MARKET STRATEGY By Jerry Gulke

Brazilian Real versus U.S. Soybeans

he currency relationship between exporters of Brazil’s Currency Relationship With U.S. grains and those who import grains has long 2008 A 0.6400 been a factor in pricing. The soybean currency 0.64 0.6200 Trelationship is probably the one that has affected U.S. B C 0.60 0.6000 D farmers the most, beginning with the expansion of 0.5800 1345^0 soybean production in Brazil brought on by the Nixon 0.56 0.5600 administration’s export embargo. The rest has been a 0.5410.54000 history of expansion in Brazil, which had an initial cur- 0.52 0.5200 rency advantage. Real 0.5000 Brazil benefited by selling soybeans in dollars, con- 0.48 SOURCE: THE GULKE GROUP 0.4800 0.4600 verting back to the Brazilian real at a 1:4 ratio. U.S. U.S. economic 0.4400 Value of Brazilian real Value 0.44

soybeans at $6 meant $24 to the Brazilian farmer. The stimulus 0.4200

chart to the right shows the acceleration of the real 0.40 Soybeans 0.4000

from 2005 through 2008. During that time, in spite of MovingAvgX (5,F) MACD (C,9,17,F)s -0.00238-0.0004156

rising soybean prices, Brazil became less competitive 4/05Apr-05 Aug-05 Dec-05 4/06Apr-06 Aug-06 Dec-06 4/07Apr-07 Aug-07 Dec-07 4/08Apr-08 Aug-08 Dec-08 4/09Apr-09 Aug-09 Dec-09 Apr-1 4/100 Aug-10 Dec-10 4/11Apr-11 Aug-11 Dec-11 4/12Apr-12 with U.S. soybeans, as the currency ratio was two reais to $1. U.S. soybeans at $10 equaled 20 reais to the > During the rise of the Brazilian real from 2005 to 2008, the U.S. farmer became more competitive and profitable. Brazilian producer, not 40! The U.S. farmer was not only more competitive but more profitable. In fact, there were years during that period where the Brazilian government extended farmer Current Environment. The recovery attempt last loans. A close examination of subsequent events reveals month by the real, ended with another weekly key how the value of U.S. soybeans has been tied reversal lower even on the realization that S. America’s to the hip of the Brazilian currency. crop was sub-par (D). A cheaper real makes Brazil more competitive pricewise and U.S. soybeans comparatively ABCD Relationship. Point A on the chart more expensive. However, by Sept. 1, South America shows the real taking out the 2008 highs will not have excess stocks, making the U.S. the major as if to indicate that Brazil’s currency supplier. The main thrust of a cheaper Brazilian cur- had the worst behind it and was rency will be to incentivize acreage expansion in Brazil. going higher. It failed to extend, col- lapsed through the uptrend and tried What to Do? A basic understanding of currency rela- to retest that uptrend only to post a tionships and how they can affect supply and demand weekly key reversal down (point B). globally is not necessarily something you learn at the Coincidentally, with the attempt of coffee shop. However, it is a subject of conversation in the real to break out to the upside, South America and other countries with whom we soybeans attempted to break out to the compete. Hopefully, this column helps explain the upside of a nine-month sideways mar- complexities of our situation. We in the U.S. have ket and also failed, and then reversed benefited from a weak currency for some time, but we trend completely on the Sept. 12 USDA have forgotten all too soon how Brazil expanded pro- report , closing lower in what turned into duction early in its ag exporting career. If the currency a $3.50 collapse into December and the relationship between the U.S. and other exporting beginning of the South American crop nations continues to disfavor American farmers, our ag problems (point C). economy could very well suffer accordingly. I The market realized that if the Brazilian currency was deflating, it made their Jerry Gulke farms in Illinois and North Dakota and is president market more competitive and the price of Gulke Group Inc., a market advisory firm with offices at the of U.S. soybeans would need to fall Chicago Board of Trade. Gulke Group recently published ahead of the U.S. harvest, which it did Technical Analysis: Fundamentally Easy. For information, send into December. an e-mail to [email protected] or call (815) 520-4227.

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