From droughts and floods to wildfires, agricultural markets are increasingly feeling the change in the world’s climate.
The frequency of agricultural shocks caused by extreme weather events has risen sharply over the past decade, and the resulting surge in food commodity prices has hit not only consumers, but everybody in the food supply chain, including farmers, agricultural traders and food manufacturers.
“Agricultural prices have entered a new age of volatility,” says Oliver Wyman, the international consulting firm, in its annual Risk Journal.
Some farmers and traders are braced for a volatile 2014, as drought in various parts of the world affects agricultural commodity markets.
The prices of coffee, cocoa, wheat and other grains have risen sharply since the start of the year, because of droughts in Brazil and in the grain growing regions of the US, Ukraine and Australia. Moreover, the S&P GSCI agricultural and livestock index has jumped almost 17 per cent so far this year.
Even when inventories of agricultural commodities are plentiful, a sharp rise in demand from emerging markets means that markets are tighter and more vulnerable to negative news about production.
“These days, unless you have a rise in production, you will have a problem,” says Abdolreza Abbassian, senior grains economist at the Rome-based UN Food and Agriculture Organization.
Increased volatility in the agricultural markets because of climatic changes follows a period of relative calm. For much of the second half of the 20th century, agricultural prices declined as production methods improved and productivity rose.
However, as populations grow and become more affluent, people are consuming more protein and processed food, while agricultural commodity markets attract financial investors.
“The potential impact of sharp swings in ingredient prices on the food industry is significant,” according to the Oliver Wyman Risk Journal.
Indeed, a recent report from the UN’s Intergovernmental Panel on Climate Change, the world authority on climate, stated that global warming is affecting two of the world’s most important food crops. “Climate change has negatively affected wheat and maize yields for many regions and in the global aggregate,” it said.
Since 2007, it said that “several periods of rapid food and cereal price increases following climate extremes in key producing regions indicate a sensitivity of current markets to climate extremes, among other factors”.
If the current drought conditions behind this year’s price increases continue, it will be the fourth time since 2007 there has been a jump in food commodities prices.
The first big price rise was in 2007-08, when the cost of wheat, rice, corn and soyabeans surged, triggering the worst global food crisis in 30 years. Food riots in countries from Haiti to Senegal followed, and exporters and importers engaged in beggar-thy-neighbour tactics, including export bans and hoarding.
The second price surge came in 2010-11, after the Black Sea region of Russia, Ukraine and Kazakhstan, which normally accounts for roughly a third of global wheat exports, suffered a crop failure. Russia rocked the grains market by banning all exports, triggering a wave of panic buying in the Middle East and north Africa, the world’s biggest regional importers of cereals.
Agricultural markets jumped in 2012, after the worst drought in 50 years hit the US. The price of maize, used to feed poultry and livestock, reached an all-time high.
US farmers were not the only victims as bad weather affected almost all of the world’s top food producing regions: the Black Sea region of Russia, Ukraine and Kazakhstan, the Latin American farmland belt of Brazil, Uruguay, Paraguay and Argentina, and the US Midwest.
This year, drought in the southern Great Plains of the US, where farmers are waiting for the wheat crop come out of dormancy, is buoying wheat prices. Farmers are also concerned about the lack of rain in Australia and in eastern Europe, including Germany, and Poland.
In the latest crop progress report from the US department of agriculture, scouts reported dust storms in Kansas, Oklahoma and Texas, and a significant lack of moisture.
Even in Ukraine, the dryness that is spreading to the southern part of the country is “a far [larger] material threat to Ukrainian agriculture than the current political turmoil”, says Christopher Gadd, analyst at Macquarie.
Meanwhile, meteorologists are forecasting a 50 per cent chance of an El Niño weather phenomenon developing in the second half of this year. The weather pattern, caused by warming of the Pacific sea surface that occurs naturally every few years, can trigger drought in some parts of the world and floods in others, depending on its strength.
The rising possibility of El Niño has farmers and traders on high alert, as it could mean that heat and dryness will affect India and Australia, both large wheat producers. Cocoa and coffee prices could also be affected, because the weather phenomenon tends to bring dryness in west Africa and southeast Asia.
Get alerts on Oliver Wyman & Co LLC when a new story is published