South America Calling

Brazil's soybean market is wrestling with the volatility caused by the current political crisis.

With the political class rocked to the core by investigations into corruption, President Dilma Rousseff increasingly likely to be impeached and the economy going down a hole, Brazil's situation has made trading grains a minefield.

In the near term, the soybean market response has appeared to be to "sit tight," but the longer-term strategies will soon have to be hatched.

The Brazilian real has gone on a run over the last month, hitting its strongest level since August, amid expectations that the leftist president will be replaced by a more market friendly option. As a result, local prices are down on a month ago, despite the rally in Chicago.

Beans were quoted at 60 Brazilian reals per 60-kilogram bag ($7.47 per bushel) in Sorriso, Mato Grosso, on Tuesday, compared with 62.50 ($7.78 per bushel) a month before.

With approximately 60% of the crop already committed as the main producing states of Mato Grosso and Parana reach the end of harvesting, now is a time for filling contracts rather than selling large lots.

But if the real maintains its rally or continues to strengthen, Brazil's competitive advantage in international soy markets could diminish and the recent charge in Brazilian exports could subside. Brazil will export 55.3 million metric tons (mmt) of soybeans in 2016, up 1 mmt on last year, according to Abiove, the Brazilian soy industry association.

With the change in outlook in Brazil, it is possible that the U.S. will export more than forecast, noted Natalia Orlovicin, market intelligence coordinator at INTL FCStone in Brazil.

The local market is calmed, not least because of concerns about repeats of the roadblocks seen in Mato Grosso and Rio Grande do Sul last week in support of calls to impeach President Rousseff.

Of course, the situation remains very unstable.

The trigger for the real's rally was the idea that President Rousseff would be forced to step down in the wake of developments in a corruption investigation, which is targeting her close allies. Judging the public mood has turned against her, it seems likely her coalition allies will leave the government, making it almost impossible to administrate.

It now appears more likely that the process to impeach Rousseff will gain the necessary support in Congress, especially as more incendiary allegations of corruption may be on their way.

But this is far from a done deal.

While the government is in collapse amid scandal, the basis on which the president is being impeached rests squarely on fiscal improbity. The problem here is that everyone cooks the books and, furthermore, Congress approved the government's accounts.

So, unless more allegations are added, there is a possibility that while a majority of the general population and an overwhelming majority of the business community support impeachment, the Supreme Court, or possibly the Senate, could reasonably point out that a bit of creative accountancy isn't enough to sack an elected president.

Even if Rousseff steps down and a more market-friendly administration is touted, the succession process promises to be bumpy.

Meanwhile, there is the question of how much the Central Bank wants to guide the exchange rate. It has indicated that it doesn't want the real to strengthen beyond $1 = R$3.60, which caused the currency to jump from $1 = R$3.58 to R$3.65 in early trade Wednesday.

With Chicago futures closely linked to events here, this will likely increase volatility in international soybean prices over the next couple of months.

(ES/AG)

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