Todd's Take

2015 U.S. grain markets will long be remembered for the convergence of two powerful bearish factors:

1. Big grain harvests around the world, thanks to favorable weather in major crop areas;

2. Another rise in the U.S. dollar as the U.S. economy avoided the problems encountered by many of its grain-selling competitors.

A quick survey for 2015 showed the currency of Europe down 10%, Russia down 19%, Ukraine down 34%, and Brazil down 33%.* Of the four, the drop in Brazil's real is having the most bearish impact on U.S. corn and soybean prices this winter. So far in 2015-16, USDA figures show U.S. exports of corn and soybeans are down 23% and 9%, respectively, from a year ago while the same pair of exports for Brazil are up 55% and 19%.** The marketing year in Brazil ends on Jan. 31.

Often, when I hear commentators or politicians talk about losing exports to countries that have falling currencies, there is an implication that they are getting away with something unfair. However, the reality is that all countries, including the U.S., have been through these ups and downs before, and having an economy with a falling currency is not an enviable situation. The temporary benefit of increased export business typically pales in comparison to the other negatives that these economies experience.

In Brazil's case, the negatives are easy to see. The International Monetary Fund estimated last week that real GDP in Brazil fell 3.8% in 2015 and will drop another 3.5% in 2016. Positive growth is not expected to return until at least 2018.*** Along with negative growth, Brazil also has a high unemployment rate of 9.0%**** and a high inflation rate of 10.7%.*****

Similar to the situation faced by the U.S. in the 1970s, Brazil's policy makers are now confronting dual challenges of a declining economy and rising inflation. Raising rates too high hurts the economy more, but not raising rates enough risks letting inflation get out of control -- a tough spot with no painless solution ahead.

Fortunately, U.S. producers don't have to wait for Brazil's economy to recover as the temporary benefit of last year's 33% drop in the real is already being diminished by Brazil's rising prices, with more inflation likely to come.

Some in the U.S. may be surprised to learn that a local chart of cash soybean prices in the state of Parana, Brazil, actually trended higher through 2015 and real-denominated soybean prices are now back to levels not seen since the drought of 2012. As of Jan. 21, Informa Economics reported that Brazil's dollar-denominated export price for soybeans was just 19 cents a bushel below offers at the U.S. Gulf -- an encouraging sign that the gap is already closing.

While there is no doubt that the world's currency moves of 2015 have hurt U.S. grain exports, it is not necessary for currency prices to return to their previous levels for U.S. grain prices to become competitive again. Local prices are already rising in countries like Brazil, where currencies have fallen, and that should help U.S. producers find a more competitive balance later in 2016.

* Currency data found at www.xe.com/currencycharts/

** USDA's Oilseeds: World Markets and Trade, Jan. 2016. Export data found in Table 22 at: http://apps.fas.usda.gov/…

*** "Weak Pickup in Global Growth..." IMF Survey, Jan. 19, 2016 at: http://www.imf.org/…

**** "Brazil's Unemployment Rate Rises to 9%..." by Rogerio Jelmayer, Jan. 15, 2016 at: http://www.nasdaq.com/…

***** "Brazil's Barbosa Upbeat on Trade With Argentina" by Stephen Fidler, Jan. 22, 2016 at: http://www.wsj.com/…

Todd Hultman can be reached at todd.hultman@dtn.com

Follow Todd Hultman on Twitter @ToddHultman1

(BAS/CZ )

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