Soaring Export Prices Lift Hope for Latin America

A boom in Asia's demand for commodities boosts prosperity, but many worry whether the windfall is being used wisely.

MARSELLA, Colombia (By Chris Kraul, LATimes) December 8, 2005 — A boom in Latin America's exports of farm products and natural resources is lifting standards of living, creating jobs and offering guarded hope that the region may improve education and reduce its many social ills.

Surging prices of commodities such as coffee, soybeans, copper and petroleum — largely because of exploding demand from China and India — are bringing newfound prosperity to the region's farmers, miners and workers, according to analysts and recent studies.

Violence and public disorderliness are down in towns such as this one, located in the heart of Colombia's coffee-growing region. Poverty also has declined, as has unemployment since 2003. And Latin American countries are using their new wealth to boost spending on health, education and public works projects.

But experts say the region's problems are still daunting. Eventually, they say, commodity prices will level off or even fall. And although Latin American countries are in much better shape to avoid a severe economic downturn, experts worry that the nations aren't converting their windfall into something much more durable and ultimately productive by investing in human capital. More than 40% of the continent's people still live in poverty, according to a recent United Nations study.

"The region is still too dependent on commodities and needs to be more active in developing manufacturing efficiency and competitiveness, which is the real long-term solution," said Jose Antonio Ocampo, U.N. undersecretary for economic and social development.

The commodity boom has been good for people like coffee grower Alberto Zapata. Here in this bustling hill town 200 miles west of the capital city of Bogota, prices for Zapata's beans are up 40% since early last year. The profits have enabled him to pay off debt, invest in his farm and even buy a used truck.

"It's the best market in 15 years," said Zapata, adding that the entire town of 23,000 seemed to have kicked into a higher gear of prosperity.

Affluence also reigns half a hemisphere away in Pergamino, Argentina, the heart of that country's booming soybean industry. Farmer Federico Varela says he and his neighbors are cashing in on the 20% rise in soybean prices and export sales stoked by soy-mad China. The Asian nation last year snapped up 7.8 million tons, or one-fifth of Argentina's crop, up from zero in the early 1990s.

Varela and others are remodeling their houses and buying sport utility vehicles. Demand for tractors among growers is so high that there is a one-year waiting list. Varela is also plowing profits back into his farm.

"We're all taking advantage of the higher prices to plan for the long term, to bet on innovations that will pay off in future profits," said Varela, a fourth-generation farmer in Pergamino, 150 miles northwest of Buenos Aires.

Over the last two years, prices of Honduran timber and Brazilian cotton are up 25%. Colombian sugar and Ecuadorean fish are up 50%. Cuban nickel is up 75%, and Chilean copper has doubled. Mexican and Venezuelan oil prices have more than doubled.

The price surges have had a direct and highly beneficial impact on Latin America's economy, which is expected to grow 4.5% this year, slowing from last year's 6% clip, which was the best expansion the region had seen in 25 years.

Such growth has been fueled primarily by an explosion in exports, which grew 23% in 2004 to $463 billion, and are likely to grow 20% this year, according to Jurgen Weller, a U.N. economist in Santiago, Chile. Half those exports are commodities such as farm products, minerals, petroleum, fish and timber.

Good times are evident in Marsella. Stores are full and work is plentiful. Not just coffee prices, but bananas, avocados and hay as well — just about everything grown around here — is booming.

The boom didn't come a day too soon for Zapata, who owns a 250-acre coffee plantation. He suffered through five horrible years before prices began rising in early 2003.

"During the last crisis, 50% of the farmers around here stopped growing coffee, thinking it would never improve. Workers left for the jungle to pick coca leaves," said Zapata, who thinks he's got another two years of high prices before growers inevitably flood the market.

Latin America has been through past commodity price cycles before, in which booms were inevitably followed by crashes, often leading to recessions, devaluations and massive joblessness. That's what happened in the early 1980s, when prices fell, causing widespread defaults on huge loans that many Latin American governments had taken out as bets on continued high prices.

Most economists say the current commodity price boom will moderate. But many, such as Ken Shwedel of Rabobank in Mexico City, believe there have been "structural changes" in the global commodities market that will keep prices at higher "levels of equilibrium" than before.

The most important change is the emergence of China and India, whose voracious appetite for raw materials is the single biggest factor in the current price boom. In addition to China's dominance of the region's soy market, it now buys 60% of its frozen orange juice and 30% of its cotton from Brazil.

Economist Jane Eddy of Standard & Poor's says there is less chance of a 1980s-style crash when commodity prices settle because most Latin American economies are in much sounder condition. They have stronger, more flexible currencies, trade surpluses and a rising tide of foreign investment and remittances, she said.

Reflecting the sunny outlook is the astounding performance of Latin American stocks and bonds over the last three years. Mexico's main share index soared 44% in 2003 and 47% in 2004, and is up 33% this year. Brazil's key index gained 97% in 2003 and 18% last year, and is up 25% this year.

Investors have reaped similar or better returns in Argentina, Chile and Peru, among other Latin markets.

By contrast, the U.S. Standard & Poor's 500 index has posted far smaller gains since 2002. This year it is up less than 4%. Measured since 1999, U.S. stocks still are in the red.

But many economists worry whether the countries now in the chips are using the commodity windfall wisely, developing "value-added" manufacturing and technology, and reducing the region's grinding poverty.

There are some hopeful signs, said the U.N.'s Ocampo. Latin American countries, he said, are spending more as a percentage of total economic output on health, education and public works projects. "Social spending is probably growing faster in Latin America than any other region," Ocampo said.

Examples include $50 a month that the Vicente Fox government in Mexico is paying each of about 5 million poor families to keep their children in school. Chile is spending tens of millions of dollars on building freeways, upgrading airports and reopening a major railroad to boost its competitiveness.

Poverty in Latin America has fallen over the two years by 13 million people, to 213 million, or 41% of the population, according to a study issued last month by the U.N.

But Sebastian Edwards, a former World Bank chief economist for Latin America and now a UCLA professor, is concerned that the region is not investing enough in education to develop the human capital necessary for Latin America to join the First World.

A discouraging sign is that while jobs are growing in Latin America — a record 5.5 million were created in urban areas last year — they aren't growing fast enough to keep up with population growth, or even to catch up to employment levels of the early 1990s, said economist Weller, who works for the U.N.'s Economic Commission for Latin America and the Caribbean in Santiago.