Note: Cruz and colleague Brian Basting will present their world view on grain market threats and opportunities at the upcoming Farm Futures Business summit, Jan. 19-20. Review and register here.

You have probably heard a lot about Argentina lately. They won the World Cup for the third time after 26 years, defeating France in a very exciting game on Dec. 18.

You may continue to see Argentina in the news in the coming months, but not in the sports section. Soccer is one of the few things my Argentine friends can celebrate these days. The country has been going through an economic crisis and we are more likely to read and watch news about Argentina’s finances and agriculture in the new year. Here’s what’s happening in Argentina that may affect your business, at least during the first part of 2023.

Rampant inflation

Double-digit inflation rates in the country have afflicted the Argentine population for 10 straight years now. Average prices have increased roughly 11 times since 2016. The 12-month inflation rate in November was 92.4% and is expected to end above 100% in 2022 (see graph below). Prices increased 4.9% in November alone.

By comparison, in October 2022 the International Monetary Fund forecast global inflation to rise from 4.7% in 2021 to 8.8% in 2022. According to the U.S. Bureau of Labor Statistics, the annual inflation rate in the U.S. was 7.1% for the 12 months that ended November 2022. High prices are uncomfortable for families who see their purchase power decrease when they buy groceries, and result in budget problems for farmers and companies that end up spending more on inputs than expected. Unfortunately, this scenario has been worsening since the Covid-19 pandemic began in 2020 and was further affected by the consequences of the Russia-Ukraine conflict.

High inflation is not the only economic problem in Argentina. The monetary policy interest rate is set at 75% per year and has constantly faced upward pressure due to increasing prices (the effective annual rate is 107.35%). With higher interest rates, future investments in real assets may be limited, resulting in lower economic growth and a higher unemployment rate. According to Bloomberg, Argentina’s real GDP is expected to increase by 5% in 2022 and by only 0.2% in 2023; unemployment may increase from 7.1% in 2022 to 8.0% in 2023.

In a push to contain the crises, in early 2022 the country had a US$ 44 billion agreement approved by the IMF to reschedule the debt already owed to the institution. On the one hand, the deal with the Fund may help Argentina deal with problems related to its balance of payment and government budget, by tackling inflation and boosting the country's international reserves. On the other hand, the deal is likely to create political challenges in the country, as possible cuts in government expenditure may affect the population.

As an attempt to increase the level of U.S. dollars in the central bank’s account (part of the agreement with IMF), the government used preferential exchange rate programs to promote soybean and soybean products sales and exports in September and November. During the first version of the program, the “soy dollar 1”, the exchange rate was set at AR$200/US$1, and later, through “soy dollar 2”, at AR$230/1US$, when the official rates were nearly 140 and 166 pesos, respectively.

Now the question stands whether the country will continue to use these programs in 2023.

Weather batters crops

For the third year in a row, La Niña has been affecting Argentina and resulting in a severe drought in a wide part of the country. The recent May-December period is likely to be the driest of the last 44 years and, while the planting season is not yet complete, Argentina may have significant reductions in the production of key agricultural products such as corn, soybean, and wheat during the 2022/23 season. Additionally, the country’s exports of soybean oil and meal may also be affected, causing uncertainty in world supply and affecting international prices, since Argentina is the major exporter of these oilseed products.

According to the Buenos Aires Grain Exchange (BAGE), as of the last week of 2022, 62.9% of the expected corn was planted in Argentina (5-year average: 77.9%), with only 15% rated as good or excellent (58% in 2021/22); 72.2% of the soybeans were planted (5-year average: 86.1%), with only 10% in good or excellent condition (last year: 57%); and 91.4% of the wheat was already harvested and yields were nearly 64% of those observed in 2021/22.

In addition to the lower yield, the observed 8.95% decrease in wheat acreage in Argentina is expected to result in a significant cut in production of roughly 45% (BAGE: 12.4 MMT in 2022/23 versus 22.4 MMT in 2021/22).

The map below (left), highlights the main soybean-producing regions in Argentina. The map on the right indicates a two-week forecast for the precipitation anomaly in the country (the deviation from average rainfall).

If the weather forecast does not change during the first weeks of January, corn and soybean yields are likely to suffer severe cuts in the areas most affected by the drought and high temperatures. Moreover, producers may not complete planting all their intended acreage in the 2022/23 crop year.

We should closely watch estimates from Argentina and the world that will be released on the first WASDE report of 2023, on Jan. 12. Meanwhile, we will keep our fingers crossed to expect good news regarding weather in the southern parts of South America.

Unfortunately, the future news regarding Argentina may not be as positive as the World Cup championship, but they will surely keep corn, soybeans, and wheat prices volatile in 2022/23.

At last, congrats on the World Cup, my Argentine friends! I am hoping for better days to come for you all and wishing you all the best in 2023!

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