October 7, 2011

Exchange Rate Helps Brazilian Farmers Avoid Lower Soy Prices

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

Brazilian soybean farmers have been mostly insulated from the recent decline in soybean prices due to weakening of the Brazilian currency and as a result, they do not see the same price for soybeans as do American farmers.

Since the end of August, soybean prices on the Chicago Board of Trade have fallen approximately 20%, but according to the Center for Advanced Studies of Applied Economics at the University of Sao Paulo (Cepea), the price of soybeans at the Port of Paranagua declined only 7% during the same period.

The reason for the difference is the exchange rate between the U.S. dollar and the Brazilian real. Late in the summer, the real was trading at approximately 1.55 per U.S. dollar. Currently, it is trading at approximately 1.8 per U.S. dollar. Several weeks ago it was trading at nearly 2 reals per dollar. Since soybean prices are determined in dollars but paid in the local currency, the weaker the local currency, the more money a farmer puts in his pocket for each sack of soybeans he sells.

On August 31 a sack of soybeans was selling for R$ 51 at the Port of Paranagua and as of October 5, it was selling for R$ 48. While commodity prices in Brazil have declined slightly over the last few weeks, these are still extremely good prices for Brazilian farmers and many farmers forward contracted their anticipated 2011/12 soybean production for near record prices.

Brazilian farmers have also lucky in the sense that they purchased most of their fertilizers prior to the weakening of the currency. Since most fertilizers are imported in Brazil, the weaker currency has caused fertilizer prices to spike as much as 20% in Brazil over the last several weeks. The farmers will have to pay the higher fertilizer prices when they purchase their fertilizer needs for the safrinha corn crop which will be planted in January or February. They have not been as aggressive in their chemical purchases and they are expecting to eventually pay about 10% more for their chemical needs (herbicides, fungicides, insecticides).

Where the currency exchange rate goes in the future is uncertain. Brazilian farmers would like to see it weaken a little further to the range of 2 to 1 in order to make their products more competitive in the world markets.