Why a Brazil-Argentina currency union is bad news for coffee

common currency brazil
  • Argentina and Brazil have renewed proposals for a monetary union – similar to the euro
  • Many economists highlight glaring discrepancies between the two economies
  • A monetary union could drive down the global price of coffee – and make farming more expensive for Brazilians

AT THE Florida-based Coffee Trading Academy, the first rule they teach new students is simple: know Brazil, know the Brazilian real.

This is smart – according to recent figures, the South American country contributes more than 35% of the world’s coffee, making it the largest producer by volume. It’s no stretch to imagine that any change to its output invariably has a knock-on effect on every other coffee origin.

Similarly, if there is a dramatic change in the value of the Brazilian real (BRL), other producing countries will soon know about it.

This happened during the 2018/19 harvest season when, due to a weak BRL, exports from Brazil jumped by a third compared to the previous year. This put downward pressure on the prices of both arabica and robusta, which slumped by 23% and 30% respectively.

Recent talks of creating an additional common currency with Argentina and other Latin American countries have naturally raised some eyebrows in the coffee industry beyond Brazil.

Although the BRL has experienced some volatility since entering the market in 1994, it is still among the most stable currencies on the continent. Brazil’s economic performance has also been one of the strongest.

Some, therefore, worry that being tied to the likes of Argentina, which has grappled with sky-high inflation and a mismanaged economy for decades, could wreak havoc on international coffee prices.

brazilian real currency union

What are the proposals?

In January, Perfil, an Argentine newspaper, published a jointly written article by the country’s president, Alberto Fernández, and the president of Brazil, Luiz Inacio “Lula” da Silva.

In addition to condemning all forms of anti-democratic extremism and political violence, the two leaders declared they had “decided to advance discussions on a common South American currency”. Their reasons for doing so included “use for both financial and trade flows, and to reduce operating costs and our external vulnerability”.

During a summit in Buenos Aires a week later, officials from the two countries elaborated on the plans, stating that the the ultimate goal was to “invite the rest of the region” to join the bloc – similar to the euro. However, rather than replacing national currencies, it would serve as a third unit for trading to reduce reliance on the US dollar and boost regional trade.

This isn’t the first time the two countries have floated the idea of a common currency. In the 1980s, Brazil and Argentina discussed the creation of a trade currency called the “gaucho”, but it never came to fruition. In 2019, Lula’s predecessor, Jair Bolsonaro, also put forward the idea of a monetary union.

However, economists are generally sceptical. Although South America needs deeper economic integration to accelerate its development, there is concern about glaring discrepancies between the two countries’ economies.

Of particular note is Argentina’s inflation rate, which recently soared past 100% for the first time since the early 1990s, compared to Brazil’s rate of around 6%. For a common currency to function, greater balance would need to be achieved – which could take decades.

coffee prices traded on NYSE

How could it affect the price of coffee?

Scepticism about whether a common currency between Brazil and Argentina would work is shared by many in the coffee industry, too.

Thomas Raad, who runs Bravus Commodity Trading in São Paulo says it will carry little benefit for Brazil’s coffee farmers as Argentina is not a major trade partner when it comes to coffee. On the contrary, he believes it could cause problems if Argentina’s rampant inflation adversely affects the value of the BRL.

“If a common currency were to happen with Argentina, I don’t think it would affect coffee directly, it would be indirect because of the foreign exchange,” he explains. “The BRL could go from 5.2 to 7 to 8 to 9. This would keep coffee prices internally inflated the way it is today. It would make differentials for the international market more aggressive, but it won’t make goods cheaper for Brazil’s coffee farmers.”

The reason for this is that many products essential to coffee farming, such as fertilisers, are imported and paid for in US dollars. For Brazil’s coffee farmers, a weaker currency would therefore drive up costs of production.

A weaker BRL is also generally bad news for coffee farmers globally. Brazilian exporters and farmers often hedge in BRL, but coffee is sold on the international market in US dollars.

This means they earn more when the BRL loses value compared to the US dollar, because an increase in sales tends to translate into more hedging in the futures market from exporters – thus putting downward pressure on the international price of coffee. The opposite is true of a strong BRL.

However, while this may all seem like cause for concern, Thomas, like others in Brazil, is relaxed given the perceived outlandishness of proposals. “I don’t think it will make Brazil a less attractive coffee origin,” he says. “As long as prices and differentials are competitive, I don’t think it makes any difference. This common currency doesn’t have much to do with agriculture in Brazil.

“That said, I don’t think the common currency is a good idea at all, point blank. It just doesn’t make any sense to me. But it’s a long shot. People aren’t really talking about it – especially in the coffee sector.”