The fall in Brazil’s currency is beginning to take it under investors skin.
There was a common trading idea around last month that emerging market currencies such as the real would benefit, and the dollar decline, as Covid-19 vaccination campaigns rolled out and risk appetite improved.
With the real a key currency for ag markets - given Brazil’s pre-eminence in coffee, soybean and sugar exports, and high rank in trade of the likes of corn and cotton too – that was music to bulls’ ears. A rising real would, after all, buoy dollar prices of the above contracts.
‘Pick-up in producer selling’
But while the strategy worked for a while, and emerging market currencies as a whole remain only marginally down for 2021 against the dollar, the real itself has fluffed its lines.
It fell a further 1.4% on Wednesday to R$5.75 per $1, taking to 6.5% its losses in a week, undermined in part by the broader market jitters injected by bond market retreats, but also by concerns centred on Brazil, which reported a 4.1% decline in GDP last year, and has had hopes of a recovery overshadowed by a resurgence in Covid cases.
Softness is being instilled by worries of uncomfortably significant government inference, after the replacement last week of the chief executive of Petrobras.
“There is talk today the movements in South American currencies are starting to influence Chicago agriculture futures,” said Terry Reilly at Futures International.
“The real is weaker today and, like yesterday, chatter of a pick-up in producer selling in Brazil could emerge.” A weaker real boosts the value in local terms of assets traded internationally in dollars.
‘Can extend this recovery’
Certainly, futures in all five contracts mentioned above closed lower, with the few ag winners on the day, which limited to 1.1% the decline in the Bcom ag subindex in late deals, not so directly related to Brazil.
Cocoa futures for May, for instance, added 0.5% to $2,657 a tonne in New York, a three-month closing high, and 0.8% to £1,815 a tonne in London, the best finish for the lot in five months.
“Cocoa prices have been resilient in the face of mixed results from its key outside markets,” ADM Investor Services said, flagging the boost to values from ideas, on a worldwide scale, of Covid going into retreat and travel resuming, giving a boost to impulse buying of chocolate.
“With global demand prospects on the mend, cocoa can extend this recovery move,” which has already, in the past two weeks, take the New York May lot up 11.9%, and its London peer up 11.1%.
“Demand is expected to improve as the world economies recover from Covid-induced downturns,” said Jack Scoville at Price Futures.
‘Sharply reduced stocks’
Canola was another ag which bucked the trend, adding 1.8% to Can$766.60 a tonne for May in late deals in Winnipeg, to return closer to last week’s record high (for a nearest-but-one contract) of Can$782.90 a tonne.
Oil World has pegged EU rapeseed/canola imports for 2020-21 at a record 6.55m tonnes, at a time when Canada is running low on stocks, so requiring increasing purchases from Australia.
And “large plantings in Canada & Australia [are] required to satisfy world demand for rapeseed and canola in 2021-22,” the analysis group said, underlining the likelihood whatever that “sharply reduced stocks keep world supplies tight next season”.
With canola/rapeseed strong in oils rather than meal (of which soybean produces more when crushed), the rally has helped support values of vegetable oils such as palm oil, which closed up 1.0% at 3,678 ringgit a tonne in Kuala Lumpur.
‘More talk of ASF’
In Chicago, soyoil managed some headway too, edging 0.2% higher to 49.78 cents a pound for May.
But soybeans themselves, undermined by the softer real, shed 0.4% to $14.07 ½ a bushel for May.
And corn fell even harder, by 1.8% to $5.35 ¼ a bushel for May, lacking a vegoil support, with corn oil not so much of an influence on values of the raw grain.
Benson Quinn Commodities noted too, on the negative side for feed grains, “more talk of African swine fever in northern provinces” in China.
That said, the contract at least held just above its 40-day moving average, which it has not closed below since August, gaining some help from US ethanol production data for last week which, at 849,000 barrels per day, recovered more than investors had expected.
That represented a rebound of 191,000 barrels per day from the cold-impeded levels of the previous week, compared with the revival of 162,000 barrels per day forecast by a Bloomberg poll.
‘Taking a break’
Cotton, meanwhile, shed 2.7% to 88.45 cents a pound in New York for May, also undermined a bit by the real, but with chart factors also seen taking a toll in what is proving a technical market.
“Futures appear to be taking a break from the relentless up move seen over the last few months,” Mr Scoville said, noting that “chart trends are still sideways to down on the daily charts”.
New York raw sugar for May shed 1.8% to 16.14 cents a pound, little helped by the weaker real, but also by data showing that India had produced 23.4m tonnes of sugar so far this season, up 20% year on year, according to the Indian Sugar Mills Association.
More promisingly for sugar bulls the association added that Indian sugar prices down some 80-100 rupees per quintal on year ago levels, and “much below the cost of production for the last several months” had “adversely affected the liquidity of mills and their ability to pay” farmers cane.
“It is feared that if such situation persists then cane price arrears will jump very fast to uncomfortable levels” for growers. But this is a dynamic which will play out, or not, over a long period.
‘Market on edge’
Back in Chicago, wheat, not so much within the real’s orbit (although Brazil is a major importer), ended down 1.6% at $6.56 a bushel for May.
That did not give back all the previous session’s gains, but did take the lot back below its 10-day, 20-day and 40-day moving averages.
Steve Freed at ADM Investor Services flagged a “lack of demand for US exports”, which he saw evident in the relatively weak prices of near-term contracts against further away ones, compared with the greater backwardation seen in the likes of Paris.
Richard Feltes at RJ O’Brien reported a “wheat market on edge given the narrow window for possible US wheat export business before July-August,” when European Union and Black Sea harvests bring extra competitor supplies onstream.
“US wheat FOB is reportedly trading $20 per tonne below EU wheat” in an effort to win business.