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August 20, 2013

Weaker Currency Increases Income for Brazilian Farmers

Brazilian farmers are watching the currency markets very closely because last week alone the Brazilian real lost 5% of its value compared to the U.S. dollar. As we have mentioned many times before, since soybean and corn prices are set in dollars but paid in reals, a weaker Brazilian currency means farmers in Brazil put more money in their pocket every time they sell a sack of soybeans or corn.

The Brazilian currency is now trading about 2.4 to the dollar, which is much weaker than what had been expected just a few weeks ago. In July, the forecast was for the currency to hit 2.4 to 1 sometime next year, but it has already hit that point and it is only August.

There are a lot of ramifications from a weaker currency. A weaker currency means more income for Brazilian farmers because it is the exact same thing as a price increase. It also makes their exports more competitive in the international marketplace. On the flip side, it means that imports such as fertilizers and chemicals are more expensive and Brazil imports approximately 70% of its fertilizer needs. In the big picture though, Brazilian farmers like to see a weaker currency as long as it does not unleash rampart inflation.

The weaker currency has compensated for much of the recent price declines in soybeans and corn and Brazilian farmers are now going to see a different price for their crops compared to American farmers. I think this will encourage Brazilian farmers to expand their crop acreage especially for soybeans. Soybeans are cheaper to plant and the crop does not require nearly as much expensive fertilizers such as corn. Soybeans are also higher yielding in Brazil relative to corn and it is the preferred crop of Brazilian farmers.