The collapse of Brazil’s currency is helping to compensate for the sharp fall in the price of many commodities, writes Patrick Knight. This state of affairs will persist in 2016.
Reflecting the country’s very poor economic performance of recent years, as well as the political turbulance of the past few months, the Brazilian currency has fallen by almost 50% against the US dollar and other currencies in the past year.
The weaker currency means that Brazilian goods of all types are much more competitive in world markets than a year ago. This is compensating, at least in part, for the impact caused by the fall in the price of most of the hard and soft commodities whose export now generates three quarters of Brazil’s export earnings.
China is now the leading destination for many of Brazil’s exports, notably iron ore and soya beans, as well as pig iron, pulp, leather and wood. But although China’s need for iron ore has weakened, along with the country’s economic growth, this has not affected the sale of most other goods imported by China.
Although a boom in building infrastructure and housing has slowed, so fewer minerals and the metals which China does not produce are being imported, consumer demand for foodstuffs and most other goods has slowed far less, if at all, as wages continue to rise.
Demand for soya beans by China, the destination of three quarters of the more than 50mt (million tonnes) of soya beans exported by Brazil each year, has not fallen at all. It also seems likely that China will soon join the many countries which import Brazilian maize, of which an all-time record 30mt has been exported 2015/16. Until five years ago, Brazil often imported some of the maize used to feed chickens and pigs. But more maize is now planted as a second crop to soya in the winter months than is in the summer. This trend will continue so long as more soya is planted in the north of the country, which seems inevitable, as demand grows.
Farmers growing grains are amongst those benefiting most from the devaluation. But production costs, which includes imported fertilizer, and equally important, the cost of transport, have risen greatly as well. Many farmers in the frontier areas have large debts set in US dollars, so are aprehensive.
Should the Brazilian economy start to grow again soon, rather than only after several more years of stagnation, something considered more likely, this would cause the currency to strengthen once again. If that happened, and world grain prices did not rise, the financial situation for many farmers would become very precarious. Many farmers would plant less, so less grains would be available for export.
The year 2014 saw significantly more of the soya and the maize grown in the centre west being exported from ports in the north and north east of the country. This followed the building of new terminals alongside the Tapajos and other rivers and the availability of many more barges and tugs to carry them. A few of the roads used to take soya and maize to ports have been improved, but not fast enough to keep pace with increasing output. The cost of road transport will rise even further if the world price of oil starts to rise once again, as seems likely in the long term at least.
Anxious to encourage a switch from road to rail transport, and so ensure Brazil’s crucial soya industry remains competitive, the government wants to attract investors, notably some from China. Finance is needed to build a new line which would link the tracks which now carry Vale’s Carajas ore to the deep water port of Itaqui on the Atlantic, to ports close to the mouth of the Amazonriver. Thisisnowamaindestinationofthebarges taking grains north.