Following the food crisis of 2012, felt globally by producers and consumers, many analysts are asking if there is a risk of a similar situation in 2013. Production and yields in food commodities such as wheat, soybeans and corn have improved, yet prices which hit record highs in 2012 are still being felt by consumers as stockpiles are low. Essentially, food crises are becoming more likely thanks to global warming impacting harvests and global population growth driving demand for food.
- Food crises and food security are major threats facing the world today. Climate change is leading to an increasing number of extreme weather events such as flooding and droughts which negatively affect harvests of wheat, soybeans, corn, rice and other grains, cereals and oilseeds. The greater demand for food is driven by rapid population growth and this gives rise to fears about food security, which is essentially the assurance that people having ready access to sufficient food to maintain a healthy diet;
- In 2012, we witnessed the second major food crisis in five years. Precipitated by La Niña weather phenomenon which leads to adverse weather by shifting global atmospheric patterns, harvests in the USA’s Midwest region, Latin America and Eastern Europe all suffered because of the worst droughts in over fifty years. This led to massive price rises in soybeans, used in animal feed; wheat, a staple element of most diets globally; and corn, used in the production of bio-ethanol currently used in the USA to make blended gasoline which produces fewer emissions;
- In 2013, the impact of the 2012 food crisis has abated but it is still being felt. Besides the fact that any further adverse weather conditions will impact harvests, and obviously this can’t be forecast, there is also the issue of still-elevated domestic prices (rather than market prices) as inventories of last year’s harvests were so poor. In addition, the US Department of Agriculture has revised its forecast crops for grain downwards in August 2013, pushing future prices up which has made investors slightly more bearish about the food commodities market;
- New issues have also arisen in 2013 in the Asia Pacific region and in Latin America. India has had excessive rainfall during the monsoon season which is threatening its soybean production while China’s rice yield will be lower than expected thanks to drought in the southern part of the country. Drought has also hindered wheat planting in Argentina and the 2013/2014 yield is expected to only rise very marginally, if at all, on the 2012/2013 yield.
Recovery from 2012 crisis is continuing
Despite the negative effects of the 2012 food crisis, many places are expecting bumper yields this year as weather patterns return to normal. However, while prices have come down they are still elevated and this negatively impacts consumers food bills as supermarkets and retailers tend to pass high food prices on to consumers rather than absorbing them into their own costs. If there are no further external shocks i.e. adverse weather conditions or tariffs on imports or exports imposed by any countries, prices should continue to fall in the short-term.
- In July 2013, wheat (US$ per metric ton) registered its first year-on-year price decline of 8.3%, having risen every single month in year-on-year terms since July 2012. Month-on-month the price of wheat per metric ton in US$ terms has been slowing declining with a slight increase in July 2013 of 1.2% over the June 2013 price. The World Bank is estimating a record wheat yield in 2013/2014 but that prices will remain high as global wheat consumption is expected to increase in the same time period by 10 million tons. Euromonitor International is expecting this trend of declining wheat prices to continue in August and September 2013, before registering slight price increases month-on-month in October, November and December 2013;
- Soybean prices are expected to fall by 7.0% on their July 2012 prices in US$ terms in July 2013, but in monthly terms they will be up 1.1% on June 2013 in terms of US$ per metric ton. The monthly increase is down to tight inventories, a legacy of the 2012 food crisis, but as these are being replenished and the forecast is good for the 2013/2014 yield, we are forecasting the price of soybeans to fall from US$567 per metric ton to US$500 per metric ton between July and December 2013;
- Record levels of corn (maize) are also expected to be planted and harvested for 2013/2014 following last year’s crisis. Used in animal feed and ethanol-blended gasoline, the massive drop in yield in 2012 impacted consumers at the supermarket and the petrol pump. The USA is the biggest corn producer in the world so its corn data has a huge impact on prices and while wet weather in early Spring 2013 did delay planting, farmers worked round the clock in May 2013 to sow record amounts of corn which should bring prices down and reduce the price for farmers trying to feed livestock, which will in turn reduce meat prices while petrol in the USA should also be relatively cheaper, but this also depends on oil prices.
