Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
1/26/99
Contacts:
Robert Wisner, Extension Economics, (515) 294-6310
Treva Blumenshine, Extension Communication Systems, (515)
294-5672
Brazil's Currency Devaluation Impacts Corn and Soybeans
AMES, Iowa -- On Jan. 13, the Brazilian government stopped supporting its currency, the real, resulting in a sharp drop in its value against the dollar. By Jan. 19, it had dropped 22 percent in value against the dollar and 24 to 25 percent against most other major foreign currencies from the Jan. 12 exchange rate, according to Robert Wisner, Iowa State University Extension economist.
"This unexpected development is a reminder of the uncertainty and risk in world markets, and is a negative development in soybean price prospects for 1999," said Wisner.
Foreign grain buyers have followed this development closely, according to Wisner. "They are waiting to see if further weakness occurs in the Brazilian currency before aggressively taking advantage of the reduction in Brazilian soybean and soybean product export prices that resulted." The drop in Brazil's currency means foreign buyers have the opportunity to buy Brazil's products at much lower cost in their currencies or U.S. dollars than was possible just a few months ago.
Using an initial port price of $5 per bushel in dollars, there is the equivalent of a potential $1.10 reduction in price to foreign buyers who buy in dollars. This will occur if all of the currency weakness is passed on in lower export prices, and there are no changes in Brazil's farm prices for soybeans or marketing margins. However, part of the price impact could be passed back to Brazilian farmers in higher Brazilian prices for soybeans, according to Wisner.
"The devaluation is hoped to allow Brazil to significantly reduce its high interest rates, which would encourage increased soybean plantings next fall," he said. "The net impacts include that downside price risk in soybean prices is increased, especially for late February, early March and next fall. Also, the upward price potential for the U.S. planting season is more limited than expected earlier, although summer markets will remain moderately sensitive to any widespread U.S. weather problems. The impact on corn and wheat could be slightly negative. Brazil typically imports these products, and Brazilian buyers will have to pay more of their currency than in the past per dollar's worth of corn or wheat. However, the impact on corn prices should be almost unnoticeable for corn for this year. For the longer run, it might encourage a slight increase in Brazilian corn plantings."
Brazilian economic trouble also raises concern that it may spread to an economic slowdown in other Latin American countries, which this marketing year represent one of the main areas of growth in U.S. corn exports, according to Wisner.
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