Ouch! Corn prices dropped 70¢/bu. within a two-day period following the release of USDA’s March crop report. Welcome to the wild world of global economics! Are commodity prices being affected by weather and adjustments being made in planting, or are there other concerns on the economic horizon? Let’s examine the emerging BRICS nations to determine how this major driver of the commodity super cycle is performing economically, which could impact long-term commodity price outlook.
Of all the BRICS nations, Brazil, the initial letter of the BRICS acronym, was most affected by the recent global slowdown. The Brazilian economy was growing at a 7.5% rate in 2010. Its GDP growth slowed to just less than 1% in 2012, and is expected to bounce back to 3% in 2013, still well below the 5% growth rate needed by emerging nations to remain vibrant economies. Brazil has been impacted by limitations on capital inflow to the country and a perceived increase in government intervention in the economy, while business and industry have been impacted by higher costs, rising wages and weak productivity gains. Their government, however, is making efforts to stimulate the economy, so time will tell.
Russia is the fastest-growing of the large economies in the European region, but it is also slowing down. GDP growth is near zero, well below the 5% growth rate desired by the government. Changes in leadership at the central bank may result in a softer stance on inflation, growth, and investment, specifically in the military.
India’s high-growth economy in recent years has slowed to a crawl. Major reforms by the finance minister relating to privatization of businesses and increases in foreign investment incentives may result in a GDP growth rate of 5% for the globe’s second-largest population country. Reform of labor and land laws is not moving rapidly enough to revert back to the high-growth model in the previous years.
China is the fulcrum of the BRICS, since it is bigger than the other BRICS nations combined. GDP growth rates of 10% have slowed to 7.8% in 2012, the slowest pace since the year 2000. China is attempting to reduce the country’s dependence on export led growth to an internal focus or Asia regional focus. Expect China to grow at about 7-8% rather than 10-12% like over the past three decades. According to the OECD, China could overtake the U.S. economy by 2016.
South Africa’s economic performance has slowed since 2008, growing at about 2.5% in 2012. The economic strength has been reduced by domestic labor issues, lack of infrastructure, overall government direction and the slowing of the European economy, since South Africa exports many of its products. However, South Africa remains in the BRICS because of Africa’s role as a great source of natural resources.
Overall the BRICS nations are slowing. It will be interesting to see how their economies impact commodity markets as we go through the summer, fall, and into 2014.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at email@example.com.