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Feed producers at the mercy of currency rate fluctuations

Photo: Canva
Photo: Canva

Despite weakening global soybean prices, Indonesian feed producers are still incurring higher costs due to the appreciation of the US dollar against the rupiah. Although rupiah depreciation has not had a significant impact on the industry, a weaker real is enabling Brazilian farmers to better withstand lower commodity prices that are denominated in dollars.

According to Bloomberg (July 2024), soybean prices for November had fallen by as much as 3.1% to US$10.94 per bushel at the close of trading on Monday 8 July 2024. Soybean prices continue to be pressured as global supplies are higher than last year, as tropical storm Beryl was expected to bring much-needed rain to dry areas and thus raise the likelihood of higher soybean crop yields.

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Imported feed ingredients reliant on currency exchange

Desianto Budi Utomo, general chairman of the Indonesian Feedmills Association (GPMT) said that feed produced in the country contains 35% imported ingredients, but that their monetary value amounts to 65% of the total costs of producing feed. This is why currency depreciation is putting a strain on the industry as many feed ingredients are imported. However, imported ingredients are associated more with the need for feed production rather than prices, with soybean meal as the primary source of protein and amino acids in feed formulation for livestock worldwide.

Increasing soy exports

According to the Foreign Agricultural Service (FAS) of the US Department of Agriculture, soybean meal imports in 2024-2025 are expected to reach 5.8 mt, up 100,000 tonnes from 2023-2024. Meanwhile, soybean meal consumption is expected to increase by 2% to 5.75 mt in 2024-2025 based on continued demand from the feed sector.

“The poultry industry is the largest consumer of soybean meal, accounting for at least 80% of animal feed consumption and is expected to grow along with population growth and the growing preference for poultry meat,” said Dr Utomo.

The weakening of the rupiah exchange rate against the US dollar does have an impact but not a significant one.

Weakening rupiah: No significant impact on feed sector

The strengthening of the US dollar against the rupiah has not had a significant impact on feed producers because there are still feed ingredients produced locally, like corn. “Corn utilisation in feed formulations at 47.9% and the currently falling price of corn can cover feed production costs. The weakening of the rupiah exchange rate against the US dollar does have an impact but not a significant one. We do not have to raise the price of feed,” Utomo noted.

Drop in corn & soymeal prices: Boost profits

It is even predicted that poultry integrators in Indonesia will see better profits in Q2 2024, despite the currency depreciation, according to BRI Danareksa Sekuritas. The price of corn has dropped slightly from US$0.29/kg to US$0.28/kg, the lowest level this year. Meanwhile, the price of soybean meal remains at US$340-370/tonne, down 33% year-on-year. The drop in corn and soybean meal prices will boost profits, given that these ingredients make up 50% and 25%, respectively, of the feed formula.

Indonesian imports concerned about prolonged rupiah weakening

Hidayatullah Suralaga, secretary general of the Indonesian Soybean Importers Association (Akindo), admitted that importers are starting to worry that the impact of the prolonged weakening of the rupiah could risk the price of imported soybeans. However, he believes that the national soybean stock is sufficient for approximately 2 months and the current supply situation for imported soybean is considered to have improved compared to the previous period.

Brazil: Real decline offset soy price decline

Meanwhile, the weakening of the Brazilian real exchange rate plays an important role in agricultural markets given that the country is the world’s largest exporter of soybeans. The 11% decline in the Brazilian real versus the US dollar this year has helped to offset the decline in prices for Brazil’s soybean exporters, helping them maintain their edge over their American competitors.

Indeed, the weaker real is enabling Brazilian farmers to better withstand lower commodity prices that are denominated in dollars than their US counterparts. A clear example of the real’s influence on trade is that Brazilian farmers sold more than 4 mt of soybeans in the 5 days ending 5 July 2024. That was the most for a similar period since October 2020, after the currency had plunged to its lowest level against the US dollar in more than 2 years.

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