I was minding my own business Wednesday evening, getting ready to watch LeBron James thrash the Celtics (which he later did) when I glanced at the quote screen on my laptop and literally saw the daily bar on the chart for the Brazilian real double in size in a matter of seconds, heading due south. Knowing this was bearish for U.S. corn and soybean prices, I quickly scoured the news and made some contacts, looking for an explanation.
Recent news items showed that Brazil was in the process of trying to pass pension reform that was expected to help the economy. The looming vote was close and my first guess was that maybe the reform did not pass. There had also been articles that expected Brazil's central bank to lower interest rates in 2017 -- a move that would be seen as bearish for the country's currency, the real. However, it did not seem likely the central bank would cut rates so late in the day.
As it turned out, neither of those factors were responsible for the real's sharp drop. A reporter on Twitter tipped me off to fresh news that concerned President Michel Temer and Brazil's ongoing corruption scandal.
As Bloomberg News later reported at https://bloom.bg/…, one of Brazil's largest newspapers reported that two executives from meatpacking giant JBS SA gave the Supreme Court tapes which allegedly recorded Temer authorizing bribes being paid to Eduardo Cunha, a former speaker of the lower house involved in last year's impeachment of then-President Dilma Rousseff.
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If you are starting to feel a little dizzy at this point, it is understandable as it was one year ago at this time that we were talking about the Brazilian real rising because investors thought the impeachment of Rousseff would lead to a more pro-business government under Temer. JBS SA also made headlines in March of this year when it was discovered that the company was involved in shipping unsafe meat with the cooperation of Brazilian inspectors.
Wednesday evening's news was the unexpected offspring of both stories, now involving Temer and laid at the doorstep of the Supreme Court for its ruling. Investors in Brazil were understandably shocked by Wednesday's news, sending Brazil's stock market, the Bovespa, down 8.6% and the real down 7% on Thursday morning at the time of writing this blog.
For importers of soybeans, a 7% drop in the value of Brazil's currency means that Brazil's soybean prices just got 7% cheaper overnight and that puts bearish pressure on U.S. soybean prices to compete for export business. Before the real's drop, U.S. soybean exports had been doing well and total soybean shipments were up 18% in 2016-17 from a year ago.
The key question now is: How long will it take for investor confidence to return to Brazil?
Given the long, tangled web of the corruption investigation still unfolding in Brazil, a quick return to stable government does not seem likely, meaning that the real, which just broke to its lowest prices in 2017, is likely to stay lower.
For U.S. soybean prices already weighed down by the anticipation of increased ending supplies in 2017-18, this latest news out of Brazil heaps more bearish weight on U.S. soybean prices and gives investors one more reason to be skittish in 2017.
Todd Hultman can be reached at Todd.Hultman@dtn.com
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