Another record Brazilian soybean crop, currently estimated at 119 million tons, will provide ample supplies for export in 2018. Adding to the competitive pressure is the recent weakening of the real relative to the dollar as political and economic uncertainty has helped drive it to near 3.8 to the dollar.
This is nearly 20 percent below the level in January 2018 and approaching the near-term record low of 4.04 observed in January 2016. With elections in Brazil scheduled for October, the same forces pushing the real lower today are likely to persist through at least the U.S. harvest if not through the latter half of 2018.
Weak currencies generally augment pricing power in the market providing producers more flexibility to undercut competitor prices and to increase sales.
While the recent decline in the real adds to this pricing power, it is an issue that has dogged U.S. producers since the early part of this decade. While average Brazilian export prices, in dollars, have declined roughly 20 percent since 2011, prices in reals have nearly doubled from 800 to over 1,500 reals per metric ton.
These high prices and market power have helped Brazil sell out most of each year’s crop over the past 5 years. While short crops and strong global demand in the early part of the decade helped all exporters draw down stocks, the large crops of the past few years have led to stock building, much of it occurring in the United States.
Since 2014/15 when stocks in both Brazil and the United States reached minimum levels, Brazilian stocks have remained relatively unchanged while stocks in the United States, as a percent of supplies, are projected to rise to 11 percent in the coming year.
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The high prices in reals have provided Brazilian producers the flexibility to undercut U.S. prices and have encouraged continued acreage expansion, all factors contributing to Brazil’s rising global market share. As long as U.S. producers continue to battle against a weak real, this trend will likely continue.
Despite the prospect of Brazil clearing out the 2018 crop this year, limited year-over-year growth in Brazil’s soybean production, rising global demand, and smaller supplies in Argentina and Uruguay following this year’s drought should sharply curtail exportable supplies in the latter half of 2018.
Despite a weak real, this should reduce competition in the global soybean market, boosting U.S. exports in 2018/19.