Another Food Price Spike?

At the time of writing (August 2012) the worst drought in half a century is occurring in the US Corn Belt, despite high harvests having been predicted as little as two months ago. As an article in the Financial Times documented, 9 out of 10 acres of maize and soybean land is suffering drought and half of the maize harvest and a third of the soybean harvest are being categorised as poor to very poor.

Given that the US is the largest exporter of agricultural commodities, exporting 40% of the world’s maize and soybean crop last year, the impact on food prices is felt globally. Another increase in prices may lead to the same panic buying and export restrictions seen during the 2010 Russian heatwave and consequent cereal shortage.

Moreover the impacts are expected to reach far beyond the maize and soybean markets. Use of these crops as livestock feed, in processed food and as biofuels mean that shortages will affect the whole agricultural commodities market, indeed livestock farmers in the US are already having to reduce herd sizes in order to cope with higher feed prices. And it won’t only be prices that are affected. Substitution of maize for crops such as wheat may occur in the short term. In the longer term high prices will motivate farmers to plant maize and soybean on larger areas of land taking it away from crops such as wheat. This will have knock-on effects for the prices of wheat (they have increased 50% since mid-June).

Because the impact of the drought may take some time to affect supermarket prices, the U.S. Department of Agriculture has predicted stability in food prices for 2012. The FAO Food Price Index, however, increased 6% from June to July this year. Although below the peak of February 2011, prices look to be on the rise, driven mainly by increases in the prices of grains and sugar.

The World Bank, however, does not equate the recent rise in prices with the spike of 2008. In the current instance prices have risen across all non-rice grains and prices of crude oil, fertilizers and international freight are lower than in 2008. This may dampen the predicted food price spike. Instead the World Bank warns of increased price volatility. The US, Russia, Ukraine, Kazakhstan and India are experiencing poor rains while in Europe continuous rain is causing problems for wheat growers. Combined with low global stocks of grain this leaves food prices vulnerable to volatility.