The U.S. still commands pole position as the largest global soybean producer and exporter, contributing 33% of the world's total production and 40% of the world’s exports. But Argentina, now in third place in the export table, is catching up fast. It is already the world's largest exporter of soybean meal and oil.

Last year Argentina exported $6 billion of soybeans, $11 billion of soy flour and $8 billion of soy oil. However, market differences between the U.S. and Argentina could yet derail Argentina’s soybean industry.

Indeed, the country has a comparative advantage in the production of soybean products. “Argentina has one of the largest clusters of soybean crushers in the world in Rosario,” says Fernando Nazar, an agricultural consultant and producer in Buenos Aires province. “And it also has some of the most efficient plants globally, boosted by international investment. But hardly any of the primary or processed products end up in the domestic market.”

Domestic demand is very limited.  Soybean oil is not typically used in cooking, nor is soybean meal fed to livestock. Argentina’s poultry industry is too small to require any great volumes.

In contrast, U.S. domestic consumption of soybean products is very high, with over 75% of its meal production and over 80% of its oil production destined for the local market.

Even if there was domestic Argentine demand for the use of soybean proteins in food products, the odds are stacked it. “There are limitations to achieving this in Argentina due to higher costs than U.S., and less experience in marketing and development of technology,” says Alfredo Rojas Lagarde, director of the food processing company Pop Argentina. “Inflation hits the value chain more post harvesting. Transport, processing, packaging, export costs or labor are much more exposed to rising costs. We are clearly losing ground and competitiveness against other countries.”

There seems to be little incentive for the Argentine government to promote domestic consumption. According to a study by the National Agricultural Technology Institute, the federal government receives more than $10 billion from the soy sector in export taxes, representing near 4% of the GDP, making it an important source of funding. It also aids the country’s financial system as the dollars are used by the central bank to keep the exchange rate fixed.

China and India account for more than 80% of Argentine exports, posing a huge potential risk from a downturn there. If external demand collapses for Argentine soybean exports, with virtually no domestic demand, farmers will diversify into other crops. When international demand picks up again, U.S. farmers should benefit from a tight market in the form of rising prices.

But any slump may be cushioned the growing internal demand for biodiesel. “Domestic demand for soybean oil for the biodiesel industry will likely cause an increase in consumption of soybeans for crush and a decrease in exports of beans and oil,” says Claudio Molina, executive director Argentine Bio-combustibles Association.

The biodiesel requirement is already 10% and could reach 20% by 2015.

This is part of a series on agriculture in Argentina by John Kennedy, a writer and economic consultant. You can contact him at [email protected].