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October 26, 2016

Brazilian Currency Strengthening - Not What Farmers Want

Brazilian farmers always closely watch the currency exchange rate between the Brazilian real and the U.S. dollar because often times that is actually more important to their bottom line than the actual prices being paid for their soybeans or corn. Currently, the exchange rate in Brazil is moving in the opposite direction of what they would like to see.

Yesterday, the exchange rate was approximately 3.10 to the dollar, which was the strongest the Brazilian currency has been in 16 months. You could also say the dollar is the weakest it has been compared to the real in 16 months. The last time the currency was this strong was on July 2, 2015 when it traded at 3.096 to the dollar. The real has strengthened (or the dollar has weakened) in value by 4% in October and 21% thus far in 2016.

Why is this important for Brazilian farmers? It is important because a stronger currency impacts the competitiveness of Brazilian exports by making them more expensive. If exports are less competitive, then it pressures the prices paid to producers. Brazilian farmers want to see the Brazilian currency devalue, because that results in more competitive exports and higher domestic prices paid to farmers.

A devaluation of the Brazilian currency is exactly what happened in 2015. The Brazilian currency devalued because of concerns about a deepening recession and the prospect that President Rousseff would be removed from office. In August of 2015, the Brazilian currency traded at 4.20 to the dollar, which resulted in a surge in corn and soybean exports and very good domestic prices in Brazil.

The Brazilian currency is getting stronger for several reasons. The Brazilian Congress is set to vote on a constitutional amendment limiting the growth of public spending for at least a decade. If the amendment passes, it would hold down the deficit and subsequently inflation. The central Bank also announced that there is little room for further interest rate cuts, at least in the near term. The money market likes this because it could signal that the Brazilian economy has bottomed out and it should slowly improve moving forward.

Another reason why the currency is strengthening is because of a one-time event. Brazilian citizens have unto October 31st to declare and repatriate any resources they are holding offshore. They have been granted amnesty from prosecution if they bring the money back into the country and pay 15% income tax and a 15% penalty. This influx of cash is pressuring the dollar lower and strengthening the real.