Soy and copper surge boosts South America, but bonanza unlikely to repeat super boom of 2000s

RIO DE JANEIRO, BRAZIL – Finally some good news, something reasonably solid to hold on to. The pandemic took a particularly heavy toll on Latin America: on health, with one of the world’s highest mortality rates among the population; and on the economy, with one of the harshest recessions and one of the slowest recoveries.

However, today the region’s south is in for a positive surprise: a growing range of commodities, including copper and soybeans, have surpassed pre-pandemic prices in recent weeks, opening up an unexpected escape route from the crisis. The challenges are tremendous, but things at last look somewhat better than they did a few months ago.

The rapid return to normal activity in China and the U.S. recovery due to the stimulus measures introduced by the Joe Biden administration have shaken off worldwide pessimism. Robust investment plans in infrastructure have substantially increased expectations for food and metal consumption. And bottlenecks in these products’ production chains, pressured by two major storms in a short time frame – first it was confinements, but the last straw was the recent Suez Canal debacle – have complicated the picture, triggering an inflation surge in commodities unprecedented in the last decade.

“It’s a clear element of optimism,” says the head of the Ibero-American General Secretariat, Rebeca Grynspan, who expects an upward revision in growth projections for all of Latin America and, in particular, for the southernmost part. “But the starting point is much worse than in the super-cycle of 10 years ago: poverty has increased, fiscal deficits are higher, and debt is higher,” she cautions.

The data are clear: The coronavirus has pushed poverty in the huge expanse of land between Rio Grande and Ushuaia to 12-year old indicators, while extreme scarcity has retreated to levels of two decades ago. And the International Monetary Fund (IMF) believes that per capita income will not return to pre-crisis levels until at least 2024. With or without the rise in commodity prices.

From dependence to capitalizing on the upswing

The plunge in commodity prices during the worst part of the pandemic was the last straw for some economies in South America, paralyzed by restrictions to contain the spread of the virus. Oil, a leading figure, reached negative quotations, i.e., investors paid to get rid of barrels because they were unable to stock more in overstretched tanks; metals plummeted because of the sudden halt in demand; and only food held up because it was a staple commodity.

A year later, all this seems distant, remote, almost in the past. The region’s economies are still suffering the consequences of the stoppage, but the commodities market – such as stock markets and bonds – has taken a 180-degree turn. And with it, the expectations of the most dependent countries in South America: Chile, Peru and Bolivia, driven by copper and lithium; and Brazil and Argentina, global agribusiness titans.

All of Latin America, but particularly the Southern Cone, has for years been trying to overcome – without much success – its perennial subordination to commodities and the progressive re-primarization of its economies.

However, when the wind blows in its favor, as it does now, the curse becomes a blessing: soy, by far the most exported product by the two largest South American economies, has almost doubled in price over the past 12 months in the heat of increased Asian demand and occasional supply shocks such as droughts. Copper is operating at a record high. And iron ore, Brazil’s second largest source of income, has just surpassed them.

The golden years: no trace of the super-cycle

A little more than a decade has passed since those golden years when oil was traded at triple digits, soybeans tripled in value in only five years, and copper increased fivefold in record time. Hence, the parallels between the recent surge in demand for basic commodities and that one are tempting. As much as unrealistic: only one in a dozen economists dares to speak of a super-cycle like the one that boosted the South American
economy and allowed the greatest improvement in social indicators since records began. Today’s boom, they add, has more transitional than structural connotations.

“We didn’t expect it, it’s very positive. But there is so much uncertainty about whether or not it will sustain itself over time that I believe a cautious approach is needed. You can’t talk about a super-cycle,” says Martín Castellano, chief economist for Latin America at the Institute of International Finance. “I believe that conjunctural factors weigh above all,
such as the search for protection against inflation on the part of many investors. They used to buy gold and now they are focusing on other raw materials,” adds José Luis Machinea, ex-president of the Central Bank and former Economy Minister of Argentina.

Between the super-cycle, the cycle and the mini-cycle, the stakes are shifting towards the third. “After two or three years, it will be very difficult to keep growing because global GDP will not grow as it did in the 2000s, when China became the powerhouse it is today,” says Marcos Casarin, Oxford Economics’ head of regional analysis.

