US Midwest drought drives up costs and concerns

By Maureen Aylward

With the drought in the US Midwest continuing, we asked our Zintro experts about the repercussions and impacts for the agricultural economy in the US and globally as food prices rise.

As the worst drought in recent history sweeps across the US, its seismic impacts are reflected in soaring prices of corn and soybean in the past few weeks not only domestically but across the globe as well, says Raghavan Sampathkuma, an expert in agribusiness and agrimarketing. “As one of the major players in global agricultural production and trade, the US has greater and far-reaching impact in three fronts: food, feed and fuel,” he says.

Sampathkuma says that as other parts of the globe, including Europe and the Black Sea region, are experiencing tormenting weather patterns affecting wheat yields, it would not be surprising to see the world witnessing another crisis similar to 2008 that caused social and political unrest in many countries. “Lower global estimates of production and trade of wheat is bound to affect the world’s poorest as most of them depend on food aid. As the US is one of the major contributors to the global food aid, it would become increasingly difficult for it to balance its commitments,” he says. “The triple A’s of food (availability, affordability and accessibility) are important for all, but extremely critical for the economically weakest sections. Food security for two-thirds of the world’s population living in the developing world will become the biggest worry for those governments forcing them to take knee-jerk policy reactions such as export bans that may further distort the global trade.”

As the drought causes a significant reduction in yield and production of corn and soybean, the key inputs for animal feed, it pushes up food prices including meat and dairy products worldwide, notes Sampathkuma. “As this troubles the consumers, it equally affects the profitability of the industry. The worst affected will be the countries that are heavily dependent on US corn. In South East Asia, Vietnam imports over a million and a half tons of corn and any increase in the prices of US corn will impact the country’s livestock sector that is growing at about 9 percent annually. China’s insatiable appetite fuelled by its growing meat consumption will only worsen the crisis as it is another major importer of US corn,” he explains.

In regions like India, the fast growing animal protein sector will be facing a huge challenge to optimize their feed costs as domestic corn prices have risen by at least 15 percent in tandem with the prices in the US, says Sampathkuma. “Soybean prices also reflect similar upward trends in the domestic markets. Being highly-sensitive to feed costs, the livestock sector will be forced to substitute cheaper grains in place of corn causing prices of ingredients such as sorghum and other coarse cereals to rise. This may prompt the Indian government to announce a blanket ban on food exports including corn to stabilize the domestic prices,” he says.

Rising corn prices are sure to push up demand for other feed stocks for producing ethanol and will cause a surge in their prices. “The intense competition between food and fuel will result in global grain prices reaching a new high and trigger interest among the speculative investors who are waiting to jump in and cash in on the crisis. However, learning from the food crisis in 2008, the world could handle the crisis-like situation better,” he says.

Donald Nordeng, an expert in risk and sustainability, says there are several impacts:

1. Immediate and future price increases for commodities: corn, soybeans. “The model for this is the ethanol debacle. Drought in Australia, Brazil, Canada or China will radically affect food prices,” Nordeng says.

2. China is now a major importer as is Indonesia. “These economies are expanding and are larger than they were in 2007 with a bigger impact on prices than in 2007,” he says.

3. India’s inability to boost grain production. “While China and India are seen as mainly rice producing countries, in fact many areas in both rely on wheat for their staple. Wheat areas are gradually being eroded by heat in the US and will impact production,” Nordeng explains.

What do you think?

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