A notable headwind for U.S. corn prices over the last several weeks has been export demand. We’ve discussed the implications of a weaker Brazilian Real here on our blog, and on social media before – but, with some unexpected political developments in Brazil lately, we thought it would be worth revisiting today.

First, a yearly comparison of Brazilian corn exports per month since 2008. Not only is the seasonal nature of Brazilian corn export activity shown very clearly by this chart, we can also see that this year has been a barn-burner for the Brazilians.

Since export figures for the month of November aren’t complete, we left it a lighter shade of yellow. However, you can already see it right up there with the monthly pace for years like 2009.

What’s been the main reason for such a strong export pace as of late? The weakened Real has continued to make export attractive. The currency, after a period of sub – R$4 trade, rocketed up again last week. This time, it was off of news that the jailed former President, leftist Luiz Inácio Lula da Silva (“Lula”), was to be released from custody. A threat to President Jair Bolsonaro’s pro-market right-wing government, Lula’s release was a cause for a break above R$4, where the currency has remained since (as of this writing).

So, a weaker Real has been a damper on export demand. We’ll see if any major increases in corn export sales occurred this week tomorrow morning, but the numbers continue to show relative weakness in American corn prices to other major exporters:

As harvest rolls across the United States, some interesting trends have developed in the corn and soybean markets’ fundamentals. Soybean demand has been carried by Chinese purchasing and lessening of trade tensions.

Corn demand has been noticeably poor, however. Demand from ethanol production has been tepid, certainly; a major problem has been an unseasonably weak export demand for American corn overseas.

There have been several headwinds facing corn exports in recent months; not only are we dealing with the hangover from the runup of prices during the summer rally tamping down demand, we are dealing with a political situation in Argentina that has prioritized exporting corn now before the new president, Alberto Fernández, assumes power in December.

What has been particularly burdensome for export demand has been from Brazil, however – and the impact a weaker Brazilian Real has had on American corn’s competitiveness in the global markets.

Despite some recent strength, the Brazilian Real is historically weak against the U.S. Dollar at present.

What explains the dollar’s strength against the currency? Beyond the recent strength of the U.S. Dollar to other currencies (we won’t be getting into this today), much of this stems from a lack of investor confidence in the Brazilian economy in recent years.

After 2009, and for several years after, foreign direct investment in Brazil picked up as investors shifted focus to emerging market economies. Brazil, with a pro-market government and Latin America’s largest population, was a popular choice for many looking to invest in emerging markets.

However, weakness began to develop in Brazil in the back half of this decade. Among other things, falling commodities prices and massive corruption investigations against the highest levels of the Brazilian government contributed to a recession lasting from 2014 – 2017.

Naturally, these developments were a damper on investment – and a damper on the Real. A weakening Real meant that exports paid for in the Brazilian currency were cheaper when bought with U.S. dollars; this contributed to stronger export demand for Brazilian commodities like sugar, ethanol, corn, and soybeans (among others).

There are signs that this trend is reversing now, however. The Brazilian government returned to pro-market policies with the election of Jair Bolsonaro in 2018; his signature policy plank in the election – reforming the nation’s ballooning pension system – recently passed the Brazilian Senate and is on its way to his desk. Managing debt has been a priority for market-friendly politicians like Bolsonaro for some time, and recent moves like this have offered some strength to the fundamentals of the Real.

Global macro trends also support a stronger Real, as well. With record-low interest rates in developed nations, the search for yield inevitably will look increasingly at countries like Brazil. A potential turnaround in emerging markets will produce less-favorable conditions for export demands as the currency appreciates against the dollar, however.

For American ag producers, it could be reason to celebrate: with Brazilian stockpiles of corn and soybeans running low, a strengthening Real would be a headwind to continued export business out of Brazil. Weakness in the Real has also depressed global sugar prices; Brazilian ethanol is primarily made from cane sugar. Higher sugar prices would de-incentivize ethanol production, and potentially boost American ethanol exports, as well.