Another crisis coming?

In the Russian summer of 2010, the worst drought recorded in 38 years destroyed its wheat crops, sending the world into another food-price crisis, dumping millions into hunger and inflating food import bills in poor countries. Two years later, the world is experiencing the consequences of another eventful northern summer.

The worst drought in nearly 25 years in the US, the world's largest producer of maize, has shrivelled most of its crop. Hot weather has also affected crops in South America, Russia, Kazakhstan and China. Maize and wheat prices have climbed in the past two weeks - the question is, ‘Are we headed for another crisis?’

What will this mean for food aid operations? With the help of the Food and Agriculture Organization (FAO), the World Food Programme (WFP), and food security experts, IRIN takes a closer look.

Are we headed for a crisis?

“No,” say food security experts, but there is concern that staple grains like maize and wheat could become less affordable for the poor, and sharp fluctuations in prices or volatility could disrupt the efforts of grain-importing poor countries to stay within their budgets. "It is still early days - it might just rain in the US and the situation could improve dramatically," said Abdolreza Abbassian, secretary of the Intergovernmental Group on Grains (IGG) at FAO.

"Our stocks of cereals are relatively comfortable and the situation is not comparable to 2010/11 [when wheat stocks were smaller] or to 2007/08 [when stocks of the main staple grains, wheat and maize, fell to record lows]."

Prices might not spike as much, said Abbassian, after the US Department of Agriculture (USDA) took everyone by surprise with its monthly forecast on 11 July. It showed an even smaller harvest than anticipated, with a projected drop in demand taking stocks off export for use in biofuel production. Following the announcement, the price of maize dropped by two percent, but overall the prices of staples - maize, soybeans and wheat - remain high. Maize and soybeans are traded globally as feed for livestock, but when prices rise some buyers use wheat as a substitute, which affects the price. 

Christopher Barrett, a professor of applied economics at Cornell University in the US, said in an email he believed the transmission of any increase in maize and soybean prices to other main staples, such as wheat or rice, and any impact on hunger and poverty would be "fairly modest".

He said there were substitutes besides wheat for maize and soybeans. "So… livestock producers' cost increases are less than the increased market price of corn/soy, and meat/milk/egg prices don't increase as much as producer costs - plus, those are commodities purchased disproportionately by better-off consumers,” he noted.

"While there is an impact, it's nothing like when rice or wheat prices spike [as in 2008 and 2011] and much more directly impact poor consumers. The big maize and soy consumer is China, which has ample financial reserves and government control to effectively buffer local consumers if needed, unlike the Philippines, Egypt or various African countries. So while I'm watching the commodity markets' response to the present extreme weather events in the Midwestern US, I don't anticipate anything like 2008 or 2011 at this point."


Photo: Produced by Maximo Torero/IFPRI based on FAO data
A few countries produce the bulk of the world's staple cereals: Major exporters’ shares of global maize and wheat exports, 2008

Maximo Torero, director of the Markets, Trade and Institutions Division at the International Food Policy Research Institute (IFPRI), said he anticipated that a hike in maize prices would be felt more in major importing countries in North Africa, Central America and Mexico.

But global prices do transmit to other major maize producers like South Africa. Grain South Africa's senior economist Wessel Lemmer said the price of yellow maize was up by 16 percent compared to 2011, and white maize 28 percent higher. He said while maize stocks were comfortable, but affordability would be an issue in the coming months.

How will it affect aid operations?

The price of maize and wheat will affect agencies like WFP, said Torero. "But at this point I will not be alarmist, although cautious. Remember, aid agencies not only provide raw staples, they provide combinations of nutritious products also."

In a tough financial climate, the agency was already experiencing problems raising funds for its operations, said WFP's Jane Howard, and high prices did not help. "High and volatile food prices affect WFP in two ways: it costs us more to purchase food for the hungry, and the number of people needing food assistance increases. We have calculated that a 10 percent increase in the price of the commodities in a typical WFP food basket costs us an additional US$200 million a year to buy the same amount of food."


Photo: Produced by Maximo Torero/IFPRI based on FAO data
A few countries produce the bulk of the world's staple grains: Major exporters’ shares of rice exports, 2008

Afghanistan is a good example of a country "where we are quite worried about the prospect of lower funding levels, especially now that donor countries are facing some very tough economic decisions at home. The price of wheat is only a small part of the picture - and bear in mind that although the average price of wheat flour in main city markets of Afghanistan in June 2012 was still above pre-crisis levels (about 35 percent higher than from January to October 2007) - but lower than last year by about 13 percent,” Howard said.

