Emerging market investors bet big – and wrong – on the outcome of Brazil’s presidential election runoff Saturday, triggering an ugly selloff for soybeans and soybean futures.
January soybeans closed at $12.52 ½, down 16 cents, after hitting a two-month low at $12.39 earlier in the session, a move that found bean and meal futures joined at the hip with the Brazilian real. Brazil’s currency had surged versus the dollar after challenger Flavio Bolsonaro defied expectations to outperform President Luis Inacio Lula da Silva in first-round voting on Oct. 5 and had maintained gains even as polls showed the race tightening.
When Lula eked out a victory Sunday to claim an unprecedented fourth term as president, Brazilian real futures collapsed overnight. The spot forex market caught up to the futures drop in domestic FX trading. The U.S. dollar was up more than 9% versus the Brazilian currency to change hands at 5.445 reais in recent trade. That more than erased a move that had seen the real strengthen to around 4.95 per dollar from around 5.20 per dollar ahead of the Oct. 5 election.
There are two things at work in the soybean selloff. First, the drop by the real makes Brazilian soybeans much more competitive on the global market. Brazilian soybeans – and other commodities – are already priced in dollars, so it isn’t that a weaker real makes them less expensive to users of other currencies. Instead, when Brazilian farmers sell their soybeans, those dollar sales are converted back into Brazilian reais. A stronger dollar means more reais in the farmer’s pocket, thus providing an incentive for more sales. Those increased sales push down the local price and help make Brazilian cargoes more competitive on the global market.
Second, commodity traders are well aware of the correlation between the real and soybean futures. A violent move by the real likely triggered further rounds of fund liquidation and perhaps some short selling. Forced liquidation, given the scale of the carnage in Brazilian markets, may also be at play. Friday’s Commitments of Traders data from the Commodity Futures Trading Commission showed net longs in soybeans remained at an elevated 206,936 contracts as of Oct. 20 after a liquidation of another 30,555 contracts over the previous week.
The wild swings in the currency market underlined just how crowded trades based on a victory by Bolsonaro, who was widely viewed as much more market friendly, had become. Brazil’s benchmark stock index dropped more than 10%, sparking multiple trading halts. Brazilian bonds sank as well. Like the real, those markets had rallied in the wake of Bolsonaro’s Oct.5 showing and had largely held gains even as polls had shown the race narrowing.
Betting markets fared no better, reflecting overwhelming odds of a Bolsonaro victory right up until election day.
Keep in mind, however, that a weaker real remains a double-edge sword for Brazilian farmers. It will likely induce near-term selling. But if it remains weak, it will make imported fertilizer, seed, chemicals and other inputs more expensive in local currency terms. Also, Brazil under Lula has clamped down on deforestation. Bolsonaro was expected to significantly loosen environmental regulations, which could have resulted in a faster expansion of crop acres, at least in theory.
Meanwhile, Bolsonaro has said he will request an annulment of the election after an extension to voting hours, which was requested by both candidates, led to chaos at some polling places. Lula won more than 64 million votes versus just under 60 million for Bolsonaro, a margin of nearly 4%, the Associated Press noted. “This is a really uphill battle for Flavio Bolsonaro,” Brian Winter, Brazil analyst and editor-in-chief of Americas Quarterly told AP. “Brazilian power brokers are closing ranks behind Lula, sometimes begrudgingly.”
Markets cheered Bolsonaro on hopes he would follow through on pledges to deliver a fiscal adjustment aimed at putting Brazil’s debt burden back on a sustainable trajectory and pursue other structural reforms. The question now is how Lula reacts to the market reaction.
“Between today and Lula’s inauguration on 5 January, his government has to convince markets it’s serious about getting debt under control,” said Nigel Green, CEO of London-based deVere Group. “Get that right and much of this sell-off could unwind surprisingly fast. Get it wrong and losses likely deepen across emerging market holdings worldwide, hitting savers through the funds they own.”
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