(Bloomberg) — Drought is shrinking crops from the U.S. belt to China’s Yangtze River basin, raising fears of global hunger and weighing on the outlook for inflation.
Most Read by Bloomberg
The latest warning flash comes from the American Midwest, where some corn is so dry, stalks are missing ears and soybean pods are fewer and smaller than usual. The dismal report from the Pro Farmer Crop Tour helped lift a range of grain prices to their highest level since June.
The world is desperate to replenish grain stocks depleted by trade disruptions in the Black Sea and adverse weather in some of the biggest growing regions. But an industry tour of U.S. fields last week surprised market participants — who were more bullish — with reports of widespread crop damage due to scorching heat and water shortages.
Meanwhile, drought is affecting Europe, China and India, while the outlook for exports from Ukraine, a major corn and vegetable oil exporter, is difficult to predict amid Russia’s incursion.
“Even before this week’s news from the crop tour, I was concerned that we wouldn’t see much of a rebuild in stocks until 2023,” said Joe Glauber, a former chief economist at the U.S. Department of Agriculture who now serves as a senior fellow at International Food Policy Research Institute in Washington. “The opening of Ukrainian ports is a welcome sign, but volumes remain well below normal levels.”
Read more: Smaller 2019 US corn crop signals higher food costs
Traders always keep a close eye on weather forecasts, but this year vigilance has been heightened — every bushel counts. While corn, wheat and soybean prices have eased from record or near-record highs seen earlier this year, futures remain extremely volatile. Bad weather surprises between now and the end of the fall harvest could send prices soaring again.
An index of grains and soybeans is trading nearly 40% above its five-year average, and rising crop prices have contributed significantly to global inflation. Already, food shortages helped bring down Sri Lanka’s government earlier this year when the country ran out of hard currency it needed to pay for imports.
The United Nations Food and Agriculture Organization’s index that tracks food prices fell last month from June, although it remains 13 percent higher than the same period last year.
In the US, corn is the most dominant crop and a weak harvest will have ripple effects throughout the global food supply chain, adding pressure on South America to produce bumper crops early next year. This is especially true if China, which is suffering its worst drought since the early 1960s, is forced to import more grain to feed its huge livestock herds and bolster domestic stocks.
After the recent crop tour, officials now estimate that US production will be 4% lower than the government’s official forecast. The pinch follows drought-induced shortages of winter wheat in the US as well as soybeans in Brazil, the top producer.
The global outlook for agriculture in 2023 has market watchers worried. For the first time in more than 20 years, the world is experiencing a rare third consecutive year of La Nina, when the equatorial Pacific cools, causing a reaction from the atmosphere above it. This could have dire consequences for drought in the US, as well as drought in vital crop areas of Brazil and Argentina.
And while it’s difficult to link any given year’s weather to long-term climate patterns, analysts warn that global warming will be an increasing burden on agricultural production in the coming years.
READ: Drought threatens China’s harvest when world can’t afford it
Europe is currently in the throes of a drought that appears to be the worst in at least 500 years, according to a preliminary analysis by experts from the European Union’s Joint Research Centre. Several EU crops are being hit particularly hard, with maize yield forecasts 15% below the five-year average, the latest figures show.
“With energy prices remaining high at least through the coming winter, any significant shortfall in corn supplies will have devastating effects on the food and feed sectors,” said Abdolreza Abbassian, a food market analyst and former United Nations Food and Agriculture Organization economist. Georgia. Organization.
In China, historic drought has hit areas along the Yangtze River and the Sichuan Basin, damaging crops of rice, the country’s top food grain.
Rice planting in India has shrunk by 8% this season due to lack of rainfall in some areas. The government is discussing restrictions on exports of so-called broken rice, which is mainly used for animal feed or to make ethanol in India. Top buyers include China, which mostly uses it to feed its livestock, and some African countries, which import the grain for feed.
India accounts for about 40% of the world’s rice trade and is the world’s largest shipper.
In the US, Nebraska farmer Randy Hulse, who is on the crop tour, is looking at a smaller corn crop this year due to a lack of rain. In the long term, he worries how changing weather conditions might affect the farm he leaves behind.
“They predict the Corn Belt will move north,” said Huls, 71, who raises corn, soybeans, wheat and hogs in southern Nebraska. “We could be a lot drier yet and that’s the climate change thing they’re talking about.
“I doubt in my lifetime that I will see this, but I always wonder about my son and especially my grandchildren,” he added. “What will they see?”
(Adds food price index to eighth paragraph. An earlier version of this story has been corrected to correct a reference to the Black Sea in the third paragraph.)
Most Read by Bloomberg Businessweek
©2022 Bloomberg LP