What Argentina’s new soybean program means for China

Argentina’s Economy Ministry on Monday granted a special exchange rate program for soybean farmers and exporters in the country in order to boost exports this month. 

The special program allows pledges a fixed exchange rate of US dollar to Argentinian pesos at 200 pesos per dollar, which is significantly above the spot market rate of 140 pesos per dollar. The program is to last throughout September and until October. 

The country’s economy minister Sergio Massa said soybean exporters have agreed to sell at least $5 billion worth of soybeans in September. 

This could inject more than 10 million tons of Argentinian soybeans into the global market in the short-term as farmers have been reluctant to sell due to rising inflation and currency devaluation. According to several traders, Argentinian farmers have only sold half of their current crops. 

Since the announcement, Argentinian farmers are said to have sold 1-1.5 million tons of soybeans overnight on Monday, making it the biggest single-day sale this year. 

How could this program affect China? It could spur buying interest from China during a month which Brazil is struggling to offer, and the US new crop is being harvested. 

Argentina is the third largest soybean exporter to China, following Brazil and the US. China imported more than 3.7 million tons from Argentina in 2021, accounting for roughly 13% of annual soybean exports from the South American country. 

Chinese soybean imports from Argentina were only 262,000 tons between January and July this year as prices have been less competitive than US and Brazilian soybeans due to the lack of offers. 

Weaker global prices 

The immediate impact the program has had on global soybean markets since the official announcement is putting bearish pressure on cash premiums and futures. According to three China-based traders, October 2022 shipments of Argentinian soybeans traded at 340 c/bu (over November CBOT futures) in CFR China market. 

The traded level is 30 c/bu lower than offers last week. 

However, CFR premiums for US and Brazilian soybeans are estimated to have also dropped 20-30 c/bu overnight, making them more cost-competitive than Argentinian beans. 

The positive outcome for Chinese importers is that the import cost is lower. 

Meanwhile, CBOT soybean futures have stayed largely stable since the announcement as the US market was closed on Monday due to national holiday, but futures for soybean and soybean meal in China have begun to slide in response. 

Futures contracts for soybean meal and No.2 (GMO) soybean on Dalian Commodity Exchange softened less than 1% across the board by the close of morning trading session in China. 

Smaller pool of buyers 

In addition to price differentials between Argentinian soybean and its counterparts in Brazil and the US, there is quality difference. 

Argentinian beans tend to have lower protein and oil content than Brazilian and US soybeans, making it easier to storage. Therefore, they are preferred by Chinese state stockpilers instead of crushers. 

“Except state-owned buyers, demand for Argentinian beans from most crushers is pretty weak,” one trader in southern China commented. 

While state buyers have ramped up purchases since the announcement, commercial crushers have remained quiet as they are waiting for prices in the US and Brazil to come down in accordance with Argentina. 

Macro headwind 

Despite the prospect of lower import prices at origin, the slow economic recovery in China continues to hurt domestic demand and the country’s currency. 

The exchange rate of USD/CNY hovered near the two-year high of 6.94 renminbi per dollar. 

China’s central bank announced a cut of commercial banks’ reserve requirement ratio in a move to boost liquidity in the market, but caused the currency to weaken against the dollar. 

“Renminbi is weakening and domestic buyers continue to suffer,” one Shanghai-based trader said. 

The macro headwind could linger for the rest of 2022 as Chinese fiscal policymakers maintain their expansionary strategy to recover growth while central banks in other major economies further raise interest rates to tame inflation.