Will Commodities Be Affected by the South American Drought?

Harvest season will start in a month or so for the major South American agricultural areas in Brazil, Argentina and Uruguay. Unfortunately, for many of the farmers there will not be much to harvest. There has been no rain in much of the region for all of the spring and summer. This linked AP article gives some graphic examples of how Argentinian farmers are being affected.

Brazil and Argentina are the number 2 and 3 producers of soybeans. Brazil is the world’s number 1 exporter of beef and Argentina is in the top 5. The drought is especially hard on the corn crop which is used mainly to feed the beef, although a lot of the beef raised in the region is grass fed. The grass has not been watered either.

During the spring planting season the financial meltdown was at its peak and many South American farmers were not able to get loans to purchase fertilizer for their crops, putting a dent in the possible harvest for the year. Now the drought is further reducing the amount of grain that will be harvested and killing off a significant portion of the region’s cattle herd.

What does this mean for investors? First, I think you will start to see significant price increases in agricultural commodities: corn, soybeans and beef especially. Normally increasing prices for commodities would be good for the fertilizer prices, but this drought may have a strong negative impact on fertilizer sales in South America. Farmers there will not have the money or motivation to buy fertilizer for the next season's crop until they know the drought has broken.

The problems in South America should be a benefit for U.S. based producers of meat and soybeans. The foreign markets that need these products will be forced to buy from U.S. suppliers.

I have not seen a lot of U.S. based news on the severity of the drought in South America but it is going to have a tremendous impact on exports from the region.

Disclosure: No position.

Comments

[Deep_Blue:]

Link this with Paul Farrells comments today over at Marketwatch - we got a decade long theme. long cresy and dba, looking at MOO

Jan 27 09:41 AM

[Bartlesby:]

The combination of drought and tight credit has already had a drastic impact on fertilizer consumption (and therefore yield) in the current South American crop season. Some recent evidence:

Brazil’s National Association of Fertilizer Distributors recently reported that fertilizer deliveries fell nearly 9% in 2008 versus 2007. However, a closer look reveals that this drop was driven entirely in the October-December period. Whereas Brazil saw a 5% increase in deliveries for the first three calendar quarters, the final quarter showed a 36% decrease in October, a 50% decrease in November and a 38% decrease in December as compared with 2007.

Feb 20 01:29 PM