The Brazilian real (BRL) continued tumbling in October 2019, reaching a new 1-year low this week, at 0.239BRL/USD, down by 9% y-o-y and by more than 36% compared to January 2015. The Brazilian currency lost ground during the past year, partly driven by concerns over global economic growth. However, investors’ confidence toward Brazil was focused, in 2019, on the Brazilian pension reform introduced by the new President Jair Bolsonaro. The delay in voting the reform by both the lower and upper chamber in Brazil induced low optimism of the medium-term future of the Brazilian economy, especially the management of its public debt. In September, Brazil’s Senate finally approved the introduction of the reform, slowed down the Brazilian real depreciation. However, lower-than-expected forecast by the IMF on Latin America’s growth and the intensifying tensions between US and China prevented any appreciation of the Brazilian real in September and October.
As Brazil is the largest exporter of sugar, coffee and orange concentrate globally, any variation in the local currency has a major contribution to the level of Brazilian exports, thus being a major driver of those agricultural commodity prices. Most Brazilian commodities are traded in US Dollar (USD), meaning that a depreciation of the Real would encourage exports, adding supply on global markets. Using coffee as an example, the substantial depreciation of the BRL coupled with an increased output by Brazil, have been absorbed extensively by importing markets, adding downward pressure on global prices. Figures for the 2018/19 marketing season for coffee (October-August) showed that exports from Brazil increased by more than 30% compared to the previous marketing year, at 38m bags (60kg). As 35% of global coffee exports are supplied by Brazil, arabica coffee prices (ICE – Intercontinental) slumped by 23% y-o-y in October while robusta coffee prices also showed a downward spiral with a 30% y-o-y.
A further decline in Brazilian real would push additional supply on the global market, possibly encouraging lower global production in the next years, due to global prices not being able to cover for production costs for other producing countries.