The markets saw some big swings last week for a variety of reasons, but there is one place in particular that the trade is giving much of its attention to: South America. South American weather, demand, and the policies of the new Argentine President have become the focus after a very neutral December WASDE report from the USDA.
Historically low water levels are still impacting transit through the Panama Canal, and this is likely to continue through at least April or May when that region’s typically wet season begins. In normal conditions, 35 vessels are allowed to pass through the canal daily. In current conditions, only 22 vessels are allowed to transit the Panama Canal. Authorities say that the number of vessels will drop to 18 per day in February. This impacts many types of vessels including ships of grain or other agriculture commodities, container ships, and cruise ships. It is also said that grain vessels usually receive the lowest priority in being granted shipping slots as their booking requests are typically only made days before arrival rather than months in advance like container ships and cruise ships.
In the second half of October of this year, only five grain vessels destined for Asia transited the Panama canal compared to thirty-four ships during the same time period in 2022. Alternative routes are available – going east to get to Asian destinations using the Suez Canal, going around South Africa, or going west by going south around South America – but these add at least two weeks of travel time and incur much higher costs.
Several weeks ago, I wrote about the new Argentine President, Javier Milei, and how his policies may impact the ag markets. On December 10th he was sworn into office, so we are now starting to see some of these impacts in real time. Last Monday, Argentina temporarily suspended its grains export register. This wasn’t highly unexpected as it came just before President Milei announced a series of economic measures, and several Argentine governments have suspended it in the past only to reopen it a few days later. Milei is battling sky-high inflation rates – topping around 160 percent last week – and is expected to make some extreme fiscal changes and cuts to social spending.
When I wrote about this election, I discussed the changes to export taxes that Milei intends to make. He has not completely eliminated them yet, instead, he has actually raised export taxes on some grains like corn to 15 percent from the current 12 percent tax rate. The current export tax for soybeans is 33 percent, and this is not expected to change, but some are expecting soybean meal and soybean oil tax rates could be cut from the current 31 percent rate. These changes in Argentina did come with an announcement from the administration that they do still plan to eventually eliminate export taxes, but for now they will stay in place as they attempt to stabilize the economy.
The new Argentine administration has also begun to devalue the peso, going from the previous official exchange rate of 366 pesos per U.S. Dollar, now to 800 pesos per U.S. dollar. This is a sharp devaluation, around 54 percent (which is much closer to the unofficial black-market rate) and they plan to continue to devalue the peso by 2 percent each month for some time. These changes are pressuring our grain markets as it is increasing the selling of stored grain in Argentina. However, it also increases their cost of crop inputs, so the longer-term impacts will be something to watch. Wheat has been pressured as the Bahia Blanco Grain Exchange says that Argentine wheat production could rise 60 percent if President Milei can end currency controls and export taxes. This will be an interesting story to watch unfold.