World markets are better placed than before to brace poor harvests, say Steve Wiggins and Sharada Keats.
It’s more than two years since the peak of the last spike in world grain prices, back in mid-2008. Since then prices have been drifting back to the levels last seen in 2005, or earlier.
The cause? Reports from Canada that harvests will be low on account of too much rain early in the season; while in Kazakhstan, Russia and Ukraine drought has cut the forecasts for the harvest. These countries feature amongst the top eight wheat exporting countries, shifting around one third of wheat traded globally in the mid-2000s. Failing harvests in these countries hits world markets hard.
The grain trade is already reacting strongly. Prices are up by US$50 a tonne in a month and by US$70 a tonne for some export wheats. The Financial Times says these increases are the fastest seen since 1973. That year saw the largest spike in cereals prices since the Korean War, prompting apocalyptic predictions of future famine which, incidentally, added impetus to the ‘green revolution’ period that saw major increases in cereal yields.
As if this was not bad enough, Thursday 5 August produced a bombshell as Russia announced suspension of wheat exports from mid-August to December. In three days of trading, the wheat futures market in Chicago saw a full US$55 a tonne added, an extraordinary addition to the rises seen in late July.
Are we facing the prospect of replay of the food prices spikes of 2007/08 or even – heaven forbid – 1973/74? Not quite.
This is not 2007 or 1973. First, world wheat production may fall – perhaps 26M tonnes down on the forecasts – but this is a 4% reduction on a 2010 harvest that was expected to the be the third largest in history. Probably 650M tonnes will be harvested in 2010/11; compare that to 597M tonnes in 2006/07 and 606M tonnes in 2007/08.
Second, stocks that had been driven to their lowest levels in more than 30 years by the 2007-08 food crisis have been rebuilt. As a ratio of annual use, end-of-season stocks of wheat that had slumped to 23% in 2007/08 were almost up to 30% by 2009/10.
Third, harvests for the other two major grains, maize and rice, are not likely to be affected and some consumers deterred by higher wheat prices will have the chance to switch to other grains. Whether there will be a knock on inflationary effect on other grain prices remains to be seen.
Fourth, forecasts of demand for feed wheat by livestock producers have been reduced because less meat than expected is consumed during an economic downturn.
Hence, the ‘market fundamentals’ of supply and demand suggest that while wheat prices will be pushed up by harvest failures, this will be at most a minor spike. But what may we expect from harvest failures on the scale currently contemplated?
Before 2007/08 the last minor spike followed the 1994 harvest that was 37M tonnes, 6.6% down on 1993 and over the next two years prices climbed from US$167 to US$222 a tonne, or by 33%. If that’s any guide to current events, then it may well be that spot price increases seen in July, at 29%, are the worst of it.
But policy can be as destructive as drought, as the rice market showed in 2007/08 when India’s rice export ban led other rice exporters following suit. Rice prices tripled in the ensuing panic, so the key question is whether other countries follow Russia’s lead and restrict wheat exports.
Amongst the top eight wheat exporters, there are two likely candidates: Kazakhstan and Ukraine. Both countries have been affected by the same drought, and both restricted exports in 2007/08. Their combined wheat exports were expected to be not far short of those from Russia, so were they to ban exports it would be another heavy blow to the market.
Another key question is whether markets are likely to take fright as they did for rice, with importers over-ordering in a tight market fearing that soon there will be no rice at all on offer?
To judge by last week’s reaction on the futures market in Chicago, traders have been shocked by Russia’s move – but not for long.
The last two days of trading have seen those same prices fall back, by US$50 a tonne, more or less to where they were before the surprise of the export ban.
Are there lessons to learn from this shock? Yes – things can always go wrong and so it is wise to have some resilience in the system, in this case adequate stocks. Trade also helps. Some harvests fail somewhere in the world pretty much every year and trade can prevent people in local economies taking the full force of localised mishaps. In this case, a wheat surplus in China and the US is having a significant braking effect on prices.
However, abrupt and unexpected policy interventions, such as Russia’s export ban, can throw further spanners into the works.
Finally, it is intriguing to read reports of the impact of industrial animal feedlot decisions on grain markets. Why can’t we reduce their feeding activities when grain harvests fail? Most of us can live for a while without meat, but not without bread.
About Steve Wiggins and Sharada Keats
Steve Wiggins and Sharada Keats are agricultural economists working for the Overseas Development Institute who have strong interests in food security and nutrition. For the last two years they have studying causes, impacts and responses of the spike in grain prices on world markets of 2007/08.