The drought in the US has caused a spike in global food prices, with corn, wheat, and soy prices rising nearly 50% since early June. The US produces about 40% of the world's corn and the drought is the worst in over 50 years, affecting 60% of the country. This has exacerbated global food price inflation, driven higher by a stronger dollar. Analysts expect prices to continue rising through September before easing, but high volatility in food prices may be the new normal due to increasing demand, climate change impacts on supply, and biofuel substitution of crops. Adaptation is needed through strategic reserves and aid to food insecure countries.

1. QNB Economics
economics@qnb.com.qa
04 August 2012
Drought in the US causes sudden spike in food prices
The sudden onset of a serious drought across much of Moreover, 55% of land used for animal raising is in
the US has caused a major spike in food commodity poor or very poor condition.
prices. This is the third spike in food prices in four
years. If it continues, there are concerns that it could Food prices (% change since 1 June 2012)
threaten food security in some countries, with (Closing prices for September 2012 futures contracts)
destabilising effects on society, as was the case with 60% Wheat
the last two price spikes in summer 2008 and early Corn 54%
2011. Much will depend on the quality of harvests Soy
50% 47%
elsewhere in the world, according to QNB Group.
The US is one of the world’s largest food producers, 40%
particularly of corn where it grows about 40% of the
global crop, and is a major exporter. This is why a 31%
poor harvest in the US can have serious global 30%
25%
consequences.
20%
Concerns about the US drought briefly pushed three
key foods—corn, wheat and soy—to record prices on
July 20th, of $8.28, $9.44 and $17.77 per bushel, 10%
respectively. Most prices have eased slightly from that
peak in the last few weeks, but remain elevated,
although corn remains around the peak level. At the 0%
end of July, futures contracts for September delivery 3 Jun 17 Jun 1 Jul 15 Jul 29 Jul
of wheat and corn were nearly 50% above their levels Source: Chicago Board of Trade and QNB Group analysis
at the start of June, while soy was about 25% higher.
The markets have been fluctuating in recent weeks on
According to QNB Group, the high prices are the basis of rain forecasts. However, even if there was
exacerbated in many countries by the strength of the substantial rainfall, it is now probably too late to
US dollar. The benchmark index of the dollar against revive the corn crop, as it has passed its pollination
six major currencies is about 15% higher than it was in stage, although the soy crop might yet be revived.
July 2008. This makes the cost of food commodities
even higher in countries whose currencies have Elsewhere in the world, the important wheat growing
depreciated against the dollar. regions in Russia and Ukraine are facing a second dry
year, adding to the upward pressure on prices.
The problems with the US harvest have been brewing Meanwhile, floods in parts of Asia have been
for some time, as the entire 2011-12 agricultural year threatening the rice harvest, although the key Chinese
has been unusually dry. Conditions had been expected harvest looks healthy.
to improve during the summer growing season.
However, by late June it was becoming clear that this A recent poll of commodity analysts suggests that
was going to be an extremely hot and dry summer, as prices are expected to increase to new highs in August
also evidenced by the large number of wildfires across and September. Thereafter, prices are expected to ease
the country. off after the US harvest as attention shifts to the
southern hemisphere, particularly Brazil, which
The drought, centred on the nation’s Midwest food harvests at a different time of year. A positive factor
basket, is now thought to be the worst in over half a that may put a brake on prices is that global cereal
century. It currently affects 60% of the country, stocks are around 515m tons, about 23% higher than
including 78% of the corn-growing regions, according they were during the 2008 food price spike, according
to the weekly US Drought Monitor. As a result, 30% to FAO estimates.
of the corn crop is in poor or very poor condition.
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2. QNB Economics
economics@qnb.com.qa
So far, the spike in certain food futures prices has not developing strategic reserves and providing assistance
yet been fully reflected in actual sales prices, nor has it to the poorest and most food insecure countries.
spread into other types of food. Indeed, the global food
price index produced by the UN Food and Agricultural
Organisation (FAO) was at its lowest in nine months
in June, and well below its peak level. However, the
price rises should feed through into the cereals
component of that index in the next few months.
Moreover, high crops prices will increase the prices of
meat and dairy, after a lag time, because of the higher
costs of animal feed.
QNB Group argues that the experience of recent years
suggests that high and volatile food prices may be the
new normal. This is a result of a range of factors
including growing demand from an increasingly
affluent global middle class, as well as the substitution
of some crops from food to biofuels. On the supply
side, the instances of both droughts and floods appear
to be increasing as a result of climate change.
Speculation in the futures markets may also be a
factor, although its significance is debated.
The world needs to find new mechanisms to adapt to
the changing food situation, increasing production,
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