Oct 15, 2010
Currency Exchange Rate Aids Brazilian Millers Import Wheat
Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.
Farmers in southern Brazil are in the midst of harvesting their 2010 wheat crop and they are expecting the yields and the quality of the grain to be much better than in 2009. Parana is the largest wheat producing state in Brazil and three quarters of the 2010 wheat crop has already been harvested. The state of Parana is expected to produce 3.2 million tons of wheat and all of Brazil is expected to produce a total of 5.4 million tons compared to 5.0 million tons produced in 2009. Heavy rains during the 2009 harvest reduced the quality of the wheat so much so that nearly half of Parana's 2009 wheat crop was considered only feed quality.
As a result of the poor quality of last year's wheat crop, Brazilian wheat imports in 2010 are running 20% above 2009 levels. Brazil needs at least 10 million tons of wheat to meet domestic demand and wheat imports this year could hit 5.3 million tons. In fact, Brazilian millers prefer to import wheat than to purchase their wheat on the domestic market. The primary reason for this preference for imported wheat is the currency exchange rate.
Even though international wheat prices are higher in 2010 compared to 2009, the strengthening of the Brazilian currency has compensated for a significant portion of the price increase. From January to September of 2010, the average price of Brazil's wheat imports was US$ 232 per ton, which is 5.4% higher than the price during the same period in 2009. During this same period the average exchange rate has been1.78 Brazilian reals per U.S. dollar, 15% stronger than in 2009. The Brazilian real is currently trading in the range of 1.65 per U.S. dollar making imported wheat even cheaper for domestic millers. As a result, Brazilian millers prefer to import their wheat than to buy it locally.
An additional advantage of buying imported wheat is the fact that the millers have a longer time to pay for the imports and if the Brazilian currency continues to strengthen during the period between the time when the wheat was purchased and when it needs to be paid for, the wheat becomes even cheaper. If a miller buys his wheat locally, they have thirty days to pay and the exchange rates do not affect the price.
The vast majority of Brazil=s wheat imports come across the border from Argentina, but due to short wheat crop in Argentina in 2009, Brazil imported wheat from Paraguay and Uruguay as well. The cost of transporting the wheat from these three neighboring countries into Brazil is probably no more than it is to move the wheat around domestically. To meet all of domestic needs, Brazil has also purchased about 10% of its imported wheat in 2010 from the U.S. and Canada even though a duty had to be paid because those countries are not members of Mercosul and the cost of transportation is higher compared to buying the wheat from other South American countries.