Grain
markets soar on worldwide crop downgrades
By
Naomi Spencer
WSWS,
26
April, 2012
Downgraded
harvest outlooks in the US, Russia and Australia sent grain markets
soaring upward Monday. As US crops wither under the most severe
drought and heat wave in more than half a century, droughts in Canada
and the Black Sea growing region, a below average Indian monsoon, and
a massive downgrade of the Australian wheat harvest threaten a global
food crisis.
For
the eighth consecutive week, the US Department of Agriculture (USDA)
on Monday reported a deterioration in the nation’s corn crop.
As
of the week ending July 29, less than one quarter (24 percent) of US
corn is considered in “good” or “excellent” condition, down
from 77 percent in mid-May. Only 3 percent of the corn crop across 18
states surveyed was rated as “excellent.”
Soybeans
were also once again downgraded, with 29 percent in good or excellent
condition and 37 percent in the worst categories. These ratings are
the worst since the drought of 1988, which devastated the rural
economy and forced thousands of smaller farmers out of business.
There
are no signs that the drought or heat wave will ease in the coming
weeks before soybean harvest. Across the southern corn belt, high
temperatures will continue to approach 110°F, USDA meteorologist
Brad Rippey said Monday.
This
area, encompassing Missouri, southern Illinois and Indiana, is a
major center for grain crops as well as livestock production. Little
to no rain has fallen for months in the region, and temperatures have
consistently averaged 5° to 10°F above normal. Worldwide, the past
weeks have seen the hottest land temperatures ever recorded.
The
damage to the US corn crop sustained during the critical pollination
stage last month is now irreversible. More than two-thirds of corn
acreage in major agricultural states Illinois and Indiana were rated
as “poor” or “very poor.”
Throughout the Midwest as a whole,
48 percent of the corn crop is similarly rated.
A
rating of “very poor” means that the plants will yield little to
no corn. In Vermillion County, Indiana, for example, farmers have
estimated some acreage will yield only 14 bushels of corn per acre.
The USDA officially projects an average yield of 146 bushels an acre.
The
US produces one of every three tons of corn, soybeans and wheat
traded globally.
“It
is a disaster this year in the Midwest and I think that we need to
start talking about disaster-type yield losses,” Des Moines,
Iowa-based Freese-Notis Weather meteorologist Craig Solberg said in
an interview with Agriculture.com. “In my mind this may mean a
national corn yield below 120 bushels per acre (and maybe a national
corn crop below 10 billion bushels) and a national soybean yield
below 36 or even 35 bushels per acre.”
Other
recent estimates by private firms of 120 bushels an acre have fueled
a buying frenzy of corn futures on the Chicago Board of Trade. On
Tuesday morning, corn for September delivery surged to $8.2425 a
bushel. The price represents a 28 percent increase over the month—the
largest one-month gain in more than five years. Soybean and wheat
prices are also spiking upward on speculation.
“Global
attention remains fixed on the state of the US corn crop,” Rabobank
analyst Erin FitzPatrick said in a statement. “Hope is now starting
to run out that we will see any improvement in the US corn crop and
the bulk of the crop is beyond repair. … The next stage of the
debate will be about demand rationing, the smaller crops will have to
be rationed by price. The question is who will be able to afford it.”
Investment
firm PRICE Futures Group Vice President Jack Scoville told
Agriculture.com that the rally was “mostly a lot of speculative
buying,” with predictions of “a move to $8.50 December [delivery]
corn and $17.00 November soybeans” based on the continuation of the
drought. The National Oceanic and Atmospheric Administration has
forecast that the dry spell could extend through October.
Canada’s
agricultural areas are experiencing a similar plight. On Monday,
Ontario’s agriculture minister appealed to the federal government
for disaster assistance for farmers and livestock producers crippled
by the drought. Canada is a major global producer of wheat, canola,
and livestock.
