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October 10, 2018

Brazilian Currency Reacts strongly to Election Results

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

The strong showing by Jair Bolsonaro in the first round of voting in Brazil's presidential election resulted in a significant strengthening of the Brazilian currency compared to the U.S. dollar. Bolsonaro finished with 46% of the votes compared to the second place finisher with 29% of the votes. This was a better finish than expected, so as a result, the odds are very high that Jair Bolsonaro will become the next Brazilian president after the second round of voting on October 28th.

The financial markets reacted positively to Sunday's vote. On Monday, the day after the first round of voting, the Brazilian currency strengthened 2% to trade at 3.75 to the dollar. It strengthened even more on Tuesday to close at 3.71 to the dollar.

Since commodities are priced in dollars, but paid in the local currency, a strengthening of the local currency results in lower domestic prices for the commodity, which is exactly what happened on Monday.

At the Port of Paranagua, soybeans last Friday were priced at R$ 95.00 to R$ 95.50 per sack (approximately $10.80 per bushel), but that declined to R$ 91.00 per sack on Monday. In fact, domestic prices had started to decline last week as polls indicated that Bolsonaro would have a strong showing in the election.

Farmer selling also started to decline last week as the Brazilian real started to strengthen. The sediment among farmers is to wait and see what happens with the currency. There was very littler farmer selling on Monday and they can afford to wait because they have already sold approximately 30% of their anticipated 2018/19 soybean production.

Over the last few months, Brazilian farmers took advantage of the strong premiums being offered for Brazilian soybeans to book a significant portion of the soybeans. As long as the trade dispute between the U.S. and China remains unresolved, domestic price of soybeans in Brazil are expected to stay strong. Soybean prices in Brazil may not be record high, but they are certainly very good. At the same time, the soybean prices at the Chicago Board of Trade are at the lowest level in a decade.

Another reason for Brazilian farmers to wait to book further sales is the potential for wet weather in the U.S. to delay the soybean harvest. The U.S. soybean crop is 32% harvested compared to 34% last year and 36% average. The forecast for this week is for more wet weather especially across the western Corn Belt.