Kub's Den

When U.S. soybean meal exports are forecast to reach a record high, and the total outstanding export sales commitment (5,521 metric tons so far this marketing year, as of Oct. 19, 2023) is running 143% hotter than last year at this time, it's a strong reminder of how the fates and choices of our competitors can drive a commodity market's prospects here in the United States. After Argentina's drought-riddled soybean harvest, soy processors in that country are now reportedly struggling to find soybeans to process, and international buying interest has spilled over to America, lifting U.S. soybean prices as high as $440 per ton on the nearby futures market last week and this week.

More cataclysmic shifts may be in store for Argentina's commodity markets, if the country's restless voters have their way. One of the candidates running for president of Argentina is seriously, credibly calling for the country to scrap its own currency -- the peso -- and instead conduct all business in U.S. dollars. In a country where annual inflation hit 138% in September, we can imagine how "dollarization" might seem appealing if it's possible to pull it off without sending the whole economy into a meltdown. I will leave the mechanics and the bond market implications for others to discuss and instead focus on the potential impacts on global grain prices.

-- Why is this being talked about now?

A runoff election for Argentina's presidency last Sunday narrowed the field to two candidates -- Sergio Massa, who represents the old-school Peronist government that has arguably spent the past four decades getting Argentina into the economic mess it's in today, versus Javier Milei, a bombastic, chainsaw-wielding, TV-friendly, social media-friendly libertarian with fiery ideas about radically upending the federal government's departments, shutting down the central bank and, famously, dollarizing the Argentinean economy. In the first round of voting, center-left Massa got 36.7% of the vote, libertarian Milei got 30% of the vote, and conservative Patricia Bullrich got knocked out after receiving 23.8% of the vote. She now encourages her voters to go for the chainsaw guy, saying, "To succeed, Argentina needs a change at the roots that will protect capitalism and end money printing to stop inflation." Argentina's voters will go to the polls again on Sunday, Nov. 19, to decide.

-- What markets would it affect?

If Argentina dollarizes next year -- if it is even capable of amassing enough U.S. currency in its own accounts to cover its obligations and do so -- then, obviously, the first rumbling will be in the market for Argentina's sovereign debt (its government bonds). Argentina's bonds already trade at distressed prices, and they shift from day to day based on traders' guesses about who will win the election and how disorderly the process of dollarization may eventually go.

But Argentina is a commodity-exporting country, and its peso can be considered a commodity currency. This means much of the country's prospects for inflation or deflation depend on the demand for the commodity goods it's able to export. In Argentina, those exported commodities are mainly corn (41 million metric tons) and wheat (11.5 mmt), but also soybean meal (18.75 mmt forecast ... usually the world's No. 1 exporter, but maybe not this year after the drought) and soybeans (4.6 mmt), as well as animal products, meat, vehicles, and other chemical goods. In a potentially dollarized future, the overall volume of the country's export sales may not really change. In that sense, their current account may be somewhat agnostic whether Argentina is selling these commodities in pesos or yuan or dollars, as long as it's selling enough of them. But a more interesting change, perhaps, would be the price point at which foreign buyers are able to transact such business.

-- How would it affect prices in the U.S.?

First, let's talk about the typical way foreign currencies influence benchmark commodity prices. When the Brazilian real, for instance, is "cheap" compared to a strong U.S. dollar, then a buyer using, let's say, South Korean won can get a bargain price on Brazilian soybeans denominated in reais. If soybeans are worth 2,368 reais per metric ton at the port in Paranagua, then a foreign buyer is paying the equivalent of $470 USD per metric ton (about $12.80 per bushel). Compare that to the price of U.S. soybeans in U.S. dollars at a coastal port today, which is generally above $13 per bushel. To attract buyers, U.S. prices can't get too far out of line with competitors' prices. Therefore, if all else stays equal, and the only thing that changes is the value of the foreign currency getting even weaker, then the price tag for U.S. soybeans must also get weaker in sympathy. As convoluted as the relationship may seem, when commodity-exporting countries' currencies move up or down then the benchmark Chicago futures price tag for those commodities tends to move up or down in the same direction at the same time, more or less. Without that pressure from Argentina's volatile currency, there would just be one less factor influencing the U.S. commodities' benchmark prices.

At this point, no one knows what Argentina's election outcome will be, or what the new administration will be like (whichever candidate is elected), or what bond markets will do in response, or how international demand for Argentina's commodities may shift after the drought regardless of any currency exchange deals to be made. So, perhaps the best we can say is this: the dollarization of Argentina would certainly be an adventure, and at best, it might remove one source of opaque, unpredictable pressure on international corn, wheat, and soybean meal prices.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involves substantial risk isn't suitable for everyone.

Elaine Kub, CFA is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at analysis@elainekub.com.

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