Dave Juday
The corn harvest in the United States is moving ahead of its normal pace. USDA data this week showed the U.S. corn crop was 59 percent complete as of last Sunday, which is ahead of the five-year average. However, looking ahead to 2016, there is a big unknown about corn production in Argentina, an important player in the market, which bridges the gap between Northern Hemisphere harvests, according to Dave Juday, principal, The Juday Group and NCC consultant.
According to the Argentine Ministry of Agriculture, Livestock and Fisheries as of October 15 only about 20 percent of the expected corn crop was planted. Furthermore, seed sales are down nearly 30 percent from normal years. Traditionally, most corn in Argentina has been planted in October, but in recent years, the planting dates have been delayed. In the country’s main corn-belt, planting can be done through November and in the South, corn can still be planted into December. The risk with November planting is that the crop pollinates in January, which is the hottest month of the year. December plantings, however, have seen some of the better yields recently and thus nearly two-thirds of the crop is now planted in December.
Currently, there is plenty of incentive for Argentine corn farmers to wait before making their planting decisions. First, there is the current low price of corn. Moreover, Argentina is a high cost producer, with energy costs considerably higher than most major exporters; financing more difficult to come by; land rents a major consideration as nearly 70 percent of Argentina’s crop land is leased; as well as high transportation costs, which also impact local prices. This week, corn FOB in the Gulf of Mexico was USD$171 per metric ton; in Argentina it was USD$160 per metric ton. The combination of low prices and high production costs makes corn unprofitable for Argentine farmers.
Moreover, Argentina maintains export controls, and a fixed – and overvalued – exchange rate for the peso. The peso trades in a band around 9.59 pesos per U.S. dollar, while on the black market in Argentina, U.S. dollars bring 16.4 pesos. Of course, Argentina also has its export commodity tax. Corn exports are taxed at 20 percent, as is barley. The result has been a steady drop in corn acres over the years. In the Argentine corn-belt region, instead of a 50/50 corn and soybean rotation like the United States, acres are planted to soybeans over corn at a ratio of about six to one in order to avoid the export tax.
That is why perhaps the most important factor in the decision of when – or if – to plant corn is the upcoming election on Sunday, October 25. With the late planting cycle, farmers can still plant corn after the election, depending on who is elected. While the commodity export tax is a tough issue to tackle, as it now accounts for more than 10 percent of federal revenue, one candidate has promised fiscal reform and trade liberalization. He is Mauricio Macri, the current Mayor of Buenos Aires, and the candidate of the Republican Proposal Party (PRO).
Another candidate also likely to make changes to some economic policies is Sergio Massa of the Renewal Front Party (FR). Aside from export tax changes, even a change in the exchange rate would likely boost corn production. Exporting corn, which is priced in dollars, would earn more peso’s with an adjustment of exchange rates.
Currently Daniel Scioli of the Front for Victory Party (FPV) is leading in the polls. Scioli is the same party as outgoing President Cristina Fernandez and promises to keep current policies in place (the export tax was originally implemented under the Presidency of Nestor Kirchner, Fernandez’s husband whom she succeeded). The USDA Attaché report speculates that, if no polices change, a 15 to 30 percent drop in corn acreage could be expected.
Currently, forecasts for Argentine corn production are between 21 and 21.6 million metric tons, which could be significantly lower or higher depending on the election. Those forecasts are equivalent to a 20- percent reduction from last year’s production and are about 12.5 percent lower than USDA’s official forecast. Another 15- to-30 percent reduction from the current forecasts would mean by March or April global production would be down 205 to 310 million bushels from USDA’s official forecast. That would be enough to firm up corn prices and add to feed costs.
