Introduction
Brazil is currently offering a 10% discount. But how can you import cheaper from Brazil? Understanding the dynamics of the Brazilian currency and utilizing effective hedging strategies can make a significant difference. In this blog post, we'll explore the factors influencing the Brazilian Real (BRL), the impact of currency fluctuations on international trade, and how businesses can protect themselves using hedging tools.
Brazil's Floating Exchange Rate
Brazil adopts a floating exchange rate, and the government estimates an average of R$ 5.15 for USD 1.00 in the years 2024 and 2025. Although this level varies greatly and is not considered a target to be pursued by the Central Bank, the dollar has been fluctuating in recent years between R$ 4.65 and R$ 5.80. This fluctuation can make Brazil 20% cheaper or more expensive in short periods of time.
Causes of Currency Devaluation
There are two main reasons:
First, the High Interest Rates and Country Risk
With real interest rates of 10.50% per year (SELIC as of July 4th), Brazil needs to pay a higher risk premium (Country Risk) to attract foreign capital. This means that in the long term, more BRL is printed than USD to pay debts to lenders (owners of BONDS or public securities that lend to local governments). Even though both countries are growing the percentage of debt relative to GDP at an extremely worrying pace.
Second, the Domestic Policy and the Market Reactions
In Brazilian domestic policy, compliance with a fiscal framework that contains the bleeding is expected. However, when the union budget signals to the market the possibility of spending above the ceiling or above pre-established targets, the market reacts quickly, fearing inflation out of control.
Impact on International Business
This results in:
1. Devaluation of the stock market
2. Devaluation of the exchange rate (BRL/USD) due to internal issues such as high inflation, economic uncertainties, the impact of the pandemic, political instability, fluctuations in oil and other commodity prices, external debt, among other factors.
Economic and financial reports from institutions such as the World Bank and the International Monetary Fund (IMF).
COUNTRY | CURRENCY | CODE | CURRENT VALUE (USD) | % DEPRECIATION (LAST 12 MONTHS) |
|---|---|---|---|---|
Mexico | Mexican Peso | MXN | 1 USD ≈ 20 MXN | ~5% |
Brazil | Brazilian Real | BRL | 1 USD ≈ 5.50 BRL | ~15% |
Chile | Chilean Peso | CLP | 1 USD ≈ 900 CLP | ~15% |
Iran | Iranian Rial | IRR | 1 USD ≈ 42,000 IRR | ~20% |
Angola | Angolan Kwanza | AOA | 1 USD ≈ 825 AOA | ~25% |
Turkey | Turkish Lira | TRY | 1 USD ≈ 27 TRY | ~30% |
Nigeria | Nigerian Naira | NGN | 1 USD ≈ 770 NGN | ~30% |
Zimbabwe | Zimbabwean Dollar | ZWL | 1 USD ≈ 361 ZWL | ~40% |
Sudan | Sudanese Pound | SDG | 1 USD ≈ 600 SDG | ~45% |
Argentina | Argentine Peso | ARS | 1 USD ≈ 350 ARS | ~50% |
Lebanon | Lebanese Pound | LBP | 1 USD ≈ 89,000 LBP | ~50% |
Syria | Syrian Pound | SYP | 1 USD ≈ 2,500 SYP | ~60% |
Venezuela | Bolívar Soberano | VES | 1 USD ≈ 4,000,000 VES | >99.999% |
Ensuring Currency Stability: Key Tools for Brazilian Exporters
The exporter can, at any time, ensure that they will receive the USD converted to BRL at the rate of the day of the protection operation and for a long period of time. However, for the exporter to protect themselves from currency fluctuations, it is essential to work with predictability of receivables and a good history with their bank. Transparency and a good relationship with the customer portfolio (importers) can greatly help in using three important currency protection tools. They are:
- ACC (Adiantamento sobre Contrato de Câmbio): A financial instrument used in Brazil where exporters receive an advance payment from a bank based on a foreign exchange contract.
- ACE (Adiantamento sobre Cambiais Entregues): Similar to ACC, but the advance is given after the goods have been shipped and the export documents have been delivered to the bank.
- Hedge Cambial: A risk management strategy used to offset potential losses in investments due to currency fluctuations by taking an opposite position in a related asset.
ACC, ACE, or Hedge should be undertaken with great care and a deep understanding of the risks involved, and never in a leveraged manner.
