Lula won, why are American soybean farmers panicking?

On October 25 local time, the results of the second round of voting in the Brazilian presidential election were announced. Lula staged a come-from-behind victory and was successfully re-elected, ushering in his fourth presidential term in his political career.

Brazil's electoral body stated that after about 99.9% of polling stations completed the vote count, Lula won 51.77% of valid votes, defeating right-wing candidate Flávio Bolsonaro who garnered 48.23% of the votes.

Flávio is the eldest son of former Brazilian President Jair Bolsonaro.

After the results were released, Brazilian financial assets suffered a sharp sell-off.

EWZ, the Brazil stock ETF traded on the U.S. stock market, plunged 19.63% overnight at one point to $34.23; as of press time, it rebounded to $35.16, narrowing the decline to 17.44%.

The depositary receipts of major Brazilian enterprises listed in the United States also fell collectively: Petrobras fell 11.96% at one point, Itaú Unibanco fell 13.65%, and Vale fell 4.19%.

The foreign exchange market also saw drastic fluctuations: Brazilian real futures traded in the Chicago market fell by about 9% at one point, and the USD/BRL rose to around 5.51. The ETF tracking Brazil's Ibovespa index listed on the Tokyo Stock Exchange plummeted by about 13% at one point.

Some people believe that this is the political risk premium brought by Bolsonaro's refusal to admit defeat, but U.S. soybean farmers care about something completely different. They pay more attention to the exchange rate against the U.S. dollar and the buying quotation of China's next shipment of soybeans.

Lula has no direct conflicts with U.S. soybean farmers. He will neither order a ban on Brazilian soybean exports, nor most likely impose any sanctions specifically targeting U.S. farmers. What really makes U.S. soybean farmers nervous is that after Lula's victory, the risk premium of Brazilian assets is repriced, the trend of the real exchange rate changes, the U.S. dollar quotation of Brazilian soybeans adjusts accordingly, the balance of China's procurement shifts, and finally the CBOT market moves.

Every link in this chain can be observed, quantified, and bet on in advance.

Therefore, I think the reason why Lula's election makes U.S. soybean farmers nervous is that the exchange rate engine is re-ignited, and the political aspect is secondary.

The competitiveness of Brazilian soybeans has never relied solely on land and output, but also on the three pillars of "weak real + China's procurement trust + absolute supply volume". Lula's re-election has strengthened the last two pillars, while the tightness of the first pillar depends on the tug-of-war between Brazil's fiscal authority and the Congress.

The opponent U.S. soybean farmers are facing is a large-scale agricultural export group that uses exchange rates to fight price wars, and the output itself is secondary.

The exchange rate is the invisible hand

We assume that when a Brazilian soybean farmer sells a shipment of soybeans, his income is roughly equal to the U.S. dollar quotation multiplied by the real exchange rate, minus the U.S. dollar-denominated costs. When the real depreciates, the same shipment of soybeans brings more local currency, so farmers are willing to sell; exporters are also willing to lower the U.S. dollar quotation, because their local currency profits are still guaranteed.

This is equivalent to the Brazilian agricultural sector obtaining a "macro exchange rate subsidy" — no government budget appropriation, no WTO disputes, but the effect is more direct than many explicit export subsidies.

Some documents show that when Bolsonaro unexpectedly took the lead in the first round of voting, the real appreciated sharply, which briefly pushed up U.S. soybean prices instead. The reason is simple: the appreciation of the real means that the U.S. dollar quotation of Brazilian soybeans becomes more expensive, its export competitiveness declines, and part of the demand shifts to the United States.

Conversely, after Lula's victory, the market's expectation for Brazil's fiscal discipline reversed, the risk premium rose, and the real came under pressure.

When the real weakens, Brazilian farmers find it more cost-effective to calculate in local currency, and exporters are more motivated to lower U.S. dollar quotations to grab Chinese orders. The starting point of this chain is fiscal expectation, the end point is the CBOT market, and the intermediate transmitter is the exchange rate.

In addition, some foreign media mentioned that Brazil's total debt has reached 82.9% of GDP, the benchmark interest rate is in double digits, the nominal fiscal deficit is close to 10% of GDP, and Bolsonaro's Liberal Party has won the largest number of seats in the Congress for decades. Lula does not govern in a fiscal vacuum: he faces the triple constraints of high debt, high interest rates and a conservative Congress.

