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DAVID KRUSE

By Staff | Oct 29, 2010

President Lula da Silva was a pleasant surprise, a leftist in rhetoric, but moderate in governing who allowed Brazil to finally achieve some of the potential that always existed. Brazilians are deciding between Dilma Roussett and Jose Serra as to who will succeed Lula as president in a runoff election.

Both once aspired to be members of the Brazilian Tea Party to the extreme left. Neither has Lula’s charisma. Dilma is the more liberal of the two with the Brazilian farm community supporting Serra. All Brazilians are required to vote. Without proof of voting, you can’t get a visa, contract with the government or enjoy a number of other rights and privileges that make voting compulsory.

As 10 percent of Brazilians are functionally illiterate, candidates are identified by number rather than by name. Dilma is still expected to win, but has not polled as strong as many expected. Lula enjoyed near 80 percent support so Dilma’s 47 percent, less than a majority, first round electoral showing was not impressive as his hand-picked successor.

The surprise electoral performance came from a third party candidate, Marina Silva, who had resigned in protest as Lula’s environmental minister who polled 19 percent. Both Dilma and Serra will be courting her Green Party support. Silva opposes development of dams and roads in the Amazon.

While neither Dilma or Serra are expected to dramatically alter the course the country is on, there is always an occasional tilt in policy to populism such as the recent announcement in changes in policy regarding foreign purchases of Brazilian farmland. The new rules attributed to Lula/Dilma are unlikely to be implemented if Serra wins which is why the Brazilian farm community, which has benefited greatly from foreign investment developing farms, favors him.

The new rules are not believed to be constitutional but depending on how they are employed could slow foreign investment into farmland ownership which is their intent.

The Brazilian government became alarmed over reports of huge pending transactions from global funds and even a Chinese State Investment fund for massive tracts of farmland to which they intervened while they could in order to become part of the process.

They were not wrong in their assessment of the pending foreign investments. I have participated in global investment conferences where the funds were doing what they do, preparing massive investments in Brazilian farmland purchases. It takes funds years in order to become comfortable with investing in new sectors and Brazilian farmland had finally been given the green light when global investor ratings services gave Brazil an investment grade rating.

That opened the door to global pension funds who began targeting billions of dollars to invest in Brazilian farmland or Brazilian rainforests which they are extremely sensitive to.

Post election, I believe that foreign investment into Brazilian farmland will resume under restricted terms more likely to impact global pension or state-controlled investment funds than cooperating companies such as Brazil Iowa Farms.

I believe that the total loss of foreign investment would negatively impact farmland asset values and rural economic development which no one there wants to see as a result. As a whole, Brazilian agriculture is still grossly undercapitalized.

The weakness in the U.S. dollar and subsequent strength in the Brazilian Real is causing great concern in Brazil. The strong Real is making it increasingly difficult for Brazilian exporters to compete as well as cheapening imports which puts pressure on domestic Brazilian manufacturers.

The Real has continued to strengthen despite Brazilian central bank intervention. Goldman Sachs computer model puts fair value of the Brazilian Real at 2.65 per U.S. dollar, far above the 1.66 traded recently, making the Real in Goldman Sachs opinion “the most overvalued currency in the world.” It has been the rush of foreign investment into Brazil that has inflated its currency but one could argue that it is magnified by exaggerated weakness in the dollar.

Corn and cotton are essentially domestic markets in Brazil driven by domestic fundamentals that don’t fully correlate with Chicago and New York markets.

The soybean market, however, is global so currency is one reason why China has been such an aggressive buyer of U.S. soybeans despite supply available in Brazil. The cheaper dollar and competitive transportation rate give U.S. soybean exporters the advantage selling to China over Brazil.

Crop prices are so good, the financial incentive exists to expand all crop acreage in Brazil this year.

Cotton is the most profitable crop in Brazil right now taking hectares away from corn and soybeans in Bahia this season. Our company is planting more cotton, more corn and fewer soybeans. Any increased soybean acreage in Brazil is likely to come on weaker, newer land so yield potential is not as great.

Brazil’s government agency CONAB is forecasting soybeans acreage to be up, but production off slightly this year anyway. A strong La Nina is likely to have some negative weather impact on Brazilian crop production this year.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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