Hello everyone. Welcome to the first episode of The Cons out of Economics.
So in this week’s segment, I explore the South American market by reviewing financial articles in which I have come across this month. These articles are on the Argentinian drought and the economy of Brazil. This podcast provides a brief overview of current events in South America in which I hope will encourage us to develop our commercial awareness.
But before we do that, I’m gonna be explaining the key terms. I’m sure you’re wondering what exactly is a commodity?
Well, a commodity is a raw material, agricultural or agronomic product. So to class this, a raw material example would be gold, metals, crude oil and an agricultural product would be something like coffee, sugar or wheat. Lastly an agronomic product would be something like manure.
Although South America is not as dependent on Commodities as Africa is. It is still quite reliant on its exports which makes about 51% of its revenues. Whereas Africa is dependent on export [eh] which revenues which generates its revenues at 81%.
Now that we have explored what a commodity is. Let’s look at the key players in the South American commodities markets. First and foremost is Brazil which is the 21st largest export economy in the world. Followed by Chile, which is the 35th largest export economy in the world and Argentina is the 36th largest export economy in the world. And Peru is the 43rd largest export economy in the world. And lastly Columbia is the 45th largest export economy in the world.
Some of the goods that these countries produce includes things like soya beans, iron ore, raw sugar, crude petroleum, coffee, refined petroleum, copper ore, gold, soya bean meal, corn, soybean oil, refined copper, wood pulp, fish fillets, wine and cut flowers.
The goods in which these countries produce are very important. For instance, crude oil petroleum contributes directly to the production of goods and services. Soya meal beans helps feed the animals which we eat such as chicken, pig and fish. So all in all, they are very crucial.
So what exactly is happening in South America at the moment? Well, there are two main events. The first is that there is a drought which has affecting Argentina adversely and the second is that Brazil has just come out of a recent recession. Let’s look at both events.
So here is a summary of articles about the Argentinian drought.
According to NASDAQ, the forecast in crops produced has reduced due to adverse weather conditions in the country’s central Pampas grain belts. So there were initial estimation of 54 million tonnes of soy and 41 million tonnes of corn. However due to the bleak weather conditions, the soy beans and the corn futures market [is] fluctuating.
Next we look at the article on Reuters, despite the drought, rain in late April and May can normalise the soil. However climate adviser Edwardo Sierra states that this may not be until May in which farmers can start planting their 2018/2019 crops.
Lastly, the Financial Times offers some insight into this Argentina drought problem. So currently, Argentina accounts for 47% of the world’s Soya bean meal exports. An extended drought has affected Soya bean productions and Soya meal prices have catapulted to a twenty month high. Soya Bean meal prices also risen which has been driven by hedge fund buying.
In this article by the Financial Times it details that Argentina struggles with a drought which has impacts on world farmers, food producers and hedge funds. This soya bean meal is a key source of protein used to feed chicken, pigs, cows and fish across the globe. This lack of rain has damaged crops and prompting analysts to slash production forecasts for his year.
And we know these drought conditions are caused by a weather condition caused La Nina. As we know, La Nina is one of the causes of agricultural production volatility.
Next we have a brief look at Brazil’s economy. Right, according to the BBC, Brazil has been in a recession for about two years. Some causes of these recession are falling commodity prices, corruption, political instability and scandals which has meant investors lost confidence in Brazil. Unemployment has risen in Brazil as well. They’ve experience negative growth for twenty four consecutive months. Brazil’s recovery is dependent on public spending and its fiscal policies.
In the Financial Times as reported this week, that Brazil’s economy has expanded since 2017 with an improvement in the agricultural sector. So GDP has increase by 1%. Although the credit rating of the country was downgraded last month, there are still some causes of concern for Brazil. This includes politics and its generous pensions system.
Lastly, here is my verdict on what I have read and what I have understood from these articles.
Number one: Commodities are unstable. In fact, it is one of the most volatile products. A dependency on this translates to a volatile economy.
Number Two: Forecasts are too optimistic- Personally, I believe the analysts are too expectant on what a country can produce. As much as they try to take into consideration adverse whether conditions and risks, there is still an element of uncertainty as we cannot fully determine a countries output even if we have vast amount of data reflecting previous output.
Number Three: There are always limitations in Commodities- This is because commodities have a tariffs and quotas. This means there is a restriction on how much you can import or export. This can affect countries who are too dependent on exports as their main source of revenue.
Number Four: Commodities makes countries too dependent. This is because they tend to specialise in one area of trade because that is naturally what they produce and trade specialisation is relatively cheaper. However in an instance where there is little or no demand for the commodity you are producing then there is a limitation to how much revenue you can generate from the few goods that you can export. In this scenario, diversification is key. It is imperative to have a wide variety of goods and services that you can export.
Lastly, I believe hedge funds remain optimistic or bullish about commodities because of their ability to use financial instruments to hedge the volatility and risks.
Thank you for listening. These articles can be found on the BBC, Financial Times, Thompson Reuters and NASDAQ.
See you next week for another episode of The Cons of out Of Economics.
Thank you very much for listening.