February 15, 2011

Strong Currency Worries Brazilian Producers

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

At a time of high commodity prices, farmers in Brazil continue to be worried about the strength of the Brazilian currency. Any time there are currency fluctuations, some sectors of the economy will benefit and some sectors of the economy will be harmed. In the case of Brazil, the strong Brazilian currency compared to the U.S. dollar has been harmful for Brazilian agricultural exports, but it has been a boon for the tourism industry.

The Brazilian real has been gaining strength compared to the U.S. dollar for a number of years which has increased the prices for Brazilian agricultural exports while reducing the prices for imports. Wheat is a perfect example of how currency fluctuations can disrupt the domestic market.

Farmers in southern Brazil recently harvested a good wheat crop, but millers in southern Brazil prefer to import wheat from Argentina instead of buying wheat from local producers even though there are ample supplies of Brazilian wheat and Brazilian wheat is relatively cheap. The millers say they are importing wheat because of the low quality of Brazilian wheat, but producers think there are ulterior motives at work.

The strong Brazilian currency compared to the Argentine peso makes wheat from Argentina cheaper than Brazilian wheat. Due to the lack of demand from Brazilian millers, the domestic prices for wheat in Rio Grande do Sul are currently below the minimum price set by the government. Farmers do not want to sell their wheat at below the minimum price so they are demanding the government step up their purchases of wheat at the guaranteed minimum price.

Even though the level of exports for such commodities such as soybeans, corn, cotton, and meat are up, the total receipts for the exports are being held down by the strong currency. All of these products are sold in dollars, but when the dollars are converted to the local currency, the amount of money the farmers put in their pocket is reduced as the currency gets stronger.

In contrast, the strong currency is making it cheaper for Brazilian to travel to other countries especially destinations such as Argentina and the United States. Ticket sales to foreign countries increased 30% in 2010 and 2011 is expected to be another good year.