24/25 Season: Sharp cut in the southern region summer corn area

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Porto Alegre, September 9, 2024 – The Brazilian domestic market is trying to gain strength with the pace of exports and retention of producers in the interior. The still tense exchange rate and now soybean prices at higher levels are allowing for this slow trading and regional support for corn prices. In the week of the USDA report, the market wants to bet on some cut in productivity from the record estimate of 183.1 bushels/acre made in August. Such data should change the direction of international prices very little. Strong demand for US corn seems to be the most important factor at this time. Meanwhile, the Brazilian summer crop is starting to be planted, in a climate situation with a significant delay in rainfall even without the confirmed presence of La Niña yet. Corn planting has started in the South region, where it rains at the beginning of spring, but is halted in other regions. Safras & Mercado updated its estimate for the 2024/25 crop, with a strong reduction in area in the South of the country and still under observation in the other states. With this, the Brazilian crop is now cut to 133.5 mln tons, one mln tons below the first estimate. The initial delay in soybean planting, so far, has not affected the 2025 second crop in any way. Finally, exports are continuing at a good pace for the year’s profile, exceeding 20 mln tons so far.

The first key piece of information to support a probable decline in the US prime interest rate was the unemployment data released last Friday. Payroll grew less than expected, with 142 thousand new jobs, and the unemployment rate fell to 4.2% compared to 4.3%, while wage growth remained robust. Based on this information alone, we can say that there is still no consolidation of the labor market in a sharp decline to the point of generating a constant slowdown in the local economy.

Based on this information alone, the bias can be considered to be interest rate stability in September with a decision to cut interest rates in November. However, there is still one key piece of information before this decision: inflation in August. Employment may remain firm, as long as inflation tries to get closer to the 2% target in twelve months, currently at 2.9%. These data will be released this week and should support the Fed’s decision on interest rates on the 18th.

In the meantime, the US currency is awaiting the decision for a new bias. A good part of the interest rate cut bias is already priced in by the dollar index, which fell from 104 to 101 points in the second half of the year. The loss of 101 points could lead the dollar to further devaluation to 100 points. This environment shows that there is little room for a much sharper loss of the dollar against other currencies, with the constant decline in interest rates on long-term bonds favoring this currency devaluation.

For Brazil, the major important movement is precisely the decline in interest rates on US bonds and the depreciation of the dollar, allowing for an improvement in Brazil’s arbitrage with the rest of the world and avoiding greater pressure for devaluation in the short term. If, on the 18th, the Fed really does cut the interest rate by 0.25%, which is not yet clear, it would be possible to consolidate this movement.

On the other hand, we also have the meeting of Brazil’s Monetary Policy Committee (Copom) on the 18th, and the Central Bank may tend to use the Fed’s decision as an argument for interest rates in Brazil. Without a cut in the United States, the Selic could rise by 0.25%. With a cut, it could remain stable. This is a fundamental consideration for the short-term exchange rate in Brazil, as it could represent a recovery in the exchange rate toward the support of BRL 5.48 and perhaps BRL 5.30 at a later date. There are versions of raising the Selic rate by 2% by March 2025, in order to enable the rollover of public debt and contain inflation.

The other negative points for the Brazilian economy are related to the government’s continued lack of effort to cut spending, and, in addition, it is maintaining unprecedented public spending, with a fiscal deficit of BRL 256 bln over twelve months, despite record revenue. Excessive taxes can paralyze the Brazilian economy, making private companies unviable and increasing unemployment. The institutional disaster is just another variable in this unprecedented environment.

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