South America Calling

It's Been Real

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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Brazil's real fell to its lowest close in four months last week as concerns about trade policy changes rippled through markets. A cheaper currency along with favorable planting weather is potentially bearish for row crop prices here in the U.S., but there is plenty of growing season still ahead (Source: DTN ProphetX).

In early March 2016, Brazil's real started trending higher as the case for the impeachment of Brazil's President Dilma Rousseff was building. Currencies don't normally go higher in scandalous situations, but in this case, investors saw her successor, Michel Temer, as a pro-business alternative who would help revive Brazil's economy.

To say that most analysts (including myself) were skeptical of the real's rally would be an understatement. The International Monetary Fund estimated Brazil's GDP would contract 3.8% in 2016 and, with the scandal unfolding, it was hard to imagine what would keep buyers' attention for more than a month.

But the spot price of Brazil's real, which started the year at $0.2490, would not stop climbing until it hit $0.3227 on Oct. 26 -- a 30% gain in 10 months. The combination of Brazil's lower grain supplies and rising real were important bullish factors for U.S. row crop prices in 2016 and helped U.S. exports jump out to a good start this fall. So far in 2016-17, U.S. corn exports are up 82% from a year ago, while soybean exports are up 20% from a year ago.

The brisk pace of U.S. grain exports should continue at least until the end of 2016 and may even pick up as some may want to get their purchases in before President-elect Donald Trump takes office. However, investors are already showing concerns about the changes a Trump administration may bring and last week, Brazil's real fell over 5% to its lowest close in four months. The rally of 2016 appears to be over for Brazil's currency.

Fortunately, for U.S. corn and soybean producers, tight supplies in Brazil continue to favor more U.S. exports for now, but Brazil's next corn and soybean crops are being planted as this is being written. As DTN Senior Ag Meteorologist Bryce Anderson reportedon Nov. 7 in "Soil Moisture Spurs Brazil Planting," soybean planting is off to a strong start and is past the half-way mark. (See…)

According to USDA's WASDE report of Nov. 9, if all goes well, Brazil is expected to produce 3.29 billion bushels (83.50 million metric tons) of corn and 3.75 bb (102.0 mmt) of soybeans in early 2017. In the case of soybeans, even if Brazil's record harvest comes through, USDA only expects Brazil to show 129 million bushels of ending soybean stocks by the end of January 2018. In other words, soybean supplies don't have much margin and any significant weather problem in Brazil, if one arises, will be quickly bullish for U.S. prices.

So once again, the outlook for row crop prices comes down to weather with one new twist in 2017. Trump's promises to get tough on trade and specifically on China raises new bearish threats of possible retaliation. We cannot yet say what specific changes are coming, but we can say that Brazil's real has already started to discount the price of Brazil's next crops -- a potentially bearish scenario for U.S. producers.

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