What a Difference a Currency Makes

Spend Matters welcomes this guest post from Loraine Hudson, of Mintec.

Currency can affect everything we buy. It might not seem like it, but even if you “Buy American” there could be inputs earlier in the supply chain that have had their prices affected by an exchange rate. Sometimes, the currency influence is small, outweighed by other factors; sometimes currency can be a massively influencing price driver. This can be seen easily in the price of maize over the last six months.

Maize prices

If you look at the price of maize on CBOT in U.S. dollars (USD) and compare it with the price of maize from the Brazilian Mercantile & Futures Exchange in USD, you will see that the Brazilian maize is roughly the same price as U.S. maize. However, by changing currency and looking at the Brazilian maize in reals (BRL), we can see that the price has risen by 30% since July 2015. There are some significant reasons for the price of Brazilian maize rising so sharply.

Primarily, of course, there is supply and demand. In 2015/16, maize production in Brazil is forecast to fall by 4% to 81.5 million tonnes, due to a drop in yields. Production in Brazil had been increasing for several years, but this season will be the first since 2008/09 that production is forecast to be lower than the previous year. In an oversupplied global market, reduced production is not really a surprise and in itself wouldn’t push up prices by much. In Brazil, though, domestic consumption is rising and is forecast at 59.0 million tonnes, up 4% year-over-year for 2015/16. Compared with a slight fall in consumption in the US (down 0.1%), and a small rise globally (up 1%), this is enough to send prices heading upwards.

You may be wondering what that has to do with currency. Well, production is influenced by the application of fertilizers, some of which Brazil imports from the US. The strength or weakness of the BRL against the USD will ultimately affect the price of imports. As the BRL has been weakening against the dollar for the past two years, imports purchased in USD have been getting more expensive and in turn farmer costs have risen.

That’s not the only rise in costs, though. Brazil’s economic troubles have meant that high inflation and interest rates have also added to farmer costs. Understandably, as a result of these many contributing factors, prices have risen.
Are these higher prices a good thing for Brazil’s maize farmers? You’d think so, but it is ironic that although the weakening of the BRL has made exports competitive in the global market, it comes at a time when global economy concerns raise their head and the competition for global exports has gotten a whole lot stronger.

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