Porto Alegre, January 5th, 2025 – The 2025 second corn crop is being planted well in Brazil, albeit in a slightly later traditional window. Rainfall has been very good in most producing regions and, for now, does not raise major concerns. However, the market has registered more pronounced highs in February, given the factors already pointed out in our newsletters. A modest summer crop, despite good productivity, plenty of corn for silage, very complicated logistics with a huge soybean crop, consumers with low stocks, and strong demand for the semester. Associated with this, attention is being paid to the weather for the corn second crop, with pollination and silking in April in most Brazilian crops. Good weather conditions in the fall will certainly promote greater sales of both the corn summer and second crops. Otherwise, we will have a long semester until the harvest of the second crop. The market is now preparing to move away from the South American climate to start focusing on the 2025 US crop, with a bias toward a recovery in the corn area and a slight cut in soybeans. This scenario will become clear with the planting intentions on March 31. The rest is the weather in the 2025 US summer.
The Brazilian economy substantially increases its risks for the 2025/26 cycle. After the Brazilian government eliminated “macroeconomics” from Economic Sciences, the economy manager offers signs that there will be no aggressive action by the government regarding its spending. The economy minister’s statement that it will not be possible to cut spending in a year of low economic growth reflects the mismatch between basic schools of economics and the design of the future. Without spending cuts, the government will need to continue raising taxes and/or interest rates to avoid generating national economic chaos. However, interest rates are holding back the economy, together with the exacerbated increase in taxes, the most recent on small and medium-sized companies. High interest rates and high taxes make growth unfeasible. So, does the Brazilian model use public spending to try to activate the economy or keep it minimally operating?
Brazilian economic policy deteriorates every month that the government does not act against the central problem: public spending. The economy will not be able to withstand high interest rates and taxes and will enter a recession, culminating in lower revenue in the face of lower demand. The IPCA-15 of 1.23% in February shows the next big problem, that is, the inflation resulting from this economic policy environment. The Central Bank will make an important decision at the Copom in its March meeting, that is, in addition to confirming the new 1% high in the Selic rate, it will also outline the interest rate trajectory for the rest of 2025. And this will be the first real decision of the new Central Bank management. Should it continue with new highs in the Selic rate and control expectations for a new inflationary and dollar escalation, or follow the government’s electoral line by keeping interest rates low even with inflationary risks and ignoring the exchange rate?
The government’s fiscal result in the first two months of this year will be an important factor in determining this interest rate curve. A fiscal deficit equalized by revenue, that is, low or close to
zero, can calm expectations and give the government time until the following figures. A large deficit at the beginning of the year promises to inflame expectations again, causing a dollar hike and a bias toward higher interest rates by the Central Bank. The lack of a solution for public spending leads us to this difficult and problematic equation for Brazil, with a substantial increase in economic parameters, with the inevitable loss of income of the population. Naming the responsible for inflation demonstrates a lack of knowledge of the cause and effect of economic policy or a desire to place the blame on villains such as coffee, eggs, corn, and other items as the ones responsible for the economic chaos. At this point, the government is acting aggressively to target national agribusiness, restricting the availability of credit at subsidized interest rates, threatening to reduce import taxes or, now, creating export quotas. These are models that were tried in Argentina in the recent past and that generated hyperinflation and food shortages. The Brazilian model is heading toward a tragic trajectory.
Thus, the real refused to lose its support of BRL 5.66/dollar and is falling again due to the statements made by the main members of the government. In addition, there is the external variable.
In the external environment, the market is awaiting the February employment data, as well as the inflation data, to be released in the next two weeks. High employment and higher inflation may suggest that the Fed (the US central bank) will change its focus, now toward a resumption of interest rate highs. The new government’s tariff policy may lead the economy to a new high in inflation, with the consequent need for raising both interest rates and the dollar. A rise in the dollar will end up influencing the real’s devaluation.
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