You probably already know that the weak dollar boosts U.S. exports at the same time it makes imports like fuel and fertilizer more costly. However, the weak dollar's negative effects can hit farmers in other countries even harder.
"A weak dollar is negative for Brazilian farmers. Even those of us who tie dollar-based inputs to dollar-based commodity sales have some inputs like fuel and labor that are difficult to hedge," says John Carroll, an American whose family farms 26,000 acres in Bahia, Brazil.
He cites a gritty real-life example of the economic tug-of-war between the Brazilian real and U.S. dollar: "In December 2008, we had a 2.5:1 exchange rate. Currently, we have a 1.7:1 rate. Let's assume beans are $9/bu. An employee making 30,000 reals/year last December was making $12,000, or 1,333 bu. of soybeans. To pay the same employee 30,000 reals at the 1.7:1 rate, it costs us $17,650, or 1,960 bu. of soybeans. We need rising commodity prices just to keep pace with the weakening dollar."
"Brazil is better off with $7 beans and currency at a ratio of 4:1 rather than the ratio it now has," says market adviser and Top Producer columnist Jerry Gulke. "It puts a real strain on growers to cash-flow stuff. Their incremental cost per bushel of soybeans to open up new land is very expensive. It will take $12 to $13 soybeans to make that pay."
Competitive Disadvantage. David Kruse, whose family farms more than 22,000 acres in Bahia, adds: "When soybean prices rise in the U.S. and the dollar falls, it's tougher for Brazil to compete.
"In essence, Brazil is being penalized for its success in terms of its currency. Brazil has come through the global recession better than most countries. It has been attracting investment money, which has been inflating its currency," Kruse says. "That has now become a negative factor.
"Profit margins in Brazil are still relatively narrow. Basis levels are terrible down there and their cost structure is not that different from the U.S. Corn Belt," he says.
Brazil's currency situation is unique, says Phil Abbott, a Purdue University economist specializing in international trade and ag development. "Over the past few years, Brazil's currency has been more volatile than the Euro. When the dollar was weakening, the real appreciated faster than the Euro. Cycles in Brazil are more pronounced," he says.
- DECEMBER 2009