The Effects of Brazilian Real Fluctuations on Global Soybean Prices

This paper examines the transmission mechanism through which exchange rate fluctuations in the Brazil Real (BRL) influence the global benchmark price of soybeans. Using an Instrumental Variables (IV) approach with 5-year sovereign credit default swap (CDS) spreads, the empirical design isolates exogenous movements in the Brazilian Real exchange rate. Results demonstrate that a 1% depreciation of the Brazilian Real against the US dollar leads to a 0.51% decline in global soybean futures prices. The magnitude of the pass-through is a function of a country's short run supply elasticity and global production share, which we classify as the country's ability of exerting short-hedging pressure in futures markets. We confirm this by running the same model on cocoa futures, in which Brazil is a small and inelastic producer, and showing that there is no price response after a currency shock. Altogether, our findings complement the dominant currency paradigm literature (Gopinath et al, 2016) by highlighting that bilateral exchange rates of large producers can affect commodity prices, regardless of the currency the product is invoiced. For global agricultural producers, these findings highlight a significant source of market risk that must be taken into account, especially in countries with high levels of political and fiscal risk.