Price Growth of Selected Grains, Cereals & Oilseeds: June 2012- December 2013
Source: Euromonitor International from International Monetary Fund (IMF)
Note: (1) Growth is month-on-month and in US$ per metric ton terms. (2) Data from Aug 2013-Dec 2013 are forecast.
Downside risks still threaten food prices in 2013
From the chart above, we can see that while price growth levels of certain food commodities are still a bit volatile, they are considerably lower than they were in the summer of 2012. However, there are threats emerging to food security in other parts of the world that are cause for concern, while residual effects of the 2012 crisis are also being felt, further along the food chain in certain meat and fish prices.
- A drought in the Southeast of China, the country’s main rice-growing region has put pressure on yield projections for 2013/2014. Output is predicted to match 2012’s record levels and this is currently being reflected in price forecasting but if the drought gets any worse or spreads into the other smaller rice-producing regions of China, it will be a serious threat to global supply. The Chinese government has been steadily expanding planting area over the last decade so producing the same yield as the year before would be viewed as disappointing results. Alternatively, there is a risk that if they plant too much rice there will be a glut in the market and prices will plummet, negatively effecting planters’ incomes;
- The opposite conditions in India have led to fears of excessive rainfall damaging soybean production. Future prices of the oilseed rose at the beginning of August 2013 due to fears about the monsoon season damaging the growing process. A weak rupee in August 2013 would support speculators buying up soybeans but if the yield is disappointing, while those investors may make a profit, Indian consumers who need to buy imported soybeans will pay more;
- A legacy of the 2012 food crisis, certain meats are still seeing high prices in 2013. When corn and soybean prices reached record highs in the summer of 2012, it forced livestock owners such as farmers breeding pigs, chicken and cows for slaughter were forced to destroy many of their animals earlier than anticipated as they could not afford the feed i.e. corn and soybeans. This drove the price of these meats down to record lows in the autumn of 2012. With depleted livestock numbers, meat such as chicken and pork is now trading at a premium, with chicken up 12.4% per US$ per pound in July 2013 over July 2012, going from US$94.7 to US$107 per pound. A similar scenario has occurred with lamb prices, which were up 19.0% in July 2013 on the July 2012 figures per US$ per pound and this year-on-year growth is forecast to continue throughout the second half of 2013.
US$ Price of Selected Meats: Jan 2012-Dec 2013
Source: Euromonitor International from International Monetary Fund (IMF)
Note: Data for Aug 2013-Dec 2013 is forecast
With so much of the media constantly focusing on oil prices, it’s easy to forget that food commodities play such an important role in price levels and consequently, impact businesses and consumers’ spending power. From the planting fields to the supermarket shelves there is a whole supply and distribution chain impacting producers, suppliers, retailers and consumers and this is a cyclical process at the heart of economics. As such, the fact that food crises and food security issues are forecast to become more prevalent in the long-term means more volatile, rising food prices are set become the norm.
- Having mentioned oil prices, it’s worth reiterating that these will also be a contributing factor to higher food prices as production and distribution becomes more expensive. Both Europe Brent crude oil and West Texas Intermediary (WTI) Cushing oil hit record highs per US$ per barrel in 2012 and while prices have receded in 2013 thanks to an easing of geopolitical tensions following the Arab Spring of 2010/2011 and the practice of fracking to release shale gas for energy, as a finite commodity, prices of oil are predisposed to continued increases;
- Ultimately, we are not facing another food crisis in 2013 as food prices have abated but the fact that it’s taking so long to fully recover from the 2012 food crisis is an issue in itself. 2014 is forecast to see prices stay relatively stable, notwithstanding another bout of adverse weather, but the demand for food will continue to rise exponentially with global population levels which will inevitably lead to food shortages and more food crises in the long-term.