Drought in South America Impacts Soybean Production

Sources:
The Argentina Independent: Is Argentina’s Economy Overheating?
Bloomberg: South America Soybean Crop to Slide on Drought, Oil World Says
FT: Drought Raises Fears for Brazil Food Crops
IDB: How Will the Food Price Shock Affect Inflation in Latin America and the Caribbean?
IMF: Rising Prices on the Menu
LA Times: Soybeans Now Rule the Range on Argentina Plains
NYT: To Fortify China, Soybean Harvest Grows in Brazil

A drought that began in June in Latin America has impacted agricultural production throughout the region, especially soybean production in South America. Experts estimate that the drought could lead to a decline in total output for Brazil, Argentina, Paraguay, Uruguay, and Bolivia from 136.7 million tons last year to 132.7 million tons this year. South America grows most of the crop for the global market, and Brazil and Argentina produce almost half of the world’s soybeans alone. Experts believe that Brazilian production could decrease from 75.3 million tons last year to 71 million tons this year. Argentine production, however, is expected to rise to 51 million tons this year from 49.4 million tons the year before. This figure is still 1 million tons less than what was expected prior to the drought. Even with rainfall, Brazil’s and Paraguay’s crops cannot be saved because they are almost fully grown, meaning those countries are already facing irreversible losses.

Over the last decade, the global demand for soybeans has increased dramatically, largely fueled by China. China requires soybeans not just to make tofu, a staple of the Chinese diet, but also to feed the livestock consumed by its growing population. China turned to South America as the major source of its soybeans, in particular Brazil, because it lacks the land and water supply necessary to meet its own agricultural needs.

Growing soy has contributed to economic prosperity for many South American countries. For example, it was instrumental in leading Argentina out of its financial crisis following the economic crash in 2001. The Argentine economy has benefitted from a tripling of soybean prices since 2002 because of high global demand. Because of growing global demand and the low risk of loss from this industry, many Argentine cattle farmers have turned in recent years to soybean farming and away from cattle-growing. Soybeans are inexpensive to grow and yield at least two harvests per year. Raising newborn cattle and bringing them to market requires a commitment of three years, carries greater risk, and results in lower profits than cultivating soybeans.

Economists fear, however, that the drought will drive prices too high as the supply of soybeans declines and global demand remains high. Rising prices have concerned the global community even before the South American drought, especially emerging and developing economies. The increased costs of importing and buying soybeans will affect developing countries more than developed ones because a larger percentage of the money developing countries spend goes to buying food. Although economists predict that the surge in food prices will eventually stabilize, they warn that an increase in food prices will take time to reverse because the supply of food must catch up with the demand.