Over the last decade, soy production in Brazil has expanded rapidly as producers there have increased harvested soy area by 4 percent a year on average.
Part of the expansion can be tied to strong productivity. Indeed, Brazil soybean yields are on par with—if not better than—U.S. yields. Beginning in 2016, Brazil soybean yields took a solid turn higher with the country as a whole, hitting or getting close to 50 bushels per acre in each of the last four growing seasons.
The other key element has been Brazil’s ability to achieve solid yields at costs levels that are below U.S. farmers. If we go back to 2017, according to USDA-ERS, average soybean production costs were $445 an acre. At that same time, Brazil’s farmers could produce soybeans at a cost of 1,133 Brazilian real, which was $365 an acre in U.S. dollars.
Add to that foreign currency effects, and the cost divide between Brazil and U.S. farmers has widened further. Brazil’s economy has hit some severe speed bumps in the past six months, and the economic fallout of COVID-19 in the country has accelerated the Brazilian real’s weakness against the U.S. dollar. So even as inflation costs have increased the Brazilian farmers’ inputs, denominated in their home currency from 1,133 real per acre in 2017 to 1,558 real per acre in 2020, the devaluation of the Brazilian real has completely reversed the effect with Brazil’s cost in USD shrinking to $305/acre in 2020 from $365 in 2017.
This matters as international commodity markets mostly trade in U.S. dollars. So as soy prices have generally been flat to weaker in recent years, farmers in Brazil face exceptionally strong domestic prices denominated in their home currency. In fact, Brazil prices are the highest they’ve been in seven years, meanwhile U.S. farmers face some of the worst prices seen in seven years. The main culprit for the disparity is the exchange rate spike in recent months, which has caused the Brazilian real to fall 30 percent in value relative to the USD.
As farmers in Brazil gear up to start planting soybeans in September, it seems likely that the economic signals will be in place for a big expansion in soy plantings, which could limit upside potential for U.S. soybean prices into winter and spring. With the Brazilian real collapsing 30 percent since the start of 2020, this has likely caused U.S. soy prices to be about 15 percent lower than they otherwise would be. So reversing this trend would be extremely valuable to U.S. farmers.
As long as Brazil’s currency remains devalued, this poses a big headwind for U.S. soy prices. Brazilian farmers face all the right incentives in terms of relatively cheap production costs and high internal soy prices to keep expanding. Pro-capitalist President Bolsonaro has been leading reforms for a more market-based economy and opening the country to foreign investment, but those fixes will take time to expand and return Brazil’s economy to better footing. In the meantime, expect the currency issue to restrict soy price’s ability to get much buoyancy even as the U.S. balance sheet improves.
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