As the old saying goes, history does not repeat itself, but it rhymes.  Brazil finds itself in a similar situation to that of October of 2002.  It was then that Brazil elected President Luiz Inacio Lula da Silva.  “Lula” was seen as a left-wing candidate, unfriendly to Brazil’s free market.  These fears weakened its currency, the Real, to what was a record low at the time.  Hindsight is 20/20, and we now know those fears were unfounded.   In the decade to follow, Brazil paid down much of its international debt, and their currency began to strengthen.

Sixteen years later, Brazil finds itself in a similar situation.  A Presidential election looms with wildcard candidates, a currency weakened by uncertainty and market volatility.  It would be easy to group Brazil’s weakening economy in the same bucket as its neighbor Argentina.   It would be a mistake to do so.  Unlike Argentina, Brazil’s currency, while at an extreme, is still range bound within its historical trends, first established in the Presidential election of 2002 and retested during a Presidential impeachment in 2015.  The currency weakness is not surprising, and as history has shown, there is strong reason to believe that market jitters will diminish following Brazil’s presidential election next month.  Investors fear the unknown, and once the elections are over, the amount of uncertainty will be reduced.

For emerging market investors, this creates a tremendous buying opportunity where the dollar goes much further.   Brazil’s agriculture industry is running on all cylinders as it comes off its best season ever.  Accommodating weather has led to Brazil’s highest soybean yield ever.  This has happened in conjunction with the US/Chinese trade wars, which has helped boost local prices for Brazilian farmers.  Due to the laws of supply and demand, it is common to get high yields and high prices, but rarely do you get them both together at the same time as Brazil is now.  Brazil stands to be the number one benefactor as the trade wars linger on.  It is becoming increasingly evident that export demand will continue to build, as long-term relationships shift from North to South America.  As China waits for the US to yield, they will gradually begin making infrastructure investments in Brazil.  Once they make that commitment, their demand for Brazilian grain will be consummated.

Fortune Magazine has reported that soybean prices at the Brazilian port of Parangua have reached as much as U$2.21 per bushel higher than those of the Chicago futures.  Some analysts are skeptical at how long this will last. However, trade wars have a long history of poor results.  Unfortunately, the United States has already passed the point of no return.  Even if the Trump administration announced tomorrow that it was calling a truce, to many bridges have been burned and new alliances formed to go back exactly as it was.

This brings back recollections of the US wheat embargo against Russia by Jimmy Carter in 1980.  The USSR had just invaded Afghanistan.  It was the cold war and the US was not about to let their archenemy invade countries without any repercussions.  Russia was importing vast amounts of US wheat.  Following a drought, Russia was importing nearly 75% of its wheat from the US. In other words, they were highly dependent upon sourcing wheat from outside their borders.  Jimmy Carter unleashed his retaliation in the form of wheat embargos to Russia.  He incorrectly assumed that he would starve them into submission.

Initially, Russia was forced to scour the rest of the world to fill its wheat shortfall.  The US was forced to export their wheat to other parts of the world.  For the most part, Russia simply began importing wheat from those countries that the US exported to.  The wheat did not stop flowing to its ultimate destination; rather it simply took a more inefficient path to get there.  This has already begun happening in todays trade war, as China is simply buying soybeans from places like Brazil and Argentina, who in the case of Argentina, have recently purchased those soybeans from the US.

Something changed in the Russian mindset and the same thing is happening in China.  This scenario made it clear that Russia’s national security in the form of food supply was exposed, as they were too dependent upon US wheat exports.  And what happens when your security has a vulnerable spot?  You fix it.  Naturally, this forced Russia to make food production a priority so would become less reliant on foreign exports.  Today Russia is the third largest wheat producer in the world, surpassing that of the United States.  And that is largely attributed to the US trade sanctions from 1980.  It did not happen all at once.  It was a long ascent to the top.  But Russian leaders vowed to no longer allow food to be used against them as leverage.

China is highly dependent upon soybean imports, consuming 62% of global soybean trade.  In light of recent events, China has re-evaluated their food sourcing policies and has determined that they will no longer be as dependent upon the United States as they once were.  Long term, Brazil will position itself as the supplier to the largest grain consumer in the world, China.  Land values will have tremendous upside potential to grow in conjunction with its rising position as a global protein supplier.

Matthew Kruse is the Chief Executive Officer of Genesis Investimentos, an asset management company focused on farmland investment opportunities in Brazil.