Political Turmoil Hangs Over Brazil's Agricultural Markets

04/28/2016 - 10h18

Corruption, conspiracy accusations and an impeachment battle - the turmoil surrounding Brazilian politics has not been far from the minds of agricultural commodity traders over the past few months.

The political and economic crisis has depressed the Brazilian currency, which in turn has also dragged down agricultural commodity prices as the South American country has boosted exports in soyabeans and corn.

Brazil has always been the dominant exporter of sugar and coffee, with the real strongly influencing prices of those commodities. But as the country has risen to be the largest soyabean exporter and a leading seller of corn, as well as the strengthening of the US dollar, the correlation between these markets and the real has also heightened.

With most agricultural raw materials priced in US dollars, the Brazilian real's depreciation boosted the competitiveness of the country's exports. This led to a flood of sugar, coffee and soyabeans from the Latin American country sold into international markets, depressing prices.

"These commodities have been whipsawing around due to the real," says Kona Haque, head of research at ED&F Man.

The latest twist has been a sharp rebound in the real on the back of the impeachment process against Dilma Rousseff, the country's president. This has meant currency-linked selling has somewhat abated.

The real has been in steady decline since 2011 and halved between 2014 and 2015. However, the currency is up more than 12 per cent since the start of the year, trading at about R$3.53 against the dollar, and is one of the best performing currencies this year.

Worried about the negative impact on the country's exports, Brazil's central bank intervened earlier this month in order to prevent the real from appreciating too far.

Agriculture has been the one bright spot for the otherwise struggling economy. "[The central bank] wants to support the export sector. They don't want to kill the goose that lays the egg," says Michael McDougall, at Société Générale in New York.

The desire to keep the real low is hardly surprising. Brazil exported record levels of coffee in 2015. The country accounts for about 40 per cent of the export market for arabica, the higher quality bean, and analysts say that overseas sales have not slowed in the face of this year's real's appreciation.

Continued selling has weighed on prices, but Brazil's coffee sector is now watching the country's robusta crop, known as "conilon".

The growing areas for conilon have been excessively dry, and while the arabica harvest this year is expected to be large at about 40m 60kg bags, according to Carlos Mera, analyst at Rabobank in London, low volumes of robusta production have started to affect the arabica price, which is currently trading just above $1.20 a pound, says Mr Mera.

Brazil boosted soyabean sales on the international markets last year by almost 20 per cent to 54m tonnes in 2015, according to customs data from the International Trade Centre. It sent more than three-quarters of the total to China, widening its lead over the US to the world's largest buyer of the oilseed.

This year, excessive rains in Argentina, a leading soya meal exporter, have pushed prices higher, and the oilseed is up almost 17 per cent since the start of the year, above $10 a bushel.

On the corn markets, Brazil exported a record 29m tonnes of the commodity in 2015, the second largest overseas seller after the US. Less than five years ago, Brazil's corn crop was almost exclusively sold to the domestic animal livestock industry.

But last year's export surge has led to lower domestic supplies, and the government has been forced to reduce the tariff on corn imports. Corn is currently nervously trading at $3.80 a bushel on worries about the dry weather affecting the Brazilian crop.

Sugar shook off the currency shackles last September, and is now more focused on its own supply factors. Firstly, Brazilian mills, strapped of cash with high debts, produced more ethanol than raw sugar from the cane.

The "mix" in Brazil is normally about 45 per cent sugar and 55 per cent ethanol, but last year, about 40.5 per cent of the sugar cane was turned into sugar and the rest into ethanol, says Robin Shaw, analyst at brokers Marex Spectron. "The mix heavily favoured ethanol," meaning there was less sugar in the market, he says.

With Brazil accounting for more than half of the world's exports, this was enough to push the market higher. In addition, the impact of the droughts caused by the El Niño weather phenomenon became clearer in countries including India, Thailand and the Philippines.

The market is up more than 50 per cent from its seven-year low in August, trading at 15.55 cents a pound. Production is expected to fall short of consumption this year for the first time in five years, and although Brazil is expected to have a bumper harvest this year, "the market doesn't go down that far because [sugar] is one of the few markets in deficit", says Ms Haque.

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