Porto Alegre, February 22, 2023 – The Brazilian agribusiness media has tried to describe a bullish picture for soybeans, selling corn. Even with the record Brazilian production and already showing the evident effects in the logistics of this crop arrival, the efforts to convince growers to retain soybeans and wait for highs are impressive, just like in 2022. In this environment, some growers who missed the best selling moments now see premiums deteriorating and transport costs knocking down prices in the interior of the country. So, some try to accelerate the sales of the corn that is still in silo bags and of freshly-reaped corn.
In some cases, the concern over soybean storage accentuates this issue. With this scenario, the upward movement has been contained for corn in February but leaves room for exporters to speed up shipments through Rio Grande and Imbituba in the south. The cycle of tools used to contain corn prices at the moment are still present, that is, curbing regional highs such as in São Paulo via indicators, acting on the B3 as a psychological variant for prices in the country, and even creating a link to a case of Avian flu in a wild bird in Uruguay as an argument for pressure on prices in São Paulo. Maybe that is why more and more exporters are giving preference to growers in their selling actions. At the same time, attacks on the Central Bank continue, and the impact on the economy and the exchange rate will come up in due time.
The world economy resists to still rising interest rates. After the US employment data in January, US inflation resists retraction. The inflation accumulated through December was 6.5% in twelve months and now, with the January data, it is at 6.4%. A discreet decline for a major effort to recover interest rates. This resistance to the fall suggests that the Fed will confirm an 0.25% high in the prime rate on March 22. Some currents are suggesting that an 0.5% high would be indicated to accelerate the effect on inflation. Others are betting on the continuation of the gradual high of 0.25% in all meetings until July.
From any angle, the absence of a decline in the US and European inflation suggests more interest rates on both economic sides. More interests will come, therefore with a greater propensity for the return of the dollar’s appreciation against other currencies and greater difficulty for emerging economies to find room to sharply reduce domestic interest rates. Of course, there is always the vision that future data could converge to the curve expected by the Fed. However, interest rate hikes will not stop anytime soon, let alone a curve reversal. Inflation must be tamed.
Meanwhile, in Brazil, attacks on the pillars of economic solidity continue. Initially, the spending gap with the support of the National Congress, which appreciates bloated budgets. Later, attacks on the already determined inflation target for 2024 and 2025 at 3 to 3.25% a year, with the possibility of a 1.5% break either up or down. The attempt to break this target to 4/5% a year with an additional 1.5% risk reflects nothing more than the very condition of public spending and the public debt, which will increase in the coming few months. So, knowing the additional expenses and the greater need to issue currency with the consequent rise in inflation, an attempt is made to raise the inflation target so that the Central Bank (CB) does not have to raise the interest rate much beyond what is possible. Well, that is exactly like Argentina’s economic picture. The only difference is that the Brazilian CB is independent, and we still have great dollar reserves. Even if the CB remains independent, there may be changes in its board and chair, aligned with political decisions, and the economic solidity found by the country in these last four years may be replaced by aggressive speculative movements and capital flight.
Always observing the indicators, the Brazilian exchange rate is still too linked to the dollar index, but with a risk premium already adopted in view of the uncertainty curve in monetary policy. Otherwise, we would already have a dollar below BRL 5.00. The Copom already has a target to reduce the Selic to 12% at the end of the year, of course depending on external and internal parameters. If it is driven to bring interest rates to 12% or below in a way that is not indexed to external and internal indicators, that is, political cuts, the market will move away from fixed income to seek protection in foreign currency. This is the CB’s challenge in the coming few weeks and in the middle of persistent political attacks. Lower interest rates and higher exchange rates? Signs of Inflation coming back in 2024.
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