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Currency depreciations pose further challenge to food market stability

06 Sep 2018

As the 2017/18 season gradually unfolds, it is becoming increasingly clear that agricultural markets are in rougher shape than in previous years. Several factors are at play. While policy developments such as the US-China trade dispute have loomed over markets for the past couple of months, more recently heat waves and prolonged dry conditions in several parts of the world have introduced new risks by sharply reducing the expected production of wheat and other crops. A less apparent but potentially very destabilizing factor is the drastic depreciation of several emerging market currencies against the US dollar, the most widely traded currency.

In 2018, most currencies have weakened against the dollar, but emerging economies have been particularly hard hit. The Argentinean peso is almost 60% lower since the beginning of the year while the Brazilian real and the Russian ruble have lost more than one fifth and one sixth of their values, respectively. Considering that all of these countries are major exporters of agricultural commodities, the importance of these currency depreciations for global food markets cannot be overstated.

A case in point is Brazil. In normal times, the sharp drop in international soybean prices – denominated in US dollars – would be a signal for a large exporter to produce and sell less. Instead, the cheaper real is providing an incentive to soybean farmers to increase cultivation and cash sales to global markets, especially in view of strong buying interest from China. In fact, contrary to US benchmark prices that declined in the wake of the US-China trade dispute, Brazilian export prices have appreciated, leading to a significant (and unseasonal) premium over those in the US.

In Argentina, the sharp drop of the peso as a consequence of the country’s challenging economic situation pushed the government to reinstate duties on grain exports and raise the effective export tax for soybeans and derived products. In the case of Russia, the government has so far opted against export restrictions, despite this year’s sharp decline in wheat production and continued high export sales. While the government may still decide to impose some limitations on exports, the fact that such actions in the past dented the country’s hard sought international credibility as a reliable supplier is seen as a strong deterrent.

It is important to keep in mind that some of the increased competitiveness of a country with a weaker currency is likely to be offset by higher interest rates and prices for energy and agricultural inputs such as seeds and fertilizers, especially if these need to be imported and distributed across the country. Again, Brazil offers a telling example. Following a change in the country’s fuel pricing policy, domestic diesel prices have tracked rising global market prices, making transport costs – primarily by truck – significantly more expensive in depreciated reals. Also, double-digit interest rates have led many producers to rely on barter arrangements in which inputs are exchanged for a crop portion, thereby limiting marketing options.

Predicting the precise impact of currency movements on markets is a formidable task. Clearly, though, these movements introduce an important degree of market instability, especially if they are as widespread and pronounced as the ongoing wave of currency depreciations in key emerging markets.