August 10, 2011

Volatile Currency Markets Worry Brazilian Farmers

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

Uncertainty in world markets has farmers around the world concerned about the future direction of commodity prices and their cost of production. The outside markets seem to have superseded the fact that corn and soybean stocks remain very tight and subject to even tighter supplies due to adverse weather. Additionally, Brazilian farmers have another worry, the continuing strengthening of the Brazilian currency and its effects on their farming operations.

At the end of July, the Brazilian currency reached its strongest level compared to the U.S. dollar since 1999 trading at 1.53 reals per dollar. The Brazilian government has since intervened in the market, but without constant intervention, it is believed the currency will eventually trade at 1.50 per dollar. Where the currency will trade in the future is uncertain, but one thing that is certain, a strong Brazilian currency is not good for Brazilian farmers.

A strong local currency is a disincentive for exporters because it makes their products more expensive and it is an incentive for importers because it makes their products cheaper. As the Brazilian currency gets stronger, Brazilian farmers put less money in their pockets every time they sell a sack of soybeans. As a result, soybean farmers in Brazil do not receive the same price for their soybeans as do farmers in the U.S. even correcting for increased transportation costs in Brazil. As Brazilian farmers are being hurt by a strong currency, their main competitors, which are American farmers, are being helped by the weak dollar. As a result, central Brazil is probably one of the most expensive regions to grow soybeans and the central U.S. is one of the cheapest.

While a strong currency is bad for exports such as soybeans, it does offer an opportunity to purchase dollar-bases items such as equipment, fertilizers, and agricultural chemicals. A strong currency puts downward pressure on the costs of imports and that is beneficial for Brazilian farmers who must import the majority of their fertilizers and agricultural chemicals. Unfortunately for them, the recent increase in international fertilizer prices has more than offset any reduction due to the strong Brazilian currency.

In a country heavily dependent on agricultural exports such as Brazil, the strong currency is also negative for processed products such as soybean oil, meats, sugar, leather, etc.

There are many reasons for the strong Brazilian currency including currency speculation. As a result, the government has indicated they may implement a tax of up to 25% on currency trades as a disincentive for excessive currency speculation.