Oct 12, 2010
A Strong Brazilian Currency and a Weak Dollar Worry Brazilian Farmers
Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.
Farmers in Brazil not only pay close attention to the soybean price, they also closely monitor the value of the Brazilian currency compared to the U.S. dollar. They like what they see as far as the prices are concerned, but they do not like what is happening to the exchange rates.
The Brazilian currency continues to strengthen compared to the dollar and every time the dollar weakens, Brazilian soybean farmers put less money in their pocket for every sack of soybeans they sell. Since approximately 70% of Brazil's soybeans are negotiated in dollars and eventually enter the export market, the domestic price of soybeans in Brazil is directly tied to the value of the U.S. dollar. A stronger Brazilian real has some advantages in that it lowers the cost of producing soybeans since much of the chemicals and fertilizers used to grow soybeans are imported. The down side of a strong currency is that it reduces the margins for Brazilian producers and it reduces the competitiveness of Brazilian exports. In recent months, it is estimated that half of the soybean price increase has been compromised by the strengthening of the Brazilian currency.
According to studies released by Brazilian cooperatives, if the U.S. dollar devalues 10%, it reduces the cost of producing soybeans in Brazil by 5.3% and it reduces the price of soybeans in Brazil by 9.1%. In historic terms, a "breakeven point" for Brazilian soybean producers as far as the exchange rate is concerned, would be about 2.21Brazilian reals per U.S. dollar. Currently the exchange rate is 1.66 Brazilian reals per dollar.