In 2020 Brazilian farmers and exporters saw a steep devaluation of Reais (Brazilian currency), driven lower than usual by economic instability due to coronavirus. That is one reason why last summer Brazilian commodity prices hit record levels, and why many Brazilian soybean farmers saw their most profitable year ever, even at the expense of higher domestic consumer food prices.
Hit by pandemic, the Brazilian economy stood at a standstill last year as investors fled to the safety of the U.S. dollar. The Real, already weak compared to the dollar, devalued even further, causing a direct impact on the Brazilian agricultural sector.
This is why Brazilian farmers must constantly watch the currency exchange and how it impacts commodity prices – and farm production costs. A USDA report notes, “the weaker currency will push up production costs thanks to large quantities of dollarized inputs that Brazil imports. Some of that increase will be counterbalanced by lower prices in a few segments, such as transportation.
With the collapse in oil prices, the costs of freight, both truck and ocean, should decrease.” The majority of transportation in Brazil is done via road (trucks), therefore any increase in fuel prices causes an increase in freight prices.
Around 70% of crop inputs are imported from outside of Brazil, so currency exchange impacts farm cost side as well. Brazil also imports machinery and fuel, based on U.S. dollars.
One way to get around this increase in costs would be to use supplies from national (Brazilian) suppliers.
In short, farmers in Brazil have to manage costs, making sure that their economics are in place.
Export prices went up for sugarcane, coffee and soybean, of which 70% of production is shipped to China. That was once in a lifetime. Commodities represent around 50% of Brazilian export numbers, which is a very good reason for farmers to honor their future contracts and ship their goods overseas.
Consumers pay the price
But this currency-driven surge in exports has made it difficult for Brazilian consumers. Cheaper reais makes it more attractive to ship overseas, and that can cause domestic shortages. The price of soy oil almost tripled the last six months. Rice is another example. Rice is consumed daily by Brazilians; consequently the internal market consumes most of the grain produced in Brazil. Yet this past year we had a lack of rice in the internal market, causing record local rice prices. The weaker currency triggered farmers to sell their rice overseas increasing more than 80% of rice exports in comparison with 2019.
With all of those input costs going up and farmers deciding to export their goods, Brazilian consumers faced the prices of “basic basket” sky rocketing.
Overall, a weaker reais favors Brazilian agribusiness, but farmers still need to maintain solid cost management and watch the world economy in order to create strategies to benefit from the current instability.