September 2009

Financial Situation Of Brazilian Farmers Still Precarious

International investors are once again pouring dollars into Brazil to take advantage of some of the highest interest rates in the world. Good for investors (and Brazilian banks), bad for Brazilian soybean farmers. As a result of the influx, the Brazilian real has appreciated against the dollar to levels not seen since early last fall. Last August, the exchange rate was 1.5 reals per dollar. In March it weakened to 2.35 per dollar. As of mid-July, it is back down to 1.95 per dollar.

For Brazilian soybean farmers, the exchange rate has taken away much of the recent soybean price increases. It has also introduced a level of volatility into soybean pricing that in the past made companies shy away from the forward pricing of soybeans. I do not know if that will happen again this year, but concerns over availability of credit for the new growing season are already surfacing.

It was reported in the Brazilian press last week that Cargill will increase the amount of funds dedicated to farmer loans from $400 million in 2008-09 to between $500 to 550 million in 2009-10. It is unclear if other large grain companies will follow suit, but Cargill’s action is an indication of the continued financial problems facing Brazilian soybean farmers.

We have written about this so many times that I even hesitate to bring it up again, but Brazilian soybean farmers, especially in Mato Grosso, are still trying to pay off debts that were incurred in the early 2000’s. The Brazilian Government and the Bank of Brasil have allowed them to roll over their debts numerous times, but each time its rolled over, the debt increases, which puts the farmers even further behind.

In decades past, rolling over debts in Brazil was a wise financial strategy because as the currency weakened, it was easier to pay off the debt in deflated reals. Now though, it’s just the opposite. If you don’t count what has happened during the last six months, the Brazilian currency has been continuingly getting stronger for the last four or five years. Therefore, as farmers have postponed their debt payments, not only has their debt increased it has gotten progressively harder to pay off these old debts with a stronger currency.