Therefore, I think Lula's election will bring a risk premium and weak fluctuations to the real, but will not automatically lead to a currency collapse.

What U.S. soybean farmers need to guard against is a "weak real" rather than a "collapsed real". A weak real is enough to give Brazilian soybeans an advantage of several more U.S. dollars in quotation, while a collapsed real will trigger an all-out price war. The probability of the former is much higher than that of the latter.

Another point is the suppression of the supply side by high interest rates in Brazil. Data shows that CONAB forecasts Brazil's 2026-27 soybean output at 181.6 million tons, an increase of only 0.7%; the planting area is 121.8 million acres, up 1.4%, which is the smallest annual increase since the 2011-12 season. This shows that the marginal expansion speed of Brazilian soybean production is slowing down.

In a high interest rate environment, the financing cost for farmers to hoard goods and expand planting is extremely high. Small farms are squeezed out, while large farms with strong cash flow and low financing costs can enjoy the depreciation dividend instead. As a result, Brazilian soybean supply is more concentrated, and export bargaining power is stronger.

The competitors U.S. soybean farmers are facing are a group of capitalized, large-scale agricultural groups that can use exchange rate arbitrage, and smallholder groups have already exited the market.

Under such a trend of exchange rate changes, Lula's election raises the probability of a weak real, the U.S. dollar quotation of Brazilian soybeans gains additional flexibility, and U.S. soybeans face a competitor with more flexible quotations during the export window.

However, the output expansion of this competitor is slowing down, and the intensity of the negative impact depends on the range and duration of the weak exchange rate, which cannot be simply extrapolated as "Brazilian soybeans will flood the global market".

Lula's diplomatic line makes Brazilian supply more "reliable"

Apart from the exchange rate, there is another front, that is the political risk premium of China's procurement.

China is the world's largest soybean importer, Brazil is the largest supplier, and the United States is competing for the same market. For Chinese crushing plants, whether to buy Brazilian soybeans or U.S. soybeans depends not only on price, freight and crushing profit, but also on the political performance risk of the supplying country.

Lula's diplomatic line emphasizes sovereignty, multilateralism, the Global South and ties with China; Bolsonaro is pro-Trump and promised to get closer to Washington. The implications of these two lines for China's procurement decisions are completely different.

Lula's re-election means that the political performance risk of Brazil as a supplier is lower.

Chinese crushing plants are more willing to sign forward contracts with Brazil to lock in South American supplies, because they do not have to worry about sudden shifts in the Brazilian government and sudden changes in trade policies. It is reported that the previous Lula government deepened trade relations with China and sought greater global influence through the BRICS countries. This diplomatic independent line is a "trust premium" for Chinese buyers — the reliability of Brazilian supply rises, and the proportion of South American procurement can remain at a high level.

At the same time, the uncertainty of U.S. tariff policies will accelerate China's "de-risking" procurement.

For example, as some media mentioned, soybeans are excluded from the latest round of tariff cuts between Washington and Beijing, Chinese crushing plants have high soybean inventories, and feed demand is weak. In this environment, Chinese buyers have more incentive to use Brazilian supplies to suppress U.S. prices.

The most uncomfortable scenario for U.S. soybean farmers is that China does not stop buying U.S. soybeans, but uses Brazil as a bargaining chip to make U.S. soybeans lose pricing power during the export window. The loss of pricing power is more fatal than the loss of market share, because the former means that U.S. soybeans are downgraded from "price setters" to "price takers".

Lula's pragmatic attitude towards China has another effect: Brazilian supply is more reliable, the proportion of forward contracts for China to procure South American soybeans rises, and the export window for U.S. soybeans is compressed into a shorter period of time.

U.S. exporters can only compete in a narrower window, and their bargaining power further declines.

Lula emphasizes Brazilian sovereignty and strengthens ties with the Global South and China amid tensions with the U.S. government. This line is good news for Chinese buyers, but worsens the competitive environment for U.S. soybean farmers. Their dilemma is that the pricing power of U.S. soybeans in the export market is continuously eroded, while the U.S. own trade policy is pushing Brazil closer to China.

For example, Trump imposed double-digit tariffs on Brazilian goods, and Lula turned nationalism into the slogan "Brazil belongs to Brazilians". If U.S.-Brazil relations remain tense, Brazil will turn to China more firmly, and U.S. soybean farmers will lose China's procurement trust, which is more serious than losing a single business deal.

