A bitter and hard-fought midterm battle for control of Congress dominates the news cycle, but U.S. farmers should pay close attention to Sunday’s presidential runoff election in Brazil.
That equally bitter battle between right-wing challenger Flavio Bolsonaro and President Luis Inacio Lula da Silva has already roiled the currency market and carries both near- and longer term consequences. Brazil, after all, is the largest competitor to the U.S. when it comes to soybeans and directly competes with the U.S. across several other major agricultural markets, including corn, cotton, beef and poultry.
Here’s the setup. Bolsonaro surprisingly outperformed Lula in the first round of Brazil’s presidential election on Oct. 5. Bolsonaro received around 47% of valid votes to Lula’s 44.9%, defying pre-election polls. Since no candidate topped 50%, Bolsonaro and Lula now face each other in a head-to-head runoff on Sunday. Polls are showing a statistical tie, while betting markets clearly favor Bolsonaro.
For U.S. farmers and grain traders, the near-term focus is on Brazil’s currency, the real. Bolsonaro’s surprise first-round performance saw the real surge nearly 5% versus the U.S. dollar. The real ended Friday trading just below 5 reais to the U.S. dollar versus 5.212 per dollar just before the Oct. 5 first round vote. A sustained rally by the Brazilian currency can be a positive for U.S. ag exports.
Brazil’s soybeans and other major agricultural commodities are priced in dollars, so it isn’t that a stronger real automatically makes Brazilian ag products more expensive. But it does mean that a weaker dollar reduces revenues in reais for farmers who haven’t yet locked in their sales, noted Joana Colussi, professor of agricultural economics at Purdue University. Since production costs have largely been set, that could squeeze margins and lead farmers to delay selling, thereby reducing Brazil’s price competitiveness in export markets.
For the 2027-28 crop, however, the effect could be more favorable. If the real remains stronger when farmers buy their next round of inputs, imported fertilizers, crop protection products and machinery could become cheaper, helping to lower costs and boost margins.
“So the impact on margins depends partly on timing – when farmers bought their inputs and when they sell their crop,” said Colussi, who noted that Brazilian farmers pay close attention not only to Chicago futures prices but also the exchange rate with the dollar.
As demonstrated by the reaction to Bolsonaro’s surprise showing in the first round, a victory by the challenger is expected to be bullish for the Brazilian real, as well as Brazilian assets in general.
“That’s because Bolsonaro is perceived as more market-friendly, particularly on fiscal policy and deregulation,” said Thierry Wizman, currency and rates strategist at Macquarie, in a note.
It may be difficult, however, for Bolsonaro to meet expectations. Wizman noted that he would inherit structurally rising mandatory spending requirements, high debt-servicing costs, and limited budget flexibility. That would put pressure on Bolsonaro to quickly present a credible fiscal plan.
Lower interest rates would be a particular boon to Brazilian farmers. Brazil’s benchmark Selic interest rate stands at 13.75% following a quarter of a percentage point cut last month. That compares with a U.S. fed funds rate of 3.75%-4%.
Some producers are able to access subsidized rural credit, which means they pay interest somewhat below the benchmark rate, but there are many who don’t have strong credit scores and are paying above 14%, Colussi told Pro Farmer. Needless to say, those high rates also affect producers’ decisions around selling or storing grain. Higher interest rates raise the opportunity cost of storing grain.
While Bolsonaro and Lula are running neck and neck, Brazil’s farmers clearly favor the challenger and are largely hostile to the incumbent. Brazil’s powerful farm lobby is expected to gain even more influence if Bolsonaro prevails, Bloomberg reported. The report noted that he has promised to let the Frete Parlamentar da Agropecuária, known as the farm caucus and made up of lawmakers dedicated to the industry, to choose his agriculture minister. That would give the group a bigger say in government decisions, with farmers seeking to counter rural debt with subsidized credit and bring down double-digit interest rates they say are stifling business, the report said. It noted that environmental law is also on the agenda, with industry-backed lawmakers largely in favor of loosening regulations.