If the oil price threat to global economic growth has long been regarded as the proverbial ‘elephant in the room’ the elephant may soon have company in the form of drought induced food price inflation
The problem is serious enough to be setting-off alarm bells in the corridors of G20 members, who are due to discuss the issue this week. While no formal decision on how to tackle it is expected before a mid-September report on global grain supplies from the Agricultural Market Information System (AMIS), South Korea’s President Lee Myung-bak has already taken the lead, calling on fellow members to step up joint action to stabilise international grain prices; including proposals to ease export controls on food items, impose more regulation on market speculation and modify biofuel policies to cushion supply shocks.
This comes against a backdrop of poor crops in Russia (Urals/Siberia) and the Black Sea region and the worst drought in 56 years in the US – latest data there from droughtmonitor.com showing 85 percent of the US corn crop, 83 percent of the soybean crop, 65 percent of the hay crop and 71 percent of the cattle production area witnessing drought conditions.
To make matters worse, nearly half the US corn and soybean crops are in the so-called red zone, meaning extreme and exceptional drought conditions. Unsurprisingly, corn prices have jumped 60+ percent since mid-June and soybeans 30+ percent – both having reached record levels last month, following the third warmest July in 117 years across the seven major US producing states, according to government data. Corn, the biggest US crop, is the main ingredient in livestock feed and ethanol, a gasoline additive.
While the US Department of Agriculture (USDA) has left its 2012 food inflation forecast unchanged at a modest 2.5 percent to 3.5 percent, increasing to three percent to four percent in 2013, the likely negative impact on consumption as families are forced to allocate a larger share of their weekly income to milk, bread and other basics – at the expense of clothes, toys and consumer goods – is a feasible scenario.
Either way, the problem is unlikely to go away anytime soon – USDA having cut its 2012/13 US corn crop forecast by 4.011bn bushels, or 27 percent, over the past two months and slashed its estimate of corn use across all demand segments by 2.55bn bushels, or 19 percent.
US inventories at the end of next summer are now expected to fall to 650m, a 17-year low and down from the 2bn bushels forecast as recently as June.
The picture for wheat isn’t much better – the International Grains Council in its latest monthly report reducing its forecast for Russia’s crop by 4m tonnes to 41m tonnes, below the amount produced during the last drought in 2010 when the Russian authorities imposed a ban on exports. Last year Russia produced 27m tonnes of grain, 21m tonnes of which were wheat.
World stocks of wheat meanwhile are forecast to slip to a 4-year low of 180m tonnes, while production is forecast to come in at 662m tonnes (2011/12 estimate: 696m tonnes)
Compounding the problem, soybean production in Brazil and Argentina, the two biggest producers after the US, fell 14 percent earlier this year, according to USDA data, following last season’s dry weather in South America.
Hope may yet triumph over adversity of course, especially if global weather patterns improve. But it shouldn’t be based on G20 members sticking their collective heads in the sand, despite having already recognised what the problem is.