US drought could translate into global food crisis, impact MENA region

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A field of corn awaits the harvest in rural McLean county, Illinois, US. Photo – tlindenbaum

The worst US drought in a quarter of a century is rallying world commodity markets, causing key grain prices soar and create global food crisis witnessed around four years ago when vulnerable parts of the globe faced unprecedented inflation.

Foregoing past lapses, many countries this time around are seeking to protect their populations from hunger, ramping up imports, touting healthy stock levels and hoping other sources will come through and bring prices down, a Reuters report said, warning their hopes may be short-lived if they all return to market at once.

Corn prices have gone up around 40% due to dry US weather, followed by soybeans and wheat.

“Production potential looked great and it kind of lulled these end-users into a false sense of security. At that point we were seriously looking at (corn) prices under $5 if weather conditions remained ideal, but now we’ve rallied sharply higher and never looked back,” Jefferies Bache, analyst Shawn McCambridge, told Reuters.

Traders said consumers in Europe, Middle East and North Africa are refraining from regular purchases, expecting prices to cool off.

“This to me is a time bomb. I am routinely one of the more bearish people but it wouldn’t surprise me if corn traded at $10,” the trader added.

The current alarming food situation, worsened by scorching weather, wilting crops and sky-rocketing prices, has several parallels with Russian crop failure in 2010 when heavy rains lashed out the country’s bread basket regions.

Wait, Watch, Buy

Top importing countries, including China, Egypt, India and Iran are ready to sit out the current price surge.

Egypt, which imports more than 10 million tonnes of wheat per year, has said it has a strategic stock of about six months plus to last until January.

“Of course entering the markets for August shipment isn’t likely now and that’s because our local purchases leave us in a very comfortable position,” Nomani Nomani, vice chairman of the General Authority for Supply Commodities (GASC), told Reuters last week.

China and India, top grain consumers in Asia, are sitting on ample stocks of wheat and rice, thanks to near-record harvests in the last few years. US corn export sources also noted that China and South Korea were ahead of the curve, booking larger shipments in anticipation of supply problems and high prices.

Bad Memories

The recent surge in prices is reviving memories of the 2007-08 food crisis which the United Nations Food and Agriculture Organisation (FAO) estimates suggested 75 million people faced chronic hunger in the world. Other estimates put the figure at 160 million.

The International Grains Council’s Grains and Oilseeeds Index, a weighted average of prices for wheat, corn, soybeans, soymeal, rice, barley, sorghum and rapeseed, rose this week to its highest level since July 2008.

According to IGC data, grain stocks currently stand 25% higher compared with 2008. However, China is reportedly holding a large amount of wheat and corn but is unlikely to release it onto international markets.

The IGC forecast earlier this month said consumption of grains has steadily increased in recent years and would rise by 1.8% in 2012-13 (July/June) thanks to a boost in meat consumption, particularly in developing countries.

Trade sources also said Iran was checking international prices daily with a view to major purchases of grain as US-led sanctions on its banking sector were making it hard to purchase quantities in bulk.

Nearby Syria, suffering from unprecedented strife and troubled with Western sanctions against the Assad regime, is unable to trade in big enough amounts to satisfy its grain import requirement of about 3 million tonnes.

Damascus repeatedly failed at attempts to strike major deals, while prices kept on rising.

“With the economy already a major concern, soaring grain prices will heap more and more pressure on the Syrian government. Forex reserves are at new lows and decreasing at a faster rate as commerce and the ability to collect taxes decreases,” Alan Fraser, Middle East analyst with security firm AKE, told Reuters in an interview.

On the other hand, Morocco is grappling with its highest cereal import needs in three decades due to a poor domestic harvest. The North African nation’s cereals crop fell from 8.4 million tonnes in 2011 to 5.1 million tonnes this year. A shortfall in rain caused an 11.7% drop in agricultural production.

“Buyers have been rejecting offers in the last couple of weeks expecting prices to come down,” a Singapore-based grain trader said. “We have seen it in South Korea, the Philippines and Vietnam but how long can they wait?”

Buyers will do their best to hold out for the release of new crop grain in September and October from multiple sources including Eastern Europe, with Black Sea countries having forged a place on international markets as key suppliers of grain at cheap prices.

However those origins are also under pressure.

Hot and dry weather has forced Russia, Ukraine and Kazakhstan to reduce their harvest forecasts and the region’s total grain output could be at least 35 million tonnes less than in 2011.

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