Moreover, it's worth remembering that in addition to "hunger" per se, chronic malnutrition is a significant issue in Afghanistan, with half of all children under five being stunted. WFP has been planning its defences against sudden price hikes since the 2007/08 crisis. It set up a Forward Purchase Facility in 2008 to buy food in advance while market prices are low, which has helped WFP minimize "the impact on our budget", said Howard.

"This year our Executive Board doubled the amount available under the Forward Purchase Facility, approving the allocation of up to $300 million. WFP's Executive Director, Ertharin Cousin, told a board meeting on 4 June, ‘The Forward Purchase Facility has served to greatly enhance WFP's emergency response in places including the Horn of Africa and the Sahel, helping country offices gain, on average, 56 days of supply lead-time and maximizing every dollar used'," Howard noted.

Why are there spikes?

While you cannot do anything about the weather, economists and food experts like Barrett and Steve Wiggins, development and agriculture expert at the Overseas Development Institute, a UK-based think-tank, said sharp fluctuations in prices are a symptom of a structural problem of low stocks.

"It was pretty inevitable that maize prices would spike if there were a whiff of a harvest failure, since stocks have never been rebuilt to anything like a safe level," said Wiggins. "Without stocks, almost all the adjustment will have to be by price. A fundamental underlying factor here is the way that maize demand has risen over the last 5 to 10 years, repeatedly blindsiding most expectations. Hence, farmers have been playing catch-up. This might have been the year when mass planting and more intensive production would have finally caught up and allowed stocks to grow, but the weather has intervened."

FAO's Abbassian said the problem was that the bulk of global production of the world's main staple grains relied on a handful of countries. "If climatic or any other exogenous shock affects either of these, then it impacts the global prices and volatility."

Torero agreed. "We need to have big producers to be able to have a more geographically diversified world portfolio of food. If not, we will keep seeing the problems we have been seeing since 2007."

Wiggins said while he agreed that the world did "depend heavily on US maize exports", the range of exporters is, I think, growing". He cited the growth of Black Sea countries like Kazakhstan, Russia and Ukraine as producers and exporters of major staples like wheat.

More on food crises
 Why everything costs more?
 How to fix a "broken" supply system
  Is there a crisis?
 Price volatility - causes and consequences
 Sahel Crisis
 Food crisis in-depth
 A question of dignity

These countries are located in a part of the world that is extremely vulnerable to environmental shocks, Abbassian said. The Russian drought in 2010 also affected wheat crops in these countries. This year, poor rains have affected wheat yield in Russia, Kazakhstan and China.

What happened to the weather?

The planting season in the US began on a high note, with favourable weather. Farmers planted more than 39 million hectares of maize, 5 percent more than in 2011, making it the highest acreage under maize in the last 75 years. The third largest soybean crop ever was put in. All planting was completed by May. "The farmers responded to the need to build more stock and they diversified to protect themselves by planting both maize and soybeans," said Abbassian.

Then record high temperatures and poor rainfall - less than 50 percent of normal precipitation in the corn-belt, a group of Midwestern US states where maize is traditionally grown - wilted most of the standing maize. In the past few weeks, just when the plants needed moisture in the crucial pollination phase, there was little or none. "Irrigating this scale of farms is out of question - we would need to empty an ocean," said Abbassian.

The USDA announced this week that only 48 percent of crops were in a “good to excellent” condition, down from 72 percent at the beginning of June. This is the worst good to excellent rating since 1988, said the department, when 23 percent of crops were given a good to excellent rating. The USDA cut its projections for maize production to a level that is still the third largest on record, but the lowest since 2003. The projections for soybeans have also been reduced by eight percent - the lowest level since 2003.

Is it climate change?

As levels of man-made greenhouse gas emissions rise in the atmosphere, temperatures are expected to rise and affect rainfall patterns. The first six months of 2012 were the warmest in the US since recordkeeping began in 1895, the US government's National Oceanic and Atmospheric Administration (NOAA) reported. Temperatures in maize-growing states like South Carolina and Georgia went as high as 45 degrees Celsius in June, setting a possible new record. 

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