October 31, 2017

Brazilian Currency Weakens - Brazilian Farmers Increase Sales

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

Last week was the latest example of what Brazilian farmers have long known, the currency exchange rate is often times more important than the price of the underlying commodity. The Brazilian real weakened last week resulting in an increased domestic price of soybeans that is now approaching the highest price levels of the year.

The Brazilian currency has weakened over the past week to finish trading on Monday at approximately 3.28 to the dollar. Earlier last week, it had hit 3.3 to the dollar, which was the weakest level since mid-July. This weakening is probably both a "Brazilian story" as well as a "dollar story."

A currency move is nearly always the result of a combination of factors and in the case of the Brazilian real, it was probably caused by a number of factors including:

The "Brazilian Story"

  • A brief medical scare last Wednesday that sent the Brazilian president to the hospital for a few hours, but he was released later in the afternoon. Late last week, he was admitted to a hospital in Sao Paulo for treatment of a urinary blockage caused by an enlarged prostate. He is expected to return to Brasilia mid-week.
  • It now appears that President Temer will finish out his term. It looks like he may have cut a deal with members of the Brazilian Congress in order to stay in power. In exchange for not being impeached, he may have agreed to not act on reforming the Brazilian pension system and other structural reforms. The market wanted to see these reforms in order to shore up the current recovery.
  • The Brazilian politicians have no appetite for reducing people's pensions or weakening worker rights. There were massive demonstrations in Brasilia over the last few months against these measures, so Brazilian politicians are more than willing to postpone any of these painful changes.

The "Dollar Story"

  • Stronger performance of the U.S. economy is leading to a strengthening of the dollar.
  • The potential for corporate tax cuts in the U.S. continues to draw more money into equities.
  • The potential for increased interest rates in the U.S. is also drawing in money from investors.
  • Some of the funds coming into the U.S. are coming at the expense of developing economies such as Brazil.

Regardless of why the Brazilian currency is weakening, the result has been improved domestic prices in Brazil which farmers have taken advantage of to increase their sales of any old crop soybeans they have left and to forward contract new crop soybeans as well.

By some estimates, Brazilian farmers may have increased their forward contracts by 4% to 5% last week to the range of 18% to 20% of their anticipated 2017/18 soybean production. Over the past few years, generally 35% to 40% of the new crop would be sold by this date.