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Higher food prices are on the near-term horizon for U.S. consumers as exporters look to cover shortages caused by this summer’s challenging weather conditions in the Midwest, where most of the country’s corn and soy are grown.
And this coming week will mark one of the most-significant developments in a long time for a region that stands to profit — perhaps handsomely — in the aftermath of its Northern neighbors’ record heat and drought.
Hope for the North in the
‘Common Market of the South’?
The Latin American trading bloc Mercosur includes regional heavyweights Brazil and Argentina as well as Uruguay and Paraguay. This political and economic alliance is further expanding its network of South America’s biggest grains and energy exporters now that Venezuela is set to join the group.
Mercosur is South America’s leading trading bloc. Known as the Common Market of the South, it aims to bring about the free movement of goods, capital, services and people among its member states.
And the newly expanded Mercosur will have a third of the world’s water reserves, a third of arable lands, and produce more than 45% of global soy production.
This area has been likened to the European Union but, with an area of about 4.6 million square miles, it is four times as big. The bloc’s combined market encompasses more than 250 million people and accounts for more than three-quarters of the economic activity on the continent.
South America might not only have a hand in feeding U.S. citizens, but it may also be a big reason why some prominent companies in the agricultural business can provide respectable earnings numbers, despite the extensive crop damage here at home.
Earnings Season for U.S. Agribusiness
Not Overly Arid, Thanks to South America
Just this week, White Plains, N.Y.-based agribusiness heavyweight Bunge (BG) disappointed investors with numbers that fell short of consensus estimates.
Bunge, the world’s largest soybean processor, has traditionally dominated business in agricultural markets. (It’s one of the “ABCD” players in this space. The other majors are Archer Daniels Midland, Cargill and Louis Dreyfus Corp.)
Currently, the company expects a tempering of near-term demand among commercial customers as the Midwest’s worst drought since the 1950s lowers expectations of replenished supply this fall.
However, it expects large crops next spring from farmers in South America, which would help provide relief to a stressed market.
And despite the current weak weather conditions, AGCO Corp. (AGCO) posted a solid $2.08 earnings-per-share figure, which is up over $1.35 in the second quarter of last year.
In its earnings release, AGCO pointed to the favorable conditions it anticipates in the coming year in South America.
“Supportive government financing programs in Brazil, favorable crop prices and improved weather are all sustaining industry demand in South America.
“Longer term, the growing population and the shift to higher protein diets are driving increases in the consumption of food and demand for grain, providing support for farm income and our industry.”
My take on this is that, just as OPEC was able to influence prices for oil, we will see an increase in prices for grains with a political message. And that is: The newly emerging economic power of Latin America is not something to be ignored.
Best wishes,
Rudy
