Mar 21, 2017

Brazil's Long Economic Recession may be Ending

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

Brazil may be slowly emerging from its worst recession since records began. After 24 months of negative growth, there are some signs that the recession may now be ending. Brazil's inflation rate has stabilized and interest rates are falling faster than expected. Both of these could speed up the recovery by increasing consumer spending and investments. Employment is starting to pick up and the Brazilian GDP is expected to increase 0.7% in 2017. Even with these hopeful signs, there is a long way to go for Brazil to gain back what it has lost over the last two years.

According to the Brazilian Census Bureau (IBGE), the Gross Domestic Product of Brazil (GDP) declined 3.6% in 2016 with all sectors of the economy declining. This is the first time since 1996 that all sectors declined during the same year. The agricultural sector declined 6.6% in 2016, the industrial sector declined 3.8%, and the service sector declined 2.7%. In December of 2016, the Brazilian economy was 8% smaller than in December of 2014, marking the worst recession since records began.

During the two year slump, unemployment increased 76% and there are now 12.9 million Brazilians looking for work. Most people believe the official unemployment rate of 12.8% undercounts the actual number of Brazilian out of work. On the positive side, there have been reports over the past few months that some of those jobs are now starting to return.

This two-year recession has been the result of a number of factors including: a slump in commodity prices, slower demand for commodities from China, internal political turmoil involving top politicians and some of the country's largest companies, and over spending on the World Cup and the Rio Olympics.

Many of Brazil's main exports such as oil, soybeans, and metals were in great demand several years ago which helped to fill the country's coffers. Brazil at one point was viewed by many investors as having one of the world's best growth potentials. Brazil also seemed to "be on a roll" when they secured the two biggest sporting events in the world – the World Cup and the summer Olympics.

As we all know, commodities are cyclical and virtually all of Brazil's main commodity products turned down at the same time. Iron ore, which is the number one Brazilian export, declined due to lower demand from China. Oil prices slumped worldwide. Grain prices, which were at near historic highs several years ago, declined for four straight years. The combination of slumping commodity prices, overspending on sporting events, and widespread corruption forced the federal government to slash spending on social programs, pensions, infrastructure projects, etc., making the recession even worse.

During 2016, the agricultural sector was the worst performer in Brazil according to IBGE. The agricultural sector declined 6.6% in 2016 compared to a decline of 3.8% in the industrial sector and a decline of 2.7% in the service sector. The agricultural sector was impacted by adverse weather in 2016 in the principal production areas for soybeans, corn, and rice. After three quarters of negative growth in 2016, the agricultural sector actually started to turn around in the fourth quarter posting a growth of 1%. That hopeful sign is expected to continue in 2017 when Brazilian farmers harvest record large soybean and corn crops.

According to the Agricultural Policy Secretary for the Brazilian Ministry of Agriculture, the GDP of the Brazilian agricultural sector is projected to be R$ 548 billion in 2017 or 3.2% more than 2016. Higher grain production and increased fruit and food production, are contributing to the increase. In 2017, the overall revenues from Brazil's main grain crops are expected to increase 6.3% while livestock revenues are expected to decline 2.5%.

The best preforming grain crops in 2017 are expected to be corn and soybeans while the best livestock products are expected to be hogs, milk, and eggs. Corn is expected to lead the way in 2017 with a 33.6% increase in revenue, dry beans up 38%, grapes up 30%, peanuts up 25%, tobacco up 22.6%, rice up 17.7%, cotton up 12.6%, soybeans up 7%, and bananas up 4.8%. Lower revenues are expected for onions down 53.6%, tomatoes down 31.9%, potatoes down 28.5%, wheat down 27.1%, coffee down 10.6%, and oranges down 7.3%. These estimates may be altered by the scandal that broke last Thursday implicating Brazilian companies for selling tainted meat.

The three states with the highest agricultural GDP in 2017 are expected to be Mato Grosso with R$ 78.5 billion, Sao Paulo with R$ 74.2 billion, and Parana with R$ 70.7 billion.

The improved outlook for the economy is probably why the Brazilian currency has not weakened compared to the dollar. A year ago the currency was approximately 3.7 to the dollar and today it is hovering around 3.1 to the dollar. With interest rates in the United States increasing and interest rates in Brazil declining, I would have thought that the Brazilian currency would be getting weaker, but that has not been the case, at least not for the time being. The market seems to be satisfied that the Brazilian government has taken adequate measures which will allow the economy to resume growth.

The currency is really important for Brazilian farmers. Generally a weaker currency means improved domestic prices, so farmers would like to see the Brazilian real weaken.