The United States has its own weaknesses

As for the United States, half of the risk sources for soybean farmers are actually in their own country.

It is reported that the U.S. Department of Agriculture raised the U.S. soybean output estimate to 4.59 billion bushels, with a yield of 53.1 bushels per acre, both of which set records. Record output itself is not a problem, the problem is where this output goes. Exports face exchange rate competition from Brazil and a shift in China's procurement trust, while domestic crushing is increasingly dependent on demand for soybean oil for biofuel.

Strong soybean oil demand brings good crushing profits, and the basis of inland crushing plants is strong; weak exports lead to weak port basis.

Lula's election will intensify export competition and make the port basis weaker, but the crushing basis may remain relatively strong. U.S. soybean farmers will see regional differentiation: those close to crushing plants will benefit, while those close to export ports will suffer losses.

This is the repricing of industrial geography, which is more worthy of attention than the total figures.

The key lies in policy dependence. A large part of the incremental domestic demand for U.S. soybeans is bet on biofuel policies. If the soybean oil biofuel policy falls short of expectations, the record output will turn into inventory pressure.

The continuous expansion of the U.S. biofuel industry should be able to digest this year's large soybean harvest, but this "should" is based on the assumption that policies will not regress. The profits of U.S. soybean farmers are increasingly dependent on soybean oil biofuel demand, and their export competitiveness is squeezed by both Brazil's exchange rate and China's procurement.

This is walking on two legs: one leg is restrained by the quotation flexibility of Brazil on the exchange rate battlefield, and the other leg is stepping on the accelerator of biofuel policies.

Once the policy loosens, the inventory pressure will become explicit.

There is also a feedback logic that U.S. tariffs and political pressure on Brazil may hurt itself.

If U.S.-Brazil relations are tense, Brazil will turn to China more firmly. What U.S. soybean farmers lose is not only the goodwill of a competitor, but also China's procurement trust. Half of the nightmare of U.S. soybean farmers may be written by the U.S. own trade policy.

In this light, all signs show that the impact of Lula's election on U.S. soybeans can be divided into three scenarios.

First, Lula advances fiscal policy gradually, is constrained by Congress, and the central bank maintains high interest rates. The real fluctuates weakly without collapsing, the Brazilian premium expands, China's procurement of South American soybeans remains at a high level, U.S. soybean export share declines slowly, the CBOT price center is under pressure but supported by biofuel demand, the profits of U.S. soybean farmers are differentiated, the export basis is weak, and the crushing basis is strong.

Second, Lula is forced by social expenditure pressure to break the fiscal framework, the real depreciates significantly, the Brazilian premium expands sharply, China accelerates locking in South American forward contracts, the U.S. soybean export window is lost, CBOT prices fall below the cost line, and U.S. inventory pressure rises.

Third, Lula's fiscal credibility exceeds expectations, the real stabilizes or even strengthens, Brazilian export costs rise, at the same time Brazil's area expansion slows down or weather problems occur, U.S. soybeans gain a weather premium, and the "nightmare theory" is falsified.

The monitoring list can be very specific: Brazilian real exchange rate, Brazilian soybean FOB premium, China's weekly procurement volume, CONAB area and output data, U.S. crushing profit and soybean oil biofuel policy, U.S. export inspection data.

Therefore, it is better to look at the premium than EWZ, and look at the real and the Congress rather than Lula's speeches. The range of the weak exchange rate determines the quotation flexibility of Brazil, the rhythm of China's procurement determines the width of the U.S. soybean export window, and the U.S. biofuel policy determines the digestion capacity of the record output.

Therefore, in my opinion, Lula's election is not the starting point of the nightmare for U.S. soybean farmers, it resets the competitive environment.

Brazil's comparative advantage has never only been land and output, but also exchange rate flexibility and diplomatic trust. Lula's re-election has strengthened the latter two, making Brazilian soybeans more flexible in quotation and more reliable in China's procurement.

The risk for U.S. soybean farmers is that they use the output narrative to understand a market priced by exchange rates and geopolitics, treat the Brazilian election as an ideological drama, but forget that soybean prices are jointly determined by the real, China's procurement and biofuel policies.

Lula won in Brazil, U.S. soybean farmers should not lose to their own policy inertia. When the competitive environment changes, the way of accounting should also change accordingly, which probably brings the hope of improvement.

This article is from the WeChat Official Account "Dongzhen Strategy", author: Dongzhen Strategy, published with authorization from 36Kr.