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July 14, 2017

Volatile Grain Prices in Brazil - Political and Weather Uncertainties

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

For Brazilian farmers, the combination of the currency exchange rate and the price of soybeans and corn has resulted in a price "roller coaster" in recent weeks. Often times in Brazil, the exchange rate alone is more important for domestic grain prices than the price of the underlying commodity. If both the exchange rate and commodity prices are volatile, it can result in sudden and wide swings in domestic grain prices.

That has been the case in recent weeks as events in Brazil and the United States have resulted in wide price swings in Brazil. Since commodities are priced in dollars, but paid in Brazilian reals, a weaker Brazilian currency is generally good for Brazilian farmers because they put more money in the pocket for every sack of soybeans they sell. Conversely, a stronger currency is generally bad for Brazilian farmers because they would put less money in their pocket for every sack of soybeans they sell.

Two recent events in Brazil have resulted in a strengthening of the Brazilian currency. Earlier this week, the Brazilian Congress passes long awaited worker and pension reforms designed to rein in spending and hold down the deficit. That move along resulted in a strengthening of the Brazilian currency to the strongest level in over a month.

A second and important event occurred on Wednesday when the former president of Brazil, Luiz Inacio Lula de Silva, was found guilty of corruption and sentenced to nearly 10 years in prison. If his conviction is upheld upon appeal, he will not be eligible to run for the presidency again in 2018. He was planning on running again because the Brazilian constitution allows for a president to serve more than two terms if he/she sits out one term. Even if he wins his appeal, his troubles are not over because he is accused in four other corruption schemes.

The market had been concerned that if Lula resumed the presidency, he would attempt to undo the recent reforms thus leading to higher inflation and more deficits. If Lula is deemed ineligible to run again, then the reforms will likely remain in place and result in an even stronger currency. A month ago the Brazilian currency was trading at slightly more than 3.3 to the dollar and it is now trading at 3.2 to the dollar.

There has been additional price volatility in recent weeks due to adverse weather in the U.S. The combination of higher commodity prices and a weaker currency over the last several weeks was double good news for Brazilian farmers. Now, it may go just the other way. Soybean prices have weakened over the last few days due to rainfall in parts of the Corn Belt and now the Brazilian currency is getting stronger - double bad news for Brazilian farmers.

The entire political situation in Brazil is very delicate. What happens going forward is uncertain. President Temer is himself under investigation for corruption and he may be removed from office like his predecessor President Rousseff. Adding to the price uncertainly is the weather in the U.S. and all this is coming at a time when Brazilian farmers must finalize their plans for the next growing season. Farmers in southern Brazil will start planting their full-season corn in August and in central Brazil they will start planting soybeans on September 15th.