Agro Perspectiva

Global food risk from China-Russia pincer

24.09.2010 13:27 "Agro Perspectiva" (Kyiv) — World food supplies are caught in a pincer as China becomes a net importer of corn for the first time in modern history and Russia’s drought inflicts even more damage than expected, raising the risk of a global grain shock in 2011. The Moscow bank Uralsib said half of Russia’s potato crop has been lost and the country’s wheat crisis will drag on for a second year, forcing the Kremlin to draw on world stocks. Wheat prices have risen 70pc since June to $7.30 a bushel as the worst heatwave for half a century ravages crops across the Black Sea region, an area that supplies a quarter of global wheat exports. This has caused knock-on effects through the whole nexus of grains and other foods. «We had hoped things would calm down by September, but they haven’t: more commodities are joining in,» said Abdolreza Abbassanian, grain chief at the UN’s Food and Agriculture Organisation. The UN fears a repeat of the price spike in 2008 that set off global food riots. Wheat prices are still far below the $13 peak they reached then, and the global stocks to use ratio is still «safe» at 22pc. However, the outlook is darkening. «It is not yet a crisis but things are precarious. If there is another bad year in Russia and Ukraine, this will leave us prone to shocks. All it takes then is one piece of bad news,» he said. Chris Weafer, Uralsib’s chief economist, said Russia’s wheat harvest will be near 60m tonnes this year, far short of the 75m consumed locally. The country has intervention stocks of 9.5m. «We think Russia faces shortfall of 17m tonnes and will have to import next year,» he said. Moscow has already disrupted grain supplies by imposing an export ban until late 2011, but markets have not discounted the risk of Russia becoming a substantial importer. Luke Chandler at Rabobank said the drought has gone on long enough to hit winter wheat planting and damage yields for next year’s spring wheat. «At this stage there is no substantial recovery in subsoil moisture levels in Russia,» he said. Ominously, a corn crunch is also creeping up on the world. Global stocks are at their lowest level for 37 years, at a stock to use ratio of 13pc. «This is getting extremely tight,» said Mr Chandler, questioning whether the US should divert 36pc of its corn crop into ethanol for fuel. Corn prices have jumped 40pc since June, reaching $5 a bushel. This was first blamed on lower US crop yields due to bad weather, but China has since revealed that it imported a record 432,000 tonnes in August. Sudakshina Unnikrishnan from Barclays Capital said China may soon become a «structural» corn importer. While it imported corn in 1994, that was due to bad harvests. This time the cause is a permanent shift towards meat-based diets. This has led to a steady rise in the use of corn for animal feed. More than 70pc of China’s corn is now used in feed. It takes about seven kilos of grain to produce one kilo of beef. There is a widely-held view that roaring «agflation» and record gold prices signal inflation, evidence that ultra-loose monetary policy in the US and Europe is leaking excess liquidity into the world. Japan is the latest country to boost liquidity, launching «unsterilised» yen sales. However, this year’s spike is narrower. Crude oil is at $75 a barrel, half the 2008 peak. The CRB commodity index is back to 2004 levels. Natural gas prices have fallen this year. Copper has surged, but other base metals have lagged. While gold is in vogue, this is partly due to diversification out of euros and dollars by Asian governments, and loss of faith in Western leadership. Central banks must make a tricky judgement call, deciding whether food shortages are inflationary or deflationary. They can be either. Policy makers in the US and Europe misread the commodity spike of 2008 as the start of a 1970s inflation spiral, when in reality it sapped broader demand. Central banks tightened policy, just as their economies were buckling. The financial system crashed two months later. Inflation collapsed in short order. The US Federal Reserve does not want to repeat that mistake. Its minutes this week warned of «downside risks» to inflation. The message is clear: the Fed plans to steel its nerves this time and «look through» any spike in resource costs.