Prepare yourselves. Brazil is about to shake up the markets

The Brazilian currency, the real, has traded around record lows in recent months, thanks in large part to President Jair Bolsonaro’s efforts to tear a fiscal straitjacket and introduce a poverty reduction program ahead of the 2022 election. laws that will allow the measures to pass – a restart of the Bolsa Familia social assistance cash payment introduced by his predecessor Luiz Inacio Lula da Silva which Bolsonaro wants to increase to around 400 reais ($ 71) per month – have already authorized the lower house of Congress and now operate through the Senate.

Politically, this is a remarkable reversal. One of Bolsonaro’s central policies to come to power in 2018 was a reform of the state pension system to close budget deficits and regain the investment grade credit rating that Brazil lost in 2016. Regaining Confidence investors has been the driving force behind the constitutional public spending cap that Bolsonaro himself is now abandoning to advance his own social protection agenda. Beaten by the highest number of Covid-19 deaths after the United States, Brazil’s commitment to budget cuts has become so worn out that the career decisions of its more orthodox Economy Minister Paulo Guedes, have become an indicator of market movement.

The wider global impact may, however, be felt in commodity markets. Along with signs of easing the US supply chain crisis and a return of energy prices in China to near normal levels, the weakness of the real could further help ease the inflationary pressures that are plaguing the country. ‘Mondial economy.

This is because Brazil has an inordinate role in a wide array of the world’s essential food and mineral products. When the currency falls, the production costs of Brazilian producers also fall, making their products more competitive and increasing supply.

Take soybeans, the country’s largest export, where US futures prices hit a nine-year high in May. Land is typically around a quarter of the costs for Brazilian soybean producers, but – unlike fertilizers and pesticides, global commodities whose prices tend to move in parallel with the dollar – its price doesn’t really increase. when the real weakens. The same goes for labor expenditure, taxes and other household expenses.

As a result, production for the current crop year is expected to hit a record high of over 5 billion bushels. Maize, whose futures prices also rose in May, is also expected to post a record production.

It’s a similar situation for meat. Brazil is the world’s largest exporter of chicken and beef and third of pork, and all three are expected to see production increase in the coming year, according to the US Department of Agriculture. Exports will total 2.66 million metric tonnes in marketing year 2022, USDA reported this month, increasing Brazil’s share in world trade from around 18% in 2017 to 22%. now. This may be just the beginning: cattle take several years to mature, and the Brazilian herd’s growth rate is faster than that of its exports. Four out of five cows added to the global herd since 2017 are in Brazil. This suggests a further expansion of exports in the coming years.

In chickens, the effects were mitigated by how the currency depreciation, pandemic, and inflation affected living standards. Domestic consumption of chicken has increased in recent years to replace calories from beef that Brazilians can no longer afford. Even so, production will reach 4.2 million tons next year.

Only iron ore among Brazil’s main commodity exports has lagged behind. Analysts expect production at the world’s largest rust miner, Vale SA, to increase by around 20 million metric tonnes next year, but the company’s forecast could be lower than that when they will be presented later this month, Bloomberg News reported. Australia’s largest producer will account for a larger share of output growth next year, and a faster pace as well.

However, the biggest bet on the real will likely be 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 the prices of arabica fall.

It seems to have collapsed in recent years. At a time when the real is trading near record lows, coffee is at its highest level in a decade. Investors also don’t expect this to be an anomaly: with reports of poor coffee belt crop performance, traders’ net long position in futures contracts on arabica is only just below all-time highs, suggesting they expect prices to rise again.

It is a daring bet. Budget turmoil and the fall of the currency in Brazil are already shaking up and upsetting the soybean, beef and chicken markets. Don’t be surprised if he repeats the trick in the coffee shop.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer businesses. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

This story was posted from an agency feed with no text editing. Only the title has been changed.

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