Timing and Patience
Even if everything is planned as per the book, another factor is fundamental to extract some advantage from these currency movements. It is necessary to have patience and be extremely selective in defining the right moment for the appetite for risk. Or, for the lack of risk.
Recently, two days ago, the dollar hit R$ 5.70 again (today it has already dropped to R$ 5.50). Did your supplier promise you a one-time discount? Have you noticed delays? Well, the currency is strongly related to the demand for Brazilian consumer goods and commodities. The dollar went up, the ports get crowded.
Hedging is risky because, for example, a large part of the costs at the FOB (Free on Board) origin of an FCL (Full Container Load), (on average around USD 2000 per 40’hc container), are quoted in dollars and receiving a payment via bank Swift at a much lower rate than the rate charged by the service provider (freight agent or port) can compromise the profit of the entire operation.
What is the Fair Exchange Rate in Brazil?
Proudly described as the world's breadbasket, the country is a leader in the production of various commodities, and for this reason, even with all the fiscal juggling of public accounts, the BRL has solid fundamentals and market-leading companies in various segments. We can mention JBS (Animal Protein), Ambev (Beer), Suzano (Pulp), Vale do Rio Doce (Iron Ore), Petrobras (Oil). All these are global companies and exporters counting on their revenues in dollars and stable profits.
When vulture funds speculate against the health of the BRL, this movement creates moments of great uncertainty in the country and generates distortions in the fair value of the currency, opening windows of opportunity. This benefits the local manufacturing industry, both because it scares the importer who sees costs skyrocketing, and for the exporter, who sees opportunities to work with discounts of 8% to 15% compared to current price lists.
If the exchange rate is already sufficiently devalued, another selective way to punish the country is through the capital markets. However, in this criterion, according to World P/E Ratio, if we consider the price-to-earnings (P/E) ratio of publicly traded companies, Brazil is below two standard deviations in its prices and is considered "cheap." in the last 15 years.
So how Long Can Global Funds, Foreign Investors, or Importers Overlook That Brazil is "Cheap"? Let's Look at Some of the World's Major Commodities and Brazil's Position in Global Production and Trade.
COMMODITIES | BRAZIL'S POSITION | BASE YEAR | INFORMATION SOURCE |
Soybeans | 1st largest producer worldwide | 2022/2023 | USDA - "Oilseeds: World Markets and Trade" (March 2023) |
Coffee | 1st largest producer and exporter worldwide | 2022/2023 | USDA - "Coffee: World Markets and Trade" (December 2022) |
Sugar | 1st largest producer and exporter worldwide | 2022/2023 | USDA - "Sugar: World Markets and Trade" (November 2022) |
Beef | 2nd largest producer worldwide | 2022 | USDA - "Livestock and Poultry: World Markets and Trade" (April 2023) |
Cellulose | 2nd largest producer worldwide | 2021 | FAO (2021) |
Oranges | 1st largest producer worldwide | 2021 | FAO (2021) |
Cotton | 4th largest producer worldwide | 2022/2023 | USDA - "Cotton: World Markets and Trade" (February 2023) |
Chicken Meat | 3rd largest producer worldwide | 2022 | USDA - "Livestock and Poultry: World Markets and Trade" (April 2023) |
Beans | 3rd largest producer worldwide | 2021 | FAO (2021) |
Iron Ore | 2nd largest producer worldwide | 2021 | U.S. Geological Survey - "Mineral Commodity Summaries 2022" (January 2022) |
Petroleum | 8th largest producer worldwide | 2021 | U.S. Energy Information Administration (EIA) - "International Energy Statistics" (2021) |
Conclusion
A close and trusting relationship between the Brazilian manufacturer and the importer that can predict the financial volume to be negotiated between the parties over a period of 360 days to 720 days, along with a good dose of patience for those who use hedging, for example, can make the price paid for goods imported from Brazil 20% cheaper or 20% more expensive.
Finally, the values of maritime freight originating from Brazilian ports compared to ports in China, India, Indonesia, and Turkey, which are tied to supply and demand, risk, and especially the price of a barrel of oil, are factors that also impact the unit cost of an imported consumer good. The formula to identify the ideal momentum to go shopping in the external market, especially to import from Brazil, requires a careful sense of evaluation, planning, but also a good dose of opportunism.
By following these insights and strategies, you can navigate the complexities of importing from Brazil and potentially achieve significant cost savings.
Liked it? Discover the Brazilian high-end decor products industry at Consolida Brazil and request a quote today.
Great insight ! Thanks for sharing It.