September 28, 2011

Weakening Currency Good News for Brazilian Farmers

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

The Brazilian currency has weakened significantly since the beginning of September reversing the trend for the past five years when the real had been strengthening compared to the U.S. dollar. In the last three weeks it has weakened approximately 20%. This weakening is very good news for Brazilian soybean farmers because it is exactly the same as receiving a price increase for their soybeans. Even though soybean prices have fallen over the last several weeks, the currency has weakened at even a faster pace, which is resulting in higher soybean prices for Brazilian farmers.

For Brazilian farmers the currency is just as important as the actual prices paid for their soybeans because soybeans are priced in dollars, but paid in the local currency. Therefore, if the real is weaker compared to the dollar, a farmer puts more money in his pocket every time he sells a sack of soybeans. Farmers have been complaining about the strong currency for years because it makes their products less competitive compared to soybeans from Argentina or the United States. Various farm organizations have stated over the years that in order to stay competitive the exchange rate needed to be approximately 2.0 Brazilian reals per U.S. dollar. It is currently trading at 1.8 per U.S. dollar.

Brazilian farmers have been forward selling their 2011/12 soybean production at a very fast pace in order to capture exceptionally high soybean prices. Last week in Parana, farmers were contracting their soybeans for an average of R$ 45.50 per sack of 60 kilograms, which is R$ 10 more per sack compared to a year ago. In a few instances, soybeans were being contracted for up to R$ 50 per sack, which is a magically number for Brazilian farmers. As a result, it is estimated that 25% of the 2011/12 soybean production in Parana has already been priced, which is an increase of 10% since last month and 5% ahead of last year's pace. Farmers have slowed their forward contracting in recent days in the hope that the currency would weaken even further.

The same thing is happening for corn as well, but corn in Brazil is not as sensitive to currency exchange rates as soybeans because a much smaller percentage of the Brazilian corn crop is exported compared to soybeans. The corn market in Brazil is more of a domestic market, whereas the soybean market is more global in nature.

The exchange rate could eventually influence the acreage mix between soybeans and full-season corn in southern Brazil. If farmers in southern Brazil encounters significant delays in planting their full-season corn due to adverse weather, they will not be hesitant to switch back some of their intended corn acres to soybeans due to the very good soybean price. Farmers in Brazil prefer to grow soybeans and if given the right financial incentives, they will choose soybeans over corn. It's too early to say right now that this will happen because the planting window for corn in southern Brazil is still open until about mid-October.