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January 7, 2013

Brazil's "Green Gold" Lived up to its Name in 2012

Soybeans in Brazil have often been referred to as "green gold' and true to its name, the largest grain crop in Brazil even outperformed gold in 2012. In Brazilian reals, gold appreciated 15.5% during 2012, while soybeans appreciated more than 60% during the same period, or four times more than gold.

The strong valuation for soybean prices was due to a number of factors including: drought reduced production during the 201/12 growing season in Argentina, Paraguay, and southern Brazil, a severe drought in the U.S. during the 2012 growing season, a stronger U.S. dollar, a weaker Brazilian real, and continued strong demand for soybeans especially from China.

The world relies on soybean production in South America and North America, but back-to-back poor crops sent soybean prices to all-time highs in Brazil in July, August, and September. The higher international prices coupled with a devaluation of the Brazilian real combined to be very good news for Brazilian soybean producers.

The international price of soybeans increased 16% in 2012, but the domestic prices for soybeans in Brazil increased much more. In December of 2011, a 60 kilogram sack of soybeans in the state of Parana sold for an average of R$ 40 per sack, but that increased by more than 60% to R$ 66 per sack in December of 2012.

In December of 2011, the drought in South America had not yet started to negatively impact the soybean production, but soybean prices started to rise as soon as it became apparent that the crop was not going to meet earlier expections. Soybean prices then rose to record highs when the worst drought in fifty years took its toll on U.S. soybean production. On top of that add a stronger U.S. dollar and a weaker Brazilian real and the results were very positive for Brazilian farmers. For several months in mid-2012, soybeans were selling for record high prices in Brazil.

Domestic corn prices in Brazil did not increase as much as soybeans because of a record large safrinha corn crop especially in Mato Grosso. During the same period in which soybean process increased over 60%, domestic corn prices increased 30%. As a result, farmers in southern Brazil reduced their full-season corn acreage in favor of increased soybean production. Farmers in central Brazil also converted some of their pastureland to additional soybean production as well to take advantage of the record prices.

Since soybeans are priced in dollars but paid in Brazilian reals, the exchange rate between the two currencies continued to play an important role in domestic soybean prices. The exchange rate between the two currencies stood at approximately 1.5 Brazilian reals per U.S. dollar in 2011, but by December of 2012, it had weakened to 2.05 reals per dollar. Any time the Brazilian currency weakens compared to the U.S. dollar, Brazilian farmers put more money in their pocket every time they sell a sack of soybeans. The combination of record high prices and a weakened currency made for a very good year for Brazil's "green gold."