Commodity Prices Perspectives and Challenges Laura Cuccaro VI Meeting of Monetary Policy Advisors Bogotá, Colombia, 8-9 April 21
Agenda (1) Economic and social importance of agriculture for Latin America (2) Commodity prices recent developments and perspectives (3) Challenges for the monetary policy 2
Agricultural production in Latin America has grown strongly during the last decade Agricultural production Source: FAO <-2-2- -2 2-5 >5 No Data (% chg. from 1997 to 27) 3
Agricultural GDP Commodity Prices Perspectives and Challenges and for some countries of the region still represents an important portion of their GDP Guat em ala Par aguay 2.8 21.5 Ecuador 1.6 Colombia Cost a Rica 8. 8.5 Peru Uruguay Chile Dominican Republic Latin America Br azil Argentina Venezuela Mexico Sour ce: FAO 6.9 6.4 6. 5.9 5.6 5.2 4.7 3.7 % of total GDP 3.7 5 1 15 2 25 4
Latin America s agricultural exports represent a large percentage in total exports Agricultural exports (as % of total exports) Source: FAO -5 5-1 1-3 3-5 5-7 7-1 No Data (27) 5
and for some countries, in terms of their GDP Exports of agricultural, fishery and forest products Commodity Prices Perspectives and Challenges Par aguay 19.1 Uruguay Chile Argentina 11. 12.1 11.7 Ecuador 9.4 Guat em ala 8.4 Bolivia 6. Latin America Peru Br azil 3.8 3.8 4.4 Colombia 2.9 Dominican Republic 2. Mexico Venezuela.1 1.5 % of total GDP Sour ce: FAO 5 1 15 2 25 6
In addition, several countries have a high share of agricultural population Agricultural population Commodity Prices Perspectives and Challenges Guat em ala 52 Par aguay 4 Cost a Rica 37 Ecuador 35 Dominican Republic 32 Peru 29 Colombia 26 Mexico 23 Br azil 15 Chile 12 Argentina Uruguay Venezuela 7 8 8 % of total population Sour ce: FAO 1 2 3 4 5 6 7
Finally, the Latin America s contribution to the world agricultural GDP is important Agricultural GDP Br azil 3.2 Mexico 1.9 Argentina 1.3 Colombia.8 Chile Venezuela Guat em ala Peru.5.4.4.4 Ecuador Dominican Republic Par aguay Cost a Rica Uruguay.2.2.1.1.1 % of world agricultural GDP Sour ce: FAO..5 1. 1.5 2. 2.5 3. 3.5 8
In Argentina, agricultural sector production has responded strongly in the last 15 years million tons. Gr ain har vest 12 1 million tons. 6 47.5 4 46.2 Soybeans Corn W heat 31. 53. Cereals Oilseeds 97 9 8 6 2 21.8 22. 19. 13.1 14.5 16.3 7.5 8.4 26/7 27/8 28/9 29/1 61 33 27 4 56 2 34 1979/8 1982/83 1985/86 1988/89 1991/92 1994/95 1997/98 2/1 23/4 26/7 29/1 Source: MAGyP and USDA 9
...led by the rise in soy crop area and by the higher yields observed in corn and wheat 5 4 3 2 1-1 -2 Contribution to production growth (29/21 vs. avg. 199/) million of tons Sour ce: SAGPyA 8.2 32.6-5.9-4.3 Corn Soybean W heat Soybean Corn W heat Production, crop area and yield growth (29/21 vs. avg. 199/) -36.5-43. 4. 31.6 25.3 59.4 71.2 188.3 Production Yield Area 1 28.1 Others -1-5 5 1 15 2 25 3 % Source: BCRA from SAGPyA data
During the beginning of this decade soft and hard commodity prices have exhibited a steep increase 5 45 4 35 3 25 2 15 1 2=1 5 Ener gy Agriculture Metals and minerals Commodity Prices (in current US dollars) 2=1 5 45 4 35 3 25 2 15 1 Jan-8 Jul -8 Jan-9 Jul -9 Jan-1 Dec-71 Oct -77 A ug-83 Jun-89 A pr-95 Feb-1 Dec-6 Source: BCRA from Bloomberg, W orld Bank and IMF 11
Expressed in other currencies the increases are still substantial, but below their 7 s and 8 s levels 6 5 2=1 Ener gy Agriculture Metals and minerals Commodity Prices (in constant SDR*) 2=1 35 3 25 4 3 2 15 1 Jan-8 Jul -8 Jan-9 Jul -9 Jan-1 2 1 Dec-71 Oct -77 A ug-83 Jun-89 A pr-95 Feb-1 Dec-6 * Deflated by weighted average CPI of SDR currencies (dollar, euro, yen and pound sterling) Source: BCRA from Bloomberg, W orld Bank and IMF 12
The price boom have been also accompanied by higher volatility than in the previous periods 1 % 93.1 Commodity Prices Yearly Growth. Standard Deviation 8 7's 8's 9's 's 6 4 2 25.1 25.3 36. 3.8 14.3 9.3 16. 26.1 21.2 17. 25.7 Ener gy Agriculture Met als and Miner als Source: BCRA from World Bank 13
Key fundamentals behind commodity prices Demand for grains Structural factors Demand for bio-fuels Production capacity Stocks Medium-term factors Cost Short-term factors Regulation Climate Commodities as financial assets 14
The soaring commodity prices are connected with their own fundamentals, where high supply has been over passed by demand Soybean global demand and supply billion tons 27 USD 6 Soybean ending stocks and prices billion tons 7 Pr ice 235 Demand 5 Ending stocks (right axis) 58 Supply 2 4 46 165 3 34 13 2 22 95 1 1 199/1991 1996/1997 22/23 28/9* 199/1991 1996/1997 22/23 28/9* Sour ce: USD A *: 28/29 and 29/21 estimated 15
