INTERVIEW: Argentina's crushing industry saddled with thin margins, logistical issues

New Delhi — Argentinian soybeans crushing industry, one of the world's biggest, has been struggling with tight profit margins and logistical issues, which have negatively impacted the industry, Bruno Ferrari and Tomás Rodríguez Zurro, economists at the Rosario Stock Exchange, or BCR, told S&P Global Platts.

"The crushing industry´s main problem is tight profit margins, which even went negative during most of the current marketing year (April 2020–March 2021), making exports of the raw soybeans more profitable than crushing them into meal and oil," Ferrari said.

Raw soybeans are processed into soybean meal and oil through a process known as crushing. The crush margin is the difference between the value of raw soybeans and its byproducts, and is considered a criterion for the profit margin.

According to general consensus amongst agricultural analysts, soybean crushing in Argentina -- world's largest exporter of soybean meal and oil -- has remained well below its potential in 2020 because of high taxes, foreign exchange volatility and lower supply of the oilseed.

The Argentinian government had recently revised its foreign currency transaction policy, under which it has become more difficult for the soybean farmers to receive dollars for their soybean sales. So, the farmers have become more reluctant to sell their stocks in recent months.

With limited raw soybeans supply and low crush margins, the Argentinian crushers are operating below capacity for the most part of 2020 and are struggling to meet rising global demand for soybean meal and oil.

TRANSPORTATION

Argentinian crushing industry's heavy dependence on the Parana river was bared in 2020, when record low water levels impacted the overall logistics.

"The Parana River (where the crushing cluster is located, near the city of Rosario, and 95% of Argentinian soybean meal and oil is shipped every year) had the lowest water level in the last 50 years in 2020, making logistics very expensive, Zurro said.

As the Parana water level abated, the vulnerability of Argentinian crushing industry was exposed as transportation costs skyrocketed, impeding the inflow of raw soybeans, as well as the outflow of processed soy products, thereby severely affecting the crush operations.

"Finally, the production of biodiesel (that is made out of soybean oil in Argentina) was hit hard by the pandemic, making oil stocks accumulate during a big part of the year," Zurro said.

Lower biodiesel demand, coupled with high oil stocks meant a decline in 2020 crushing. But 2021 crush outlook is seen positive, albeit marginal.

"With regards to crushing, we are projecting a volume of 39.5 million mt for marketing year 2020-21 (April 2021–March 2022), a small increase from the 39.2 million mt estimate for the current season, Ferrari said.

CHALLENGES FOR ARGENTINIAN SOYBEANS

On the question of challenges faced by the Argentinian soybean farmers, apart from high taxes and foreign exchange volatility, the BCR economists noted multiple issues.

"Currently, farmers are mostly worried about the prospect of poor rainfall in the upcoming months," Zurro said. Weather variability creates a risky environment that affects investments and the decision-making process of the farmers, he added.

"Soil moisture is far from optimal over the vast areas, and medium-term weather forecasts are not particularly optimistic on the possibility of sufficient rains," Zurro said.

According to Zurro, dry weather conditions are a major concern among Argentinian soybeans farmers as the crucial phase of planting and crop development take place until February.

"Another issue the farmers face is the uncertainty generated by the macro-scenario in a pandemic year that as we all know is still unsettling international markets and that makes it particularly difficult to figure out where to invest their sales revenue, in order to maintain their value until next crop year," Ferrari said.

"Many inputs farmers need are valued in US dollars, and inflation, global uncertainty and the gap between what we call 'soybean exchange rate' (that is, what farmers actually get for selling their product once export tax has been deducted) and the 'financial exchange rate' (the exchange rate one can access to in the financial markets) contribute to make farmers choose the most conservative investment alternatives," Ferrari said.

On a more structural level, transportation is an important issue, as it accounts for a large portion of the farmers' cost, especially for those farms that are located far from the ports, Ferrari said.

"There is great uncertainty regarding Argentina's economic conditions, especially in the context of the coronavirus pandemic, as well as the weather conditions in the coming months," Zurro said.

LA NINA CONCERNS

This summer La Niña has taken place and it is usually related to below normal rainfall for the Pampa Húmeda region, country' top soybeans producer, Ferrari said.

Argentinian soybeans production for the 2020-21 crop year (November–October) is expected to decline due to La Nina, he said. And if the dry weather persists in coming weeks during the crop's critical development stage, the output forecast could be revised further down.

Compared with the early season forecast of over 50 million mt for Argentinian soybeans in 2020-21 crop year, the latest general consensus amongst the agricultural analysts peg the volume down to 46 million mt on the La Nina-led drought concerns.

"However, we are expecting to finish our current marketing year with an ending soybean stock of 12.2 million mt, the second-highest in a decade, which could make up for some production loss due to La Nina, Ferrari said.