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April 15, 2011

Strengthening Brazilian Currency Lowers Margins for Soy Farmers

Brazilian soybean farmers are being impacted by something that American farmers rarely think about - the currency exchange rate. The Brazilian currency has been getting stronger compared to the U.S. dollar for a number of years and as it strengthens, Brazilian soybean farmers see a lower price for their soybeans compared to American farmers.

The growing season that is currently wrapping up is another example of the phenomena. In October of 2010 when Brazilians were planting their soybeans, the Brazilian real was trading at 1.72 per each U.S. dollar. Currently, it is trading at 1.58 per dollar or an increase of 8%. Regardless of the market prices paid for soybeans, the change in the currency rate alone means that the soybean prices being paid to Brazilian farmers is 8% lower than what it would have been if the exchange rate remained unchanged.

The entire exchange rate problem goes back to the fact that soybeans are priced in U.S. dollars, but paid in the local currency. Therefore, the stronger the local currency compared to the dollar, the less a farmer puts in his pocket for each sack of soybeans he sells.

The currency exchange rate is troublesome for exported commodities and especially for commodities that must be transported long distances to export facilities. The problem is that transportation costs (which affects the basis) are calculated in dollar terms for soybean contracts.

For example, in the municipality of Sorriso located in central Mato Grosso, it can cost as much as R$ 216 per ton to transport soybeans to the Port of Paranagua in southern Brazil. If the Brazilian real was trading at the rate of 2 reals per U.S. dollar, the freight costs would be US$ 108 per ton. At the current exchange rate of 1.58 Brazilian reals per U.S. dollar, that same freight would costs US$ 137 per ton.

The exchange rate adds a level of uncertainty for Brazilian farmers. For approximately the last five years, the Brazilian currency has continued to strengthen (or the U.S. dollar has weakened, whichever way you want to say it) and as a result, Brazilian farmers have been losing potential sales income for every sack of soybeans they have marketed.