A new report from the USDA’s Economic Research Service takes a deep dive into the role of Brazil’s macroeconomic policies in its emergence as one of the world’s top agricultural products exporter. In particular, the study focuses on the currency depreciation those policies have driven and the potential impact the COVID-19 pandemic might have on them going forward. The study confirms that when the Brazilian currency weakens, higher prices in local currency stimulate production and exports of most major commodities.
The USDA study also examines two different macroeconomic scenarios on future Brazilian agricultural productivity. To show how further devaluation of the Brazilian currency could impact global agriculture, ERS considered a scenario under which the BRL depreciates more rapidly and over a longer period than what happened during the recession. A second scenario features sustained GDP growth during the years of Brazil’s recession (2014-16) and to 2028 to explore whether economic growth reduces agricultural exports by generating stronger domestic demand for commodities. Below are details about the key findings. The full report is available HERE.
Weaker Real Contributed to Record Brazilian Export Growth: A weaker value of Brazil’s currency during its deep 2014-16 recession contributed to the record growth in Brazil’s agricultural exports. A devaluation of the Brazilian currency during that period encouraged Brazil’s farmers to bring more new land into production and increase double-cropping. Consequently, local currency-denominated prices yielded increased net returns for Brazilian farmers despite weak dollar-denominated prices in global markets. The expansion of Brazil’s land use was led by a +20% growth in the soybean area. The increasing efficiency of Brazilian agriculture paired with devaluation of the BRL relative to other currencies further contributed to the growth in Brazil’s agricultural exports.
Continued Production Growth Ahead: USDA has projected additional growth in production and exports to 2028, and simulations show that this growth could accelerate if Brazil’s currency weakens more than previously expected. Alternatively, stronger economic growth in Brazil could stimulate more domestic meat consumption with more domestic use of corn and soybean meal. Key findings from two simulated macroeconomic scenarios (accelerated depreciation and sustained growth) show:
- Faster depreciation of the real could lead to even faster growth in Brazilian exports than projected in USDA’s 10-year projections. Simulations show that Brazil’s exports of each major commodity could be an aggregate +5.6% greater and international prices -2.7% lower by 2028, compared with the USDA projections released in February 2020.
- Changes in net returns would divert cropland from sugarcane to soybeans and corn, yet a reduction in fuel imports would induce greater use of sugarcane to produce ethanol.
- Faster economic growth in Brazil would reduce its exports of beef and pork as more meat is consumed domestically, narrowing the gap between red meats and chicken prices. Increased poultry exports, driven by the price competitiveness of the Brazilian product, reflect Brazil’s status as the world’s largest exporter of chicken meat. More Brazilian corn would be used as animal feed and more soybeans would be processed to feed livestock. Corn exports would fall marginally, but soybean exports would not change substantially.
- During the 2020 COVID-19 pandemic, Brazil’s currency depreciated further, and its economy slowed. Experience and simulation results suggest that these developments could spur Brazil’s agricultural export growth. However, Brazil’s export performance also depends on the pandemic’s impact on demand in importing countries.