ASUNCION (Reuters) - Paraguay is forecast to export more soybeans than neighboring grains powerhouse Argentina for the first time this year as growers in the smaller country push to increase output and fill the supply gap left by a drought on the Argentine Pampas.

FILE PHOTO: Soybean plants are seen in a field in Hernandarias, Paraguay February 8, 2017. REUTERS/Jorge Adorno/File Photo

Paraguay produces around 3.0 percent of global supply. Any additional exports are likely to be snapped up in a market buffeted by tension over trade policy between top soy importer China, and the world’s second-largest soybean exporter, the United States.

Land-locked Paraguay sends most of its soybean exports next door to Argentina, the world’s top supplier of soymeal livestock feed. Paraguayan beans are known for their high protein content, making them especially attractive to soymeal manufacturers.

Argentina’s soy crushers have brought in cargoes from as far afield as the United States to compensate for a drought that cut soy output estimates at home to under 40 million tonnes from early forecasts in the 55 million tonne range. Argentina crushes almost all its soy rather than exporting raw beans.

Paraguay soybean exports are expected at 6.3 million tonnes this year, according to the U.S. Department of Agriculture (USDA), compared to 4.2 million tonnes from Argentina. Exports should return to their normal trend next season, with the USDA projecting shipments from Argentina at 8.0 million tonnes of soybeans and Paraguay shipments at 5.9 million tonnes.

Paraguayan soy production rose over the 10 million tonne mark last year and is expected to hit that milestone again this season. The government says the country aims to double production by 2028. The key to hitting that target is the vast, arid western part of the country known as Chaco.

“If Chaco is brought on line we could produce 60 percent more soy than we do now,” said Hector Cristaldo, a grower and president of Paraguay’s UGP umbrella organization of farm groups.

Chaco receives around 900 millimeters of rain per year versus 1,800 to 2,000 millimeters in Paraguay’s eastern soy belt, Cristaldo said. Western Paraguay is also 8 to 10 degrees centigrade hotter than the 21 to 22 degree average (70 Fahrenheit) in eastern Paraguay, he said.

Some additional growth could come from the eastern soy belt, fronted by the Parana River. About a million hectares could become available if land used for cattle ranching here is converted to soy, Cristaldo said.

But the region has limited upside potential due to strict environmental laws that prohibit deforestation.

“It is not so easy to expand crop area,” said Jose Berea, head of the Capeco chamber of grains and oilseed exporters.

“We cannot open lands the way we did in the ‘90s, so we are strengthening the soybean program in Chaco.”

Capeco is working with local farmers and the USDA to come up with soybean varieties that can withstand Chaco’s hot climate.

This year 30,000 hectares in Chaco were sown with experimental varieties of soy with 50,000 hectares of experimental planting expected next season, Berea said.

If heat-tolerant varieties can be adapted to the region, soybean acreage in Paraguay could more than double from 3.5 million hectares forecast for the 2018/2019 crop year, according to a recent USDA report.

Beans from Chaco would be trucked east to the Paraguay River and put on barges headed south to export hubs Nueva Palmira, Uruguay, or Rosario, Argentina.

Companies including ADM, Bunge, Dreyfus and AGD have crushing operations along the Paraguay River. Grains giant Cargill has a plant in the eastern soy belt with quick access to the Parana River, which leads to the same export hubs.

In addition to Argentina and Uruguay, Paraguay exports soybeans to Europe, Russia and Turkey.

BRAZILIAN GROWERS

Paraguay’s soy industry was pioneered by Brazilian planters who, attracted by cheap land prices, poured over the border in the 1970s through the 1990s, establishing towns where Portuguese is still the main language.

Paraguay’s output is dwarfed by neighbors Brazil and Argentina. But unlike those countries, respectively facing an election and a currency crisis, Paraguay’s policies are likely to remain stable and pro-market, setting the stage for investment that will be needed to promote soybean output growth.

President-elect Mario Abdo will continue the ruling Colorado Party’s mandate for another five years. He has opposed a bill sponsored by the left-leaning opposition to slap a 10 percent tax on soybean exports.

Outgoing President Horacio Cartes has already vetoed the export tax bill once and has started infrastructure projects expected to be continued by Abdo after his Aug. 15 inauguration.

To boost exports, a lot more will be needed than a heat-resistant bean, said Cristaldo.

Paraguay needs more “paved roads, silos, ports, and processing services” to accommodate the kind of soy production growth the country wants to see, he said.