South America Calling

Brazil Debt Rated Junk; Grain Industry Benefits For Now

The Standard & Poor's rating agency downgraded Brazilian sovereign debt to junk status late Wednesday, deepening the country's economic and political malaise.

The Brazilian real slumped 2% against the dollar on the news, continuing the dramatic slide that has made Brazilian grain so competitive on international markets over the past year.

But, beyond the immediate forex impact, the move could bring closer political and economic changes that will affect the marketing of Brazil's soy and corn crops over the next year.

Brazil's economy is in a mess. GDP will contract 2.4% in 2015 and is expected to shrink 0.5% in 2016, according to a central bank market survey. Meanwhile, inflation is raging at 9.5% per year, forcing the government to hike the base interest rate to 14.25% per annum, which in turn is stifling investment.

But it is the poor state of the government's accounts that was the trigger for the downgrade. Brazil's government is a profligate spender, but a shrinking economy is causing revenues to drop, necessitating drastic cuts. Unfortunately, President Dilma Rousseff's government has lacked 'the ability and willingness', in the words of Standard & Poor's, to make the cuts and push them through Congress.

It is this inability to make tough economic choices, which highlight her previous errors, and open rebellion in Congress -- where coalition members have long resented her autocratic style and others feel she hasn't done enough to protect them from a corruption scandal that has enveloped state oil giant Petrobras -- that points to massive instability ahead.

This morning, Rousseff held a crisis cabinet meeting to discuss how to push through necessary cuts, but there are signs that she is becoming politically very isolated with allies beginning to distance themselves from her.

The situation has led to renewed chatter about replacing Rousseff, after only nine months of a new term, despite there being no real legal grounds for impeachment.

Meanwhile, the economy falls deeper into the doldrums and the Brazilian real continues to slide.

For Brazilian grain producers, in the short term, the sliding real allows Brazil to be aggressive on the export market. That can currently be seen in the corn market, where Brazil looks on course to export a record 27 million metric tons (mmt).

With the 2014-15 soybean crop already 87% sold, according to Safras e Mercado, a local consultancy, Brazil will not export much more of the oilseed in 2015. But it can be aggressive in the sale of its 2015-16 crop.

According to Safras e Mercado, Brazilian farmers had committed 30% of their 2015-16 soybean crop up to Sept. 1, much higher than the 9% sold at the same stage last year and a little higher than the average level of 25%.

However, there are other factors.

Farmers in parts of the Cerrado are reporting difficulty in accessing credit. These problems will only intensify if the crisis deepens and extends deep into next year, possibly forcing farmers to sell to raise cash.

A further deterioration of the Brazilian real is obviously generally good for farmers, expanding margins, but a major meltdown may prompt farmers to retain soybeans along the same lines as what currently occurs in Argentina. Equally, a resolution to the political crisis, however distant that may seem at the moment, could lead to a rebound in the Brazilian real and a change in farmer sale strategy.

Alastair Stewart can be reached at



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