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Latin America faces pain as commodities party ends

The end of a long global commodities boom threatens to hit Latin America harder than any other region, putting a sharp brake on its economies and pressuring government spending plans.

From bulging foreign reserves and the emergence of corporate giants to the destruction of vast areas of the Amazon rainforest, booming commodity prices have reshaped Latin America as supplier of the world’s raw materials and underpinned its resurgent economies.

The region is now better prepared to weather this shock than past crises because it has stronger budgets, bulked-up dollar reserves and lower levels of foreign debt.

But with prices of everything from Chilean copper and Brazilian beef to Argentine soybean all sliding on expectations that the financial crisis will force a global slowdown, economists are sharply cutting growth forecasts and farmers are preparing for harder times.

“It’s unbelievable that in four or five months we’ve gone from healthy margins to where we are today. It’s a disaster,” said Ruben Berardo, a farmer in Argentina’s central Entre Rios province.

The Reuters-Jefferies CRB index of commodities prices fell to a year low of 289.89 last week, down from a high of nearly 474 on July 3. Although the dollar’s rise gives some relief, the price falls will squeeze governments that have used the boom of recent years to go on spending sprees.

Venezuela President Hugo Chavez has used high oil prices to fund socialist spending policies, and some analysts predict a prolonged price fall could force him to tighten belts.

President Luiz Inacio Lula da Silva has ridden Brazil’s commodities-driven boom to 80 per cent popularity ratings, helped by social programs that lifted millions out of poverty.

While Lula at first mocked the United States over the crisis and said Brazil was not in danger, the country’s policy-makers have in recent days had to rush to provide liquidity to banks and local financial markets.

For Argentina, one of the world’s biggest producers of soybeans, corn and wheat, falling grains prices could sharpen tensions between farmers and President Cristina Fernandez.

With soy products alone accounting for a quarter of export revenues, Fernandez has been forced to cut government spending, vow to chop energy subsidies by over $1 billion and make conciliatory steps toward foreign creditors and bondholders.

Months of protests by farmers and their supporters cooled when Fernandez revoked a tax hike on soy exports in July, but tumbling prices for key exports have fuelled their calls for an overhaul of government policies.

Budget, political strains

In Brazil, where some 60 per cent of exports are commodities related, heavy stock market falls since May have partly reflected the decline in global prices for oil, metals and agricultural goods.

Morgan Stanley sees growth in Latin America’s largest economy falling to two per cent in 2009, sharply below the government forecast of 4.5 per cent, largely reflecting lower prices for its exports.

“In our case, the commodity has collapsed, so obviously our margins have decreased tremendously,” said Laurence Pih, chief executive of Moinho Pacifico, Brazil’s biggest wheat processor.

The price for the wheat that Pih’s firm processes had last week fallen 59 per cent from $13.5 per bushel in February.

Surging demand from China and India has in recent years led farmers in Brazil, Paraguay and Argentina to expand land for soybeans and other crops from the Pampas to the Amazon, where it has fuelled deforestation.

Now, farmers face falling prices and a drying up of credit just as the grain-planting season starts.

“It could be the worst of all worlds – plant an expensive crop, without credit, and harvest it at low prices,” Roberto Rodrigues, a former Brazilian agriculture minister, wrote in the Valor business newspaper last week.

The decline in coffee prices to their lowest levels in well over a year is also hitting the impoverished countries of Central America, where coffee is the top agricultural export.

“If the trend continues, producers will definitely have to be more frugal in their investments,” said Honduras’s trade minister, Fredys Cerrato.

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