May 19, 2017

Weaker Brazilian Currency could Encourage Soybean Sales

On Wednesday evening it was revealed by O Globo that the Brazilian President was caught on tape agreeing to pay "hush money" to silence a witness in the "Car Wash" corruption scandal that has already entrapped dozens of politicians and corporate executives. The president's approval rating was already at historic lows and as soon as the news broke, there were immediate calls for him to resign or be impeached.

The markets in Brazil reacted violently to the news on fear that his reform legislative agenda in the Brazilian Congress would now be jeopardized and that it would be harder for the country to pull out of its worst recession in decades.

The situation in Brazil is very chaotic to say the least. The Bovespa stock exchange in Sao Paulo fell 10% in early trading on Thursday, which triggered circuit breakers that halted trading for the first time since 2008. The dollar soared limit-up to 3.4 reals to the dollar before currency trading was also halted. The Brazilian Central Bank issued US$ 2 billion in currency swaps to try and stabilize the currency. The Brazilian currency ended Thursday at 3.39 to the dollar or up 8.16%. The Bovespa stock exchange ended down 8.79% at 61,597.

The president canceled all his meeting yesterday as he huddled with his ministers as speculation increased concerning his possible resignation or impeachment. The police and military in Brasilia were seen gearing up for what is expected to be large demonstrations against the administration. The president went on national television Thursday evening stating his determination to remain in office.

As far as Brazilian farmers are concerned, the sudden drop in the Brazilian currency will result in a price hike for Brazilian farmers and it is expected to encourage farmers to increase sales of their soybeans. Since grain prices are set in dollars, but paid in the local currency, any time the local currency weakens compared to the dollar, farmers put more money in their pocket whenever they sell their grain.

For example, let's say the price of soybeans is $10.00 per bushel and the exchange rate is 3.0 Brazilian reals per dollar. For every bushel sold, a Brazilian farmer would put R$ 30 in his pocket. If the price of soybeans stayed at $10.00 per bushel, but the exchange rate climbed to 3.5 reals per dollar. Then he would put R$ 35 in his pocket for the same bushel of soybeans even though the price of soybeans did not change.

The price hike resulting from the weakening of the Brazilian currency will be tempered somewhat by a drop in the price of soybeans on the Chicago Board of Trade where July soybeans dropped $0.31 per bushel on Thursday. The market fears that Brazilian farmers will rush to sell their soybeans in order to take advantage of the improved prices. That in turn, could spur more Brazilian soybean exports at the expense of U.S. exports, thus the lower soybean prices on the Chicago Board of Trade.

Up until this point, Brazilian farmers have been very slow sellers of their 2016/17 soybean production due to the very low domestic soybean prices. As of May 1st, it was reported that they had sold only about 50% of their soybeans compared to last year when approximately 65% of the 2015/16 had been sold by that date.

Undoubtedly, farmer sales in Brazil will now accelerate due to the weaker currency. Farmers might make some initial sales and then wait to see what will happens to the Brazilian real. They have already waited paitantly to sell their soybeans, so it would not hurt to wait a little longer to see where the currency will settle. Once it looks like the move in the currency is over, Brazilian farmers may be much more aggressive in selling their soybeans.

While a weaker currency is the same as a price hike for Brazilian farmers, there is also a downside to a weaker currency because it makes imports more expensive. Approximately 70% of the fertilizers used in Brazil are imported as well as the majority of agricultural chemicals, so a weaker currency is going to increase the cost of their inputs for the next soybean crop in Brazil.

Brazilian farmers have also been slow purchasers of their needed inputs for the 2017/18 growing season, so now their costs have just increased. While a weaker currency is somewhat of a "double edged sword", farmers would still prefer a weaker currency as opposed to a stronger currency.