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October 17, 2018

Forward Selling of Soybeans in Brazil Grinds to a Halt

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

Even though the soybean planting in western Parana s progressed at a very fast pace this growing season, forward contracting of soybeans by farmers in Parana basically came to a halt several weeks ago.

The Department of Rural Economics (Deral) reported that 47% of the soybeans in the state have been planted with the western part of the state the most advanced at 85% planted. Farmers in western Parana started planting on September 11th, which was the first day they were allowed to start.

Currently, farmers in western Parana have forward contracted approximately 15% of their anticipated 2018/19 soybean production, compared to 8% forward contracted last year at this time. But, for the last several weeks though, virtually no forward contracting has taken place due to the uncertainty surrounding the currency exchange rate and freight rates.

Prior to the first round of voting for the Brazilian president on October 7th, the Brazilian currency would strengthen or weaken depending on which candidate was ahead in the polls. As the election approached and Jair Bolsonaro started to lead in the polls, the Brazilian currency started to strengthen.

No candidate received 50% of the vote in the first round and a runoff election will be held on October 28th. In the runoff election will be between Bolsonaro, who is the right wing candidate, and Haddad, who is the left wing candidate. Recent polls indicate Bolsonaro has a commanding lead. Whoever wins the runoff on October 28th will assume the presidency on January 1, 2019.

As a result, the Brazilian currency continues to strengthen and it is currently trading at approximately 3.72 to the dollar. At one point prior to the election, it traded as weak as 4.2 to the dollar. With such volatility in the currency market, everyone is afraid to sign a contract and be exposed to potential currency swings.

Another problem for both the farmers and the grain companies are the higher freight rates which took effect two months ago. The grain companies want the farmers to be responsible for the higher rates, but the farmers are hoping that the rates will be declared unconstitutional before they start to harvest their soybeans. Currently, the two sides are at a standoff and the result is forward contracting has come to a halt.

The price of the contracts signed thus far for the 2018/19 soybean crop in Parana have averaged about R$ 80.00 per sack (approximately $ 9.10 per bushel using an exchange rate of 4 reals to the dollar). With the recently weaker currency, the average price this week is approximately R$ 77.00 per sack (approximately $9.40 per bushel using an exchange rate of 3.72 reals to the dollar).