How The US Drought Will Affect Global Food Prices

Recently the severe drought in the US has already caused rapid increases of crop prices, as noted here.

Naturally, some concerns are being raised regarding the potential impact of rising prices of corns, soybeans and others on global food prices, and whether that could potentially trigger another round of global food inflation like in 2007-08, or more recently, last year.  Sudden rise in inflation is probably the last thing the global economy wants as growth is slowing,

But Barclays Capital assure us that it is going to be fine due to the different patterns of weather conditions which build up the price increases, and the fact that the global economy has much more slack, leading to lower freight and energy costs offsetting increases in production costs.  Thus emerging markets appeared to be better placed to cope with higher food prices.

A US weather shock is the key current price driver, but concerns are also developing regarding crop-growing conditions in other regions. Unlike 2008, when the problem was a gradual accumulation of poor weather in many regions, the current price spike is focused on a sudden US drought – the worst in 56 years – affecting grains and soybeans. Concerns in other parts of the world are also starting to mount, however: low soil moisture is reducing yields dramatically amongst Black Sea grain exporters, whilst India’s monsoon rains are running 20% below average, threatening lentil, rice and oilseed harvests.

Tightness is currently limited to soybeans and corn, but could spread much more widely if an incipient El Nino reaches fruition. In the past few weeks, many regional weather agencies have begun warning of El Nino conditions developing in the Pacific, potentially threatening a wide range of different crops in southeast Asia, Latin America and parts of Africa.

There is limited global capability to absorb grain and oilseed shortfalls, though China looks comfortable for now. Global stocks of agricultural products were tighter in 2007-08, but there is still only limited slack in the system. Global wheat stocks have been rebuilt substantially in the past four years, but not those of corn or soybeans. The USDA predicts US soybean stocks are heading for a 40-year low by the end of the current marketing year. Corn stocks, although predicted to build slightly, will still be close to their lowest levels in more than 15 years. One bright spot is China where after the persistent drawdown of corn, soybeans and wheat inventories in the past decade, grain stocks have risen again and are now about a third of annual supply.

Emerging markets are better placed to cope with rising food prices than was the case in 2008 or 2011. Inflation in most emerging markets has been falling for some time now, helped by lower energy prices. The dollar is also weaker against many EM currencies than it was in 2008. A macroeconomic outlook characterised by large output gaps and sluggish growth rates, plus the effect of recent improvements in domestic agricultural market logistics made by several EMs, mean that our local economists are sanguine about the risks posed to the growth outlook by food price inflation. India appears the most vulnerable major EM due to its relatively weak economic outlook and the growing likelihood of a poor monsoon season.



Source: Barclays

This article originally appeared here: The impact of recent drought in the US on global food prices
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