September 16, 2014

Weaker Currency will help Brazilian Farmers Weather Low Prices

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

As farmers in Brazil start to plant their 2014/15 soybean crop, they are facing some of the lowest prices for their soybeans in six years, but there is one small ray of hope for Brazilian farmers and that is a weakening Brazilian currency. Since soybean prices are set in dollars but paid in the local currency, a weaker Brazilian currency means that Brazilian farmers will put more money in their pocket for every sack of soybeans they sell.

The Mato Grosso Institute of Agricultural Economics (Imea) estimates that farmers in Mato Grosso have priced less than 15% of their anticipated 2014/15 soybean crop, which means that the 85% of the crop that has not yet to be sold would benefit from a weaker Brazilian currency.

The Brazilian currency is currently trading at 2.33 Brazilian reals per U.S. dollar and the Banco do Brasil is estimating that the exchange rate will be 2.35 per dollar by the end of 2014 and it will reach 2.50 per dollar in 2015. At the rate the currency is weakening, the current forecast from the Banco do Brasil may end up being overly optimistic. If you only consider the exchange rate and not the underlying price of soybeans, Brazilian farmers would be better off if they delayed the sale of their soybeans until the currency weakened even further.

With that in mind, Imea compared various exchange rates and their impact on the prices paid to farmers in Mato Grosso for the sale of their soybeans. They based their analysis on a March futures price of US$ 10.61 per bushel, which was the approximate price at the end of August. The March futures is the most widely used benchmark for soybean pricing in Mato Grosso.

Using a price of US$ 10.61 per bushel and an exchange rate of 2.10 per dollar, the price for a sack of soybeans (60 kilograms or 2.2 bushels) would be R$ 49.11. If the exchange rate was 2.20 per dollar, the price of a sack of soybeans would increase to R$ 51.45. At the rate of 2.30 per dollar, the price increases to R$ 53.48 per sack. At a rate of 2.40 per dollar, the price is R$ 56.12 per sack. And at a rate of 2.50 per dollar, the price for a sack of soybeans increases to R$ 58.46.

So you can see that the exchange rate between the Brazilian real and the U.S. dollar has a profound impact on the prices paid to Brazilian farmers when they sell their soybeans. A weaker currency though is a double edged sword. While it is beneficial when the farmer sells his soybeans, it makes imports such as fertilizers and agricultural chemicals more expensive, thus increasing the cost of production.

A similar scenario can be made for farmers in Mato Grosso when they sell their corn as well. Very little of the 2014/15 anticipated corn crop in the state has been forward contracted and it would benefit farmers in the state to hold off pricing their corn as long as possible allowing the currency to weaken even further.

Imea is estimating that Mato Grosso will plant 8.8 million hectares of soybeans compared to the 8.6 million planted in 2013/14 (+2.3%). The total production in the state is estimated at 27.68 million tons compared to 26.44 million produced in 2013/14 (+4.7%). There are other analysts in Brazil that are expecting a 5% increase in soybean acreage in Mato Grosso, but they are using a lower estimate for the 2013/14 soybean acreage in the state and thus a higher percentage increase.