By Alastair Stewart
DTN South America Correspondent
SAO PAULO, Brazil (DTN) -- Grain farmers have been one of the few groups able to take advantage of the upside of the political and economic crisis that has engulfed Brazil over the last 18 months.
That upside has been the devaluation of the Brazilian real, which has preserved local margins at a time of low international prices.
Conversely, they are also one of the few groups that see risks in an end to gridlock in capital city Brasilia and a possible rally by the real. They have responded by seeking to sell lots of soybeans in recent weeks.
"There is a movement to take advantage of prices now because the risks for the second half (of 2016) are great," said Steve Cachia, a grains analyst at Cerealpar, a local brokerage.
Brazil's President Dilma Rousseff has been under fire since her re-election in late 2014 amid a massive corruption scandal, the worst economic recession on record and open revolt among allies in Congress. These three factors have fed into each other to create crisis and impeachment proceedings.
The possibility that she will be impeached over the next month and that Vice President Michel Temer will oversee a more market-friendly government caused the Brazilian real to strengthen in March, improving from R$4.01 to the dollar on March 1 to R$3.52 to the dollar Tuesday.
Some bank analysts predict the real could strengthen to R$3.10 to the dollar, if the next government is successful in creating consensus and pushing through necessary reforms.
Obviously, a continued appreciation of the currency would be bad news for Brazilians seeking to sell their recently harvested soybean crop.
Meanwhile, with some climatologists indicating the La Nina weather phenomenon may not be as active as first anticipated this year, Brazilian farmers also fear another bumper U.S. crop.
Their response to this scenario has been to take advantage in the recent spike in Chicago soybean futures to sell large amounts.
"Brazilian farmers have ditched habit of waiting to hit price peaks and are selling when they see opportunities," said Cerealpar's Cachia.
Brazilian farmers had already committed 60% of their 2015-16 soybean harvest for sale at the end of March, ahead of the 53% registered at the same time last year, according to AgRural, a local farm consultancy.
Producers are also forward selling 2016-17 beans.
With prices indicating positive margins and terms on exchanging inputs for delivery of the 2016-17 crop even better than last year, there has been some decent early business, said Andre Pessoa, director at Agroconsult, another farm consultancy. The key to the favorable terms of exchange has been lower fertilizer prices, which are down as much as 25% on last year in dollars.
Finally, growers have already locked in prices for a large part of their second-crop corn, fixing prices on 60% to 65% of the crop in late 2015 amid an export-buying flurry.
So protection has been, or is being, put in place.
But it is far from certain that the impeachment vote will open a path out of the current crisis,
For a start, President Rousseff may fight off the threat. As of Friday, the Eurasia Group, a political consultancy, estimated a 40% probability that she would defeat impeachment in Congress.
But if she remains in power, it is difficult to see anything other than the crisis deepening.
And even if she is impeached in early May, who says an interim government will have sufficient political support to push through the much-needed reforms to kick-start the economy. As Vice President Temer recently admitted, the Brazilian political system has broken down and is not allowing leaders to effectively run the country.
So Brazilian farmers may have dodged a bullet in the short term but in the medium term they will surely be as badly affected by a prolongation of the crisis as everyone else.
The main channel through which the crisis will contaminate the sector is the disappearance of credit.
In 2015-16, credit was late, harder to get and more expensive, but farmers generally managed to obtain some -- official lending is actually up 1.5% on the year -- and farmers covered the shortfall with cash reserves -- banking 41% of costs in 2015-16, according to the Brazilian Cooperatives Organization (OCB).
But with the government accounts deteriorating, the questions are: Will the government have funds to maintain the farm credit budget? And will farmers have enough spare cash for next season?
The uncertainty has inevitably already caused investment in the farm to slide. According to the central bank, lending on official investment credit lines for farmers fell 30% to R$26 billion ($9.7 billion) in the July-March period. Grain farmers invested heavily in their operations in the five years prior to 2014, but rising costs mean they have to keep improving efficiency.
FEAR OF PERMANENT CRISIS
Of course, the big fear is that the current state of crisis will become the new normal.
After all, there are no guarantees that fresh elections will bring the bleeding to an end. The truth is that it is not just President Rousseff but the political class as a whole that has ducked difficult choices and avoided passing unpopular structural reforms needed to preserve the economic stability enjoyed over the last 20 years and caused the crisis to escalate.
With no new figures emerging in the political landscape, populist politicians will likely retain their influence.
"The fear is that we go back to the 1990s ... We go back to being a banana republic," said Anderson Galvao Gomes, grain analyst at Celeres, a local consultancy.
A return to the bad old days would certainly curb growth in grains. It is no coincidence that the recent expansion cycle started in the late 1990s with the return of economic stability.
Alastair Stewart can be reached at talk@dtn.com
Follow him on Twitter @astewartbrazil
(CZ/SK)
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