentiments, global commodity trader Bunge's CEO Greg Heckman expects the Argentinian soy crushing to remain lower-than-expected on prolonged drought in the region.

The Argentinian soybean crush is likely to be affected by tightening supplies in Paraguay, Heckman said Feb. 9. Almost 50% of the Paraguayan beans harvest is likely to be lost to the drought, he said.

Compounding the issue for the Argentinian crushers is the lack of alternate beans suppliers.

"Regarding alternative origins, Argentina imports soybeans from Brazil and Bolivia, but due to logistical and pricing issues they are rare and insignificant tonnages, Irazuegui said.

With Argentina itself looking at sizable crop loss due to the La Nina-induced drought, the overall crushing in the country remains well below early season expectations.

Most agricultural consultancies and agencies forecast Argentina's beans output in 2021-22 in the rage of 40 million-42 million mt, which is a far cry from early season euphoria of nearly 50 million mt.

With significant supply cuts, the country's crushing sector is also looking at a stagnant growth in 2022.

According to Platts Analytics, Argentinian soybean crush is expected to be nearly 40 million mt in crop year 2021-22 (November-October), down 3 million mt on the US Department of Agriculture's pre-season estimates in August 2021.

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