QATAR. Global food prices eased slightly in the second half of 2012. Good harvests in the southern hemisphere, particularly soy and corn in Brazil, together with a drawdown of stocks, partly offset the impact of lower than expected supply from the drought-stricken US.
However, prices remain high and could increase further in 2013, according to analysis by QNB Group. Existing concerns include record temperatures in Australia this month, signs that the US drought may persist for another year and low levels of food stocks. If climatic problems develop in any other key producing areas then prices could reach new record levels.
Global food prices have been both high and extremely volatile in recent years. The situation is particularly serious in regards to grains—such as corn, wheat and rice—which provide the majority of global food calories.
Last summer wheat prices, for example, shot up by over 50% in the space of 6 weeks when the extent of the US drought became apparent. The grains’ component of the Global Food Price Index, produced by the UN Food and Agriculture Organisation (FAO), remains close to record levels. Meat prices are also close to historic highs, in part because of the cost of grains for animal feed.
Although the FAO’s overall food index in 2012 was on average 7.0% below the 2011 level, it was still 5.9% above the previous record set in 2008. The easing compared with 2011 was largely due to falls in some items such as sugar, which was down by 17.1% on average over the year, and dairy, down 14.5%.
However, grains were only down 2.4%, because of a period of weaker prices first half of the year. In the second half of the year, by contrast, grain prices were 8.8% higher than the same period in 2011 and only just below the record average for a six-month period, set in mid-2008.
Food prices are of particular concern to the poorest third of the global population who spend over half of their income on food, and to countries that are highly dependent on food imports, including many Middle East states.
The drought in the US, the most widespread since the devastating Dust Bowl period in the 1930s, began widening and intensifying in June 2012. The proportion of the country (excluding Alaska) that was experiencing drought nearly doubled in the space of a few months, peaking in September.
The area experiencing drought has only fallen slightly to 57.6% of the country in late January, compared with an average of 31.3% during the 2000s. Moreover, the amount of land undergoing the most exceptional category of drought only peaked a few weeks ago, at 6.8% of the land area (nearly seven times the average in the 2000s).
This is because winter rains have been more limited than usual in many places. As a result, the winter wheat crop appears to be growing poorly and there are signs that the drought could persist into the spring and summer, damaging other crops.
The US National Weather Service has just released its first forecast for the planting season that runs until the end of April. It expects the drought to persist in most of the currently affected areas, including major agricultural states such as Kansas.
On the positive side, some improvement is expected in parts of the critical Corn Belt in the Midwest (where production last year was down by 13%). The drought is significant because the US is the world’s largest exporter of food, including of corn, wheat and soy.
Australia, the world’s fourth largest wheat exporter, is also seeing a period of exceptional weather. The last four months have been the hottest since records began a century ago. The heat wave peaked in early January, the height of the southern summer, with a string of days at record breaking temperatures. The heat triggered wildfires across the country’s agricultural belts.
Another factor of concern are global food reserves, which are relatively low. An FAO estimate in October put them at less than 74 days of consumption. Reserves are significantly lower in some countries and for certain food stuffs. US corn stocks, for example, would only last around 24 days, the lowest level on record.
If the climate during the next year or two is favourable in major food production regions then prices should ease somewhat, according to QNB Group. This will happen as farmers invest to plant uncultivated land, motivated by recent years of high prices. However, if the US drought continues to be widespread, and if there are significant droughts or floods in other key countries, then the conditions will be in place for a fresh price spikes.
Even if there is an improvement in the short term, extreme weather conditions and the associated food price spikes are expected to occur frequently in the coming years, as the global climate warms. Pricing pressure could be further exacerbated by a continuing trend towards using food crops as biofuels, speculative activity in agricultural futures market and growing demand driven by increasing affluence in some developing countries.
In this increasing food-insecure world, GCC countries will need to continue their efforts to diversify their food sources to minimise the risk of disruption to supply at times of shortage in specific producing regions. In any case, trends in global food prices will most likely impact inflation in the GCC, as food is the second largest component of consumer price indices in the region.