Drought most expensive weather disaster in Argentinian history

01 May 2018 Consultancy.lat 6 min. read
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The drought across Southern America has had an adverse effect on the regions food production. With 47% of the region's soy crops said to be in poor condition, local economies are at breaking point. In Argentina, the arrival of rains just in time for the sewing of wheat drove the price tag of the drought past $4 billion across the country.

Stretching from Uruguay, Argentina and into southern Brazil, the 2017 - 2018 drought is now one of the most expensive disasters these countries have seen. The worst drought in decades has seen both soybean and corn crops directly affected. In Argentina, billions have been shaved of the national economy affecting plans for infrastructure projects and sending insurance companies scrambling to set their policy in order.

The drought began in late 2017 and has caused both livestock and crops to deteriorate, alarming local businesses and regional governments alike. Large swaths of land used for farming and livestocks remain barren or scorched making the weather event one of the worst droughts in years. 

In monetary terms, the drought is said to have caused between $4 billion and $5 billion worth of economic damages depending on sources. The weather disaster in Argentina alone, according to the Buenos Aires Grain Exchange has caused damages of up to $3.4 billion. 

Córdoba-based consultant Pablo Adreani of Agripac consulting indicated recently that he estimates Argentina’s soybean production for this year to fall 10 million metric tons on earlier estimates. This revised estimate drops from 57 to 47 million metric tons due to the elongation of the recent drought. For corn, his estimate drops a further 5 million metric tons from 40 to 35 million metric tons.

Adreani presumes that this will cause accumulated financial losses of roughly $5 billion, due to the lack of yield in oilseed from soy crops and corn losses. The estimates are $1 billion more pessimistic than that of local insurance companies who are becoming inundated with farmers' calls for help.

Drought most expensive weather disaster in Argentinian history

Argentinian President Macri had initially hoped that economic growth would increase 3.5% this year but the drought has caused the equivalent of a reduction of approximately 0.5 in annual GDP. The country heavily relies on agriculture as the commodity exports make up a third of its economy. 

The states that have been most heavily impacted by the lack of rain include Buenos Aires, La Pampa, Cordoba, and Santiago del Estero. The end may be in sight, however, with the province of Buenos Aires recently receiving between 30mm and 100mm of rainfall, and Cordoba and La Pampa looking set to see rain by next weekend.

Whilst the rains may replenish the moisture in the soil and prepare the region for the next cycle of wheat crops, the damage to soy and corn has been done. "It will complicate the crop, which had little soybeans (due to the loss of yields)," said an Argentinian agro-climatology specialist. The process has seen over 20 million tons of soybean lost in comparison to last year's yield. 

The effects on the Argentine economy

Depending on which estimates are taken into account, the damage to the Argentinian economy could be anywhere between $4 billion and $5 billion. Conservative estimates do not take into account the knock-on effect of economic loss on other sectors such as transport, beef and poultry. The meat and dairy industry which use soy grain for animal feed have reported $600 million in economic damage themselves. 

Argentina is the worlds number 3 producer of raw soy products and number 1 for both soymeal and soy oil. As Argentina will see much lower annual exports of these soy products, the market is turning to both Brazil and the US to fill the gap. At home, the effects of the drought will be seen throughout the entire economy. 

"A reduced soybean crop in Argentina could, in turn cut its soymeal exports and so transfer export demand to the United States," said Matt Ammermann, a commodity risk manager at INTL FCStone. "The debate is now about how much Argentinas soybean crop will be cut.” 

For the Macri Government in Argentina’s new liberal economic agenda, the setback is fierce. According to one Fausto Spotorno from the Buenos Aires-based consulting firm, Orlando Ferreres & Asociados, “this situation is frustrating because it impedes the government from reaching its expected growth, and it hits other sectors.”

Uruguay bracing for rain, Brazil sends in army

Whilst parts of Uruguay anticipate up to 200mm of rain across the country during the next week the damage has been done to the national economy. According to agricultural consultancy firm Unicampo Uruguay, the drought is going to cost an estimated $600 million. The country's corn production has dropped significantly throughout the current cycle and for soy production, it could be a yield half the size of last year.

Esteban Hoffman of Unicampo Uruguay said; “given the impact of the drought in Uruguay, we are forecasting the soybean crop will have an estimated yield of 1.5 or 1.6 mt/ha during the current crop season, which will represent a decrease of 50% versus the 2016/17 cycle.” Loosing such a substantial amount of the regions corn production has had a knock-on effect, driving prices in the US up 14%.

In the southern state of Rio Grande do Sul, the Brazilian army is delivering water to citizens who are rapidly running out of options. The city closest to the border with Uruguay, Bagé, was most affected by the drought. Urban citizens are rationing water in 12 hour cycles whilst rural areas sporadically go without water.

The Brazilian army has been delivering water in military grade trucks with large water tanks attached on the back since February 2018. Municipalities in the southern part of Rio Grande do Sol as well as cities close to the Uruguayan or Argentinian border. 

The Civil Defence Agency, who are helping the army in their relief efforts have put the economic cost of the disaster at just under $300 million. Most of this damage has been within the state’s soy industry and other grain crops.