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Business News/ Politics / News/  Global food reserves falling as crops wilt
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Global food reserves falling as crops wilt

Global food reserves falling as crops wilt

Facing a crisis: Oil being pumped from a well next to a drought-damaged cornfield in New Harmony, Indiana.(Scott Olson/Getty Images/AFP)Premium

Facing a crisis: Oil being pumped from a well next to a drought-damaged cornfield in New Harmony, Indiana.(Scott Olson/Getty Images/AFP)

Chicago: Stockpiles of the biggest crops will decline for a third year as drought parches fields across three continents, raising food-import costs already forecast by the United Nations (UN) to reach a near-record $1.24 trillion.

Combined inventories of corn, wheat, soyabeans and rice will drop 1.8% to a four-year low before harvests in 2013, the US department of agriculture (USDA) estimates. Crops in the US, the biggest exporter, are in the worst condition since 1988, heat waves are battering European crops and India’s monsoon rainfall already is 20% below normal. The International Grains Council began July by forecasting record harvests. It ended with a prediction for a 2% drop in output.

Facing a crisis: Oil being pumped from a well next to a drought-damaged cornfield in New Harmony, Indiana.(Scott Olson/Getty Images/AFP)

“People thought we were going to be swimming in corn by the end of the year," said Kelly Wiesbrock, who helps manage $1.3 billion of assets for Harvest Capital Strategies, a San Francisco-based hedge fund. Then the month of June hit and into July, and it’s just been a train wreck.

Top commodities

Wheat gained 41% to $9.1825 a bushel this year on the Chicago Board of Trade (CBOT), soybeans appreciated 32% to $15.89, and corn rose 27% to $8.2375, after earlier on Thursday touching a record $8.265. They were the biggest advances in the Standard and Poor’s GSCI Spot Index of 24 raw materials, which rose 2.3%.

The US drought in June was the widest since December 1956 and the past 12 months were the hottest on record, weather data show. While USDA anticipated a record harvest as recently as June, it cut the domestic corn forecast by 12% on 11 July, the most since at least 1990. The estimate will be reduced again when the department reports on 10 August, according to the average of 29 analyst forecasts compiled by Bloomberg.

The American drought is spreading beyond agriculture into power and fuel production. US nuclear plants’ output on 27 July was the lowest for the day since 2001 because water was too hot to be an effective coolant, government data shows. Parched conditions will spread into North Dakota and central Texas through October and last across the Midwest, the main growing region, the Camp Springs, Maryland-based Climate Prediction Center said on 2 August.

Ethanol mandate

More than 150 lawmakers urged US President Barack Obama on 2 August to cut the government mandate for ethanol production, saying high corn costs are hurting livestock producers, food makers and consumers. Ethanol makers including Poet Llc and Archer Daniels Midland Co. back the mandate, as mounting industry losses curbed daily output by 15% since the end of December, US energy department data shows.

Sandeep Bhatnagar/Mint

Also See | Time Running Out (PDF)

South America

The USDA still expects a domestic corn harvest of 329.45 million tonnes (mt) this year, the third biggest ever, and Canada, the world’s No. 3 wheat exporter, predicted a 4.1% gain in output on 16 July. Higher prices also are encouraging more planting in South America. Argentina will reap a record corn crop of as much as 31 mt, growers group Crea said on 23 July. Brazil will probably surpass the US as the biggest soyabean producer, Sao Paulo-based researcher Agroconsult estimates.

While global wheat inventories are forecast by the USDA to contract 7.5% next year, more than any other major crop, they would still be 42% larger than in 2008. Droughts, freezes and floods that year damaged crops from Australia to Argentina to the US, driving the grain to a record $13.495 in Chicago. Global food prices measured by the United Nation (UN) are still 10% below the record reached in February 2011.

Given this year’s gains and increased speculation, investors should pare bets on higher prices, Barclays Plc said in a report on 3 August. Improving weather, declining demand or an easing of US requirements for ethanol in gasoline may send prices lower, London-based analysts Kevin Norrish and Sudakshina Unnikrishnan wrote in the report. The bank remains modestly overweight in grains and soybeans. Goldman said on 2 August that corn will reach $9 in three months. The New York-based bank also said soyabeans may rise to $20 in three months, topping the all-time high of $16.915 set 23 July, and wheat may jump to $9.80.

