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Kub's Den
Wednesday, April 16, 2014 10:26AM CDT

By Elaine Kub
DTN Contributing Analyst

There is a saying in Brazilian Portuguese -- "dar com os burros n'agua" -- which literally means to get into water with the asses. Figuratively, it describes being in any very frustrating situation, including the bewildering scenario of trying to learn Portuguese itself.

Well here I am in Brazil, on that very quest. The first thing I did, which has already started to give me a greater appreciation of the challenges of producing agricultural commodities in Brazil (or any non-U.S. nation), was to change over some cash.

The transformation of U.S. dollars to Brazilian reals can be made in a number of different ways with amazingly different results (costing as much as 0.53 U.S. cents for every Brazilian real if done via the airport exchange counter, or as little as 0.45 U.S. cents for every Brazilian real if done via a Banco do Brasil ATM machine). But in neither of those situations do you, the person who needs to exchange the money, get any say in the matter. You could try to time your transaction when the market is most favorable; you could theoretically negotiate with someone on the black market; but basically, when you need to buy or sell something in a denomination that isn't your own, you are at the mercy of whatever the foreign exchange markets feel about your country's economy at that particular time.

It's a constantly changing target. Two months ago, for instance, the exchange rate being traded on the futures markets was more like 40 U.S. cents per Brazilian real -- about as low as the currency has been since late 2008. Throughout most of the past five and half years of global economic recovery, the Brazilian economy has been the recipient of economic optimism and investment, which has driven their currency higher. In July 2011, it would have taken as many as 65 U.S. cents to purchase 1 Brazilian real. But of course the dollar itself has not had a constant value during this time; its lowest value of the past five years occurred right about then (May of 2011), at the equivalent of about R$1.57 per dollar.

So that's the timing and the scale of these currencies' relationship in recent history, but it's more interesting to consider the implications, especially for agriculture. A "strong" currency sounds good, right? Yes, if you're buying foreign equipment or chemicals, but generally no -- not if you're a commodity-exporting country who must compete for export business by offering cargoes at the most competitive prices, as U.S. farmers are well aware. Since the U.S. Federal Reserve embarked on QE1 in December of 2008 (followed by QE2 and QE3 in more recent years), the value of the dollar has been suppressed by a low-interest-rate, low-inflation environment and U.S. goods have been priced at relatively desirable levels on the global market. That happens at the expense of other nation's currency levels, especially fast-growing nations like Brazil, who would also like to have a "cheap" currency with which to sell their goods to China.

The trouble is (for non-U.S. agriculture producers), that global grain trade is effectively transacted in U.S. dollars. The global benchmark of futures prices in Chicago is always listed in U.S. dollars, and those Chicago prices will always be sensitive to day-to-day movements in the U.S. currency. In this way, U.S. farmers are effectively automatically hedged for currency risk. If the price itself of corn drops, it tends to happen at the same time that the purchasing value of the dollar increases. But any non-U.S. farmer or company that must sell dollar-denominated goods always faces the risk that both the price tag of what they're selling and the value of that price tag's currency could both fall at the same time. That's a risk that can be hedged if one is willing to take large enough futures positions (the contract size for BRL/USD contracts, for instance is 100,000 reais or about $45,000) and time them correctly to coincide exactly with when you're receiving payment for your goods, but that may not be a very workable or common tactic for the average farmer.

This is obviously not unique to Brazilian ag producers. All the competitors for global grain export business are in this race. Canadian farmers must track an exchange rate (only 90 Canadian cents for every U.S. dollar) that their neighbors in Michigan don't have to worry about. The Ukrainian hryvna has been weakening in recent months, experiencing some particularly volatile movement in the past couple of weeks, and it now takes about 18 hryvna to purchase one Euro ... not that a cheaper currency has necessarily helped Ukraine's exporting prospects at the moment. Meanwhile, the official exchange rate for the Argentine peso is 8 pesos per U.S. dollar, but unofficially, it might take 50 pesos on the black market to buy one physical U.S. dollar, and because Argentinean farmers must buy the same inputs as everybody else on the global market, it's that unofficial, "real" value that dictates their purchasing power. On the buying side, the Chinese yuan has weakened dramatically through this calendar year, and it now takes more than 6.20 yuan to purchase one U.S. dollar. That's helpful to China's prospects for exporting manufactured goods, but makes them even more sensitive to value when purchasing grain cargoes.

And shopping around for value is really what it comes down to when worrying about these exchange rates at all. Soybeans at the U.S. Gulf (Louisiana) are presently valued at about $15.90. Soybeans at the Brazilian port of Paranagua are valued at the equivalent of $14.40 per bushel (source: DTN/Celeres). Meanwhile, corn at the U.S. Gulf is presently valued at about $5.65. Corn at the Brazilian port of Paranagua is valued at the equivalent of $5.55 per bushel (source: DTN/Celeres). That's a very competitive environment, basically coming down to what ocean freight would cost to get the grain to a buyer -- and it's especially important for the U.S. corn market in this year when we finally have some ample grain we'd like to be shipping out of the country.

So the next time I get irritated by how much a pair of Chinese-made sunglasses cost at the store here in Brazil (relatively speaking, given the purchasing power of my cheap U.S. dollars), I will remind myself that anyone who must buy or sell a product on a global market can watch exchange rates, or can try to time their currency exchanges or hedge their currency exposure, but ultimately we may just be "cantamos de galo" (crying like a rooster, i.e. attempting to control something we cannot).

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com.


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