The International Grains Council on Thursday cut its forecast for global wheat output by 1.1 percent, primarily on the news that major grain exporter Russia has seen one-third of its crop wiped out by the worst drought in a century.
To prevent inflation and ensure supplies for Russian tables and livestock, the Russian government banned all grain exports from Aug. 15 to Dec. 31. The news has sent crop prices soaring. It's bad news for grain importers, but increased demand may boost profits for other grain exporters such as the US.
Is there a grain crisis?
While the International Grains Council cut its 2010-11 forecast by seven million metric tons to 644 million metric tons, that's still the third highest wheat crop on record.
But it doesn't mean the situation in Russia is insignificant. It was the world's fifth-largest wheat grower and fourth-biggest wheat exporter in 2009, after the European Union, the United States, and Canada. In 2009-10, Russia harvested 94 million metric tons of grain, including 62 million metric tons of wheat – 18 million metric tons of which was exported. In 2010-11, Russia is expected to harvest about 67 million metric tons of grain and to export 3 million metric tons of wheat, according to the US Department of Agriculture.
Along with drought, Moscow hit a new high of 102 degrees F. on July 30, according to the National Climatic Data Center. Temperatures continued to hover 27 degrees F. above average during the first half of August. The heat wave helped spark more than 600 wildfires in July over 494,200 acres of land. The fires crept within 50 miles of Moscow, pushing carbon monoxide levels to 6.5 times the allowable level.
What is the fallout in Russia?
By mid-August, wildfires were contained to 56,000 acres. But the damage was done – physically and politically.
The fires destroyed more than 2,000 homes and killed more than 50 people; the indirect toll of the heat and smog is estimated to have contributed to the deaths of thousands more. Analysts at HSBC Holdings said the drought could reduce 2010 economic growth by a full percentage point – or $15 billion.
Amid the crisis, Prime Minister Vladimir Putin stepped out front, personally flying a firefighting plane over the blaze. President Dmitry Medvedev said that "what is happening now in our central regions is evidence of this global climate change," a shift for a government that has resisted action on climate change out of fear it could slow economic growth.
"It's hard to tell whether or not Russia will use this as a wake-up call," says Jake Schmidt, international climate policy director for the Natural Resources Defense Council. "Policy change doesn't happen in one day."
How does this affect US farmers?
The ban, and also the drought in neighboring Black Sea region countries Ukraine and Kazakhstan, sent wheat prices to a two-year high of nearly $8 a bushel, from just about $4.50 in early June. That's bad news for grain importers but good news for grain exporters.
Egypt, the world's largest wheat importer, has said the rise could cost it an additional $705 million. Egypt is already buying more grain from the US.
For the US, the world's No. 1 exporter of wheat and corn, the effect is even greater. "The sharp fall in Black Sea region exports will see a marked shift in trade flows, with US exports in particular placed much higher than before," the International Grains Council said in its Aug. 26 report (pdf).
The US Department of Agriculture on Aug. 12 boosted its forecast for US wheat exports by 5.4 million metric tons, to 32.7 million metric tons, for the year 2010-11. The USDA projects agriculture exports to surpass $100 billion this year, second only to 2008, when agriculture exports topped $110 billion.
Could there be food riots?
Food riots are not expected, as happened in 2008 when escalating food prices led to rice export bans. At that time, grain stocks "were very tight," says Gerald Bange, head of the USDA's World Agricultural Outlook Board, but since then the world has seen several good harvests.
The world produced a record-high yield, in 2008-09, of 683.3 million metric tons of wheat, followed in 2009-10 by 680.3 million metric tons.
The year 2009-10 ended with 194 million metric tons of wheat stock, an increase of 28 million metric tons. The USDA forecasts the year 2010-11 to end with 175 million metric tons of wheat stocks, which is still much higher than the end of 2007-08.
"What happened in Russia is manageable, given we had large stocks going into it," says Mr. Bange. The USDA forecasts American food inflation this year at 1.5 to 2 percent, and at 2 to 3 percent next year – compared with 2008 food inflation of 5.5 percent. "I think that the impact of the situation on food prices will be very small, very small," he says.
Still, consumers around the world may feel some effects. Rising wheat costs, for example, led Sara Lee Corp. on Aug. 12 to say it expected to raise bread prices over the next year.
Gwynne Dyer, author of "Climate Wars," wrote in a recent column that "in poor countries, where people spend up to half their income on food, the higher prices will mean that the poorest of the poor cannot afford to feed their children properly."
Is climate change to blame?
Russia's leaders blamed the drought on global warming, though Lester Brown of the Earth Policy Institute in Washington, D.C., says no one event proves or disproves climate change. But heat and drought similar to that experienced in Russia are projected to occur more frequently as Earth's temperature rises, he says.
The rule of thumb, says Mr. Brown, is that with every degree (Celsius) rise in average temperature, we lose 10 percent of food production. Over the next century, the global temperature is expected to rise up to 11 degrees F. By comparison, the Russian drought killed 2 percent of the world's grain harvest.
USDA's Gerald Bange offers a less dire outlook. For decades, he says, corn yields have increased annually by two bushels per acre per year. "It continues to grow, and I'm not prepared to say it will plateau in my lifetime," he says. Other countries such as China, he adds, have much room to improve their crop productivity.
Both Brown and Bange agree that what happened in Russia could happen elsewhere with more serious consequences.
"We're lucky that this heat wave was centered in Moscow instead of Chicago," says Brown. "At most, the Russians lost 40 million tons of grain. If Chicago were to have average temperatures in July of 14 degrees [Celsius] above the norm, it would have cost us and the world 150 million tons of grain."