Q32020, Part 3

The Connection between Brazilian Currency and Global Ag Acreage

In mid-April, the market was signaling to U.S. corn farmers to forgo planting so many acres. Among alternatives, the cotton market was sending as strong of a signal as corn to reduce plantings. Although lower commodity prices should translate into lower acreage, world agriculture is influenced by several market-distorting policies. The agricultural policies are driven by national security concerns and domestic employment concerns. No country wants to be dependent on another country for basic commodities. The U.S./China trade war illustrates the importance of having a national food strategy in place. Also, world agriculture still employs a massive number of people at the farm and in downstream industries. As a result, sharp declines in agricultural prices do not have the same impact on production that occurs in other industries. In fact, U.S. bringing prevented planting acres back into production and record high soybean prices in Brazil that are encouraging production have world 2020/21 harvested acres for cotton, oilseeds, food crops, and feed grains increasing 14.2 million hectares and production increasing 95.3 MMT. The available supply of crops will allow animal operations and downstream operations to remain open and grow.

During the trade war, China implemented a 30% trade tariff that shifted significant soybean, corn and cotton export volumes to Brazil and Argentina. The U.S./China trade war also resulted in a flight to safety, which in turn sent the U.S. dollar to record highs versus the reais. After Phase One, the currencies stabilized, but COVID-19 sent the world traders toward the dollar and away from the reais. This currency devalued between Brazilian farmers buying crop inputs and selling crops. Because commodities are quoted in U.S. dollars, the resulting price signal to Brazilian farmers in reais is record high prices and profits for two straight years. Eventually, the currency devaluation will stop or reverse, and Brazilian farmers will lose money; but as a rule, once pastureland and forests are converted to crop land, they remain in production even if commodity prices decline. With lower prices the farmer will likely reduce yield improving inputs, but the extra volume will weigh on the world agricultural market prices, which will lower the U.S. farmers’ income. The good news is lower feed costs and available supply will encourage animal operation expansions. Therefore, over time, the supply price impact will lessen as consumption increases.

Figure 1, below: U.S. Continuous May Soybean Future Converted to Brazilian Reais (Reais per Bushel)

Next: Part 4ꟷMacro Inflation