In the aftermath of the Covid-19 breakout, economies both developed and emerging are facing an uphill battle. From the United States to the far reaches of Australia, economies worldwide are shrinking due to the lockdowns.

Data from the Commerce Department showed that the US economic activity contracted 5% in the three months ending March 2020. Similar echoes were felt across other parts of the world. Canada’s economic activity contracted by eight percent during the first three months of this year.

Italy is facing one of the worst recessions since the second world war. China has abandoned its yearly GDP targets completely after the economy shrank 9.8%.

Therefore, it shouldn’t be surprising to see emerging market economies shrinking as well. But there have been a few bright spots across the globe. Some developing economies are still posting positive growth, while others are holding up for now.

World GDP, Q1 2020
World GDP, Q1 2020

Among such countries, the contraction of Brazil’s economic activity was somewhat less dramatic. During the first three months of the year, Brazil’s GDP fell just 1.5%. This is positive for a country that is reeling under the pandemic. Brazil now has the second highest confirmed Covid-19 cases, only next to the United States.

The Q1 decline of 1.5% is the first contraction since the fourth quarter of 2016. It is the steepest contraction on record since the second quarter of 2015.

Brazil quarterly GDP growth (Source: Tradingeconomics)
Brazil quarterly GDP growth (Source: Tradingeconomics)

While almost all sectors of the economy fell, agriculture was the only one that outshined the rest. The sector grew 0.6% during the period, adding about BRL 119.7 billion in value. Comparing to the same period a year ago, the agriculture sector grew 1.9% and 1.6% on a cumulative basis.

Brazil Q1 Growth, Sector wise
Brazil Q1 Growth, Sector wise

Brazil’s soybean exports give GDP a push

In economics, one must not to get too excited about the results ofa single data set. Rather, we need to have a broader context. Firstly, if we look at the period in question, Brazil started seeing an increase in coronavirus only closer to late March.

Coronavirus confirmed cases in Brazil (Source: Ourworlddata)
Coronavirus confirmed cases in Brazil (Source: Ourworlddata)

Therefore, it is quite possible that the economy managed to emerge with just some minor bruises.

The second quarter GDP data will of course give a more realistic picture. But one must also look under the hood to gain some perspective. Factors as global commodity prices, Brazilian exchange rate, agriculture exports play a crucial role.

And in those areas there have been a lot of interesting developments. In some ways, it one could almost call it perfect timing!

In March 2020, Brazil exported 11.64 million metric tons of soybeans, which is up 38% from a year ago. The biggest customer was of course China. And if that wasn’t enough, soybean exports shattered records a month later.

In April, Brazil soybean exports hit a record high of 16.3 million mt. Demand for soybeans rose amid the pandemic uncertainty. The surge in demand also coincided with the exchange rate which fell just under 30% in the three-month period.

USDBRL Exchange Rate, Jan – March 20 period
USDBRL Exchange Rate, Jan – March 20 period

 

A weaker exchange rate is beneficial as it helps to boost competitiveness for the exporting country. But why would China prefer soybean imports from Brazil rather than the US? For one, Brazilian soybean is trading at a discount to its US counterpart at Chinese ports.

Can Brazil’s agriculture sector continue to buck the trend?

 

Going by current estimates, the data remains positive. Soybean exports are forecast to rise at least into the close of the second quarter. A report by the International Monetary Fund (IMF) projects that Brazil’s economy will contract 5.3% in 2020 before rising 2.9% the year after.

But the Brazilian central bank forecasts that growth will shrink 3.3%, according to latest studies. Agriculture is however likely to get a boost with no El Niño or La Niña weather patterns expected this year. This should help boost agriculture production.

The fragility of the ongoing U.S. – China trade deal could be a source of disruption for soybean exports for Brazil. Recent tensions on account of the instability in Hong Kong could threaten the already fragile trade talks.

On a year over year basis, Brazil’s agriculture growth is still off the recent peaks. In the third quarter of 2019, agriculture growth surged 2.1% on the year. As of March 2020, agriculture growth is up 1.9% and close to the Q3 2019 peak.

Brazil Agriculture Growth, Q1 2019 – Q1 2020
Brazil Agriculture Growth, Q1 2019 – Q1 2020

Given the current state of affairs, China could very well continue to look to Brazil to meet some of its food demands. Meanwhile, the only outlier will be the assessment of the true impact of the pandemic during Q2 2020. Yet, despite some temporary hiccups, Brazil’s agriculture sector looks to continue to perservere.

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