May 21, 2018

Weaker Brazilian Currency results in Improved Soy Prices

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

The weaker Brazilian currency compared to the U.S. dollar is offering good opportunities for Brazilian farmers to sell their 2017/18 soybeans and to forward contract some of their 2018/19 production as well.

The Brazilian currency closed last Friday at 3.73 per dollar after hitting a high of 3.77. That marked the sixth day in a row of a weaker real (or a higher dollar depending on how you look at it). It also marked the fourth week in a row of a weaker Brazilian currency. During the past four weeks, the Brazilian currency lost approximately 10% of its value compared to the U.S. dollar.

There are a number of reasons why the currency is losing ground including: a stronger U.S. economy, a lack of progress in the Brazilian Congress on spending issues, political uncertainty concerning the presidential elections in October, and maybe a little "contagion" from neighboring Argentina where the peso has collapsed in recent weeks. For whatever the reasons or reasons, most market observers feel it will continue to weaken, at least in the near term.

The combination of a weaker currency and strong demand for soybeans have led to improving prices at Brazilian ports and in the interior as well. Last week ended with prices of R$ 86.00 per sack at the Port of Paranagua (approximately $10.85 per bushel using an exchange rate of 3.6 per dollar) and R$ 85.50 at the Port of Rio Grande (approximately $10.80 per bushel). Brazilian ports are running at full capacity right now, so exporters do not have to bid up the price of soybeans to attract supplies. If they had to bid for soybeans, prices might be even higher.

In the Brazilian interior, soybean prices increased as much as 3% last week. In Sorriso, Mato Grosso they were up 3% to R$ 69.00 per sack (approximately $8.75 per bushel). In areas of Parana, prices were in the range of R$ 80.00 per sack (approximately $10.10 per bushel).

Interior prices improved due to a number of factors including: increased demand from China due to potential trade dispute between China and the U.S., less soybeans available from Argentina due to the severe drought, news that Argentina will actually have to import as much as 3.5 million tons of soybeans, and of course a weaker Brazilian currency.

Brazilian farmers are taking advantage of the improved prices to sell their existing crop at good margins and to start locking in margins on their 2018/19 crop as well. The future looks even brighter if farmers have already purchased their inputs for the 2018/19 crop. Approximately 70% of the fertilizers and most of the agricultural chemicals are imported, so the weaker currency makes these inputs more expensive. Therefore, it would be an advantage for farmers to lock in their input costs as quickly as possible before the currency weakens even more.

It is estimated that farmers in Mato Grosso have already forward contracted 10% of their anticipated 2018/19 soybean production. Mato Grosso is the leading state for bartering in Brazil. Farmers in the state go to the grain companies and commit a portion of their future soybean production in exchange for the inputs needed for the crop. At current prices, farmers in Mato Grosso would need to commit 15% to 20% fewer soybeans compared to last year to secure their inputs.