Dec 16, 2009
Currency Exchange Rate Could Be Key To Profitability In Brazil
Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.
Its not the price of soybeans that worries Brazilian soybean farmers these days, the soybean price is fairly good compared to historical standards, what really worries Brazilian farmers is the strong Brazilian currency. This is especially true in central Brazil where the soybean yields may be good, but the cost of production and the cost of transportation are some of the highest in the country.
The success or failure financially for the 2009-10 Brazilian crop will all depend on the strength of the Brazilian real. According to the ex-minister of Agriculture in Brazil, Roberto Rodrigues, Brazilian farmers planned their 2009-10 crop when the currency was worth 1.9 to 2.0 reais per U.S. dollar, but they are selling their crop with an exchange rate of 1.7 reais per dollar. The strengthening of the Brazilian currency has reduced what the farmers receive for their soybeans, coffee, oranges, and beef.
The currency exchange rate is the over ridding factor that could determine if a farmer in Brazil makes a profit or not in 2010. The exchange rate is very important in central Brazil where transportation cost can be extremely high. It could cost up to US$ 135 to move a ton of soybeans from Sinop, which is located in northern Mato Grosso, to the Port of Paranagua in southern Brazil. If the price of soybeans in Chicago is US$ 10 per bushel, the transportation costs alone (US$ 3.40 per bushel) equates to about one third of the total price of the soybeans.
According to Agencia Rural, a consulting firm in Cuiaba, Mato Grosso, if soybeans in Chicago are US$ 10 per bushel and the exchange rate is 1.70 reais per U.S. dollar and the yield is 52 sacks per hectare (45 bu/ac), a farmer in northern Mato Grosso could loose about R$ 55 per hectare. If the Brazilian currency weakened to a rate of 2.0:1, then the farmers might turn a profit of R$ 288 per hectare. Worse yet would be if the soybean price falls while the currency stays strong. That would be doubly bad for Brazilian farmers. If the exchange rate stayed at 1.7:1 and the price of soybeans fell to US$ 9 per bushel, a farmers in northern Mato Grosso might loose R$ 230 per hectare. If the soybean price fell to US$ 8 per bushel, the losses mount to R$ 406 per hectare.
During the 2008-09 growing season, farmers in Sinop registered a profit of about R$ 400 per hectare on their soybeans. If the soybean price in Chicago held at US$ 10 per bushel, in order to achieve the same level of profitability in 2009-10, the exchange rated would need to be 2.10 reais per U.S. dollar. Soybean farmers in the U.S. use price signals to formulate their marketing plan. It is doubly complicated for soybean farmers in Brazil because they must factor in the exchange rate as well as the soybean price.