By IRIN* - Lower output forecasts for US maize and soybeans and wheat from Russia in 2012/13 have been jumped on by the international media as evidence that a food crisis is almost certainly on the way.
But a range of economists and food experts are also warning against overreaction that could create panic, causing governments to apply export controls that would restrict supplies of grains. This would affect markets and push prices still higher, they say.
“Increasingly pessimistic outlooks for the US corn and Russian wheat crops this year have certainly driven prices up for both commodities, with maize reaching a record high last week following the USDA [US Department of Agriculture] announcement [that the maize crop was going to be even smaller than expected],” said Christopher Barrett, a professor of applied economics at Cornell University in the US.
The US, the world’s largest producer of maize, is expected to produce its smallest crop since 2006/07, the USDA said in its August forecast.
Prices for yellow maize, used mainly as feed for livestock, are already above US$300 per tonne, and are now projected to exceed $350 per tonne in the coming months and into 2013, the USDA said.
Maize prices climbed by 23 percent in July alone, according to the UN’s Food and Agriculture Organisation (FAO).
In this scenario, the farm price (the value of the grain when it leaves the farm) of wheat is expected to go up to around $330 per tonne, revised from around $271 – the highest price projected by the USDA in July.
During the food price crisis in 2007/08, wheat hit more than $400 per tonne.Heat and dryness persisted during July in the spring wheat growing areas of Kazakhstan and Russia, which are among the world’s largest producers and exporters, affecting the crop.
Growing Demand for Wheat
With maize supplies down and prices up, the USDA anticipates that demand for wheat will grow as a number of countries opt to replace maize with wheat to feed animals.
Aid agencies like Oxfam point out that “the time of cheap food has long gone”, and many people are already living in crisis. The rising prices are “not some gentle monthly wake-up call – it’s the same global alarm that’s been screaming at us since 2008″ and has already sent so many into hunger.
“Without action, millions more people are in danger of joining the billion who are already hungry,” said Oxfam spokesperson Colin Roche.
In an update on the food situation, IRIN attempts to assess the extent of the crisis.
How Deep in Crisis?
“We (FAO) are concerned, as the maize situation in the US is much worse than was anticipated, even as early as two weeks ago,” said Abdolreza Abbassian, secretary of the Intergovernmental Group on Grains (IGG) at FAO.
“This puts the global maize supplies in a very delicate situation. Soybeans are also a concern, while the surge in wheat prices will impose a heavy burden on poorer importing countries.
Another Food Crisis Unlikely
FAO is monitoring the situation closely but, for the time being, does not believe this situation will push the world into yet another food crisis.”
In response to IRIN via email, the USDA said, “Our August projections in no way suggest a US or world wheat supply and demand situation like that in 2007/08.”
Cornell University’s Barrett echoed the FAO, saying, “At this point… [it seems] unlikely that market price increases will have global hunger or poverty or social unrest impacts similar to those from 2007/08 or 2010/11.”
He pointed out that “yellow maize – the sort grown in the US, and for which prices have recently jumped – is less prominent as a food crop than as livestock feed or as a source of ethanol for liquid fuel supplies.
So yellow maize price increases have much less impact on hunger or poverty than, for example, equivalent increases in the prices of wheat or rice, because those are the two main staple cereals in the diets of the world’s poor.”
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Barrett said wheat stocks “remain reasonably strong in spite of the weak Russian season”, as do rice stocks.
Triggers and Signs
The economists list some possible triggers that could tip the situation out of balance.
Trade restrictions: “The crisis is not here yet,” said Shenggen Fan, director of the International Food Policy Research Institute (IFPRI).
“But if droughts in India, Russia and a couple of other major food producers become worse, we will see continued tightened food supply. Trade restrictions by these countries will make the situation worse.”
Barrett notes that “Ill-advised export bans by a major exporter” could cause wheat prices to jump. “Rice harvests and stocks on hand remain reasonably good, so those markets are calm. So long as those markets remain reasonably calm, we should avoid major social problems of the sort seen in 2008 and 2011.”
The crises in 2007/08 and in 2010/11 were largely created by export bans.
In his take on the 2007/08 crisis, Brian Wright, professor of agricultural and resource economics at the University of California, Berkeley, said grain supplies then were sufficient “to meet food demands without such great jumps in price, had exporters and importers not panicked”, leading to a cascade of export bans and taxes that cut off importers from their usual suppliers.
“Such panics, which are perhaps inevitable in such circumstances, constitute the real ‘excess hoarding’ that keeps stocks from the needy in times of global stress on supplies.”
Soybeans in the US: FAO’s Abbassian said if soybean production in the US were to be slashed even more in the coming months, then we could be in trouble.
Food experts were hoping that US soybeans, also a popular livestock feed, would withstand the drought better than maize, and so ease some of the pressure on maize and subsequently wheat.
Reflecting an anticipated increase in the demand for soybeans, the USDA revised its forecast for the price of soybean meal, used to feed animals, by almost $100 more per metric tonne than its previous estimate in July.
Tighter soybean supplies will force the world to dip deeper into wheat reserves to feed animals, pushing up prices and squeezing supplies of wheat, the most widely consumed staple grain.
Biofuel production: IFPRI’s Fan said the continued diversion of maize to ethanol production was putting pressure on global supplies. About 40 percent of US maize is used to make ethanol.
USDA told IRIN that the maize used to produce ethanol was not being wasted. ”Nearly one-third of the volume of corn [maize] used to produce ethanol is returned to the market as distillers’ grains and other feed by-products, so the entire 40 percent of corn used in ethanol production doesn’t disappear from feed supplies.”
But Fan pointed out that “If 40 percent is used for biofuel production, and one-third can be returned, we are still talking about 28 percent net loss. The US is a large producer and a large exporter. This [ethanol production] is the single most important factor in pushing higher corn prices.”
Futures trading: Following the last two food crises, many blamed higher price volatility on the significant increase in the volume of agricultural commodity futures traded on the Chicago Board of Trade.
A futures contract is an agreement between two parties to exchange a specified quantity and quality of a commodity at a certain price on a certain date in the future, according to the IFPRI’s Hunger Index 2011.
Food experts like Wright say the futures market is more a symptom than a cause of price volatility.
“If all parties agree that prices are stable, there will be little need for futures trading. But to argue that increased futures trading is a cause, rather than a symptom, of price increases, is to argue that speculation made food stocks increase at a time when, in fact, the ratio of aggregate food grain stocks to consumption was near historical minima,” he told IRIN in 2011. [ Read our discussion of Price volatility: Causes and consequences ]
Do The Right Thing
The next few months are going to be critical, with the livestock sector likely to feel the impact first, said Concepción Calpe, a senior economist at FAO. People are already talking about reducing their herds or poultry flocks.
Culling would have a major impact on communities’ efforts to become resilient to shocks like droughts. However, the mostly poor pastoralists and small-scale farmers and producers in Africa are rarely able to feed their animals with grains, but those in Asia do. She also expected milk to become more expensive.
Calpe said countries needed to take preventive action like releasing stocks of grains in government reserves, if they hold some, to ensure the supply in their markets was adequate.
“They should avoid resorting to price subsidies, except under programmes that target the poorest, as high prices are needed to encourage farmers to plant more for the next season.”
The UN Children’s Fund (UNICEF) has urged that the structural causes of food insecurity be tackled. In a briefing paper the agency said, “Policymakers should focus on a twin-track path that includes short-term emergency support, alongside longer-term development interventions that are focused on supporting consumption [reducing poverty, improving access to food, regulating food markets] and agricultural production.”