South American drought likely to fuel US soybean demand in 2022

The US soybean demand in 2022 is likely to get support from a prolonged drought at its top rivals -- Brazil and Argentina -- analysts told S&P Global Platts, which could propel prices in the coming months as well.

According to Platts assessments, SOYBEX FOB New Orleans for March loading was estimated at $555.93/mt on Jan. 24, up 8% on the month, while SOYBEX FOB Santos was assessed at $544.93/mt, up 8.5% on the month.

With every 1 million mt dip in the Brazilian soybean production in the crop year 2021-22 (September-August), the US soybean's export demand could potentially soar by an equivalent volume of 1 million mt simultaneously, analysts said.

Major agricultural agencies and consultancies have already begun slashing their forecasts for the Brazilian beans output in 2021-22 as the southern states of the country continue to reel under severe drought since November.

While the US department of Agriculture has cut Brazilian soybean production expectations in 2021-22 by 5 million mt on previous estimates to 139 million mt in its latest World Agricultural Supply and Demand Estimates, Brazilian national agricultural supply company Conab has also reduced its projections by 2 million mt to 140.5 million mt.

Despite the cuts, if we go by the latest output forecasts from both Conab and the USDA, Brazil is still on its way to produce an all-time high soybeans crop, which will also be at least 2.5 million mt higher than last year's record level of 138 million mt.

But some local analysts are not convinced that Brazil will harvest such high volumes amid prolonged drought in the southern region and believe the USDA and Conab have underestimated the dry conditions. Some Brazil-based consultancies have in fact cut their expectations by as much as 12 million mt in January.

Curitiba-based AgRural expects Brazilian soybean output in 2021-22 at 133.4 million mt, down 11.3 million mt on previous estimates, while Porto Alegre-based Safras & Mercado has reduced its expectations by 12.4 million mt to 132.3 million mt.

The situation in Argentina is not ideal either, with almost the entire country engulfed in a drought since November. As a result, soybean crop conditions in the country have plummeted drastically within a couple of weeks into January.

According to the Buenos Aires Grains Exchange, or BAGE, of the planted soy crops, 30% were in good-to-excellent condition through Jan. 19, down 18 percentage points on the week and 57 points lower since late December.

Although, the country has received beneficial rainfall in recent days, long-term forecast signals return of dry conditions in February. As a result, there is a very definite possibility of significant deductions in the Argentinian soybean production forecast for 2021-22 amid rapidly deteriorating crop quality.

From the early season forecast of over 50 million mt, the Argentinian soybean output could dip as low as 40 million mt, if the dry conditions do not ebb in the coming weeks, a local agricultural analyst said.

Both Brazil and Argentina accounted for almost 50% of total global soybean supply in 2020-21, according to the USDA data.

"I've been warning about the ongoing drought in the Southern Cone [Latin America] for months," said Jacob Shapiro, founder and chief strategist at Perch Perspectives, a consulting firm. "The [record] soybean projections for the region never made sense, especially once it was clear a double-dip La Nina was on the cards," he said.

Advantage to US beans

With all indications pointing towards tightening of global soybean supply in the first half of 2022, the focus has uncharacteristically shifted towards the US soybean supply.

Typically, in a first half of a calendar year, the South American oilseed supply peaks, coinciding with the harvesting season. But 2022 could well be an exception amid historic drought in Latin America.

"South America drought will play to an advantage for the US soybean demand because the country could supply more beans to the international market," Shanghai-based commodity consultancy JCI China told Platts.

However, JCI was quick to adopt a cautious approach on any potential shift of China's soy demand towards the US.

"We don't see any significant shift in China's demand from Brazil to the US in Q1 of 2022 due to the drought issue," JCI said.

Mirroring JCI's sentiments, Pete Meyer, head of grain and oilseed analytics at Platts, said, "Since the earlier-harvested Brazilian soybeans seem to be yielding very well so far, the only potential advantage for US exporters may occur when the drought-hit southern Brazilian states get harvested later."

But, according to some market sources in China, the world's largest beans importer is actively seeking large volumes of US soybeans for October-November deliveries.

"China is likely to use US beans as a hedge against the potential tightness of South American beans supplies in 2022," a Shanghai-based analyst said.