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December 5, 2016

In Brazil - Weaker Currency, Political Unrest, Declining Corn Prices

Author: Michael Cordonnier/Soybean & Corn Advisor, Inc.

There are a lot of things going on in Brazil these days including: the Brazilian currency weakened 6% compared to the dollar during the month of November, massive street demonstrations all across Brazil on Sunday calling for an end of political corruption in Brazil, and a precipitous decline in domestic corn prices in Brazil.

The Brazilian currency weakened last week to trade just under 3.5 to the dollar, which is the weakest it has been since the middle of June. The reason for the weakness is a combination of political unrest in Brazil and a stronger U.S. dollar.

There have been new allegation of corruption levied against the Brazilian president and another one of his ministers resigned under pressure last week. The President is in a very weak position and in fact, there were widespread street protests on Sunday in Brazil's major cities calling for his ouster and the ouster of all the corrupt politicians. As a result, it is going to be very difficult for him to pass measures that are needed to stabilize the Brazilian economy.

The public pressure to rid the country of the corrupt political class is not going to end any time soon. President Temer has said he will not run for president in the next election, which means that he is already a lame-duck president. The president has very little support from the Brazilian public and the central government is virtually paralyzed due to all the ongoing corruption investigations.

Another reason for the weakness is the expected move by the Federal Reserve to increase interest rates this month. The Brazilian Central Bank lowered the prime rate in Brazil last week by a quarter point to 13.75%.

While a weaker currency is usually good news for domestic crop prices in Brazil, the situation for corn in Brazil is more complicated. The domestic price of corn in Brazil has been declining in recent weeks due to a lack of demand on the part of the livestock industry that satisfied their immediate needs with imported corn from Argentina, Paraguay, and apparently the United States. There are reports that cooperatives in the state of Parana received six vessels of corn last week from the United States.

The domestic market has ample corn supplies due to the imports with additional supplies coming from grain companies that are emptying out their silos in anticipation of a record large soybean crop that will start to hit the market in early January. Brazil's corn exports are also down as well with November corn exports at 961,000 tons compared to 4.75 million tons in November of 2015.

Brazil's full-season corn crop is progressing well and the early corn harvest should start in January. Additionally, market participants are increasingly confident that the Brazilian farmers will produce a record large safrinha corn crop due to the fact that it will be planted within the ideal planting window next January and February.

All of these factors have helped to pressure domestic corn prices in Brazil. Last week, domestic corn prices declined 1.5% to 3.0% and they are expected to continue moving lower. Domestic corn prices in Brazil are in the range of R$ 25 to R$ 38 per sack or $3.30 to $5.00 per bushel depending on location. Most analysts are expecting the corn price to continue declining until it becomes equivalent to the international corn price, which would be down approximately another 30%.

The bottom line is that the corn crisis we have been talking about in Brazil for the last year is now nearly over. That is very good news for the livestock industry that had to reduce production due to a lack of affordable corn supplies. It may not be good news for the Brazilian farmers who will now be faced with much lower corn prices due to a record large corn crop in the U.S. and a potentially record large corn crop in Brazil as well.