Image: Chinese drought
In China, where incomes are rising rapidly, an extended drought in several provinces is driving food price relentlessly higher.
By John W. Schoen Senior producer
updated 2/10/2011 10:34:22 AM ET 2011-02-10T15:34:22

Among the economic havoc brought by this winter’s extreme weather, none has been more severe than the impact on the global food supply chain.

Over the past few years, rising global demand for crops and production shortfalls have whittled grain surpluses to historically low levels. As extreme weather continues to cut production, those surpluses have shrunk further and forced prices higher.

Now meteorologists and weather risk analysts are warning that more frequent floods and droughts may continue to crimp production and keep foods supplies tight for years to come. Until surpluses of key grains can be restored to more normal levels, weather-related crop failures will produce more price spikes.

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“If there's a surplus, you can put it in storage and carry it forward,” said Arthur Small, founder of Venti Risk Management, a weather risk consultant. “But if you have a shortfall, you can’t borrow against the future to bring it backward in time. It only works in one direction.”

The recent surge in food prices echoes the increased volatility in oil prices over a decade ago, when the growth of global oil demand began to outpace the development of new production capacity. As the supply cushion for any commodity shrinks, small shifts in supply or demand generate relatively large swings in the global price.

Part of the strain on the global supply chain is coming from rapid economic growth in developing countries, where rising incomes are boosting demand for a variety of food products. As demand has risen, severe weather has cut into crop production brought by shifts in weather patterns around the world.

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In China, where incomes are rising rapidly, an extended drought in several provinces is driving food prices relentlessly higher. A U.N. food agency said Tuesday that China's winter wheat harvest was at risk because of extremely dry weather that also has created shortages of drinking water for people and livestock. Flour prices were up more than 8 percent in January compared to the previous two months.

Premier Wen Jiabao led a State Council meeting Wednesday on increasing grain production in the world's largest wheat grower.

Story: China to spend $1 billion to alleviate drought

China’s state media said the government is sending relief teams to eight provinces that grow more than 80 percent of the country's wheat and are struggling with drought. Dry weather and higher-than-average temperatures are forecast well into spring.

“If they don’t get a lot of rain in the next few weeks it’s going to be too dry to plant,” said Small. "China will start taking out a big wad of cash and buy lots and lots of wheat and corn."

Major Market Indices

Global crop losses
When countries that usually produce surpluses have to turn around and buy grain, that tightens supplies further. Russia recently extended an ban on wheat exports imposed in August after wildfires sparked by drought caused widespread crop damage.

Extreme weather conditions have cut into crop production around the world. Floods in Australia that began in December have cut wheat production by $1 billion, according to government estimates. Banana and sugar cane plantations also sustained serious damage.

Pakistani farmers suffered an estimated $500 million in crop damage from monsoon rains that covered as much as a quarter of the country. Flooding also has damaged crops in Brazil and central Europe.

In the U.S., drought conditions in Texas, Louisiana and Arkansas have cut production of grain and livestock. Farmers in Southern states have also been hit by unusually cold weather this winter.

“Growers have taken quite a bit of economic loss of vegetables and citrus crops,” said Jim Reif, chief meteorologist at U.S. Weather Consultants in Fort Myers, Fla. “We’ve had four or five critical cold events down here in central and southwest Florida that have damaged crops.”

As farmers begin getting ready to plant spring crops, they face flood forecasts in parts of the Midwest. Last week the National Weather Service warned of increased risk of “moderate to major” floods along the upper Mississippi River.

“We have a volume of water sitting on the ground in Minnesota just waiting to come down (the river) — and in Iowa, Wisconsin, Illinois and even Missouri,” said Mark Fuchs, a hydrologist at the National Weather Service in St Louis. “If that comes down all at once, that’s obviously a big problem.”

No price cushion
In the U.S., the Department of Agriculture recently scaled back already-tight estimates of grain inventories. Corn reserves have hit their lowest levels in more than 15 years amid rising demand from the ethanol industry.

