July 9, 2024

 

Brazil's currency decline shields farmers from soybean price drop

 
 


A recent selloff in Brazil's currency is providing a cushion for farmers in the world's top soybean exporter against this year's price decline, giving them a competitive edge over their US counterparts, Bloomberg reported.

 

The Brazilian real has lost 11% against the US dollar this year due to concerns about the nation's budget gap. This devaluation translates to higher revenue for soybeans compared to 2023. The weaker real has prompted farmers to increase sales, exacerbating a fall in benchmark prices and reducing revenue for American farmers.

 

As the world's largest crop exporter, Brazil's currency fluctuations significantly impact agricultural markets. A weaker real allows Brazilian farmers to endure lower commodity prices, which are typically denominated in dollars, more effectively than US farmers. This advantage usually encourages exports from Brazil, thereby putting downward pressure on futures contracts in markets like Chicago and New York.

 

An illustration of the real's impact on trading can be seen in the sale of over 4 million metric tons of soybeans by Brazilian farmers in the five days ending July 5. This marked the highest volume for a similar period since October 2020, following the currency's plunge to its weakest level in more than two years against the dollar, according to Victor Martins, a risk manager at brokerage firm Amius Ltd.

 

"This is bad news for US exporters," Martins said. He noted that the currency boost could give Brazilian farmers a competitive advantage extending well into the fourth quarter, thus shortening the period during which US suppliers typically dominate the market.

 

Soybean futures have dropped nearly 13% or $1.68 per bushel this year due to expectations of ample global supplies. However, the decline is reduced to only 1.7% or US$0.19 when prices are converted into reais. In Sorriso, a key production area in Mato Grosso state, cash prices have risen 3% year-to-date.

 

Data compiled by Bloomberg shows that the correlation between soybean prices and the Brazilian real was as high as 59% in June, indicating that the commodity and the Brazilian currency often moved in the same direction.

 

Brazilian producers, who started late, are now capitalising on the weaker currency to accelerate sales for 2025 delivery. SLC Agricola SA, a major farming company that grows soybeans in an area four times the size of New York City, has secured prices for nearly 44% of its next crop, up from less than 28% last year and the highest in at least three seasons, according to a company filing.

 

However, a weaker currency means Brazilian farmers must pay more reais for each dollar's worth of imported crop nutrients and pesticides, which partially offsets the positive impact on revenue. A Green Markets index of fertiliser prices in Brazil recently surged to the highest level in over a year when measured in reais.

 

The real has regained some of its losses in recent days, as the Brazilian government seeks to reassure investors of its commitment to fiscal discipline.

 

-      Bloomberg

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