Investors in emerging markets positioned themselves firmly behind the wrong horse as Brazil’s presidential runoff unfolded on Sunday, leading to a sharp downturn in soybeans and soybean futures.
January soybeans concluded trading at $12.52 ½, declining by 16 cents, after briefly dipping to a two-month low of $12.39 during the session—a movement closely tied to fluctuations in the Brazilian real. Prior to the election, the real had strengthened against the U.S. dollar following surprising performance by challenger Flavio Bolsonaro in first-round voting on October 5, maintaining its upward trajectory despite tightening poll numbers.
As Lula narrowly claimed a historic fourth term as president on Sunday, real futures plummeted overnight, with the spot forex market quickly reflecting similar declines in domestic FX trading. The U.S. dollar surged over 9%, reaching 5.445 reais per dollar in recent transactions—effectively wiping out earlier gains that had pushed the real to approximately 4.95 per dollar from roughly 5.20 per dollar before the October 5 election.
Two primary forces drove the soybean selloff. First, the weakening real enhances the competitiveness of Brazilian soybeans in the global marketplace. Since these commodities are already priced in dollars, a stronger dollar doesn’t reduce their cost to international buyers; instead, when farmers convert dollar revenues back into reais, they receive more local currency, incentivizing additional sales which depress local prices and boost global competitiveness.
Second, commodity traders recognize the strong correlation between the real and soybean futures. A dramatic shift in currency values often triggers cascading liquidations among funds and potentially sparks short-selling activity. Compulsory liquidation due to extensive market turmoil cannot be ruled out. Data from the Commodity Futures Trading Commission revealed that net long positions in soybeans remained elevated at 206,936 contracts as of October 20, despite shedding 30,555 contracts throughout the preceding week.
Extreme volatility in currency markets highlighted how heavily trades were stacked in favor of a Bolsonaro win—who was broadly perceived as being more aligned with market interests. Brazil’s main stock index fell over 10%, prompting several temporary trading halts. Government bonds suffered steep losses too, mirroring declines seen in the real following Bolsonaro’s strong showing on October 5, holding steady even as polls indicated a tightening race.
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Betting platforms mirrored broader sentiment, showing overwhelming confidence in a Bolsonaro victory right up until election day itself.
Nonetheless, investors should consider that a depreciating real carries mixed implications for Brazilian agricultural producers. While it encourages immediate selling pressure, prolonged weakness increases import costs for fertilizers, seeds, chemicals, and other essential inputs in local terms. Furthermore, Lula’s administration historically emphasizes environmental protections such as restrictions on deforestation—an approach likely to limit land-use expansion compared to Bolsonaro’s anticipated deregulatory stance.
In the meantime, Bolsonaro has voiced intentions to challenge the election results after last-minute extensions to polling hours—requested jointly by both candidates—created confusion at certain voting locations. According to the Associated Press, Lula garnered over 64 million votes against just under 60 million for Bolsonaro, securing a nearly 4% lead. “This is proving to be an uphill battle for Flavio Bolsonaro,” commented Brian Winter, editor-in-chief of *Americas Quarterly* and Brazil expert, speaking to the Associated Press. “Brazilian power brokers are beginning to coalesce around Lula—even if reluctantly.”
Earlier optimism in financial markets stemmed from expectations that Bolsonaro would implement fiscal discipline measures targeting public debt sustainability and advance critical structural reforms. Moving forward, attention turns to how Lula navigates post-election dynamics without destabilizing investor sentiment further.
“From now until Lula’s inauguration on January 5th, his administration must demonstrate commitment to reining in national debt,” noted Nigel Green, CEO of the London-based deVere Group. “Should they succeed in restoring market confidence, much of the current sell-off might reverse swiftly. Conversely, missteps could intensify losses across global emerging-market portfolios, impacting savers through mutual fund holdings.”