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Alpha Commodity Capital's Ken Stein Provides Insight Into The Change In Agricultural Prices

Export Tax Of Argentina Creates Soymeal Shortage

by Jessica Darmoni

Hehmeyer Trading + Investments is home to a plethora of experienced and knowledgeable managers.  One of the reasons we launched this blog was to create a space to share their expert insight and observations.  This week we want to feature commentary from Kenneth Stein at Commodity Capital and tell you a little about his background.

Stein graduated from the University of Kansas with degrees in Economics and Political Science. He began his career in grains as a merchandiser for Cook Industries, Inc. and was a member of the Kansas City Board of Trade.  He also spent time as editor of Milling & Baking News, the leading publication of the wheat industry, and served as Manager of Export Wheat Trading with The Pillsbury Company.  He was one of three analysts that founded World Perspectives, Inc., an influential agricultural policy consultancy in Washington D.C. that served some of the world's major trading houses.  He has been working with members of the Hehmeyer team for 35 years.

Below is Stein's commentary into the geopolitical impacts on soymeal production and the overall changed agricultural price environment due to a recent Argentine export tax adjustment.

Export Tax Of Argentina Creates Soymeal Shortage

By, Kenneth Stein

The new year has ushered in a changed agricultural price environment.  While the historically dry weather in both Argentina and Kansas is highly influential, at the base of this development is an Argentine export tax policy, with U.S. agricultural subsidies that reserve the lion's share of corn acreage for ethanol and corn syrup a close second. In other words, but for uneconomic policy, sufficient supplies and production capacity exist to feed the world today despite adverse weather in the important growing areas.

Even after substantial liberalization by the Macri administration, Argentine soybean and soymeal exports are taxed at just below 30% ($3/bu!), with the levy declining .5% per month for the next two years.  Meanwhile, corn and wheat are entirely untaxed.  Given this gargantuan disparity, naturally farmers hold soybeans.  Plus, at the annualized tax reduction of 6 percentage points, all other things held equal, bids to farmers will rise by 60c/bu after 12 months.  So holding literally pays.  Starved of soybeans to process, Argentina's plants reduced production in December. As it exports one-half of world soymeal trade, price has risen sharply.

World soymeal usage has for years been rising at a rate that requires both a sustained annual increase in soybean production, accompanies by an equal volume of new processing-plant construction. With leading supplier Argentina actually cutting back meal output despite sharp growth in its soybean carryout to a volume which matches the U.S. near-record carryout projection, it is hard to see how meal supply can balance with demand, regardless of soybean availability. 

The developing countries whose soybean and meal imports are growing so sharply aren't merely adding to poultry and hog populations, they're building out entire infrastructures of roads, electrical generation, refrigeration capacity, housing for labor, and everything else associated with a leap into manufacturing modernity. Short of a financial disaster, these will not be slowed by a 20% increase in soymeal.  The bulk of animal rations is corn, which has advanced only 10%.  And considering that the USD exchange rate has declined about 5% in 2018, the price increase of imported feedstuffs has actually been lesser still so rationing reduced meal supply won't be easy.

Were soybean supplies, rather than processing capacity, the limiting factor, crushing margins would have come under pressure.  Instead, they soared from 96c/bu on Jan 1, as measured by futures, to a high of 1.67 on February 28. Now that Argentina's new crop is sharply reduced by heat and drought, this looks to extend as indicated by next December's futures-crush margins blowing up to 1.40 at the end of February.  Both these figures are dramatic record highs for this time of year, showing that regardless of bean supplies, world processing capacity is insufficient.

And where wheat has been the commodity in greatest supply compared to corn and soybean, a dry cold winter in Kansas has finally exposed the risk of acreage cuts to the least in many decades so that more soybeans, corn and cotton could instead be planted. Yet the most important growth phase for winter wheat is still ahead, and a strong weather history exists of turning to wet spring patterns in late March and April, just outside of current long-term forecasting ability.

There's plenty else going on: prices of all domestic modes of transportation - truck, rail, barge - are rising significantly.  But, like the need for more soy-processing capacity, these are not constraints so much as profitable business opportunities.  For example, orders for semi-trailer trucks in North America are up some 76% over a year-ago.

Despite major newspaper warnings that the U.S. is vulerable to foreign retaliation through cutbacks of soybean or meat imports from the U.S. that would translate so swiftly to smaller dinner plates of citizens it appears hardly plausible.


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