One of the main ingredients for the competitiveness of ag products is the currency relationship between the seller and the buyer.
Traditionally, the U.S. Dollar Index has been the choice for decision making. However, it does not contain the Brazilian (real), the Argentine (peso) nor the Chinese (renminbi), making the Index rather archaic for our concerns.
Currency and Competitiveness
The Brazilian real, which has a history of wildly fluctuating, influences our ability to export soy products. The chart below shows how in 2017, the real experienced a sideways price range, while soybeans priced in real stayed below the price of soybeans quoted on the CME.
The real’s downtrend lasted into 2019. It was not until the beginning of 2020 and the signing of phase one with China the real took another step lower.
The drop in soybean prices was offset enough for an uptrend in realized reals earned for each U.S. dollars’ worth of soybeans sold. Farmers there quote their beans in reals per sac (a volume measure similar to the bushel in the U.S.).
Ironically, soybeans priced in Brazilian real have exploded as soybean futures rose and the real fell more than 50%. The rise from 35 real to 58 during 2019 has been astounding, providing a financial incentive for Brazil soybean farm-ers to increase production.
Should South America be negatively influenced by La Niña, it will have an impact on the acreage allotments next spring by U.S. farmers.
The Geopolitical Effect
In Argentina issues are more complex: With an official rate at 80 pesos per dollar, and a black market at double that figure, farmers prefer to keep soybeans in silo bags as a proxy to dollar bank accounts. Not only that, but you have export taxes and a government that does not allow farmers to receive dollars for their produce, only pesos.
Finally, China is not buying on price but on other factors such as complying with phase one. Under the capitalist system, prices are the information process enabling markets to adjust supply and demand. China, however, moves for domestic and geopolitical reasons. TP
Jerry Gulke farms in Illinois and North Dakota. He is president of Gulke Group, a market advisory firm. Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee the advice we give will result in profitable trades. Past performance is not indicative of future results.
