Aug 29, 2016

Decision on Impeachment of Brazilian President set for this Week

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

The impeachment trial of the Brazilian President Dilma Rousseff started last Thursday in the Brazilian Congress with a final vote expected within a few days. The "unofficial head count" indicates that 49 senators will vote in favor of impeachment and 19 will vote against impeachment with more than a dozen senators still undecided. Fifty four votes will be needed to remove the president and install Vice President Michel Temer as Brazil's new president.

There is a high likelihood that President Rousseff will be removed from office so let's take a look at how an impeachment might impact Brazilian agriculture. In fact, I think it has already had a big impact. Earlier in 2016 when the possibility of an impeachment became more apparent, the Brazilian currency started to strengthen and it is now the strongest it has been in over a year. The market had the opinion that the economic policies of Vice President Michel Temer would be better for the struggling Brazilian economy than those of President Rousseff.

A stronger currency makes Brazilian exports less competitive and results in generally lower domestic commodity prices. The domestic prices of the 2016/17 soybean crop in Brazil has declined to about the breakeven point. The domestic corn price in Brazil is much better than breakeven, but corn is a separate issue and it is being driven by the very tight domestic corn supply.

A stronger currency is not all bad news for farmers because a stronger currency makes imports such as fertilizers and agricultural chemicals cheaper. Despite efforts in recent years to increase the domestic production of fertilizers, Brazil still imports approximately 70% of its needed fertilizers and the majority of its agricultural chemicals.

The overall domestic economic situation in Brazil continues to be a big concern for Brazilian farmers. Credit is very tight and interest rates are very high. The prime rate in Brazil is 14.5% and farmers are heavily dependent on subsidized lower-interest rate production loans from the government for their operating funds. The government subsidized loans in Brazil carry an interest rate of 8-12% compared to last growing season when they were generally 6-8%. If a farmers is forced to go to a commercial bank for an operating loan, the interest rate will probably be over 20%.

The Brazilian economy continues to shrink by 3-4% per year which means that domestic demand for agricultural products remains weak. Inflation is approximately 9% which makes everything more expensive and international commodity prices continue to be pressured by large supplies of corn, soybeans, and wheat. All of these factors are contributing to an overall gloomy picture for Brazilian agriculture.

On the positive side, a Temer administration is expected to be much friendlier toward agriculture than Dilma's Workers Party. In fact, the new Minister of Agriculture, Blairo Maggi, is one of the largest soybean farmers in Brazil, and he recently introduced a package of 60 measures that he said would reduce costs and bureaucracy in the agricultural sector.