Dried-out farms from China to Iowa will pressure food prices

Drought is shrinking crops from the U.S. Farm Belt to China’s Yangtze River basin, ratcheting up fears of global hunger and weighing on the outlook for inflation.

The latest warning flare comes from the American Midwest, where some corn is so parched stalks are missing ears of grain and soybean pods are fewer and smaller than usual. The dismal report from the Pro Farmer Crop Tour has helped lift a gauge of grain prices back to the highest level since June.

The world is desperate to replenish grain reserves diminished by trade disruptions in the Black Sea and unfavorable weather in some of the largest growing regions. But an industry tour of U.S. fields over the past week stunned market participants – who had been more optimistic – with reports of extensive crop damage due to brutal heat and a lack of water.

Meanwhile, drought is taking a toll in Europe, China and India, while the outlook for exports out of Ukraine, a major corn and vegetable oil shipper, is hard to predict amid Russia’s invasion.

“Even before this week’s news from the crop tour, I have been concerned that we would not see much stock rebuilding until 2023,” said Joe Glauber, a former chief economist at the U.S. Department of Agriculture who now serves as a senior fellow at the International Food Policy Research Institute in Washington. The “opening of Ukraine ports is a welcome sign, but volumes remain far below normal levels.”

Traders always watch weather forecasts closely but this year the vigilance has intensified – every bushel matters. While corn, wheat and soybean prices have cooled off from record or near-record highs seen earlier this year, futures remain highly volatile. Bad weather surprises from now until fall harvests are finished could send prices soaring again.

An index of grains and soybeans is trading almost 40% above the five-year average and the surge in crop prices has been a major contributor to global inflation. Already, food shortages helped lead to the downfall of Sri Lanka’s government earlier this year when the country ran out of hard currency needed to pay for imports.

The United Nations’ Food and Agriculture Organization’s index tracking food prices fell last month from June, though it remains 13% higher from the same period last year.

In the U.S., corn is the most dominant crop and a lackluster harvest will have ripple effects across the global food supply chain, adding pressure on South America to produce bumper crops early next year. That’s especially the case if China, which is suffering its worst drought since the early 1960s, is forced to import more grains to feed its massive livestock herds and shore up domestic inventories.

After the recent crop tour, officials now estimate that U.S. production will be 4% lower than the formal government forecast. The pinch follows drought-driven shortfalls of U.S. winter wheat as well as soybeans in Brazil, the top grower.

The global farming outlook going into 2023 has market watchers worried. For the first time in more than 20 years, the world is facing a rare third consecutive year of the La Nina phenomenon, when the equatorial Pacific cools, causing a reaction from the atmosphere above it. This could have dire consequences for drought across the U.S. as well as dryness across the vital crop regions of Brazil and Argentina.

And while it’s hard to link the weather in any given year to long-term climate patterns, analysts warn that global warming will be a growing drag on agricultural output in years to come.

For now, Europe is in the throes of a drought that appears to be the worst in at least 500 years, according to a preliminary analysis by experts from the European Union’s Joint Research Center. Several EU crops are being hit particularly hard, with the yield forecasts for corn 15% below the five-year average, the latest data show.

“With energy prices remaining elevated at least through this coming winter, any major shortfall in corn supplies will have devastating impact on food and feed sectors,” said Abdolreza Abbassian, a food market analyst and a former economist with the United Nations’ Food and Agriculture Organization.

In China, historic drought has hit regions along the Yangtze River and the Sichuan basin, hurting rice crops, the country’s top food grain.

India’s rice planting has shrunk 8% this season due to a lack of rainfall in some areas. The government is discussing curbs on exports of so-called broken rice, which is mainly used for animal feed or to produce ethanol in India. Top buyers include China, which uses it mostly to nourish its livestock, and some African countries, which import the grain for food.

India accounts for about 40% of global rice trade and is the world’s biggest shipper.

‘This climate thing’

In the U.S., Nebraska farmer Randy Huls, a participant in the crop tour, is staring down a smaller corn harvest this year due to lack of rain. In the longer term, he’s concerned how changing weather patterns might impact the farm he leaves behind.

“They are predicting the Corn Belt to move north,” said Huls, 71, who raises corn, soybeans, wheat and hogs . “We could be a lot drier yet and that’s this climate change thing they are talking about.

“I doubt in my lifetime I’ll see that, but I always wonder about my son and especially my grandsons,” he added. “What are they going to see?”