Soybean reserves are at the lowest levels in three decades, the USDA estimates, in part because of heavy buying by China. The ratio of stocks to demand is expected to fall later this year to "levels unseen since the mid-1970s," the agency said.

Over time, tight food supplies will prompt continued investment in biotechnology to boost output and expand storage to better smooth out wider swings in supply and demand, said Small. That will allow productive regions to offset losses where crops fail.

“The system of trade and storage is quite adaptable and resilient,” he said. Higher commodity prices typically spurs investment in more storage and production, he said. But expanding that capacity will take years.

Clouded forecast
Whether the recent increase in severe storms is related to long-term climate change or global warming is hard to say.

Meteorologists point to specific, long-standing climate patterns that have brought extreme weather events from Boston to Brisbane this winter. One is the so-called La Nina that governs ocean temperatures in the Pacific Ocean; that phenomenon could help explain recent floods and droughts in Australia, China and Russia.

In the Western hemisphere, a weather pattern called the Arctic Oscillation is getting much of the blame for the relentless series of storms pounding much of the U.S. (A related system called the North Atlantic Oscillation also has contributed to the severity and frequency of winter storms in the U.S. and Europe.)

German insurer Munich Re last month released a global tally of 950 natural disasters in 2010 — 90 percent of which were weather-related. That’s the second highest number since 1980. Total damages were estimated at $130 billion.

The frequency and severity of thunderstorms and tornadoes are also on the rise, extending a 25-year trend, said Robert P. Hartwig, president of the Insurance Information Institute.

But he said the jury is still out on whether recent weather volatility falls outside long-term historical patterns.

“You can go back to the records of Lloyds of London in the 17th and 18th century and find discernible patterns of ship losses, which we today know are the result of ordinary cycles in hurricane activity,” said Hardwig.

The longer-term outlook for global food supplies is murky. For now, the impact of surging prices will fall disproportionately on the poorest nations already struggling to feed their populations.

Rising food prices helped spark the uprising in Tunisia that brought down the government of Zine El Abidine Ben Ali and spread to other nearby countries including Egypt.

But analysts like Small note that farmers have been coping with periods of extreme weather throughout the history of mankind. 

"It’s not that the sky is going to fall and we’ll all starve," he said. "The system is going be getting hit with shocks that may not be beyond our historical experience. But it will be getting large shocks more frequently than we have in the past."

The Associated Press contributed to this report.

Photos: Deep freeze, snow across U.S.

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  1. Irving, Texas

    This sculpture was iced over Thursday, Feb. 3, in Irving, Texas. (Eric Gay / AP) Back to slideshow navigation
  2. Miami, Oklahoma

    A pickup truck that plunged off this snow-covered bridge near Miami, Okla, on Thursday sits in the Spring River. Three people were killed and five others injured. (Gary Crow / Tulsa World via AP) Back to slideshow navigation
  3. Chicago

    The Chicago skyline is reflected on a thin layer of ice as a chunk of snow-covered ice floats in Monroe Harbor on Thursday. (Charles Rex Arbogast / AP) Back to slideshow navigation
  4. Chicago

    Robert Brigs shovels snow on Martin Luther King Drive in Chicago on Thursday. (John Gress / Reuters) Back to slideshow navigation
  5. Iowa City, Iowa

    A car sits abandoned in the median of I-380 between Cedar Rapids, Iowa, and Iowa City on Thursday. (Chip Somodevilla / Getty Images) Back to slideshow navigation
  6. Commuters brave subzero wind chills as they return to work Thursday in Chicago. This week's blizzard dumped more than 20 inches of snow on the city. (M. Spencer Green / AP) Back to slideshow navigation
  7. Racine County, Wisconsin

    A man walks behind high snowdrift in Racine County, Wis., on Wednesday. (Darren Hauck / Reuters) Back to slideshow navigation
  8. Auburn, Mass.

    Officials walk past a building that collapsed in Auburn, Mass., on Wednesday, Feb. 2, after days of heavy snow followed by rain. (Paul Kapteyn / AP) Back to slideshow navigation
  9. Elizabethtown, Pa.

