US drought fuels food crisis fears

Whilst the UK is having its wettest summer for decades, drought conditions in the US and record cereal prices are fuelling fear of a global food crisis.

The US is crucial to global food markets as the world’s largest exporter of corn, soya beans and wheat, accounting for one in every three tonnes of the grains traded on the global market.

Concerns are rising as the driest conditions for 50 years have affected corn, soya and wheat crops.  Record cereal prices are prompting fears of escalating food costs around the world and reviving memories of 2007-08 crisis which saw food riots break out in 30 countries.

Forecasts are showing no end to the drought and last week corn prices hit a record high of $8.16 (£5.19) a bushel last Thursday, while soya beans hit a high of $17.17.

The impact of the weather on corn and soya bean crops is much worse than five years ago but so far traders have not pushed up prices as dramatically.  The speculatively driven highs reached in the wheat crop during that period may not be reached but, damage to actual crops is worse.

Experts predict that the grain shortage will have a knock on effect on prices of beef, pork, poultry and dairy products.  However, for the time being the price rises are unlikely to cause food shortages. Abdolreza Abbassian, senior grains economist at the UN Food and Agriculture Organisation in Rome, said: "The problems this time around start with corn, which is an important crop but not a primary food security crop like rice or wheat. There is still hope."

Although wheat prices have risen, they remain much lower than the 2008 record of $13.345.  Rice is trading more than 40% below its high in 2008.

Abbassian said wheat supplies would come under pressure if the corn crop got much worse, as wheat would be used to feed animals instead of corn. "If we have even more disastrous results on corn, the pressure on wheat will [increase], with prices rising much further. The likelihood then is that high wheat prices will spill over into rice."

Food price inflation is a particular concern to the global economy, as it limits the ability of emerging markets to provide any kind of stimulus to drive a recovery.

Karen Ward, senior economist at HSBC, said: "What the world economy really needs right now is a break. Any inflationary pressure, particularly that stops the emerging world loosening policy and providing the boost to the global economy, would be a problem."

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