Nor does the IMF’s head for the Western Hemisphere, Alejandro Werner, see signs of a lasting increase in commodities. “It would be very optimistic to think otherwise and that will prevent a growth shock like the one we saw between 2003 and 2014,” says Werner. According to his calculations, for every 10% improvement in the terms of trade, South American economies will grow by between 1 and 2 points more in three years.

‘Green’ minerals replace crude oil

Oil was the key factor in the last raw materials boom cycle. However, it looks like a very different story this time around: since April’s abyss, its rebound has been faster than expected, but nowhere near as fast as it was then. “The main difference between the two periods is crude oil, which is not keeping up with the rise in the prices of some ores and foodstuffs. And that will prevent oil-producing countries from sharing the boost in the
economy,” Werner explains.

Times have changed. With combustion cars undermined by governments’ green swerves to meet climate targets, oil has plunged into disgrace, barely sustained by OPEC’s supply cuts. It still has a few more years of dominance in the global energy matrix, but each passing day is one less towards the long-awaited post-oil world.

This change of era is starting to leave its mark on the Latin American geo-economic map: the big oil exporters -Venezuela, Mexico, Colombia, Ecuador-, which experienced rosy days with a barrel of oil over US$100 (R$522), will hardly be able to take advantage of the return to commodity life.

The other side of the coin is copper and lithium. The former is essential in the solar panel industry and in the assembly line of electric cars, among others. The second is essential for batteries. And the global supply of both passes largely through four South American countries, which stand to gain in a scenario of rising prices like the current one: Chile, Peru and, to a lesser extent, Bolivia and Argentina.

Chile: lesson learned?

The projected increase in world copper consumption far exceeds the expected expansion of supply. A deficit that is poised to be structural and is an even greater draw for Chilean interests, a country that alone contributes nearly 1 in 3 tons consumed each year in the world.

But Chile is also perhaps the most conscious nation in Latin America of how ephemeral these processes can be: after the last major increase in the price of copper 15 years ago, investment decisions were made in light of short-term price projections, and the wave of new extractive projects temporarily killed off the goose that laid the golden egg. When the price began to plummet in 2014, the Chilean copper industry was forced to deal with the
worst possible equation: oversized construction projects with high associated costs and low sales values.

This is the lesson left by those years when, for a few moments, the extractive sector’s feast seemed endless. And it seems to have been well learned. Producing companies are cautious in their investment decisions, and new projects will only see the light of day if two requirements are met: that they are competitive in terms of costs and that there is clarity in the long-term price trajectory.

The danger of inflation

Rising commodity prices will enable “a softer landing on the fiscal and debt side,” says Nora Lustig, professor at Tulane University (New Orleans, U.S.A.) and president emeritus of the Latin American and Caribbean Economic Association (LACEA). “It will give more leeway to maintain a less restrictive fiscal policy, and that is very important coming out of the
pandemic,” she explains. With public coffers under tremendous pressure, the countries in the bloc are willing, first and foremost, to put their accounts in order. “One thing is certain: more money than expected will flow into public coffers and governments will gain time before needing to make adjustments,” adds Casarin, from Oxford Economics.

The downside is inflation. Oil, the component that most affects prices, rose less than the rest. But it rose. And food, another crucial item – particularly in the basic food baskets of the poorest layers of the population, the hardest hit by the crisis – exploded. The rising cost of corn tortillas, food par excellence in Mexico and several Central American countries – which benefit little from the improvement in terms of exchange – is the best example of how this phenomenon can weigh on the pockets of the poorest.

In Brazil, accumulated inflation through April 2021 reached 6.76%, resulting in price variations in pharmaceutical, personal hygiene, and food products. The most representative case is the price of meat, which in the last year, accumulated an increase of 35.05% due to the rise in the costs of animal feed – produced basically with commodities such as soy and corn.

