The Rise of Brazil’s Soybean Export Share and Its Influence on U.S. Prices

 

We all have seen the volatility in the soybean complex in recent weeks. Most of the attention has rightly focused on the dry weather and concerns over crop losses in South America, mostly in southern Brazil and Argentina. However, it’s important to also keep an eye on another possible influencing factor, the recent increase in value of Brazil’s currency. Though its impact on soybean prices is likely smaller and less apparent than weather alone, it’s important to understand how the fortunes of Brazil’s currency affect soybean prices overall.

The Emergence of a Dominant Brazil

 

The impact of Brazilian currency on soybean prices begins with Brazil’s ability to grow its share of the overall market. As you can see in Chart A, since 2000, world soybean demand has grown from just over 40 million tonnes to about 145 million tonnes, a more than threefold increase met primarily by Brazil. More specifically, in 2000, the U.S. exported about 23 million metric tonnes of soybeans compared to Brazil’s 18 million metric tonnes. Today, Brazil leads with almost a fivefold increase in exports to about 85 million metric tonnes, while the U.S. export figure has only risen twofold to about 50 million metric tonnes. Accordingly, Brazil’s share of the export business has grown much more than that of the U.S., increasing from about 24% in 2000 to about 54% today, as compared to the U.S. share decline from about 58% to 33%.

It is this increase in export share that has made the world market, and by extension U.S. soybean prices, so sensitive to influences on Brazil’s production and currency.

Chart A, courtesy of ADMIS and The Hightower Report

 

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How did it get that way? One reason is that from early on, Brazil has been able to increase acreage to fill the supply gaps unanswered by the U.S. As demonstrated in Chart A, Brazil’s growth was rather slow and steady prior to 2011. However, from the 2010/2011 season to the 2019/2020 season, their exports grew nearly threefold to keep pace with worldwide demand, increasing from about 30 million tonnes to about 90 million tonnes. U.S. exports remained relatively steady.

Brazilian Production’s Responsiveness to Brazilian Currency

 

While we have just discussed how Brazil exploited world supply gaps for soybeans to increase their exports and export share, especially since 2011, it is important to note that the overall increase in Brazilian exports can also be correlated with the general decrease in value of Brazil’s currency — the Real (BRL) — over the same time frame. As the BRL has decreased in value relative to the USD, it has helped incentivize the Brazilian farmer to meet world demand by increasing production. This can be seen when the exports chart (Chart A) is compared to a chart of the BRL (Chart B) over the same time frame.

Chart B

 

Since soybeans are priced to the U.S. dollar (USD) on the global market, the drop in the BRL over the past 23 years has made it increasingly more profitable for the Brazilian farmer domestically to increase production. How so? As the BRL loses value to the USD, the Brazilian farmer receives more money (BRL per USD) for his crop. To be sure, the Brazilian farmers’ production costs are negatively affected by the falling BRL on production inputs that are imported and denominated in USD, as those inputs cost more with a falling BRL. However, unlike their American counterparts, Brazilian farmers can also use locally sourced inputs, all priced in BRL, which lowers their average cost of production and allows for increased profit margins. Because of this, large surges in price have helped incentivize Brazil to increase production, and therefore increase export capacity.

Quantifying the Contribution of an Increasing BRL to Soybean Price

 

Having said all this, can we quantify the relationship between the BRL and the price of soybeans? Remember, the current rally has largely been attributed to the poor growing conditions in southern Brazil and Argentina, which makes sense because of the world’s increased dependence on South American production. Any shortfall could easily swing demand back to the U.S. to fill the gap, decreasing U.S. domestic supplies. With that in mind, note Chart C which compares the price of soybeans (blue) to the value of the BRL (red) in an unusually tight correlation. As March Soybeans rallied 22.1% from $12.6525 (73.48 BRL) to $15.4525 (82.11 BRL), the BRL also rallied 9.29% from $0.1722 to $0.1882. One could surmise that of the $2.80 rally in March Soybeans, $1.18 could be attributed to an increase in value of the BRL. Had the exchange rate stayed the same at $0.1722 between 12/15 and 2/02 and had not influenced the price of March Soybeans, the BRL equivalent would be 82.88 BRL on 2/02 versus 82.11 BRL.*

Chart C

 

When the BRL gains value, it reduces the number of BRL that Brazil receives for its crop. This, in turn, could slow the sale of Brazilian soybeans into the export pipeline, causing the outside market to pay more in USD to satisfy the Brazilian marketplace and encourage more sales. Conversely, when the BRL falls versus the USD, the amount of money Brazil receives increases and they may sell more soybeans to take advantage of the increase in price, adding downward pressure to price as world buyers will not need to pay as much in USD to get the supply they need.

Given Brazil’s place in the world soybean market, any production concerns or large currency moves that they experience certainly play a significant role in the value and export prospects of U.S. soybeans. While it should be said that there are often other market forces at play that also influence prices, it is important to be aware of not only Brazil’s production concerns, but also the effect that their currency can have on the price of soybeans. With the BRL’s current run up in value, any significant setback could have quite a negative impact on the price you may receive for your crop.

Are You Interested in Staying on Top of the Market and How It Impacts You?

 

Every day there are competing factors influencing the price you get for your grain, from the weather in Brazil to the price of the dollar to the ebb and flow of the market. Stay on top of the market with a team of dedicated professionals with a long history of helping farmers like you understand the market and how that impacts the decisions you need to make day to day. If you have questions about the market, TFM360, and how Total Farm Marketing can help you make the best marketing decisions for your operation, call us at 800.334.9779.

 

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* The total soybean rally was 22.1%. Subtracting the BRL rally of 9.29% yields an assumed 12.81% weather-only rally in soybeans. Soybeans on December 15 closed at $12.6525, and adding the 12.81% weather rally of a $1.62 equals $14.2725. Converting $14.2725 into BRL with the exchange rate of $.1722, yields an equivalent of 82.88 BRL.

 

 

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