Previously, Market Leader wrote about the severe droughts in the US and other countries and their possible impact on the world (Unprecedented Droughts In USA: Major Food Crisis Ahead?). ’s forecasts seem to start being implemented. Unfavorable weather conditions caused food price hikes around the globe. In less than 4 weeks, the rally came close to the record high.
How far food prices may go? Should investors pay attention to food markets?
According to Barack Obama, the recent drought in the US was one of the most severe (and devastating for crops) in the US history. On Tuesday, he met with several minister to discuss the ways and means of helping domestic food manufacturers. The scale of the problem cannot be underestimated. 32 US states have regions that were officially announced disaster areas. This is 555 of the entire US territory.
The measures proposed by the White House testify to the scale of the disaster as well. For example, the USDA was ordered to allocate $30 million to supply US farms with water and to restore the damaged land.
Barack Obama urged the US Congress to issue a new bill to reform the agricultural sector. It is planned to allocated $500 bn within 5 years.
All these factors say that this time we are facing a real agricultural force-majeure.
Food Market Is Feverish!
Obviously, the US force-majeure couldn’t but affect the entire global food market. Droughts and rains affected the agricultural sectors of numerous countries around the globe. But the US problem affected the overall situation most of all.
The Food and Agriculture Organization of the United Nations (FAO) usually doesn’t bother itself with publishing a monthly report on food price index. However, taking into account the current force-majeure, the FAO made an exception. July’s index showed a 6% increase. This is the sharpest price increase since November 2009. Now it is 213 point, the record was set in December 2011 238 points.
Grains appreciated by 17% while sugar prices gained by 12%.
The charts below, courtesy of , reflect the current state of affairs in the market of sugar, corn and wheat:
Corn prices gained 33% while wheat price gained 19%.
The prices on dairy products remain relatively stable. However, this is a temporary phenomenon.
Meat prices are slightly lower (-1.7%) on overproduction. Meat prices may go further down in the near future as the droughts have reduced to amount of fodder. So, if the government fails to support farmers financially, they will have to get rid of the biggest share of their livestock.
Food Crisis Ahead?
A lot of people ask this question. Everyone is afraid of another 2007-2008 crisis when food inflation caused a wave of protests. In order to prevent another food crisis, UN experts suggest the following solutions:
For agricultural regions, to avoid imposing embargos on the export of foodstuffs. The USA accounts for 505 of the global market of corn.
For the US government, to reduce the production of ethanol this year (40% of the harvest goes to ethanol producers).
According to the UN, some African starving regions (over 18 million people) have already felt the consequences of this year’s poor harvesting season.
Moreover, food export cuts and higher food prices may affect numerous economies around the globe, thus pushing the global economy closer towards recession.
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Will we see a major food crisis?
