Porto Alegre, May 15, 2023 – The first supply and demand report from the United States Department of Agriculture (USDA) maintained a bearish bias for corn prices in the international environment. We would say a very bearish bias. The initial yield estimate of 181.50 bushels/acre is actually quite optimistic and the record of the records. Early planting in good progress satisfies an optimistic estimate. The issue now will be the month of July, with most crops pollinating and silking, with the need for regular rain in the Midwest.
For the time being, the May rains have not been really abundant, but one should not rely on a pessimistic forecast because of this. In fact, this picture helps to speed up planting and indicates that June will need to restore soil moisture for crop development. Meanwhile, USDA has left its number for Brazilian production similar to that from Safras & Mercado, in a scenario still open to a larger-than-expected crop. With no risk of frost in May and little expectation for June, the Brazilian second crop will hit the market with intensity. The outflow of the second crop, from now on, is the central point and port prices do not help domestic prices. Corn will need to be sold at technically low prices due to the need for a record crop, and, most likely, there will be no conditions for government support to resolve more critical issues. Speeding up exports is the only plausible exit.
The real was surprising last week with an appreciation that was not in line with the international and even domestic environment. Initially, the official Brazilian inflation index brought a higher-than-expected figure, with 0.61%. This internal inflation environment, as a reflection of the mismatch of public accounts, is an indicator for the exchange rate movement. Inflation with retraction inertia with high interest rates suggests that the Central Bank needs to further push liquidity to force inflation down. Controlled prices, such as fuel, still do not contribute to inflation. All of this indicates that Brazil’s Monetary Policy Committee (Copom) has even less space to cut interest rates on June 21, the next meeting.
On the other hand, there are also problems in the accounts of the US government. The budget hole could halt again the federal government and affect mortgages, for example, due to the need to raise interest rates on federal bonds to raise funds. Negotiations in Congress to break the spending ceiling ended up causing a rush to the dollar, with the index surpassing 102 points, in a strong appreciation.
Besides, the US inflation in April showed a slight cut. The market expected a 12-month accumulated index of 5%, without a decline in inflation, and the accumulated index hit 4.9%. The market saw the data as inflationary resistance to the current interest rate, as the Fed’s target is 2% in twelve months. The high level of employment and economic activity may also reflect this inflationary inertia. On June 14, the Fed will decide on interest rates again. There is no expectation of a cut in this environment.
Another point that could influence the exchange rate in the future is the restructuring of the fiscal plan along with government spending combined with changes in the management of the Central Bank. The Central Bank will remain independent, but with four new directors, including those for monetary policy, appointed by the government, the Copom’s bias may be changed. If the change is aimed to cut interest rates regardless of the international environment, capital outflows and loss of exchange rate support will be evident. Mainly in a season when commodities are beginning to lose value and the Brazilian trade balance may be affected in the second half of the year. Perhaps this environment of profound changes in economic policy is still holding the exchange rate back today so as not to seek the level of BRL 4.70/dollar.
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