Del.icio.us  Digg  facebook  MySpace  Twitter  Google  Bookmark Me  LinkedIn  StumbleUpon  Permalink

Investing in Brazil: Exchange Rate Trend is Key

Clearly South America's vast tracts of relatively low-cost land provide unique agricultural investment opportunities. So how should Americans go about sizing up such investments?

"It really comes down to the dollar," says Terry Jones, a Williamsburg, Iowa, farmer and farm management, marketing and investment consultant. In 2004, Terry and 79 partners, bought 74,000 acres in Brazil's Tocantins state.

Over the last seven years our dollar has been trending lower. The dollar index hit 122 in 2001. It sagged to a low last year at 70.7. That seven-year down trend made U.S. ag a lot more competitive in world markets than it was 10 years ago. "The dollar has had a little rally into the 86 to 88 area. Short-term the stronger dollar erodes U.S. export competitiveness," he admits.

"However, if you believe, as I do, that once the economic turmoil eases, the dollar will retest the low or maybe move still lower, then U.S. ag will stay very competitive," he says. "But, if you believe the dollar index will make a 50% or 60% retracement back up toward 100 or 110, then U.S. ag will be at a disadvantage and that will push ag growth back to foreign countries.

"Agriculture will flourish somewhere. People are going to eat," he adds. "But the Chinese will buy where it is the most competitive."

Short-term uptick?

Evidence suggests that our inability to manage our federal budget deficit, our trade deficit and our current accounts deficit is the reason the dollar began to ratchet lower in 2002. Those fundamentals still exist.

Many people believe that investors seeking safe haven during time of turmoil is the reason the dollar turned stronger in mid 2008. Investors view U.S. greenbacks as the world's safest place to stash cash. And with an $11 trillion tab outstanding, Uncle Sam can ill afford to develop a reputation of stiffing creditors.

"It's real hard to say if the economic turmoil is easing when you keep seeing job losses and governments pumping both fiscal and monetary stimulus into the economy.

Plan to manage inflation

"Agreed, we're currently in a deflationary period of investors turning everything into cash," says Jones. "However, if you believe as I do, that it will be very difficult for the government to take its foot off the accelerator of economic stimulus and put its foot on the brake, we're in for inflation.

It's not just here in the U.S. Every government is doing the same thing. I just can't see any other way than we have inflation coming at us. The bigger question is of course the timing of when inflation accelerates.

However, as raw commodity producers we fare better under inflationary times than we do under deflationary times.

"Are we going back to $5 to $6 corn soon?" poses Jones. "To me $7 to $8 corn is now what $4 corn used to be. Yes we will. But it will take something like a 1988 drought because we actually found what is going to limit demand. It was $7 corn and higher. Livestock, ethanol, exports all cut back. Can we trade $3.50 to $6.50 trading range in corn for the next 30 years? I think that's pretty likely.

Tremendous willingness to buy dollars as everybody in the world seeks safe haven is pumping up value of the dollar. But once the dollar buyers become driven by something other than safe haven, assets will go elsewhere. Then those fundamentals of the big deficits will come back into play and drive the dollar lower. Uncle Sam will have to pay a lot more interest to finance the burgeoning federal debt. That's all inflationary.