June 26, 2013

A Weaker Currency is Good News for Brazilian Farmers

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

The Brazilian currency has been losing ground compared to the U.S. dollar in recent weeks depreciating 12% since mid-May. The Brazilian Real closed on Monday at 2.22 per dollar after being stable for many months at approximately 2 Brazilian Reals per U.S. dollar. The causes for the weakness are many and varied, and since I am not an economist, I will leave the explanation for the weakness to others.

The weaker currency though has big implications for Brazilian farmers. Since commodities are priced in dollars but paid in the local currency, the weaker the Brazilian currency becomes, the more money a farmer puts in his pocket for each sack of soybeans he sells. As a result, Brazilian farmers have increased their selling of both old crop and new crop soybeans and corn to take advantage of this favorable exchange rate. If the currency would continue to weaken, it could compensate, at least in part, for potentially lower commodity prices resulting from good growing conditions in the U.S.

Conversely, a weaker Brazilian currency means that imported items such as fertilizers or agricultural chemicals would become more expensive in Brazil. Brazil imports approximately 70% of the fertilizers needed to produce its crops. In central Mato Grosso, inputs priced in dollars may account for as much as 50% of the total cost of production, so a weakened Brazilian Real means their cost are going to increase. Economists are advising farmers to purchase as quickly as possible any inputs that are imported, because the Brazilian currency will probably continue to get weaker.

When there are currency fluctuations, Brazilian farmers and American farmers do not receive the same price for their underlying commodity. In the big picture, when Brazilian farmers make their planting decisions, they must not only consider their cost of production and the international prices for commodities, they must also take into consideration the currency exchange rates, which in some years can be just as important as the actual price of the commodity.

Even though soybean prices at the CBOT have declined during the month of June, for Brazilian farmers who are forward contracting their 2013/14 production, prices have actually risen 2% during the month of June thanks to the currency devaluation. If a farmer in Sorriso in central Mato Grosso forward contracted his soybeans on June 3rd for delivery in March of 2014, he received R$ 43.57 per sack of 60 kilograms. If the same farmer forward contracted the same sack of soybeans last Friday (June 21) for March delivery, he received R$ 44.47, or 2% more than two weeks earlier even though the CBOT price for soybeans declined about 0.50 cents during the same period. So, during the period in which soybean prices declined 4%, Brazilian farmers actually could sell their soybeans for 2% more. That is a good illustration why Brazilian farmers pay close attention the currency exchange rates.

A weaker currency leads to increased exports and generally greater returns for Brazilian farmers, so if the currency continues to weaken, Brazilian farmers may expand their 2013/14 soybean and corn acreage more than what the actual prices for the two commodities would indicate.