Brace yourself. Brazil is all about rock markets

Brazil’s currency, the real, has been trading near record lows in recent months, largely because of President Jair Bolsonaro’s attempt to tear down the fiscal straitjacket and launch an anti-poverty program ahead of elections in 2022. The passage of laws that would allow the measure – a reboot of the Bolsa Familia cash welfare payment initiated by his predecessor Luiz Inácio Lula da Silva, which Bolsonaro wants to raise to about 400 reais ($71) a month – has already The lower house of Congress has approved and are now working their way through the Senate.

Politically, this is a remarkable reversal. One of Bolsonaro’s central policies when he came to power in 2018 was reform of the state pension system to plug the budget deficit and regain Brazil’s investment-grade credit rating in 2016. Winning back that investor’s trust was the driving force behind constitutional public spending. hat that Bolsonaro himself is now sacrificing to move forward with his wellness program. Plagued by the most Covid-19 deaths after the US, Brazil’s commitment to fiscal restraint has grown so high that the career decisions of its more conservative Economy Minister Paulo Guedes have become a market-driven indicator.

However, broader global impact can be had in commodity markets. With the US supply chain crisis easing and Chinese energy prices showing signs of returning to normal levels, the weakness of the real could still help ease inflationary pressures coming through the world economy.

This is because Brazil has a major role in supplying a wide range of the world’s essential foods and minerals. When the currency falls, production costs for Brazilian producers also fall, making their goods more competitive and adding to the supply.

Take soybean, the country’s biggest export, where US futures prices hit a nine-year high in May. Land typically accounts for about a quarter of the cost for Brazilian soybean farmers, but – unlike fertilizers and pesticides, global commodities whose prices move in tandem with the dollar – it does not actually increase the price when the real weakening. Is. The same goes for spending on labour, taxes and other household expenses.

As a result, production in the current crop season is projected to reach a record high of over 5 billion bushels. Corn, whose futures prices also rose in May, is also expected to see record production.

Similar is the case with meat. According to the US Department of Agriculture, Brazil is the largest exporter of chicken and beef and the third largest exporter of pork, and production of all three is projected to increase in the coming year. Exports in the 2022 marketing year will total 2.66 million metric tons, the USDA reported this month, with Brazil’s share of global trade rising from about 18% in 2017 to 22% now. This may be just the beginning: it takes many years for cattle to reach maturity, and the growth rate of a Brazilian herd is faster than that of its exports. Four of the five cows added to the global herd since 2017 are in Brazil. It suggests further export expansion in the coming years.

In Chicken, currency depreciation, pandemics and inflation have lessened the impact of the way they affect living standards. Domestic chicken consumption has increased in recent years to replace beef calories that Brazilians can no longer tolerate. Still, production will climb to 4.2 million tonnes next year.

Only iron ore is left behind in Brazil’s major commodity exports. Bloomberg News reported that analysts expect production of Vale SA, the world’s largest rust miner, to increase by about 20 million metric tons next year, but the company’s forecasts could fall short of that when they are presented later this month. . Leading producer Australia will also be responsible for a large part of production growth next year and at a faster pace.

However, the biggest commodity bet on the real is likely to be in coffee. Traditionally, Brazil has been a major producer of Arabica beans, creating such high-quality brews that speculators would use them as a way to bet on the real, and vice versa. When the currency weakens, production increases and Arabica prices go down.

It seems to have broken down in recent years. At a time when Real is trading near record lows, coffee is at its highest level in a decade. Investors don’t expect this to be an anomaly, either: With reports of poor crop performance from the coffee belt, traders’ net long positions in Arabica futures are just below record levels, suggesting they may see prices rise further. expect.

This is a bold bet. Brazil’s financial turmoil and bearish currency are already wreaking havoc in the soybean, beef and chicken markets. Don’t be surprised if it repeats the trick in coffee.

David Fickling is a Bloomberg Opinion columnist covering commodities as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, Wall Street Journal, Financial Times and The Guardian.

This story has been published without modification in text from a wire agency feed. Only the title has been changed.