Sunday, July 1, 2012

Global drought is damaging crops; will have a destabilizing geopolitical effect

The recent drought conditions across some of areas in the US have caused a number of wildfires in western states. The media has focused on the fact that some states are cancelling the 4th of July fireworks in fear that they could ignite dry brush and trigger yet another wildfire.

Source: University of Nebraska

But there is another effect the drought is having on many parts of the country - damage to the nation's crops.
Reuters: - Just one year ago Jeff Scates saw the worst flooding on his southern Illinois farmland since 1937. Today, Scates is watching his corn fields shrivel from the driest season in 24 years.

"We've gone from one extreme to the other, from being flooded on three-quarters of the farm now to a drought," said Scates, 42, who with his family members farms 15,000 acres of corn, soybeans and other crops along the Kentucky-Indiana border where the Ohio and Wabash Rivers meet.

Scates said his corn is still in better shape than many fields of his neighbors, who farm sandier soils that do not retain moisture. Moisture is needed to develop a strong root system to sustain plants in the hottest months of July and August.
The percentage of crops in good conditions has declined far below the 5-year range for this time of the year.

Corn crops % in good conditions (source: Credit Suisse)
Soy crops % in good conditions (source: Credit Suisse)
Futures: - The most recent crop progress report released on June 25 is not up to date with the effects of the weather of the past few days. But even so, the downgrade to the crop’s health was steep. The good-to-excellent portion of the crop fell to 56% from 63% the week before. Last year at this time, the good-to-excellent section was 68%. The July 2 progress report will almost certainly contain a further reduction in the estimate for the quality of the crop.
What's particularly troubling is that these drought conditions are not limited to the US.
FT: - Fears of crop damage in Russia due to dry weather supported wheat prices, with US benchmark prices hitting an eight-month high on Friday, shrugging off concerns about the eurozone and global economic growth.

Concerns over the past few weeks about limited rainfall in southern Russia elevated this week as farmers in the region faced the critical flowering stage. Winter wheat goes through the flowering phase in the last one to two weeks of May into early June.
And Ukraine's wheat output is materially lower as well. It is particularly painful for a nation that desperately needs hard currency.

Ukraine's wheat output (1000 MT, source: USDA)

In places such as North Korea, where food shortages are a fact of daily life, the drought may have a severe impact on the population. This is clearly a dangerous development given the nation's history of military threats in times of extreme conditions.
The Telegraph: - North Korean soldiers have been dispatched to water crops that are withering in the worst drought to affect the country in more than a century, with the United Nations warning that yields for staples such as wheat, barley and potatoes will inevitably be affected.
Even Australia is cutting wheat output projections.
Reuters: - Australia slashed its winter wheat production forecast by more than 7 percent, heightening global supply worries and boosting U.S. futures, a day after projections of harsh weather hitting output in top exporters Russia, Europe and the United States.
This confluence of global damage to harvests is driving up prices for agricultural commodities, with corn experiencing the sharpest increase.

Wheat futures
Soy futures
Corn futures

A major geopolitical concern stemming from these trends is food inflation. As discussed before, the Arab Spring had less to do with zeal for freedom/democracy and more to do with rising food prices. Nations whose currencies have weakened recently (Egypt, Iran, Pakistan, etc.) will be particularly vulnerable.

Pakistani Rupee at historical lows (number of rupees per dollar) 

The Telegraph: - Food price inflation is already a headache for policymakers around the globe, faced with the pressures of growing populations, rising urbanisation and changing diets.

That means the latest surge in crop prices state-side, with the US producing more than 40pc of global corn exports, is causing some concern. The dry weather is also affecting the Black Sea producers, as well as those on the North China Plain.
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