Corn Drought? Who Cares? For World's Poorest, It's All About Rice And Wheat

The effects of the drought that has pummeled the U.S. corn belt will be felt for a while, but the grain most affected by it isn't one the world's hungriest depend on to survive. 

The adverse effect on world hunger from America's drought "is likely to prove fairly modest," says Chris Barrett, a professor of applied economics and management at Cornell University who specializes in poverty and international development. "Meat, milk and eggs are purchased disproportionately by better-off consumers. So while there is an impact, it's nothing like when rice or wheat prices spike and much more directly impact poor consumers."

Another Global Staple Food Crisis Ahead?

So is the world about to enter another global staple-food crisis like the one that hit rice in 2007-08, or wheat in 2010-11? Russia -- a major wheat exporter -- has been struck with a drought this year that is doing to its wheat crops what dry conditions have done to corn in the U.S. But remember those floods in Thailand last year? This year has seen a bumper crop in the world's largest rice exporter. Rice production in China, the U.S., Tanzania and Indonesia are also on the up, according to a report issued by the U.N.'s Food and Agriculture Organization.

"Although the abundance of rice supplies lessens the prospect of a strong rebounding of prices in the coming months, still much uncertainty prevails as to their future direction," the report said. "For instance, the necessity for Thailand to release stocks ahead of the new harvest in October must be weighed against India's possible consideration of a reinstatement of export restrictions, in spite of the country's ample inventories."

Long-Term Outlook

But regardless of the short-term impact droughts have in key producing regions of the world, some people, such as Jeremy Grantham, chief investment strategist of Boston-based institutional money manager GMO LLC, think the world is in a long-term and gradually worsening global food crisis.

"We are five years into a severe global food crisis that is very unlikely to go away," Grantham wrote in his latest letter to shareholders. "It will threaten poor countries with increased malnutrition and starvation and even collapse. Resource squabbles and waves of food-induced migration will threaten global stability and global growth."

Grantham cites Egypt, where 40 percent of a household's budget now goes to food, compared to 12 percent in the U.S., where a good portion of the average household budget is spent eating out. He says much of the world's population is reaching a ceiling in how much it can spend on staple foods. Countries like Egypt could face more serious social upheavals.

"Any material increases in real grain prices from here on are unlikely to be easily manageable," he warns.

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India has had a record wheat crop so far this year, but its primary buyer is the Food Corporation of India, and the country maintains virtually no stockpile for export. The Hindu newspaper reported recently that traders didn’t see any reason to stockpile wheat after a 93.9 million-ton record harvest. But a dry monsoon season right now doesn’t bode well for the country’s main staple, rice, which experienced a global bumper crop in the past year. On Monday, the United Nations’ Food and Agriculture Organization warned of rising rice prices due to the dry conditions in the current growing season.

Indians can rest assured that if rice production is hit by drought, forcing it to import rice -- which it did for the first time three years ago -- Thailand will have an ample supply, creating a silver lining to last year’s devastating floods that swamped the streets of Bangkok and inundated the countryside. In July, Thailand upgraded its export forecast for the 2012-2013 period, thanks largely to the government’s intervention price, which is about a third higher than what millers are offering, and which encourages farmers to plant. It is currently selling down stockpiles in preparation for the October harvest, according to Reuters.

Winter crop conditions on the Nile River “are generally favorable,” according to the Rome-based Food and Agriculture Organization, and Egypt has had two years of above-average wheat output. But Egypt can’t meet domestic demand for grain and is one of the largest importers of wheat. Wheat and barley for the next season will be planted in October, but Egypt is highly exposed to wheat-price rises. Coupled with political instability, the country is one to watch for social upheavals linked to future rises in staples. If Russia halts exports, Egypt will feel the pain, and bakeries across Cairo will be filled with angry shoppers.

Russia continues to export wheat, but the volume is expected to fall by at least half from last year’s record export volume of 28.1 million tons thanks to worsening drought conditions. The government has reduced its grain forecast numerous times this year on persistent drought conditions in the country’s wheat-producing regions. On Wednesday, a government commission on food security will meet, possibly to discuss a wheat export restriction, according to Reuters. The country temporarily halted wheat exports in 2010 in response to a regional drought. If Russia does this again it will adversely affect developing countries like Egypt, which is a major buyer of Russian wheat. Neighboring Ukraine is also a big wheat producer. Exports there fell 45 percent in July compared to the previous month, according to Bloomberg, which cited Kiev-based ProAgro, an agribusiness research firm.

The world’s top wheat producer has been hit with a double-whammy: High temperatures and fusarium head blight, or scab, a yield-battering fungal infection that has hit wheat-producing provinces. The USDA recently downgraded its forecast for Chinese winter-wheat production by 8 percent. High crop density has exacerbated the scab blight, resulting in a higher-than-average spread of the infection. High temperatures have also reduced the size of wheat kernels, which reduces the amount of flour that can be derived from the raw grain.