U.S. drought sparks food system debateAs the drought across America sends food prices skywards for the third time in five years, the questions begs to be asked: what can be done?
This has stoked fears of a repeat of the 2007-2008 food riots in two dozen countries. In response, the G20 is considering coordinated action, banks are withdrawing from commodities trading, and the UN has called for a halt to U.S. corn ethanol production.
July was the hottest month in America since the National Oceanic and Atmospheric Administration started keeping records in 1895. While some rain and easing conditions helped in August, over half of the continental U.S. is in drought says the government, which at one point designated over 1,500 counties as disaster areas.
The El Nino weather phenomenon in the Pacific Ocean is a likely culprit, as it warms the northern hemisphere. Climate change is also a probable factor, as steadily increasing temperatures since 1895 suggest. A new study by Aiguo Dai of the National Center for Atmospheric Research, predicts a series of severe U.S. droughts in the next 20 years.
The extreme weather has hit American agriculture hard. During a warm spring farmers planted early to let plants pollinate before the summer heat. But the heat came too early, stunting or killing plants.
By mid-August, “87 percent of the U.S. corn crop, 85 percent of soybeans, 63 percent of hay, and 72 percent of cattle areas were experiencing drought. Over half of the corn and soybean areas are experiencing Extreme to Exceptional Drought,” reported the U.S. Drought Monitor, saying this has led to both “reduced yields and earlier harvests”. The Department of Agriculture has forecast that yields will be down by 11 percent and warns of increased food prices in 2013.
Corn, soyabean and wheat prices have rocketed since June with corn hitting a new record of 330 dollars per ton on average in July, according to a statement from the UN Food & Agriculture Organization (FAO).
The drought raises concerns about global food security as the U.S. is the world’s number one food commodities exporter, accounting for about 40 percent of the corn and soyabean markets in 2011.
Countries that import large amounts of animal feed made from corn and soyabean will likely suffer the most. Moreover, as U.S. corn and soya prices skyrocket, farmers turn to wheat instead, pushing up its price. Wheat prices increased by 26 percent in June and July, observed Shenggen Fan, Director General of the International Food Policy Research Institute (IFPRI).
“Prices for livestock products—such as meat and dairy—may also see an increase as the cost of feed increases, which may result in a deterioration of the diet quality of the poor if they shift their consumption from meat and dairy products to cereal crops,” he warned in a statement.
Crop insurance safety netThe silver lining, says Randall Reese, a senior underwriter at Allianz Re specializing in agricultural risks, is that “most of the production in danger of being lost goes to livestock feed and ethanol production. Only a fraction goes directly to human food consumption.” Grains that go directly into making food, like wheat and rice, were “either harvested before the drought became serious or are grown in areas with adequate moisture.”
Moreover, farmers may also be better prepared than before thanks to more widespread crop insurances. “Today’s crop insurance covers drought and even the impacts of volatile commodity prices through the Multiple Peril Crop Insurance Program (MPCI). In most parts of the drought impacted areas, 65 to 85 percent of the farmers have MPCI,” says Reese.
Due to the drought, he expects farmers to claim between two and five billion dollars above the 11 billion dollars they will pay in insurance premiums in 2012. “The federal government is likely to pay about one-third of those claims through the reinsurance it provides to the industry, with insurers and private reinsurers picking up the balance,” he explains.
This picture may change as the drought is still ongoing, Fireman's Fund Chief Underwriting Officer David Zona pointed out in a statement.
“Any estimate of potential losses due to this year's drought is very difficult to derive at this time since the crops will not be harvested until the autumn and farmers are still filing acreage reports, which document how many acres of each crop were actually planted. Insurance losses will also be related to commodity prices at harvest time, which are also difficult to forecast."
Demands for changeWhen it comes to the bigger picture, there will be enough food, argues Reese, but the knock-on effect on commodities prices “will indeed have an impact on food security in many countries”.
As the UN and aid agencies warn of expanding drought in India and food shortages in the Sahel and East Africa, some campaigners have blamed speculative trading in food commodities for price spikes.
Financial institutions respond that global demand for meat, growing populations, hostile weather and competition from biofuels, not commodities trading, drives food prices. If anything, they argue, futures markets provide price stability. Nevertheless, several European banks have announced that they are withdrawing from or restricting investments linked to food commodities.
At the same time, the drought has reignited the food-versus-fuel debate, as 40 percent of the U.S. corn crop is mandated to be converted into ethanol for blending into automobile fuel. Europe has similar mandates.
Campaigners, food producers, at least 150 members of the U.S. Congress, and the head of the FAO Jose Graziano da Silva have called for the U.S. to halt biofuels production during the drought.
“An immediate, temporary suspension of that [ethanol] mandate would give some respite to the market and allow more of the crop to be channelled towards food and feed uses,” he wrote in an opinion piece in the Financial Times. “With world prices of cereals rising, the competition between the food, feed and fuel sectors for crops … is likely to intensify”.
How that competition plays out will likely define the global food system for generations to come.