Fears of a global replay of the 2007/8 food crisis mounted last week with confirmation that the United States maize crop would probably drop to a six-year low. There was also bad news from other global production regions and in the Southern African region, the danger is worsened by the fact that farmers in Africa’s largest maize producer, South Africa, are under pressure from an above-inflation rate and diverse costs.
Mounting fears over American drought
August 21st, 2012
Maize and wheat futures spiked to a record high in the US last week on news that the US crop would probably slump by 13% to a six-year low. The US department of agriculture (DA) reported that crop conditions were the worst since 1988, with 69% of the Midwest seeing moderate to exceptional drought.
In South Africa maize and wheat futures were also at, or near, record highs last week.
This is particularly bad news for Southern African countries like Mozambique which subsidise the cost of basic food.
Worsening the global situation, countries such as Mexico, the world’s largest maize importer and victim of serious food riots in 2007, have started stockpiling with big orders, followed by buyers in the turbulent Middle East also piling into the markets.
This is strongly reminiscent of the situation in 2007/08, when food prices rose on the back of a jump in oil prices that had pushed up the production costs of inputs such as chemical fertilizers and had combined with speculation on commodity markets and export restrictions imposed by some leading agricultural nations.
One of the results of the situation were food riots in Egypt, India, Indonesia, Mexico and many other countries around the world.
Global grain prices experienced a fierce rally in June and July with maize and soybean prices rising 50% and 20% respectively. Wheat also jumped around 50% on the back of the American drought.
And it is not only in the US that maize and wheat production is under threat. Production could also be adversely affected, and prices surge, if the present hot weather conditions persist in Eastern Europe. Below-average monsoon rains in India are also adding to the concern over global grain crops.
According to a Reuters survey, 30% lower-than-average wheat production is anticipated in the grain belt of Ukraine, Russia and Kazakhstan.
Mike Schussler, director of economists.co.za, was reported last week as saying he "thinks the whole costs base in Southern Africa is under pressure as diverse costs such as rail and port fees and seeds all are increasing above the rate of inflation".
This suggests that even if the worst weather fears in other parts of the maize and wheat-producing regions of the world do not materialise, there would not automatically be price relief for Southern Africa.
Reuters reported that compared with the food price crunch of 2008, headline inflation is still moderate, but looks unlikely to stay that way, especially as the price of maize is felt across the food chain in Southern Africa. This is one of the few regions where the crop is mostly grown for human consumption instead of for livestock.
And in the longer run, the outlook for regional food prices can only be upward because of population growth that will lift demand and possible climate change that may hit supply if events such as the current US drought become frequent.
According to the UN Population Fund, 46% of the population of Zambia and Malawi are under the age of 15, a trend also seen in other countries in the region such as Angola.
In South Africa the number is lower but still high at 30%. Such a demographic profile can only mean demand for maize will continue to rise briskly for the foreseeable future.
Shortfalls in maize production will not only directly impact on the staple food situation in many parts of Africa. Maize is also used to feed livestock for most meat production. It is also used for the production of ethanol, which is increasingly in demand as governments across the world strive to reduce their reliance on fossil fuels.
At the end of July, for example, the US Department of Agriculture warned that supermarket food prices would rise in coming months. It projected beef prices to rise between 4% and 5%, and dairy products between 3.5% and 4.5%.
Large meat producers were warning at the same time that cheaper meats such as pork and chicken will become ‘luxuries’ if Washington does not suspend a programme enabling the energy industry to secure up to 40% of the US maize crop for ethanol production.
Marc Sadler, head of agriculture risk management at the World Bank, said recently that the present situation is more complicated than in 2008, when rice and wheat prices rose the most and then fell sharply the next year when plantings increased.
"The difference now is, if you look across the board, all prices are up," making it tougher for farmers to decide how to allocate their acreage.
Abdolreza Abbassian, senior economist and grain expert at the UN's Food and Agriculture Organisation (FAO) late in July still said that plentiful supplies of rice and better availability of wheat meant the situation was not as serious as four to five years ago.
He, however, also warned that "it is a serious situation which has to be monitored closely but it is too early to refer to it as a food crisis situation.” Since then, the world seems to have edged closer to a repeat of the 2007/2008 food crisis.
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