Oct 13, 2009
Brazilian Soy Farmers Very Worried About Strong Brazilian Real
Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.
Soybean farmers in Brazil and the United States do not see the same price for their soybeans due to the currency exchange rate between the Brazilian real and the U.S. dollar. On many days, the exchange rate is more important to Brazilian farmers then the actual change in soybean prices. The reason why it is so important is because the price of their soybeans is determined in dollars at the Chicago Board of Trade, but they are paid in Brazilian reals. So, if the dollar gets weaker and the real gets stronger, they get paid less and less for every sack of soybeans they sell. That is exactly what is happening right now. This is especially important for farmers in Mato Grosso where the cost of production is among the highest in the country.
Farmers in Brazil are watching with dismay the continued strengthening of the Brazilian currency. Since early 2009 it has strengthened approximately 30% compared to the U.S. dollar. For Brazilian soybean farmers, a stronger currency in Brazil has the same affect as reduced soybean prices. For the last five years the real has been gaining strength as compared to the dollar. In 2004 each dollar was worth about 3.3 reals. Today each dollar is worth 1.73 reals. The strong currency of course makes Brazilian exports (soybeans, meal, and soybean oil) more expensive as well and Brazilian farmers are very worried that they are at a competitive disadvantage compared to other soybean exporting countries.
What has been happening with the Brazilian currency over the last five years is exactly opposite of what happened in the 1980s and 1990s. During those go-go years of soybean expansion in Brazil, the prices received by Brazilian farmers kept rising and rising. The reason the prices kept increasing was the fact that the Brazilian currency was devalued over and over. Each time the currency was devalued; Brazilian soybean farmers received a price increase for their soybeans. There are a lot of factors led to the explosive growth of soybean acreage in Brazil during the 1980s and 1990s and one of those factors was a weakening of the Brazilian currency. Unfortunately for Brazilian soybean farmers, the current situation is exactly the opposite and now they are receiving less and less for their product.
The strengthening currency is also making Brazilian farmers more cautious when it comes to forward pricing of their 2009-10 soybean production. Currently, approximately 20% of the expected production has been forward priced when normally about 50% is priced by this time of the year. Farmers are waiting for a better price to sell their crop, but that may be risky because a stronger currency may offset any increase in the soybean price.