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Sunday may prove crucial for the future of world farming

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If you want an idea of what lies in store for agricultural commodity prices, keep an eye on Brazil's presidential elections this weekend.

This year has already issued a reminder to markets of the importance of politics to crop prices, with the rally in wheat which followed the onset of Russian-backed unrest in Ukraine – both countries being major exporters of the grain.

Sunday will provide another, when Dilma Rousseff, the incumbent, and Aecio Neves, viewed as the business-friendly candidate, contest premiership of Brazil – the top beef, chicken, coffee, soybean and sugar exporter, and a major force in corn and cotton too, besides being a large wheat importer.

The result will have big implications for both grain and soft commodity markets. Indeed, it is difficult to recall an election which could prove quite so significant for world agriculture.

Policy moves

The importance of the election result isn't just because of what the result will mean in terms of direct agriculture policy.

Mr Neves, for instance, looks more likely to unscrew the cap on gasoline prices enforced by Ms Rousseff to curb inflation, but which has had the knock-on effect of reducing ethanol values, in turn depressing sugar prices too.

(The impact on the finances of cane crushers into ethanol and sugar has been disastrous – as highlighted by Fitch Ratings today.)

Conversely, a rise in gasoline prices would, in lifting ethanol values, put upward pressure on sugar prices to secure the sweetener its cut of Brazil's cane crop.

Poll barometer

The result may also prove hugely influential for world farming even if the winning candidate leaves agriculture policy alone.

And that is down to the importance of Brazil's currency.

The real has in the last two weeks acted as a barometer of the Mr Neves' chances of winning the election, soaring 1.3% against the dollar on Friday after a Sensus poll put him as clear favourite to win the election, with 54.6% of the vote.

Conversely, polls on Thursday putting Ms Rousseff ahead sent the real tumbling to a six-year low of nearly R$2.52 to $1.

It is a large move in the currency after the election which the world agriculture industry really needs to monitor.

Real importance

A rising currency boosts the value, in dollar terms, of assets in which Brazil is a major force.

Sugar futures indeed managed solid gains on Friday, standing 1.6% higher in midday deals in New York, even if hopes for rains for Brazil's drought hit coffee plantations depressed values of the bean.

The real:dollar exchange rate will also have a big impact on growers' plantings decisions.

Meanwhile, turning to field crops, many investors wonder how Brazilian growers can keep on expanding, say, soybean acreage in the face of tumbling prices, and the huge hurdle farmers face of the costs of getting crop to port through an inadequate road and rail system.

The answer is the depreciation in the real, which on Thursday stood 14% lower against the dollar than a year before.

That is the equivalent to US farmers of soybeans, which were trading at $9.85 a bushel in Chicago on Friday, being worth more than $11 a bushel.

Crucial for grains

In fact, it may be in grain markets in which the impact of the election result may be more keenly felt, in global agriculture terms.

Brazil's growers will in some three or four months – plenty of time for post-election currency moves to take effect - be deciding on sowings of the safrinha crop, which is seeded on land vacated by the soybean harvest.

The movement of the real will have a big influence over whether safrinha corn is worth growing, or whether it retreats from its newly-found position as the top corn crop – exceeding Brazil's so-called "main" crop – and reverts to being a minority concern.

The importance for foreign growers is that safrinha corn is the source of most of Brazil's corn exports. Its rise has fuelled the growth in corn exports from 11.6m tonnes in 2010-11 to 22.0m tonnes last season.

Growers of corn, barley, oats and wheat in rival exporters such as Europe, the Ukraine and the US should pray for Mr Neves to win Sunday's elections, to give their own grains a clearer run.

As for the Brazilian farmers, who actually have a vote, well…


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