    A fallen tree weighed down with ice sits on Old Hershey Road in Elizabethtown, Pa., on Wednesday. (Blaine Shahan / AP) Back to slideshow navigation
  10. Milwaukee, Wis.

    This walkway to Lake Michigan was frozen over Wednesday in Milwaukee, Wis. (Jeffrey Phelps / AP) Back to slideshow navigation
  11. Chicago

    A commuter climbs over a snow bank to catch a bus Wednesday in Chicago. (Charles Rex Arbogast / AP) Back to slideshow navigation
  12. Chicago, Ill.

    Hundreds of cars are seen stranded Wednesday on Lake Shore Drive in Chicago. (Kiichiro Sato / AP) Back to slideshow navigation
  13. Chicago, Ill.

    Snow piles up on the driver's seat of a stranded Chicago Transit bus on Wednesday after the door was left open during the overnight blizzard. The bus was abandoned on Lake Shore Drive. (Kiichiro Sato / AP) Back to slideshow navigation
  14. Akron, N.Y

    Andrea Todd shovels snow from her driveway with her dog Myles in Akron, N.Y., on Wednesday. (David Duprey / AP) Back to slideshow navigation
  15. Milwaukee, Wis.

    A wave sends large chunks of ice into the break wall at the Milwaukee Marina in Wisconsin on Wednesday. (Darren Hauck / Reuters) Back to slideshow navigation
  16. Iowa City, Iowa

    Downtown Iowa City, area near the University of Iowa, is a virtual ghost town on Wednesday. (Chip Somodevilla / Getty Images) Back to slideshow navigation
  17. Windsor, Conn.

    People stop along Interstate 91 in Windsor, Conn., to help push a car out of a snow bank on Wednesday. (Jessica Hill / AP) Back to slideshow navigation
  18. Chicago

    Blizzard winds swirl the snow on an elevated train platform in Chicago early Wednesday. (Charles Rex Arbogast / AP) Back to slideshow navigation
  19. Buffalo, N.Y.

    Frost forms on a window in Buffalo, N.Y., on Wednesday. (David Duprey / AP) Back to slideshow navigation
  20. Salem, N.H.

    This car landed vertically into a snowbank after a multiple vehicle accident on Interstate 93 on Tuesday north of Salem, N.H. No one was injured. (Tim Jean / The Eagle-Tribune via AP) Back to slideshow navigation
  21. New York City

    The Wednesday morning commute in New York City's lower Manhattan was an icy one. (Spencer Platt / Getty Images) Back to slideshow navigation
  22. Westfield, N.J.

    An officer blocks the road to prevent pedestrians and traffic from approaching a fallen tree branch and power lines in Westfield, N.J., on Wednesday. (John Makely / Back to slideshow navigation
  23. Milwaukee, Wis.

    A cyclist tries to ride during the blizzard in Milwaukee, Wis., on Wednesday. (Darren Hauck / Reuters) Back to slideshow navigation
  24. Barre, Vt.

    A dog named Muldoon waits for its owner, who stopped for coffee on Wednesday in Barre, Vt. (Toby Talbot / AP) Back to slideshow navigation
  25. Chicago

    Men help push a car that got stuck in a snow on the Lake Shore Drive in Chicago early Wednesday. (Kamil Krzaczynski / EPA) Back to slideshow navigation
  26. Milwaukee, Wis.

    Students from Marquette University in Milwaukee to go to the Union Building in blinding snow as a blizzard warning hits southeast Wisconsin on Tuesday. Marquette canceled classes for Wednesday. (Rick Wood / AP) Back to slideshow navigation
  27. Chicago

    Cross country skiers navigate through snow downtown Chicago on Tuesday. (Scott Olson / Getty Images) Back to slideshow navigation
  28. Chicago

    Rush hour traffic crawls as blowing snow batters Lake Shore Drive in Chicago on Tuesday. (John Gress / Reuters) Back to slideshow navigation
  29. Columbia, Mo.

