Porto Alegre, February 21, 2022 -The Brazilian summer corn crop is being reaped regionally depending on the seasonality of each state and the climatic scenario. Now, the harvest moves forward in the center-east of the South region, São Paulo, Goiás and Minas Gerais. At this regional start of the season, consumers are trying to put prices below BRL 100/bag, keeping prices more stabilized. On the other hand, growers have been motivated to sell more corn at this time, not least because prices are good, to enable greater retention of soybeans, as the soybean market environment is expected to get more complicated over the course of the year, at least this is the expectation derived from historical production losses. Thus, the domestic market is trying to take supply to its limit until some imports to the South region are made possible with the arrival of the Argentine crop, which still seems far away even with the current appreciation of the real. Concerns begin to increase with the second crop of the axis Paraguay, Paraná, and Mato Grosso Sul due to little rains in February. Some locations have stopped planting, and it seems the fall will come without soil moisture reserves for planting should the drought continue.
Some US economic data have emerged to slightly hold back the expectations towards interest rates, at least last week. The number of new constructions dropped 4.1% in January, and the level of jobless claims rose a little last week. This looks like a market severely depleted of short-term demand potential, which could even be an indicator of natural inflation control, that is, excess demand may be running out. Whether this movement will be enough to start changing the inflationary curve will only be revealed over the next few weeks.
This is important when we look at the upcoming meetings of the Fed and the Monetary Policy Committee (Copom) here in Brazil as a focus. The next two meetings will take place on March 16. The Fed tends to satisfy the financial market and offer the first post-pandemic interest rate hike with 0.25% for April, managing new corrections in line with the pace of the economy and inflation. This percentage correction is practically already priced by the market, with the S&P 500 having strong performance this year, and other markets shifting the investors’ asset direction. One of these points involves the flow of capital to emerging markets, that is, as interest rates in the United States are not focused on immediate strong corrections, capital is flowing to other markets that bring opportunities.
At this point, Brazil and the Copom’s decisions come on the scene from now on. Brazil’s Central Bank anticipated all external interest rate movements and is now positioned with a real interest rate in relation to inflation and capable of attracting capital and holding back negative expectations towards the exchange rate. In 2022, almost USD 52 bln have entered Bovespa. Therefore, this slow rise in interest rates in the United States, contrasted with the precocity of interest rate hikes in Brazil, has offered a great opportunity for foreign capital to take advantage of ‘cheap’ Brazil in dollars.
Thus, if the Copom decides to continue raising interest rates at the March meeting, this attraction of capital will remain strong and could put the real in an excessive and dangerous appreciation for the exchange rate fluctuation in an election year. The interest rate is already doing its job in the foreign exchange environment, and some prices linked to the external market will not be adjusted by interest rates, such as oil, soybeans or meat, for example. It seems excessive interest rates can now bring about a currency distortion with excess appreciation in the short term and leading to strong devaluation in the second semester with the electoral process and this volume of capital getting out of the country again until further notice.
With the dollar index stable abroad, the real is suffering the pressure of capital inflow. Now, the dollar has important support at BRL 5.10, and its loss would lead to BRL 4.90. Therefore, the Copom’s decisions grow in importance in March.
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