Monday, September 9, 2013

Brazilian blues!

While the outlook in tourism has been more promising recently some of our globally traded tropical agricultural products such as sugar and coffee have been sliding all year.

The current sugar price is now above the low in July and may be showing more positive signs. The chart is in $US so a weaker $AUD will provide some relief to growers. A recent note from Macquarie highlighted the importance of the Brazilian economy and currency (BRL) on these commodities.
Brazil is the dominant exporter across many of the softs, and its depreciating currency has had the impact of boosting Brazilian supplies to the rest of the world. Speculators have also been trading the inverse correlation between the dollar-dominated soft commodities and the BRL on the futures markets – exacerbating the soft commodities sell-off.
The BRL has bounced from the most recent sell-off but the Brazilian economy faces some challenges as resource investment recedes. I did see a commentary somewhere that the Brazilian ethanol industry also contributes to this as sugar supplies are transferred from domestic to export as the currency declines?

Coffee is another commodity which has been under pressure (although it hasn't yet shown up in our espresso prices) where it is suggested Brazil is the global marginal producer for Arabica beans and prices have fallen through the cost of production. I'm not sure how that impacts our relatively small boutique local coffee industry but where it could have some economic impact is to our north in PNG where coffee is a significant cash crop. The impact of the resources investment boom in PNG also creates serious two-speed stresses in that still third world economy.

Related links:
Capital flows back to US
Brazil cane industry invests, just not in new ethanol infrastructure
Brazil mills lift cane crush but sugar output lags

Update: meanwhile it seems debate on sugar marketing arrangements continues in Australia: Controversial report calls for sugar reform

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