Brazil’s presidential election is heading for its second-round run-off on Sunday with the result too close to call. The latest polls show incumbent president Dilma Rousseff on 49% and the pro-business opposition party led by Aécio Neves on 51% but betting markets give Rousseff a 60% chance of winning. Given Brazil is a major supplier of commodities ranging from soybeans, iron ore, sugar and coffee what will the result mean for prices?
Overall the main impact on commodity prices will be felt through the country’s currency, the real. The unexpectedly strong performance of the pro-business party in the first election run-off at the start of October resulted in the real soaring by almost 4% against the dollar, improving the value, in dollar terms of Brazil’s commodity exports. However, since then a narrowing in the polls has meant that the currency has lost all those gains and more.
Sugar is seen as the commodity most likely to be influenced by the outcome of the election. The Brazilian government introduced a cap on gasoline prices around 10%-20% below world levels in a bid to control inflation, but which has also squeezed ethanol margins for the country’s sugar cane mills. To recap, sucrose extracted from sugar cane can be manufactured into either raw sugar or ethanol. In Brazil, typically 48% goes into making ethanol and 52% goes into producing raw sugar, which is then processed into refined sugar.
According to sugar and ethanol cooperative Copersucar, ethanol demand in Brazil could increase by 8 billion litres to over 30 billion litres a year if the government were to allow state-owned oil major Petrobras to sell gasoline at market prices. Although the extent of any increase is by no means certain, a senior government official suggested in August that gasoline prices could be raised by 6% following the election.
Given a win by Rousseff appears to be largely factored into both currency and commodity markets, a win by the incumbent is likely to have only a minimal impact on the nations key commodity prices. A win by Neves however would be bullish. The main factor affecting the price of Brazil’s commodities, agricultural ones in particular lie elsewhere – namely drought.
Ironically it could be the drought that was the opposition party’s undoing. São Paulo state, home to a quarter of Brazil’s voters and controlled by the party refused to introduce water rationing when the water crisis first became apparent. Now 70 cities in the state are estimated to have suffered regular shortages with the two main rivers in São Paulo city now full up with rubbish and raw sewage.