Effects of exchange rates in food trade

The objective of this analysis is to share with China Daily readers the possible impacts of exchange rates movements in food and agribusiness international trade. The case to illustrate the impacts will be Brazil, a country which currency, the Real (R$) faced huge variations since it was created and recently is going through a devaluation, impacting one of the world’s largest food exporters.

The article is organized in three sessions. The first will talk about the historical background on exchange rates and the impacts to food chains. Second is the new exchange rate in Brazil and what to expect. Third is related to possible internal consequences of the lower value of the Real and how can the Brazilian Government act to control problems.

Traveling to the past, the Real is a currency launched in 1994, during the new economic plan responsible for stabilization of the economy and institutional progress of the country. This currency is interesting to study since the trade value (exchange rate) towards the US$ varied in the last 18 years from US$ 1 to R$ 0,85 at early beginning, to R$ 3,8 than to R$3,2 and R$ 1,55 in July 2011. The Real, in 2011, was one of the most valued currencies in the world.

This strength of the currency was a consequence of, among other factors, thestabilization of the economy, political stability and improvement of institutions, exports of basic non food commodities, the large amount of international investments done in Brazil andhigher international prices of food and commodities made annually exports of Brazil jump from US$ 20 billion in 2000 to a possible result of US$ 100 billion in 2012. A silent revolution in food exports to the fast growing world demand made an inflow of US$ to the country.

The Realovervalued brought an explosion of imports to Brazil, being cars, electronic equipment, wines and other products from several sources. At the end of 2011, almost 22% of the products consumed in the country were imported. This brought intense and new competition for companies operating in the internal market, benefiting consumers at supermarkets with access to worldwide products, although much more expensive than for instance when purchased in the USA.

The overvalued currency also allowed two other movements: imports of equipment(capital goods) and machinery that improved competitiveness and the stimulus of the currency for Brazilian companies to invest abroad opening new marketing channels. Several food companies expanded operations outside Brazil.

Some negative impacts were reduction ofinternational visitors for tourism (the country was very expensive)and the explosion of traveling and expenses of Brazilian tourists outside. Most products, except the food commodities, had very tight and even negative margins in exporting activities and gradually companies reduced their exports. This happened in shoes, textiles, some processed foods, flowers, fruits and others.

The new fact is that the Real went from US$ 1/R$ 1,55 to US$ 1,0/R$ 2,0 at current moment. This is an important movement that can recover some margins and stimulate exports again, and as a consequence, more production, productivity, scale gains, efficiency gains and expansion in the offer of products to international markets. Sectors of more processed foodthat are cost intensive may now reach positive margins to export.

This new exchange rate will help to compensate food production costs increases due to poor logistics, more expensive labor (disputed by other sectors of the economy, like construction), strict environmental restrictions, higher land costs, higher energy costs, higher taxes that prejudice margins when producing in Brazil.

Finally, the most dangerous effect in all countries that face this situation is the risk of inflation returning, with terrible consequences, mostly for poor people.We have seen this in several neighbor countries of Brazil. Imported products become more expensive, more products are exported and other factors contribute to the rise of inflation.

There are several ways for Government to mitigate this risk. Since Government may receive more incomein taxes due to higher exports pulling more internal production, lowering taxes and also reducing not necessary Governmental expenses (the very large size of the Government) may contribute to reduce prices in internal market. We may also expect a reduction in the speed of the interest rates fall in Brazil.

A situation of a relative crisis in parts of the world also makes Brazil a target for international companies to market their products at reasonable prices, which also may help controlling prices. If we were in an era of excess of world demand, this would not impact positively. Finally, in some markets where prices raised internally due to the exchange rate, Government always can reduceimport taxes.

We could see here using the case of a large food exporter, Brazil, what are the impacts in food chains when the exchange rate changes. For food importing countries, most of the impacts of the devaluation of the Real are positive, since Brazil will be stimulated to export more, and will be more competitive in these exports due to all the investments described above.

So for China, one of the biggest food importers from Brazil, theseare good news, making even possible to expand the diversity of food imported.

The author is professor of strategic planning and food chains at the School of Economics and Business, University of Sao Paulo, Brazil (www.favaneves.org) and international speaker. Author of 25 books published in 8 countries.