Brazil is about to shake the markets

By David Fickling

You might think that the most important factors driving commodity markets right now are the rate at which the U.S. Federal Reserve reduces stimulus, the state of China’s real estate industry, or geopolitical clashes within the economy. OPEC. But let’s not discount the importance of Brazil’s social benefits.

The Brazilian currency, the real, has been trading at record lows in recent months, largely due to efforts by the president, Jair Bolsonaro, to get out of the fiscal scheme and introduce an anti-poverty program ahead of the 2022 elections.

Laws that will allow the approval of the measures – a reboot of Bolsa Familia cash support introduced by its predecessor, Luiz Inácio Lula da Silva, which Bolsonaro he wants to increase to about 400 reais (US $ 71) a month — they have already been approved in the lower house of Congress and are now in the Senate.

At the political level, it is a remarkable change. One of Bolsonaro’s central policies to come to power in 2018 was a reform of the state pension system to cover budget deficits and regain the investment-grade credit rating that Brazil lost in 2016.

Regaining that investor confidence was the driving force behind the constitutional cap on public spending that Bolsonaro himself is now abandoning to push his own wellness program. Hit by the highest number of COVID-19 cases after the United States, the commitment of Brazil with fiscal restraint it has become so threadbare that the career decisions of its more orthodox finance minister, Paulo Guedes, have become an indicator of market movement.

However, the broader global impact may be in commodity markets. Coupled with signs of easing in the US supply chain crisis and Chinese energy prices somewhat closer to normal levels, the weak real may still help ease inflationary pressures across the world economy.

This is because Brazil plays a huge role in a wide range of essential minerals and foods in the world. When the currency falls, production costs for Brazilian producers also fall, making their products more competitive.

Take soybeans, the nation’s largest export, for example, where US futures prices hit a nine-year high in May. Land generally accounts for about a quarter of the costs for Brazilian soy producers, but unlike fertilizers and pesticides, global commodities whose prices tend to move along with the dollar don’t actually go up in price when the real it gets weak. The same goes for spending on labor, taxes, and other household expenses.

As a result, production in the current harvest season is projected to reach a record high of more than 5 billion bushels. Corn, whose futures prices also soared in May, is also expected to post a record production.

For meat, the situation is similar. Brazil It is the largest exporter of chicken and beef and the third largest exporter of pork. All three proteins are forecast to see increased production over the next year, according to the US Department of Agriculture. Exports will total 2.66 million metric tons in business year 2022, the United States Department of Agriculture reported this month, pushing Brazil’s share of world trade from about 18% in 2017 to 22% now.

And that could be just the beginning: cattle take several years to reach maturity and the growth rate of Brazil’s herd is faster than that of its exports. Brazil is where four out of five cows have been added to the global herd since 2017. That suggests further expansion in exports in the coming years.

In the chicken sector, the effects have been tempered by the way currency depreciation, the pandemic and inflation have affected living standards. Domestic chicken consumption has exploded in recent years to replace the calories in beef that Brazilians can no longer afford. Still, production will increase to 4.2 million tonnes next year.

Among Brazil’s top commodity exports, only iron ore has lagged behind. Analysts expect the production of Vale SA, controlled by the state, will grow by about 20 million metric tons next year, but the company’s forecasts could fall short when released later this month, Bloomberg News reported. Australia, the leading producer, will account for a larger share of production growth next year, and it will also be at a faster pace.

Nevertheless, It is likely that the biggest bet on raw materials over the real is coffee. Traditionally, Brazil has been such a dominant producer of arabica beans from which high-quality beers are made that speculators would use them as a way to bet on the real, and vice versa. When the currency weakens, production increases and arabica prices fall.

That seems to have been broken in recent years. At a time when the real is trading near record lows, coffee is at its highest levels in a decade. Investors are not expecting this to be an anomaly: With reports of poor yield from the coffee axis crops, traders’ net long position in arabica futures is just below record levels, suggesting that they expect that prices continue to rise.

It is a bold bet. The fiscal turbulence of Brazil and the fall of the currency are already disturbing and shaking the markets for soybeans, beef and chicken. Let’s not be surprised if you repeat the picture with coffee.