Climate
scientists have warned that much of Canada, the US and Mexico are
confronting a long-term disaster. A swath of western North America
from southern Canada to northern Mexico may face a “100-year
drought,” called a “megadrought,” as a result of global
warming, according to new research published July 29 in the journal
Nature Geoscience. The extreme weather may permanently damage soil
quality and forestation, leading to a build-up of carbon that would
otherwise be absorbed and creating a feedback effect of drought.
Creeping desertification of the US Southwest agricultural zones
suggests the potential for a process to occur similar to that of the
Dust Bowl, which lasted through much of the 1930s.
The
weather disaster in North America is mirrored in the bread baskets of
Russia and the Ukraine, where wheat crops have been buffeted by a
series of extreme temperatures, floods and droughts over the year. A
lower projected surplus of wheat in the Black Sea region has spawned
rumors that Russia will cut its exports, Reuters reported Tuesday.
Although the Russian government has denied such plans, the country’s
wheat exports for July were down by a quarter—325,000 tons—from a
year ago.
Commodities
market analysts have estimated that Russia’s harvest will be 6 to 7
million tons less than originally projected. “The wheat markets are
basically marking time until the result of the Russian government
meeting on the grain market is clear,” an unnamed trader commented
to Reuters.
A
commission on food security is schedule to convene on August 8 to
discuss the Russian wheat supply. In 2010, Russia suspended grain
exports after speculation pushed US wheat prices above $13 a bushel.
The protectionist measure cut off import-dependent countries in the
Middle East.
In
the past few weeks, Egypt, the world’s leading importer of wheat,
and other Middle Eastern and African countries have seen grain
suppliers default on previously agreed sales as grain prices rise. In
June, a German speculator explained to Reuters, “traders were
selling wheat and other grains to buyers in the Middle East in
expectation that a record US corn crop and Russian export surge would
push down global grains prices. The price rises mean some sales were
made at huge losses; people are now looking at the terms of their
performance bonds to see if it is worthwhile not delivering.”
Another
speculator commented, “Some people with a 10 percent performance
bond on deals could be financially better off defaulting than
delivering. Naturally you can ruin your relationship with the buyers,
but you have to decide what is worse.”
The
anarchy of the market is stoking conditions for a food crisis across
the globe. “Wheat is the biggest problem for food security. There’s
a lot of vulnerability, given supply and demand sources,” Egyptian
Center for Economic Studies Director Magda Kandil told the Egypt
Independent last week. Forty percent of the Egyptian population
survives on $2 a day or less.
Globally,
more than a billion of the world’s poor already suffer from hunger
and malnutrition. “When food prices rise, families cope by pulling
their kids out of school and eating cheaper, less nutritious food,
which can have catastrophic, life-long effects on the social,
physical, and mental well-being of millions of young people,” World
Bank Group President Jim Yong Kim warned in a statement Monday.
Nevertheless, World Bank officials have downplayed the risk of grain
shortages from falling harvests, and have pointed to lower prices for
fuel and fertilizer currently than in 2008.
Across
Asia, however, rising grain prices pose a substantial problem.
Because Asian importers buy nearly half of the world’s corn, the
market rally is pushing up costs for Asian grain-based supermarket
goods as well as animal feed for the pork, chicken and beef
industries. Last year, Asian buyers substituted some 8 million tons
of mainly US-grown corn with cheaper Australian wheat.
This
year, however, the western Australian wheat crop has been damaged by
lack of rain and repeated frosts, degrading the quality of much of
the harvest. Grain output in the region may drop as much as 40
percent. Along with the US, Russia and Canada, Australia is one of
the world’s top wheat producers.
Island
nations Japan, Singapore, Indonesia, and Malaysia are the most
vulnerable to price shocks because they do not have sizeable
stockpiles, and most have secured imports only two to three months
ahead. “It is a very tough situation for the feed industry and we
feel prices will stay high for the entire season,” a Malaysian
grain industry trader commented to Reuters. “Substitutes are not
going to be cheap.”
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