ANALYSIS: Brazil currency to cap soybean futures rally below $10/bu

The weakening of Brazil’s currency may cap big rises in futures of soybeans as any rally towards double digits on the Chicago Board of Trade would entice Brazilian farmers to sell new crop forward, according to Brazilian sources and data compiled by Agricensus.

Brazil’s currency has depreciated 6.4% in the last three months to around 3.30 versus the US dollar from 3.1, as the government has struggled to pass social security reforms that would help rein in government debt.

While the collapse of the real has not been viewed as beneficial to the overall health of the economy, it has been a boon for Brazilian bean sellers as it has shielded them against a 5% collapse of futures prices that is hurting US farmers.

“The devaluation of our currency is compensating for the decrease in the international soy price in the last few days,” said Camilo Motter, a broker with Granoeste Corretora.

“But if you look back 45 days at the devaluation… it has helped a lot in price formation. Participants are keeping an eye on the market movement and another on the weather,” he said.

The girl

As Brazil is the world’s biggest exporter of soybeans, futures on the Chicago Board of Trade and the Brazilian real rise and fall simultaneously.

However, the recent fall in futures has largely been down to the erosion of fears that the La Nina weather phenomenon would hit South American bean production.

Just two weeks ago soybeans had hit a 4.5-month high of $10.15/bu on fears that La Nina had reduced soil moisture to such an extent it would cut production of soybeans in Argentina, the world's third largest exporter.

However, futures collapsed last week on forecasts of an impending storm that would drench the main growing regions - a dynamic that occurred at the same time as President Michel Temer warned voters in Brazil his deficit cutting bill would be delayed until the new year.

That sent the real tumbling to a near six-month low versus the dollar on December 14, a move that has immediately brought out sellers of soybeans.

"It sure helps getting some business done, although its mostly for spot positions,” said Eduardo Felau, a broker with Zairam Agrocommodities.

Data released Monday backed that up.

So far in December, Brazil has exported 1.25 million mt, according to government figures published by the nation's ministry of foreign trade.

That's almost double total exports for the whole of December 2016 and takes exports in the current February through January marketing year to 66 million mt – 1 million mt more that USDA estimates.

New crop

Yet while that is for old crop, it’s sales of new crop from the 2018 marketing year that could have a bigger impact on US farmers, who are hoping for a rally on the Board.

According to a report published by consultants Safras & Mercado earlier this month, Brazil has sold forward only around 27% of their expected harvest – 30 million mt of an estimated 114 million mt crop.

Yet as big as it is, that figure lags typical forward sales at this time of year, which last year were around 28% of the same sized crop but, according to Motter, both of those are significantly down on a long-term average of around 35% sales forward by this time of year.

That means Brazil sellers will have to increase rates of sales rapidly over the next couple of months, which could cap a rally in futures.

“Any rally on the board towards $10/bu is likely to be met by fresh selling out of Brazil, which is why its hard to make a bullish case right now for (soybeans), particularly after the rains this weekend (in Argentina),” said one US-based trader who declined to be named.

BRL1200/mt the magic number

According to data compiled by Agricensus, only once in the past three months has the real conversion of January futures on the Chicago Board of Trade reached above BRL1200/mt – on December 5 when futures closed at a near two month high of $10.10/bu.

On that day, forward selling of new crop was “huge” according to a fourth source, who claimed in a note that over 1 million mt was sold forward in just a few hours.

At current exchange rates, just a 30-cent, or 3%, hike in futures would see prices hit BRL1200/mt again for January.

And with January futures around $9.60/bu and March at $9.71/bu, the delay of Brazil's social security reform bill until at least February means it may be some time before soybeans hit double figures again.

Bulls will be praying either for a dry Christmas over Argentina or a stronger real.