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US Drought Could Trigger Higher Food Prices

The ground is cracked at the edge of a corn field near England, Arkansas, where oppressive heat is affecting the crop.
The ground is cracked at the edge of a corn field near England, Arkansas, where oppressive heat is affecting the crop.
World food prices are likely to rise in the coming months in the wake of record-breaking temperatures and drought in the major maize and soybean producing regions of the United States, economists say.

It would be the third spike in food prices in the past five years.

Previous hikes - during 2007 and 2008, and again in 2010 and 2011 - triggered riots and social instability in dozens of countries around the world.

Whether rising food prices will again trigger unrest is unclear, especially since different crops are affected.

Crops shrinking

Despite early predictions of a record maize crop, estimates have plummeted after a string of record-high temperature days and dry conditions stretching across the farm states of the U.S. Midwest.

“We need rain, and it doesn’t look like we’re going to get it,” says Iowa State University economist Dermot Hayes.
  • A farm hand harvests potatoes a month early at King's Hill Farm at Mineral Point, Wisconsin, July 30, 2012. The potato yield is about one fifth of the expected yield, but is the farm's only salvageable crop after the other crops perished in the drought gr
  • The ground is cracked at the edge of a corn field near England, Arkansas, where oppressive heat is affecting crops.
  • Farmer Scott Keach looks at a drought-damaged soybean plant in a field in Henderson, Kentucky, July 24, 2012.
  • A brown and parched corn field shows the effects of a long Texas drought in Farmersville.
  • Many Arkansas fields have required 24 hour irrigation for much of the growing season due to a lack of rain and hot weather.
  • A sign at the fire department reminds people of the mandatory water usage ban as water levels drop in Cicero, Indiana July 19, 2012.
  • Illinois farmer Joe Pickrell climbs back into the combine after a maintenance break.
  • Central Illinois corn crops show signs of stress.
  • Corn plants struggle to survive in drought-stricken farm fields in Ferdinand, Indiana.

As the world’s leading exporter of maize and a top soybean exporter, what happens in the U.S. affects global prices, according to Hayes.

Mexico and Central America, where maize is a key staple, will be affected directly, but Hayes expects others to be affected indirectly as well.

“Bread prices in North Africa will go up, and chicken prices in China, pork prices in China, et cetera,” he says. “And there are going to be some very unhappy people.”

Bread will go up in North Africa because wheat prices follow maize prices.

Meat prices to rise

Pork and chicken prices will go up, as well as beef, milk and eggs, because maize and soybeans are key ingredients in animal feed.

Countries that import substantial amounts of animal feed will feel the impacts the most, according to economist Maximo Torero with the International Food Policy Research Institute (IFPRI).

“That’s China, India, and most of the Latin American countries, which are growing a lot and are starting to consume a lot more meat," Torero says. "So it could affect them substantially.”

However, Torero expects the world’s poor to be hit less severely than in the previous two price spikes.

“I don’t see the issue of meat and milk as a huge problem for the poorest countries,” where consumption of animal products is much lower than in industrialized nations, he says.

“A different kind of maize”

Cornell University economist Chris Barrett agrees. “The poor who consume maize in large quantities are disproportionately in areas where they consume either a different kind of maize, or they’re in relatively remote regions where they are likewise buffered from the global markets.”

In much of sub-Saharan Africa, Barrett notes, consumers prefer white maize over the yellow varieties grown in the United States.

Also, the fact that the most-affected crops are primarily used as animal feed and not crops such as rice or wheat, which are consumed directly, mitigates the impact on the poor, says IFPRI’s Maximo Torero.

“If the case was rice, like what we had in 2007-2008, then the situation would be different because those commodities are really imported in most of sub-Saharan Africa. And also in the case of wheat that happened in 2010, it affected Northern Africa - Cairo and so on - because they are net importers.”

Lower standard of living

But while rising prices may threaten food security for the poor, experts note they can create unrest among consumers whose standard of living had been rising.

Iowa State University’s Dermot Hayes says it could be an irritant in China, a country with a growing middle class but significant social inequality.

“It’s a tinderbox over there,” he says. “It’s not a real homogenous or pleasant society the way it’s structured right now. So there could be some issues.”

But Cornell University’s Chris Barrett says Beijing would keep a lid on prices for the sake of stability.    

“The Chinese government isn’t going to be the least bit shy about buffering its own domestic markets,” he says. And with $3 trillion in foreign currency reserves, he adds, “they have the wherewithal to do that.”

But other countries without China’s fiscal wherewithal may feel the impacts more strongly.

Demand outstripping supply

The fundamental problem is that world production has not been keeping up with growing demand for food corps, says IFPRI’s Maximo Torero.

“There is a lot of talk about what to do and how to improve, but nothing is happening and we have not been able to change the scenario.”

Torero cautions the world will continue under the same scenario until serious efforts are made to meet the growing demands.

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