    A snow-and-ice covered Chris Gubbels pauses while walking his dog Tuesday in Columbia. Mo. (L.G. Patterson / AP) Back to slideshow navigation
  30. Chicago, Ill.

    Snow falls on the Cloud Gate sculpture, also known as "the bean," in Millennium Park downtown Chicago on Monday. (Scott Olson / Getty Images) Back to slideshow navigation
  31. View from above

    This satellite image provided by NOAA shows the winter storm covering much of the U.S. on Tuesday. (NOAA via AP) Back to slideshow navigation
  32. Fayetteville, Ark.

    A snow plow clears College Ave. in Fayetteville, Ark., on Tuesday as heavy snow falls. (April L. Brown / AP) Back to slideshow navigation
  33. Chicago, Ill.

    An approaching blizzard doesn't stop this fisherman Tuesday on Lake Michigan in Chicago. (John Gress / Reuters) Back to slideshow navigation
  34. Boonville, Mo.

    Trucks disappear into the white snow as they travel along I-70 on Tuesday near Boonville, Mo. (L.G. Patterson / AP) Back to slideshow navigation
  35. Rogers, Ark.

    Postal carrier Tip Burnett uses a rubber hammer to open a frozen mailbox at the National Guard armory in Rogers, Ark., during heavy snow on Tuesday. (Flip Putthoff / Northwest Arkansas Newspapers vi) Back to slideshow navigation
  36. Brooklyn, N.Y.

    Morning commuters in New York City make their way over a snow covered Williamsburg bridge on Tuesday. (Mary Altaffer / AP) Back to slideshow navigation
  37. Port Washington, Wisc

    Icicles form on a walkway along Lake Michigan in Port Washington, Wisc., on Tuesday. (Jeffrey Phelps / AP) Back to slideshow navigation
  38. Carmel, Ind

    A Bobcat is used to clear a parking lot of two-inch-thick ice in Carmel, Ind., on Tuesday. (Michael Conroy / AP) Back to slideshow navigation
  39. Lancaster, Pa.

    Icy patches made crossing the sidewalk in Lancaster, Pa., a challenge on Tuesday. (Richard Hertzler / Lancaster Newspapers, Inc. via AP) Back to slideshow navigation
  40. Owasso, Okla

    Ila Dooley digs her car out to try and get to work on Tuesday in Owasso, Okla. Both of Oklahoma's major airports had to shut down due to the snow. (Mike Simons / Tulsa World via AP) Back to slideshow navigation
  41. St. Louis, Mo

    Snow plows work to remove ice from Interstate 55 on Tuesday in St. Louis, Mo. A blizzard warning was in effect for the St. Louis area, as was a forecast for up to 20 inches of snow. (Tom Gannam / AP) Back to slideshow navigation
  42. Albany, N.Y.

    Snow was also falling Tuesday in downtown Albany, N.Y. Most of upstate New York was under a winter storm warning and Gov. Andrew Cuomo opened the State Emergency Operations Center due to a forecast of up to 2 feet of snow in some areas. (Mike Groll / AP) Back to slideshow navigation
  43. Denver, Co.

    A woman braces against the cold and blowing snow as she crosses the street in the financial district of downtown Denver on Monday. School officials canceled schools in Denver for Tuesday. (Ed Andrieski / AP) Back to slideshow navigation
  44. Pembroke, Mass.

    Scott Buchanan scrapes snow off the roof of his house in Pembroke, Mass., on Monday as his yellow Lab Charlie holds a snow covered ball in his mouth waiting to play catch. (Stephan Savoia / AP) Back to slideshow navigation
  45. Lexington, Ky.

    Lexington, Ky., police and firefighters work at the scene of an accident after freezing rain moved coated roads there on Monday. A section of Georgetown Road was closed after two separate accidents involving five vehicles. Freezing rain turned the bridge into a sheet of ice. (Charles Bertram / The Lexington Herald-Leader via) Back to slideshow navigation
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Video: Soaring food prices causing concern


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