Global Policy Forum

Food Price Crisis Feared As Erratic Weather Wreaks Havoc on Crops

Drought in the US and erratic weather driven by climate change in other food producing regions are threatening another global food crisis like those in 2008 and 2010. While current weather forecasts suggest that drought will continue, the US government maintains that the situation was not bad enough to reduce the government mandates for biofuels, driving the price of corn even higher. The rising prices of corn, soybeans and wheat, of which the US is the world’s largest exporter, will have a disproportionate effect on the poorest people, as many households in the global South spend around 75% of their income on food, compared to only 15% in the Western world. As people find it much harder to cope when multiple shocks occur in a short time span, social and political upheavals across the globe are likely to ensue.

By Josephine Moulds

July 22, 2012

'What the world economy really needs right now is a break', one economist says, but instead it appears headed toward upheaval

Freak weather in some of the world's vital food producing regions is ravaging crops and threatening another global food crisis like the price shocks that unleashed social and political unrest in 2008 and 2010.

As the US suffers the worst drought in more than 50 years, analysts are warning that rising food prices could hit the world's poorest countries, leading to shortages and social upheaval.

The situation has sparked comparisons to 2008 when high food prices sparked a wave of riots in 30 countries across the world, from Haiti to Bangladesh.

Researchers say rising food prices also helped trigger the Arab Spring in 2011.

Nick Higgins, commodity analyst at Rabobank, said: "Food riots are a real risk at this point. Wheat prices aren't up at the level they got to in 2008 but they are still very high and that will have an effect on those who are least able to pay higher prices for food."

In America's agricultural heartland, searing heat and sparse rainfall have left farmers helpless as their corn and soy bean crops wither in dry fields. Earlier this month, the US department of agriculture (USDA) slashed forecasts for the corn crop by 12%.

US agricultural secretary Tom Vilsack said: "I get on my knees every day, and I'm saying an extra prayer right now. If I had a rain prayer or a rain dance I could do, I would do it."

As it is, current weather forecasts suggest the drought will continue and experts fear the USDA may have to cut its targets again in August.

Dan Basse, president of AgResources in Chicago, said the government's prediction would prove too optimistic if the drought continues. "We've been traipsing through the fields of southern Illinois, and it is worse than the government says."

The US is crucial to global food markets as the world's largest exporter of corn, soy beans and wheat, so the impact of the drought will be felt across the globe.

Corn prices have already shot up 40% since June to hit all-time highs, soy bean prices have jumped 30% to record levels, and wheat has surged 50%.
It is not just the US. Unseasonal weather, thought to be caused by climate change, is affecting farmers across the world.

South America has been hit by a drought, which could damage the soy bean harvest, while UK wheat has been damaged by the rain.

Flash flooding in Russia could also affect the wheat harvest. Traders are particularly concerned about the latter as Russia might limit exports if it is worried about wheat supplies at home, causing further price spikes.
Shortages have been compounded by huge orders for corn and soy beans to make biofuels, in order to meet quotas in the US and Europe.

The US agriculture secretary said last week the situation was not bad enough to warrant a reduction in government mandates for biofuels, driving the price of corn even higher. Traders say China also buys and stores grain strategically, putting more pressure on limited supplies.

Consumers will soon feel the effects of these spikes. A high price of wheat leads directly to higher prices in the shops, as it is the main ingredient for bread and other staples.

The link is less direct with other crops. Corn and soy beans are used to feed livestock, so rising prices will ultimately cause the price of meat to rise. In the short-term, however, they will have the reverse effect. As the cost of feed rises, farmers kill cattle at lighter weights to avoid having to feed them. That will briefly flood the market with meat, causing prices to fall, but subsequent shortages will causes prices to rise sharply.

Higgins at Rabobank said meat will then remain expensive for a long time. "It is very hard to rebuild cattle herds and these inflationary effects will be long and lingering."

Rising food prices have a disproportionate effect on the poorest people in the world.

Ruth Kelly, Oxfam's food policy adviser says people in the Western world spend around 15% of their income on food, but that rises to around 75% in developing countries, so any change in food prices has a dramatic impact on household budgets.

Kelly says problems will be compounded by the previous two food price spikes in 2008 and 2011:

"People are already in debt from previous spikes and suffering the consequences. When the first food crisis hit people were forced to sell off their assets, their cattle and jewellery, and take on debt to make ends meet. After multiple crises, people run out of savings and that can be quite disastrous.

"People can find it much harder to cope when you have multiple shocks like this, without time to recover between them, rather than just a single shock."

Economists fear food price inflation will exacerbate the global economic crisis, as it limits the ability of emerging markets to provide any kind of stimulus to drive a recovery. Karen Ward, senior economist at HSBC, said: "What the world economy really needs right now is a break. Any inflationary pressure, particularly that stops the emerging world loosening policy and providing the boost to the global economy, would be a problem."


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