Part 4 — Our currency disadvantage
Lula da Silva was elected president of Brazil and served from January 2003 through 2010. Da Silva was a leftist who ran three times for president before getting elected. There were many in Brazil who thought that he was a communist and worse, and the markets there responded very defensively to the prospect of his election. On my first trip to Brazil in 2001 the real was trading about 2 to 1. Given the fear over a leftist winning the election, the Brazilian currency, the real, subsequently weakened to 3 to 1. We thought that was great as our U.S. dollar had more buying power for our investment at that time in Brazil. We got more real for the buck.
After Lula was elected and he implemented his policies, they found out that he was not some crazy wild-eyed commie but more your garden variety socialist that accepted democracy like in Canada or Denmark. He did a good job of helping the poor people without oversoaking the rich. Brazil saw strong growth during this period rising in global stature. He was a good capitalist who was arrested in 2018 for money laundering and corruption. The real came down off the 2003 bubble and strengthened to 1.6 to 1 in 2008 and again in 2011. This strength in the real, almost doubling in value against the dollar, facilitated the purchase by JBS of Swift & Company in 2007 and Pilgrim’s Pride in 2009.
It was an opportunity to move money to the U.S. while the real had purchasing power. From late 2011, starting near 1.6 to 1, the real has weakened consistently and progressively reaching 5.89 to 1 in May of this year before settling back. That means that it lost 73% of its value against the dollar. In dollars, U.S. soybean prices ranged from $5 bushel in 2004 to $10 bushel in 2008 to $17 bushel in 2011 before sliding back to where they are now. That would have exchanged to about 27 real per bushel in 2011. Today’s exchange rate of 5.33 times 8.83 is 47 real per bushel. Soybean prices in dollars today are half of what they were in 2011 yet have gone up 43% in Real. The just of it is that their currency weakness has countered and eliminated the price weakness that U.S. farmers have experienced. It is not all gravy for them. A portion of their costs are dollarized too but they have a margin in real and we do not in dollars.
U.S. farmers pay little attention to the dollar other than recognizing that it influences commodity prices. Brazilian farmers pay more attention to the real, evaluating when to sell soybeans and buy inputs when they think the currency exchange is more favorable. Recently buying inputs early and selling crops late has made them money as the real has weakened. Matthew’s father-in-law did not ask me what the price of soybeans were going to do but what I thought the real would do. That is how important that it is.
Is this currency valuation manipulation? I don’t think so. Most of their central bank intervention has been to keep the real from devaluing further. Brazil has been racked with corruption with extreme wealth disparity. It is a commodity producing country so did well when commodities were in a bull market. Their currency weakness has helped them survive the bear market. The most recent weakness in the real was Covid-19 pandemic related. Brazil’s new president Bolsonaro essentially did nothing to prepare the country for the pandemic and their cases and deaths are worse than ours. That was hard to accomplish. The dollar index has lost 10% against major industrialized nation currencies for similar reasons to why the real weakened…a corrupt incompetent government that has blown the handling of the pandemic. Lula could not stay out of jail after leaving office. We will see if Donald J. Trump (DJT) can.
The one institution in Brazil that functioned when others failed was their judicial system. One could argue that their legal system saved the country. Believe me it is not as good as ours. They are more of a full democracy than we are because all Brazilian citizens are required to vote. Without the piece of paper, they hand out for having voted in Brazil, they could not get licenses, titles and welfare. This country has always suppressed the vote somewhere/somehow with 56.9% participating in the 2016 election. The fear is that with full democracy with everyone voting is that you may have everyone voting socialist and break the bank. I can’t say that has really happened in Brazil. Someone would have to explain to me how that is too much different than us farmers voting for politicians sympathetic to farm subsidies. I have done that before. Brazil doesn’t have as much bank to break as we have. I think that we are heading in that same direction fiscally and politically.
Weakness in the dollar does strengthen the buying power of many of our best Ag customers but it is less powerful because our strongest ag competitors have seen weak currencies too. The weak dollar should help demand but similar weakness in the Russian ruble, Ukrainian Hryvnia, Argentine peso and Brazilian real dilute the benefit of the weak dollar. We will have to live with this currency disadvantage.
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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