The soaring commodity prices are connected with their own fundamentals, where high supply has been over passed by demand (II) billion tons 9 Corn global demand and supply USD 25 Corn ending stocks and prices billion tons 2 8 Demand 2 18 Supply 7 15 16 6 1 14 5 5 Pr ice 12 Ending stocks (right axis) 4 199/1991 1996/1997 22/23 28/9* Sour ce: USD A 1 199/1991 1996/1997 22/23 28/9* *: 28/29 and 29/21 estimated 16
The soaring commodity prices are connected with their own fundamentals, where high supply has been over passed by demand (III) billion tons 7 W heat global demand and supply USD 36 W heat ending stocks and prices billion tons 225 66 Demand 29 2 Supply 62 22 175 58 15 15 54 5 199/1991 1996/1997 22/23 28/9* Sour ce: USD A 8 125 Pr ice Ending stocks (right axis) 1 1 199/1991 1996/1997 22/23 28/9* *: 28/29 and 29/21 estimated 17
Agricultural prices have also been influenced by the development of bio-fuels Biofuels production 26-28 A ver age 11.9 +62.% 29* 19.3 +127.3% Biodiesel 218* 43.8 26-28 A ver age 58.8 +36.% Ethanol 29* 8. +85.6% 218* 148.5 2 4 6 8 1 12 14 16 billion liters Source: FAO - OECD *: Forecast 18
Other factors that have influenced prices include production and transportation costs, as well as investment in infrastructure 1,2 Jan-2=1 Nominal agricultural costs (current US$) 1, Crude oil (WTI) Shipping (Baltic Dry Index) 8 Fertilizers (W orld Bank Index) 6 4 2 Mar -2 Mar -3 Mar -4 Mar -5 Mar -6 Mar -7 Mar -8 Mar -9 Mar -1 Source: W orld Bank and Reuters 19
Some temporary factors, like speculative demand, have also an impact, adding volatility to commodity prices 45 % Non commercial agricult ural cont ract s (% total world supply*) 4 35 3 3.6 25 21. 2 15 11.2 1 5 Soybean Corn W heat Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 (*) Includes total production plus begenning stocks Source: BCRA from USDA and CFTC data. 2
In Latin America, as a result, net commodity exporter countries registered historical current accounts surplus and higher terms of trade % of GD P 3 2 Latin America. Current Account and Terms of Trade 23-27 CA Average:.93% of GDP ToT Average: 2.4% y.o.y. chg. y.o.y. % chg. for ecast 9 6 1 3-1 -3-2 -6-3 -4 Current Account Terms of Trade (right axis) -9-12 -5 199 1992 1994 1996 1998 2 22 24 26 28 21 Sour ce: IMF -15 21
In this context, there was a process of international reserves accumulation and several nominal FX were appreciated Lat in America. Int ernat ional reserves and select ed nom inal exchange rat es* 1994=1 5 4 3 International Reserves (right axis) Brazilian Real Argentine Peso Chilean Peso Mexican Peso Colombian Peso % of GD P 15 12 9 2 6 1 3 1994 1996 1998 2 22 24 26 28 *: currency per USD Source: ECLAC and Datastream 22
As in the majority of the economies, rising food prices have boosted headline inflation in many Latin America s countries % y.o.y. 25 2 15 Br azil Consumer price index % y.o.y. 2 CPI total 15 CPI total CPI food 1 CPI food Chile 1 5 5 % y.o.y. 1999 21 23 25 27 2 Mexico 15 CPI total 1 CPI food 5-5 % y.o.y. 1999 15 21 23 25 27 Colombia 12 9 6 CPI total 3 CPI food 1999 21 23 25 27 Sour ce: ECLAC 1999 21 23 25 27 23
In Argentina, commodities and the effects of the economic activity have too generated inflationary pressures 24 % Pr ice indexes (y.o.y. chg.) % 8 Prices structure Other goods and services Educat ion 6.3% Food & beverages 4.3% excluding meat Recreation 27.9% 18 6 5.1% Transport and F & B 37,9% communications 12 4 16.6% 6 2 Medical care 5.6% Housing services & operations 4.9% Shelter 12.1% Apparel 7.3% Meats 1.% -6-12 GDP deflator Private consumption deflator W holesale price index Commodities prices in $ (IPMP; right axis) -2-4 Q1-4 Q4-4 Q3-5 Q2-6 Q1-7 Q4-7 Q3-8 Q2-9 Q1-1* IPMP: BCRA Commodity price index * data until February 24
Sustaining non-inflationary growth in an environment characterized by high commodity prices remains the key policy challenge facing. The inflation impact of food price increases is a particular concern, especially for emerging economies. Commodity Prices Perspectives and Challenges Challenges Large fluctuations in prices can have a destabilizing effect on real exchange rates. A managed floating exchange rate regime is recommended, allowing to monetary authorities build liquidity buffers as a countercyclical policy. Improvements in local financial system are required to channel capital inflows towards productive uses and to 25
The Argentina s monetary framework is based on the following scheme: Managed floating exchange rate regime onetary policy based on the control of monetary aggregates nternational reserves accumulation egulatory and supervision policies imed at strengthening the financial system and fostering financial intermediation Goals: Guarantee sustainable growth Provide Monetary and Financial Stability Minimize External Vulnerability 26
Thank you