Porto Alegre, April 4, 2023 – The harvest of the Brazilian crop is advancing toward completion from April to early May. The planting of the 2023 second crop is trying to close the expected area in the first week of April. The Northeast region is advancing in a great second-crop planting. In these three environments, the update for the 22/23 crop by Safras & Mercado pointed to an increase in the production projection, from 125 to 130 mln tons this year.
The increase stems from excellent summer crop yields, despite the crop losses in Rio Grande do Sul and the strong increase in the planted area again in Mato Grosso and Matopiba in the second crop. Without a doubt, we have a second crop with nearly 50% of the area at risk in the Center-South and Paraguay due to late planting in March. However, we cannot cut the projection of production just because of the planting delay. Thus, our effort to sell the 2023 second crop will be huge because of warehouses full of soybeans and a bearish international market due to the new expectation of world crops.
The United States confirmed a larger corn area and a stable soybean area. Two numbers considered bearish for the Chicago Board of Trade, but with 120 days of weather ahead to define the price trajectory. The Brazilian challenge in this context will be to reach at least the volume exported in 2022, in view of the greater competition with US stocks and a European crop that is expected to be normal. Therefore, internal selling pressure increases in the first half of 2023, breaking the seasonality of highs and advancing in the search for space for soybean stocks with more corn sales.
With slightly better information coming from Europe and the United States, the market finds room for greater calm. The US personal spending index brought information of a slight decline and was evaluated as positive for the markets and for the Central Bank’s decisions on May 3. Before that, there will be the March inflation data, to be released in the second week of April and that could put inflation far below 6% in twelve months.
This occurred with the European inflation in March. Inflation in February was accumulated at 8.5% and, last week, the data released for March was 6.9%. If the US inflation follows the same downward trend, on May 3 the Fed may announce the stabilization of interest rates. Perhaps it is still too early to officially announce an interest rate cut for the second half of the year.
However, these results began to indicate that Europe could stop the pace of interest rate hikes as well. In this international arbitrage between the interest rates of the two blocs, the dollar began to recover value at the end of the week. After declines in inflation, the market saw that the US could reduce interest rates more slowly compared to Europe, and this could still keep the US attractive to investments by appreciating the dollar.
In Brazil, the exchange rate once again sought support close to BRL 5.00/dollar. Initially, through the external context of decline. Second, given the attractive interest rate for foreign capital and avoiding excessive capital flight, despite the negative flow in February of USD 2.8 bln. As Brazil is well structured in its external accounts since the great trauma in 2017, even with some capital flight, the reflection ends up being discreet.
The government launched a good intentions fiscal package last week. It showed a new fiscal anchor rule that replaces the spending ceiling, which always has Brazilian alternatives to be broken for any reason. However, it established a future primary surplus of 1% of GDP, which sounded very positive to the market. The issue is that it did not indicate any current or future spending cut indicator to make the projected fiscal surplus viable. So, the bias toward the surplus and closing of public accounts will end up occurring through an increase in the tax burden.
The government’s fiscal package was positive in the sense of pointing to the maintenance of the future fiscal surplus and the imposition of a new anchor for spending. However, it does not cut expenses and promotes an increase in revenue to generate resources to boost expenses. At this point, the National Confederation of Agriculture warns of the constitutional amendment proposals (PECs) 45 and 110, which establish key tax changes in agribusiness and may even make it unfeasible in the medium term. Problematic model for Brazil, that is, it will penalize the productive sector to generate revenue for the increase in public expenses.
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