South American Drought: Will commodities be affected?
The Associated Press: Cowskulls and dust: Drought grips Argentina.
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. The AP article linked above 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 of 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 seasons 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.
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