Costlier grain means global food prices will jump 25% this year, Danske Bank A/S said 16 July. The UN estimates imports of everything from fruit and vegetables to dairy products and cereal will top $1 trillion for a third consecutive year, with a 13% gain for meat as higher feed costs spur farmers to reduce herds.

Kenya food

The impact won’t be shared equally, with US households spending 6% of their total expenditures on food, compared with 35% in India and 45% in Kenya, data from the Gates Foundation shows. The US, with less than 5% of the world population, consumes 31% of global corn production, 18% of soyabeans, 32% of cheese, and 20% of beef and veal, according to USDA data.

Nations reliant on food imports, including Egypt, Pakistan, Bangladesh and Sudan, are especially vulnerable to unrest, according to a 10 May report by the National Intelligence Council, an adviser to the US government. More than 60 food riots erupted worldwide from 2007 to 2009 as prices surged, the US state department estimates. Production will need to expand 70% by 2050 as two billion people are added to the population, according to the UN.

“Retail food costs will rise as much as 4% next year, the USDA said 25 July. That will add pressure to consumers and Obama’s election bid in November," said Tim Hagle, a political science professor at the University of Iowa in Iowa City.

“It keeps the economy in sort of a fragile position," he said. “That’s the big issue for this particular election."

Insured crops

“Farmers in the US are less likely to feel the pinch because about 85% of crops are insured," said Steve Hatz, a senior vice-president and regional manager of the agri-business unit of San Francisco-based Bank of the West, the second biggest US agricultural lender after Wells Fargo and Co.

Obama announced $30 million in aid to farmers and ranchers on 7 August, mostly to get more water to livestock and rehabilitate scorched land.

US net farm income, based on USDA estimates in February, was set to slip this year to $91.7 billion, second only to last year’s all-time high of $98.1 billion. The agency is scheduled to update its forecast on 28 August.

The price of corn fell 1.8% in the first half of 2012 as farmers sowed the most acres since 1937. The USDA had rated 77% of the crop in good or excellent condition on 18 May, and by 15 June, futures on the CBOT were down 22% for the year. As the drought spread during the past seven weeks, the grain has surged 63%.

The USDA probably will pare its corn crop forecast by 16% to 10.929 billion bushels, the lowest in six years, from last month’s estimate of 12.97 billion, according to the average of 29 analyst estimates compiled by Bloomberg. The soyabean forecast probably will be cut to a five-year low of 2.796 billion bushels. The London-based International Grains Council reduced its global grain production forecast on 26 July to 1.81 billion tonnes, from a prior estimate of 1.868 billion. While it expects 4 mt more rice, any gains will be eclipsed by the 36 mt slump in supply of wheat and so-called coarse grains.

Indian monsoon

Wheat production in Russia, the fourth largest exporter, will decline 20% this year, and in Australia, output will fall 19%, the council said.

India’s monsoon, which accounts for more than 70% of annual rainfall, was 17% below the 50-year average since 1 June, the nation’s weather bureau said on 6 August. The government extended a ban on exports of sugar, rice and wheat in 2009 after the weakest monsoon in nearly four decades. The FAO cut its global rice production estimate by 1.1% on 6 August because of the monsoon.

Rising incomes

“Global inventories are being eroded in part because rising incomes in emerging markets mean consumers want to eat more meat," said Steve Shafer, the chief investment officer at Oklahoma City-based hedge fund Covenant Global Investors, who helps manage $315 million of assets.

“You’ve got two-three billion people on the other side of the planet who are bootstrapping their way out of poverty," he said. “You’re going to see a rising supply-demand imbalance. That’s a tightening of the pressure in the grain and protein markets for an indefinite period of time."

Abhishek Shanker in Mumbai, Jeff Wilson and Steve Stroth in Chicago, Alan Bjerga in Washington and Phoebe Sedgman in Melbourne contributed to this story.

feedback@livemint.com

Also Read | Potential for food crisis growing: UN

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Published: 10 Aug 2012, 01:13 AM IST
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