December 18, 2014

Russia's Currency Woes could impact the Brazilian Real

The financial crisis engulfing Russia in recent days is having an impact in Brazil as well. The Russian currency has lost 53% of its value in 2014 and that is leading to weakness in other currencies in emerging economies such as Brazil.

In spite of the central Bank's efforts to support the currency, the Brazilian currency traded as low as 2.76 to the dollar on Wednesday which is the first time it has traded more than 2.7 to the dollar since March of 2005.

Russia increased interest rates in an attempt to support the currency and interest rates in Brazil are expected to increase as well. Estimates are that the prime rate in Brazil could reach nearly 13% by the end of next year, if not sooner.

A drop in the value of the Brazilian currency is a short term benefit for Brazilian farmers since corn and soybean prices are set in dollars but paid in the local currency. As a result of the weaker currency, domestic prices for commodities continue to increase in Brazil.

The benefits of a weaker currency may be short lived in Brazil. Farmers will start purchasing inputs for the 2015/16 crops as soon as the harvest of the 2014/15 crops is complete and the weaker currency will purchase fewer tons of imported fertilizers or chemicals. Interest rates are already high in Brazil, and if they climb even higher, that would add to the cost of production loans for Brazilian farmers.