Brazil Elections a Mixed Bag for Commodities

Sugar prices are down more than 2.5%, while coffee prices have recovered a little to post a small gain, and soybeans and beef have also risen. Brazil is the world’s top exporter of all these commodity goods, and it produces significant amounts of corn and cotton. The country is also a large importer of wheat.

Brazil’s currency has weakened by more than 2% Monday, and that will have the effect of encouraging export sales of commodity products traded in dollars. Oil, which the government controls, most likely will be unable to take advantage of the good export environment, but sugar growers may be looking at a potential windfall.

Brazilian iron ore miner Vale S.A. (NYSE: VALE) has dropped nearly 7% so far Monday, but that is due primarily to a weak global market for iron ore. Ethanol producer Cosan Ltd. (NYSE: CZZ), down about 8% so far, also likely would have benefited if Rousseff’s opponent, Aecio Neves, had won.

Neves was expected to lift the price cap on gasoline, and that would have pushed up ethanol prices as well. Rousseff is expected to continue capping gasoline in an effort to curb Brazil’s inflation. In a note Monday morning, Fitch ratings had this to say:

Corporates in the electricity sectors, as well as those in the sugar and ethanol industry, are the most vulnerable to negative rating actions. Iron ore and pulp producers will face weak external market conditions due to oversupply, but are not likely to be downgraded, as their costs positions allow them to continue to generate positive cash flow. The protein sector stands out as a sector that could have more positive than negative rating actions. Low grain prices and growing demand for proteins should continue in 2015; balance sheets are projected to strengthen due to strong operating performance.

Oddly, Fitch had nothing to say about coffee in its note. That is likely due to the continuing impact of Brazil’s drought, which has taken a huge toll on the country’s coffee crop.

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