What has Brazil Done to Soybeans and What Happens Now?
May 18, 2017
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So it seems that many politicians in Brazil arecorrupt, or the Brazilians like to impeach presidents. Maybe a little of column A, little column B (not that we haven’t had our share of crooked politics, hey I live in IL…). Either way, for the second time in a little over a yeara Brazilian president is under serious fire. This sent the Brazilian Real (BRZ)reeling Wednesday night into Thursday. Perfect timing as we were just getting (and I just wrote about) the idea that we may be competitive on the global market for our old crop soybeans for a few months yet. I said that if the USD/BRZ relationship changed then so would the market. Well, what now?
To make a long story short the current Brazilian president Michel Termer took office in May of 2016 after his predecessor, Dilma Rousseff was impeached for manipulating government accounts. Now, Termer is under fire for allegedly bribing a former senator to “stay quiet” about the recent JBS scandal. And, apparently there are taped conversations. So… I think we know how this goes. “I am not a crook” and so on and so forth.
This matters for soybeans because the Brazilian Producer had been reluctant to sell soybeans because of the strength in the Brazilian Real making the price of soybeans very low in their home currency. When this story broke the BRZ dropped about 7% making soybean prices more favorable for producers and more competitive on the global market. For perspective The one day range in the BRZ was nearly equal to about 3x the range of the last 4 months. This triggered Brazilian producer selling and if the BRZ says weak will continue to offer opportunities for Brazilian exports to gain market share.
This obviously is bearish soybeans because of the potential loss in market share for the US, but there is also hedge pressure at work as major commercials lay off risk when they buy from the Brazilian producer. On top of that the large speculators (funds) are technical traders and have to sell the chart. On Thursday alone the funds sold an estimated 20,000 soybean contracts.
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Ok, so here is the thing. I have no idea what happens with Michel Termer. Tapes are tapes and Brazil has shown a history of removing presidents in a timely manner, but who knows. What I will say is this: We did not find any soybean bushels that did not previously exist before today. This massive, record setting Brazilian crop was going to have to get sold at some point. Yes, it would have been nice to keep the US export machine rolling along longer than expected but at some point we knew that Brazil would take over in a big way. Whilethis ispotentially very bearish in the short run, and it hurtsto rip the band aid off I wonder if this is a better thing in the long run. Otherwise we may have had a black cloud, or price ceiling over our heads for the duration of the coming marketing year.
The timing of this could also be worse. At least this is happening as we get into a growing season. There is always the uncertainty of production and the weather. It is a long way till August when the US soybean crop will be made or broken. Maybe this uncertainty will keep soybeans from falling too far (for now), or provide a healthy rebound if they do. If this had happened in January or February we almost certainly would not have had an average February price over $10.00. Also, after such a move in the BRZ, one wonders if it was a bit of an over reaction. Maybe not, time will tell.
So, a sharp drop in the BRZ is exactly what we didn’t want right now. As I wrote earlier this week that was one of the major factors propping soybeans up when many analysts were determined prices should be much lower. Cheaper South American soybeans does not bode well for our exports or for prices. But one way or another, at one time or anotherthe Brazilian crop had to move. And, the timing could have been worse. In the long run maybe it is better to rip the band aid off.
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JulyCorn Daily chart:
JulySoybeans Daily chart:
Producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
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Ted Seifried (312) 277-0113 or email@example.com
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