Central America and the Caribbean, not part of the party

The dividing line for this new commodities boom is Panama: good news down south, not so good up north. All South American countries – “without exception”, emphasizes Alicia Bárcena, executive secretary of ECLAC, the UN’s arm for the development of Latin America and the Caribbean- are net exporters and the rise in prices comes in handy. The opposite is true in Central America, a net importer of primary products, with a handful of exceptions: Costa Rica, Honduras, Nicaragua, Panama. For this sub-region, the favorable wind comes from a factor totally unrelated to raw materials: the improvement in the U.S. economy, which will give a boost to remittances from emigrants.

The rise in food and mineral prices will also be negative for the Caribbean, one of the most affected areas in the world by the tourism halt. “It will be negatively impacted in its terms of trade,” Bárcena explains. The exceptions to this rule Guyana (protagonist of the last oil miracle in the world), Suriname (rich in gold) and Trinidad and Tobago (which exports gas and crude oil), the only three net sellers of primary goods.

In Mexico, in North America, the economic recovery will be supported more by its industrial connection with the world’s largest power than by the recovery of basic products. But the rise in the price of oil and minerals will not cause it any harm; quite the contrary, it is an added bonus.

Party at the Rosario Exchange

It is Argentina’s star product, responsible for US$1 out of every US$4 that comes with exports. For the third largest soybean producer in the world, with 16% of the market, behind Brazil (35%) and the United States (33%), its increase in price is undoubtedly good news. At the threshold of US$590 (US$3,080) per ton, its highest value in eight and a half years and almost double the US$300 seen on the trading floor in Chicago in May last year, and with corn – second place in the Argentine export agenda – which has also doubled its price, Argentina will export grains this year worth US$34.4 billion (R$180 billion), US$8.1 billion more than last season, according to Fundación Mediterraneo.

The Rosario Grain Exchange, the largest agro-export conglomerate on the planet, made US$5 billion (R$26 billion) between January and March from the sale of flour, oil and soybeans alone, it reported. As every year, China took 90% of domestic production and the revenue in dollars could be even higher were it not for the drought. A hindering factor, in terms of volume, but one that raises prices: part of the recent hike is related to the lack
of rainfall in Buenos Aires, Santa Fe and southern Cordoba, regions that concentrate the bulk of the harvest.

South America’s second largest economy urgently needs the inflow of foreign currency. Without international credit, the government of Alberto Fernández covers the fiscal red by printing money, which in 2020 has skyrocketed to 8.5% of GDP. This monetary expansion has rendered efforts to contain inflation futile, and the conjuncture leaves exports as the only possible alternative to straighten the course.

Another consequence of the high prices of raw materials in Argentina is that each increase causes renewed tensions between the government and producers, because the state keeps 37% of the revenue from soy exports, a figure that farmers consider excessive.

Brazilian agribusiness up again

The recovery of commodities took on a special importance in the analysis of financial specialists who on YouTube guide millions of small investors who try their luck in the stock market. Alex Agostini, chief analyst at Austin Rating, is one of the few who believe that Brazil is at the start of a new commodities super-cycle, given the skyrocketing prices: “It’s crazy.”

In Brazil, an exporting power and world leader in soybean trading, expectations are high. With these new prices (also due to a very devalued Real), the sector’s major traders are monitoring Brazilian producers with attorneys and drones to ensure they fulfill the contracts signed a year ago.

Felippe Serigati, from the Getúlio Vargas Foundation, estimates -like most- that this boom will not be as intense or prolonged as the one in the first decade of the 2000s. “The current rise is explained by the fact that world stocks of corn, soybeans and wheat are very low, but not as low as in 2007-2008: only soybeans are at those levels.” Nor is there a factor present that then helped tip the scales: China’s entry into the WTO. “We see additional
demand from incumbent players, not the entry of a new one, as occurred then, and which impacted world trade like a meteorite.”

Agostini predicts that the current boom will benefit sectors such as agribusiness and mining, which are very important in the Brazilian economic fabric. But this bonanza, explains Serigati, is unlikely to extend to the general population. The times of surpluses, subsidies and abundant credit are over. These, as in the rest of the region, are still marked by fiscal difficulties and unemployment.

Source: El Pais