By Marcelo Teixeira
NEW YORK, Oct 29 (Reuters) - Brazil's surprising reelection of leftist President Luiz Inacio Lula da Silva will have implications for the global flow of commodities from the world's largest food exporter and key mining prospect, analysts said this week.
His opponent, poll-favorite right-wing candidate Flavio Bolsonaro, fled to the US on Wednesday. Bolsonaro, an ally of President Donald Trump, had promised to improve ties with the US, after the global superpower threatened to erode
the South American giant's growing trade ties to China.
With Lula remaining at the helm, Brazil's huge soybean flow to China will likely continue, while cotton and beef exports should also benefit from a weakening currency that increases the competitiveness of Brazilian farm exports, according to analysts and experts.
Access to Brazilian rare earth reserves, a White House plan that appeared feasible after Bolsonaro won the first round, will face hurdles, they said. Clean energy such as biofuels could get a boost, while environmental regulations and climate politics would be reinforced.
"China retains a close partner in Latin America's largest economy, at a time when most countries in the region have moved closer to the Trump administration," said Bruno Binetti, associate fellow at policy institute Chatham House.
He said Brazil will keep a close engagement with China, which bought $100 billion of Brazilian goods last year compared to $38 billion bought by the US.
Brazil supplied 75% of China's soybean imports in the first nine months of the year. In exchange, Lula has given great access to Chinese products such as electric vehicles, which became top sellers in Brazil.
Brazil's currency, the real, plunged as much as 13% a day after Lula's win.
"A weaker real increases the local-currency value of dollar-denominated export revenues, potentially encouraging Brazilian producers to accelerate sales," said Ole Hansen, head of commodity strategy at Saxo Bank.
Coffee farmers, sugar mills and grain exporters strongly hedged their foreign sales this week by selling futures.
RARE EARTHS
Brazil has the second-largest reserve of rare earth oxides, only behind China. The scarce critical mineral is used in the auto, defense and tech industries, among others.
Access to those reserves was part of trade talks between Brazil and the US before the heat of the campaign this year.
Had Bolsonaro won, analysts said the US government would have had an easier and quicker path to tap those resources.
Lula will still be looking to develop the industry, Ronaldo Felix, mining consultant and director of operations for foreign trade advisory Saygo Group, told local media. But Lula will most likely open the prospects to all countries and investors and require a higher level of processing in Brazil, instead of just exports of the raw minerals, he added.
The only Brazilian large-scale rare earth project so far, named Serra Verde, was acquired by USA Rare Earth in a deal completed last month. The company secured $1.6 billion in financing from the US government, which got a 10% stake in the firm.
Critical minerals were one of the issues discussed between Lula and Trump during a visit by the Brazilian to the White House in May. Lula said then that investments to explore those assets were open to the US and any other country.
FORESTS AND FUELS
While markets plunged in Brazil following the election, environmental groups welcomed Lula's win, noting the leftist has managed to reduce deforestation by around 40% since former President Jair Bolsonaro, the father of Flavio Bolsonaro, left office.
Lula's administration has been a backer of clean energy and climate politics, hosting the UN Climate Change Conference last year. It drove the ethanol blending rate in Brazil to a record 32% this year, as it sought to cut gasoline demand and control fuel prices.
Flavio Bolsonaro criticized the steep blending rate during the campaign.
People in the ethanol industry, however, say Lula could have done more by cutting subsidies to fossil fuels, which would have improved biofuels' market access. They do not see those subsidies going away any time soon.
Consulting firm Datagro estimates local gasoline prices to be around 35% below international prices, a fact that depresses ethanol prices and can lead mills to produce more sugar than ethanol.
Lula's government has said it wants to prevent global energy price volatility from impacting the local economy by taking time to adjust local fuel prices to international benchmarks. The government also says Brazil produces most of the oil it consumes, so local energy prices should be lower.
FARM DEBT
Though currency devaluation should boost agriculture exports, farm distress will likely grow.
Farm leaders fear that Lula's economic policy, which has been marked by high public spending, will continue, and in turn generate inflation and high interest rates.
Government debt reached 82.9% of GDP in August, up from 82.6% in July and the highest since March 2021, as spending continued to rise through fuel subsidies and social programs ahead of the elections. Lula promised to pardon small businesses' debts, which could further increase public debt.
Interest rates are among the highest in the world at 13.75% per year, which makes servicing rural debt much more expensive.
Soy and corn farmers in Brazil have struggled with low prices and high production costs linked to expensive fertilizer and diesel, amid the military conflict in the Middle East.
(Reporting and writing by Marcelo Teixeira in New York; additional reporting by Roberto Samora and Oliver Griffin in Sao Paulo, Marta Nogueira in Rio de Janeiro, May Angel in London. Editing by Emily Schmall and Aurora Ellis)
