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Corn+Soybean Digest

Lost In Translation

You'd think $8 soybeans would send a green light to Brazilian farmers to plant more soybeans. But as planting season approaches, they appear cautious. A few who could plant more beans are instead planting sugarcane. But the apparent lack of a Brazilian soybean-planting carnival likely owes more to market signals not getting through.

“Brazilian farmers just aren't getting the same market signals that U.S. farmers are getting due to the exchange rate differences,” says David Asbridge, business development manager at Doane Advisory Services.

The U.S. dollar exchange rate may be one of the factors distorting those signals. Four and a half years ago, international bankers gnawed nervously on their Mountblanc pens as newly elected President Luiz Inacio Lula da Silva dined with first Hugo Chavez, then Fidel Castro on his inauguration day.

Since then, inflation has remained tamed, Brazil's country-risk rating has plummeted and the local currency has gone from trading at 3.7 for each U.S. dollar to trading at less than two to one. And the amount of money a local farmer gets for his beans is directly connected to the value of the U.S. dollar. The world price is set,in dollars, in Chicago.

Brazilian farmers could handle the drop all right if it were a smooth decline. But in the past few years, the greenback's downward path has looked something like a rubber ball descending a staircase: Its brief upward bounces on the way down have been coming just when farmers are buying their imported inputs.

And just when the crop comes in has been where the U.S. dollar has dropped to the next riser. The result: Brazilian farmers have bought their inputs when the dollar was relatively strong, and sold their beans when it was relatively weak.

A couple years of that trend has seen some producers blocking roads to processors' locations with trucks and protesting in the national capital of Brasilia. One farmer in distant Roraima state says he would go as lightly as he could on inputs for awhile. “But you can't skip them for too many years,” he adds.

Because there's a limit on scrimping, cash-strapped farmers may have to bite the bullet and buy more fertilizer if they're going to commit to increasing soybean acres.

They don't wear green eyeshades, but Brazilian farmers usually have a good idea of the exchange rate, and figure it into their calculations when it comes time to make their planting decisions. Using late July's exchange rate, $8 beans would provide the farmer with R$15.04. Last July, $8 beans would have yielded R$17.46/bu. In July 2005, an $8 price would have meant R$19.12/bu. in his pocket. And that's before figuring in transportation.

“The problem is compounded when the exchange rate falls between the time you purchase inputs to when you sell the beans,” says Phil Corzine, who farms in Brazil. “The real problem is when the dollar is strong at the time you're buying inputs, and weak when you're selling beans.”

A comparison of September and April exchange rates shows the dollar lost about 10% of its value between planting and harvest of the 2004-2005 season, and again between planting and harvest of the 2005-2006 season.

Farmers closer to ports in southern Brazil are facing low transportation discounts and are less hurt by high fuel costs than those in the expansion areas, so some Brazilian farmers are heeding the market's calls. But the picture may be a little fuzzy still for farmers farther away. Though strapped for cash, the deluge of processor financing of inputs could turn out to be the key to unlocking lots of South American soybean acres. There's still time before those first rains in September signal farmers that it's time to plant.

“At the end of the day,” says Corzine, “the exchange rate reduces some of the higher price.”

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