Porto Alegre, September 20, 2022 – The great expectation for the USDA report was a productivity adjustment in the 2022 crop of corn in view of the climate situation in part of the US Midwest. The cut occurred and came in line with the market expectations. The surprise? The cut involved 800,000 acres, which was responsible for reducing production by 3.5 mln tons out of the 10 mln tons cut in the US crop. Now, very low stocks, a strong crop failure in Europe, and doubts about the future of the sales flow from Ukraine could accentuate concerns about prices and the need to ration demand for the first half of 2023. The United States will need to gain 4-5 mln acres in the next planting to see some price moderation in the second half of 2023. Meanwhile, Brazil continues with great shipments and Iran as the largest Brazilian buyer, but with strong demand from Spain, Egypt, Holland, and Japan. With planting in the south of Brazil progressing well this September, the outlook is concentrated in this scenario of high international prices for the first half of 2023 and the weather in South America in this summer crop.
Last week started with good expectations for the global inflationary scenario. The view that the US inflation indicator could come close to 8.1% accumulated in twelve months brought a Monday of pressures on the Dollar Index on the NY Stock Exchange, with optimism that inflation might be settling down at a faster pace. On Tuesday, the indicator brought 8.3% of accumulated inflation, the market did not like to be contradicted in its expectations and resumed tensions about the meeting of the Fed on the 21st, boosting its positions with the dollar.
The less moderate-than-expected inflation seems to suggest to the market the vision that the Fed will have to follow a more aggressive monetary policy and, in addition to the 0.75% hike in interest rates on the 21st, will make even stronger corrections in the last two meetings of the year. Perhaps 0.5% in each decision or, why not, 0.75% in the last two meetings, putting the accumulated rate close to 5% per year. The Dollar Index surged again above 110 points on the NY Stock Exchange, the highest level since 2001, demonstrating a very strong dollar against other currencies.
This external movement brought the dollar back to less than BRL 5.10, but quickly sought to break the technical barrier of BRL 5.25, the level at which it closed the week. The markets need good external news about inflation to suggest some control of the bias of continuous interest rate hikes and, consequently, a flight of capital from emerging economies. China maintains its currency devaluation to close to 6.90/dollar and may provoke situations in other emerging countries to balance rates, including Brazil.
For Brazil, the Copom has little room to hold back interest rates and needs to maintain competitiveness for a positive flow of capital, especially in an election period. The approach of the first round of Brazilian elections may be causing some movement of capital with a greater outflow of resources. Perhaps, if the elections end in the first round in a positive way for the country, the real could be partly balanced, at least at first, and then resume the global economic routine. With the second round, we will be able to see more speculative situations in the Brazilian exchange rate, which would be considered “normal” in the most difficult election for the country.
Argentina, with inflation approaching 100% in the accumulated twelve months and interest rates jumping to 75% per year, tries to negotiate with international creditors the flow of capital to the country. In this process, it focuses on generating export revenue to make some payments to creditors viable and have access to new resources. To improve this foreign exchange inflow, Argentina created a dollar rate (another one) that will only be valid for September. This is causing exporters to become more aggressive in the international market, especially in the soybean complex, but it does not have the same strength in the case of corn since export registrations reached nearly 35 mln tons, and there would be little corn to export until the new crop begins. Of course, the act provoked important changes in the relation of premiums and export prices.
The government insists on a limited deadline for the “soybean dollar” until the end of September. However, it is expected that after the measure, the government will start accelerating currency devaluation. For now, the rate of inflation continues to outpace the rate of devaluation. Pressured by the International Monetary Fund, the government would be forced to accelerate the devaluation. The way the government acts brings future expectations. Different sectors of the economy are expected to slow down their exports while waiting for a currency differential. After the “soybean dollar” was set, producers can now expect the government to need dollars and grant them a “wheat dollar,” a “corn dollar”, a “meat dollar,” an “information services dollar,” etc. Thus, the measure allowed the government a quick inflow of dollars, improved the exporters’ margins, but has caused and will keep having multiple negative effects on the rest of the chain. Finally, remember that the dollars are held by the central bank, which releases pesos. As the dollar rises, the need to issue pesos to support the incoming dollars grows higher, increasing local inflation, which suggests that the dollar at 200 pesos will become permanent.
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