Brazil: Exporters resume corn purchases with devalued currency

On the eve of the start of the US harvest, prices on the Chicago Board of Trade stabilized in the range of USD 3.70 to 4.00/bushel. As we have pointed out in our editions, with the crop aligned, the main medium-term indicator is the demand for US corn. We have also pointed out that Brazilian exports are at a good pace for this year’s profile, but they are not exceptional, especially since Brazilian corn is USD 20/ton more expensive than US corn. So, last week, there was the year’s best US weekly sale, almost 1.5 mln tons. If this demand factor continues like this it can avoid greater harvest pressures on the CBOT. Meanwhile, the internal scandals in Brazil, growing domestic debt and, now, an external deficit, led to a week of a significantly weaker real and concerns about the country’s institutional future. Exporters took advantage of the week’s improved competitiveness and accelerated corn purchases for September to November. Finally, a dry September in Brazilian growing regions promises to bring some initial expectation of delays in the 2025 summer crop.

The Brazilian institutional context has become extremely delicate with the facts declared and their consequences. The aggression against international institutions places us in the environment of economically and politically closed countries, besides restrictions on freedom of expression. The continuation of this harmful environment for international capital could lead the country to greater difficulties in the flow of investments and generate restrictions on the dollar flow. The country is already having this effect with the worst current account balance since 2019. The deficit in external accounts in the first seven months of the year was USD 25.9 bln, which the Central Bank points out as a result of the demand for products and services by the economy relative to the international context.

This faster capital outflow shows that Brazil is assuming a condition of twin deficits, external and internal. Despite record revenue, once again in July, the domestic public deficit reached another record, BRL 1.13 trillion, with July growing by another BRL 19.6 bln. Now, the public debt has reached 78.5% of GDP, and a primary deficit accumulated in twelve months of BRL 257 bln. The increase in public debt requires the issuance of new long-term bonds for its financing or currency issuance, so as not to cause an operational default in the government. To make financing a record and growing public debt viable, the financial system needs to buy government bonds, and, to do so, the government needs to offer higher interest rates.

Without this procedure, the market continues to hedge itself with foreign currency or even withdraw resources from the country. Last week, we may have begun a new phase for the Brazilian Central Bank after the appointment of the new president announced for the institution. The Central Bank had not yet intervened in the foreign exchange market this year, despite strong volatility. However, last week the transitional name for the institution was announced, and, perhaps due to this influence, the first dollar auction was held involving USD 1.5 bln. The attempt to hold back the dollar with auctions may be a preparation for the Central Bank’s decisions in the next meetings, that is, not to raise interest rates. Not raising interest rates means continuing with the difficulties in financing the debt while ignoring the twin deficits. The burning of dollar reserves could become an economic disaster for the country if the Central Bank tries to use the political bias of cutting interest rates and not solving the public debt issue. In this attempt, the government is sending another tax increase bill to Congress, now directly affecting companies’ results.

The positive side of the moment concerns the data on US inflation, which seems to be settling down a little more at now. Inflation in the United States is about to reach the 2% target at the beginning of next year, as indicated by the latest Personal consumption expenditures (PCE) index, which could pave the way for an interest rate cut in September. However, consumer spending remains strong, which may make the Federal Reserve (Fed) reluctant to make aggressive cuts. Yet, there is a dependency on August employment data, to be released on September 6, and then August retail inflation. The dollar index, despite the bias toward interest rate cuts, showed a week of strong growth, returning to the 101.6 point range, showing an appreciation of the dollar against other currencies. The slight resumption of highs in interest rates on long-term bonds in the US contributed to this situation. The Fed’s meeting on the 18th and inflation and employment data will be the focus of September.

Tags: harvest, corn, Brazil, prices, US, purchases