March 26, 2020

Brazilians Advised to Sell their Soy before Potential Stronger Real

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

Brazilian farmers are being advised by market analysts to consider forward contracting as much of their 2020/21 soybean production as they feel comfortable. Currently, domestic soybean prices in Brazil are at record levels due mainly to the rapid devaluation of the Brazilian currency compared to the U.S. dollar. If the Brazilian real strengthens (or you could say if the dollar weakens) domestic soybean prices in Brazil would decline. Therefore, analysts are advising their farmer clients to take advantage of the current high prices and sell as much as they can.

A market analysts from the consulting firm T&F Consultoria Agroeconomica estimated that approximately 35% of the record high soybean prices in Brazil is due to the devalued Brazilian currency. The Brazilian currency devalued by more than 15% just since the first of the year. At its weakest point, the Brazilian real was trading at approximately 5.2 reals per dollar. It is currently trading at approximately 5.0 reals per dollar.

Since soybeans are priced in dollars but paid in the local currency, the weaker the local currency, the higher the domestic price for grain. The Brazilian Central Bank surveyed 100 analysts concerning the potential value of the Brazilian real later this year. The average estimate was that the real would trade in the range of 4.20 to 4.35 to the dollar later this year. If verified, that would represent a strengthening of approximately 19%.

For example, the price of soybeans last week in the state of Rio Grande do Sul was in the range of R$ 92.00 per sack in the interior and R$ 100.00 per sack at the Port of Rio Grande. This represents a profit margin for farmers of about 30%. If the Brazilian real would strengthen by 19%, the price in the interior for delivery in May of 2021 would be closer to R$ 79.00 per sack.

The story is similar all across Brazil, so that is why market analysts are advising the farmer clients to forward contract as much of their 2020/21 soybean production as possible as insurance against a stronger Brazilian currency.