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Extreme weather pushes food prices higher

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.  By John W. Schoen.
In China, where incomes are rising rapidly, an extended drought in several provinces is driving food price relentlessly higher.AP

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.

“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.

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.

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."

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."