What goes up…

Over the weekend, I read a really interesting paper by David S Jacks about commodity prices over the long run. The Economist’s Free Exchange blog has a nice distillation of its findings but essentially the paper finds that over time, most commodities have risen in price—though “grown” commodities have been less robust—but in between they have been marked by 20-70 year “super cycles” and shorter booms and busts. Most importantly, as far as Latin America is concerned, it appears many commodities are at or near their super cycle peaks.

A commodity super cycle is a multi-year period of above and below-trend prices for a given commodity. A trough-to-trough cycle typically will last about 20 years, though they may last much longer. These cycles trend closely with periods of rapid industrialization and urbanization where demand for commodities grows faster than the supply, pushing up prices until supply can catch up. In the paper, Jacks identifies nearly half of the 30 commodities he tracked as reaching their price nadir in the mid-to-late 1990s. This would suggest that many of them would be close to their peak within the super cycle, with some perhaps having already passed it.

For Latin America, the beginning of a downward super cycle trend could be defining for the region’s recent economic development. Many Latin American countries remain hugely dependent on commodities and a number of them have benefitted hugely over the last decade from ever-rising prices (i.e. Venezuela from oil; Peru from mineral and agricultural goods; Bolivia from natural gas; and many others). Unlike a commodity bust, where prices fall dramatically for a short time and then recover, the downward trend would mean consistently lower prices over time, even if there were years where prices rose (i.e. the oil price spike in 1991 from the Gulf War). Depending on how adaptable each economy is, and if there is a rapid initial decline, this could manifest itself as a slight drag on growth while other sectors perhaps benefit from lower input prices, or it could be the impetus for a decade of stagnation and potentially crisis.

Roughly, I would guess that Chile and especially Mexico would be the best prepared to deal with a prolonged decline in commodity prices due to their comparatively well-developed industrial sectors and openness to trade. On the flip side, Venezuela seems the most obvious country to have trouble adjusting, not just because of its massive dependence on a single commodity, but also because of its huge stock of debt. Similarly, Argentina’s economy seems too fragile to adapt quickly to a decline in commodity prices while the underpinnings of economies like Peru and Brazil would be severely tested.

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