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What does the Political Turmoil mean for Brazilian Agriculture?qrcode

Mar. 23, 2016

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Mar. 23, 2016
Brazilian Currency - Uncertainty is never good for business, and one the biggest uncertainties revolves around what might happen to the Brazilian currency. Lately, it has been like a yo-yo, up one day and down the next depending on the daily news. When it looked like Dilma would be ousted, the currency got stronger because the market felt that anybody would be better than her when it came to fixing the economy. A stronger currency though, is bad for Brazilian farmers. When it looked like she might stay in office, the currency got weaker because the market felt her policies are bad for the economy. A weaker currency though, is good for Brazilian farmers.
Last Thursday, Reuters published an article about the potential impact of impeachment on the currency exchange rate. They surveyed 20 economists and strategists from financial institutions in Brazil and abroad. Two thirds of the respondents felt that the president would be impeached and that was before the events of late last week. If Dilma was impeached, the median guess for the exchange rate between the Brazilian real and the U.S. dollar at the end of 2016 was 3.50 with a range of 3.20 to 4.20. If she survived and remained in office, the median guess was 4.25 with a range of 4.00 to 4.50 with three outliers close to 5.00.
Often times, the currency exchange rate has a bigger impact on Brazilian farmer's profit margin than the actual international price of commodities. In 2014, Brazilian farmers planted their soybeans when the exchange rate was approximately 2.7 to the dollar, but they sold their crop when it was trading at 3.2. In 2015, they planted when it was 3.6 and 65% of the farmers in Mato Grosso sold their soybeans when it was trading at 4.0.
While the international prices for soybeans have declined over the last two years, the domestic prices for soybeans in Brazil have increased. So, for two consecutive years, Brazilian farmers have basically "bought low and sold high." There appears to be lower odds of that happening for a third straight year, so Brazilian farmers may not receive artificially inflated grain prices for their 2016/17 grain production.
Where the Brazilian currency goes from here is uncertain, but regardless of who is president, the Brazilian economy has serious underlying structural problems including: increasing inflation, increasing unemployment, reduced consumer spending, weak commodity prices (for grains, soft commodities, minerals, oil, etc.), increasing and unstainable pension obligations, widespread corruption, etc. These underlying structural problems are not going to be resolved any time soon, regardless of who is president.
Brazilian Farm Program - Brazil has an annual farm program called the Harvest Plan that is usually announced in April or May and takes effect in June or July. That program consists mainly of production loans either with subsidized interest rates of 6-8% or nonsubsidized production loans with market interest rates, which today are in the range of 20-25%. No concrete details have been announced concerning the 2016/17 Harvest Plan, but when the plan is announced, I don't think it will be good news for Brazilian farmers.
Last year the government reduced the amount of credit available at the subsidized rate while increasing the amount of credit available at market rates. Many farmers complained that they ended up being worse off with the more expensive credit, even though the total amount of available credit increased. My guess is that the same trend will continue in 2016/17 resulting in tighter credit and more expensive credit. That would not be good news for Brazilian farmers who are facing higher production costs in 2016/17.
For the last few years, the agricultural sector in Brazil has been "an island of prosperity in a sea of economic despair." The current economic situation in Brazil is very chaotic with no resolution in sight. Going forward, there are a lot of potential obstacles facing Brazilian agriculture including: an uncertain currency, reduced government spending, politicians focused on other things, reduced consumer spending, increasing cost of production, and the potential for an El Nino with the possibility of adverse weather in 2016/17. It remains to be seen if the "island of prosperity" remains above water in 2016/17.



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