Inflation trade-offs in South American trade

The Economist Intelligence Unit’s (EIU) world commodity index, which covers 25 commodities across food and industrial raw materials, has reached a record high. It currently stands at 277 (1990 = 100), much higher than the spikes seen in 2008 (at 199) and 2011 (at 240) and driven to a greater extent by food rather than industrial raw material price inflation.

For net importers of commodities this is bad news. But what’s in store for economies in South America, known for their exports of copper, iron, crude oil, soybeans, maize, coffee and meat but also their reliance on imports of fertiliser and refined petroleum? In this article we take a closer look at three of the continent's largest trading economies: Brazil, Argentina and Chile.

The EIU’s food and beverages index currently stands at 298 (1990 = 100), driven by sharp price increases for grain and oilseeds (such as peanuts and soybeans). Brazil, Argentina and Chile are all net exporters of food and, at first glance, stand to benefit from the price increases even if overall volumes fall. Oilseeds are Brazil’s top agricultural export; Brazil and Argentina are among the world’s leading exporters of soybeans.

However, these countries are also heavily reliant on fertiliser imports, a key input for their agricultural industries, the global price of which has more than tripled from US$247 per metric tonne in May 2019 to US$925 in May 2022.¹ About one-fifth of Brazil’s fertiliser imports are sourced from Russia, and the unpredictability around the sanctions imposed on Russia means that farmers are scrambling to find alternative sources.² To manage the cost of this critical input, farmers in Argentina are expanding soybean and sunflower seed production, which requires less water and fertiliser.³ But farmers of other crops using less fertiliser may end up with lower yields.

All three countries are also net importers of refined petroleum (although Brazil is a net exporter of petroleum products overall due to high crude oil exports), a necessity for agricultural production.⁴ Since early March Brent crude oil prices have soared above US$100/barrel, up from around US$70/barrel towards the end of last year.

Overall, the value of food exports of these three countries amounts to multiples of their fertiliser imports, so even if prices increase on both fronts, this is likely to have a net positive impact on South American trade.

The outlook for metals trade is similar. The EIU’s metal prices index has surged to 294 (1990 = 100) in 2022, from 167 in 2019. Chile is the world’s largest supplier of copper, exporting US$23bn worth of copper products in 2021, up from US$15bn in 2019.⁵ Metal ores are also among the top exports of Brazil and Chile. Here too, although the domestic industry faces higher petroleum import costs to power these industries, the total value of metal exports is far greater than the cost of oil imports into these two countries.

Beyond commodity inputs, there will be various other factors that could shape the trajectory of South American trade. Exchange-rate volatility is one: as US interest rates increase, the high level of dollar-denominated debt in some South American countries may lead to currency depreciation, making imports more expensive. But barring any fiscal crises, South America is likely to see a bump in export revenue from higher food and metal prices, much like it did during the commodity boom in 2021.