When the election on November 22nd switched political powers in Argentina, there was a knee jerk speculative reaction the world would be soon flooded with soybeans. But it was a quick sell the rumor and buy the fact. The fact being the new power in Argentina will not take over until December 10 and more importantly, the simple logistics of moving grain out of Argentina will not happen overnight.
Who in their right mind could imagine ocean going grain freighters would be sitting in ports waiting to be filled? Why would anyone imagine that the grains available to be moved had costs of purchasing and shipping arranged? Most likely there were plenty of conversations taking place and some ships might be headed to Argentina ports, but nothing of size will take place for a month or two and then increases will quickly move ahead into February.
First of all, costs of shipping and costs to purchase need to be arranged. Ports throughout the world load variable tonnage and from what I quickly found, Argentina has ports that load between 56,000 to 60,000 metric tonnes. 60,000 metric tonnes equals 2,204,622 bushels of soybeans or 441 contracts at the Chicago Board of Trade. Currently January soybeans as I write at 7:15AM December 3, 2015 are trading around $8.90/bushel. Purchasing a ship of 60,000 metric tonnes equates to $19,621,135.80 US Dollars or 190,015,000 Argentine Peso at the current exchange rate.
According to the latest table on the US Grain Council website of Bulk Freight Indices for Heavy Grain and Soybeans as of November 19th from Argentina to China the Bulk Freight rate is $27.50 per metric ton. At 60,000 metric tonnes with the US Dollar that equates to $1,650,000.
With the cost of the soybeans at $19,621,135 plus $1,650,000 shipping the first initial costs equal $21,271,135.80. That is not pocket change. Financing needs to be arranged, finding berth at the location where it will go along with storage and handling costs along with somebody paying the 30 percent tariff normally needs to occur before anything is loaded.
So it easily can be seen arranging and actually moving a ship filled with grains or oilseeds and products won’t happen overnight. But it will happen and by mid-January the effect of Argentina’s old crop commodities will compete with commodities throughout the world.
Then in another three to six months, March through July, strong competition from Brazil’s and Argentina’s new crops will hit the world market.
With the new Argentina government it is estimated there will be a 30 percent rise in grain and oilseed output to 130 million metric tonnes with production increases due to stronger demand, a devaluation of the currency and better farm management practices such as more crop rotation.
The new government also will be eliminating the 15 percent export tax on wheat, corn, sunflowers and beef.
Purchasing by many Asian countries such as Malaysia, Vietnam and Indonesia that now mainly buy from Brazil will now be shopping in Argentina. Japan and South Korea that buy from the United States and Brazil will have another market.
In other words, the US will feel more worldwide competition at a time grain storage is filled to capacity and the US Dollar is strong.
For your information the table below is the past and current production in metric tonnes of Argentina from the November USDA WASDE report
SOYBEAN CORN WHEAT
2013/14 53.50 26.00 10.50
2014/2015 60.80 26.50 12.50
Nov 15/16 57.00 25.60 10.50
If there was ever a time to use dead cat bounces, now is the time. If you want my current recommendations, email me with name and phone number at chris.lehner@archerfinancials.com or call me 312 242 7942.
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