Drought and Inflation: A Looming Threat to Global Food Security

Just as the world was starting to breathe a sigh of relief after the tumultuous impact of the pandemic and Russia’s invasion of Ukraine on food prices, a new threat looms on the horizon. A drought spanning across America’s breadbasket threatens to exacerbate food inflation, further straining consumers’ wallets.

The dry spell has affected the wheat fields of the Great Plains and the Corn Belt in the Upper Midwest, leaving some areas with mere fractions of their regular rainfall as we approach crucial growing periods for corn and soybeans. This fear-inducing situation is reminiscent of the drought-stricken year of 2012, which saw crop prices surge dramatically.

“The next three to four weeks are going to be huge,” warns Angie Setzer, co-founder of Consus, a firm that advises farmers on crop sales and financial risk minimization.

After a period of ease in U.S. food inflation due to falling crop prices, the early days of June have brought renewed fears. Concerns of drought-stunted crops and abandoned fields have started driving up prices for ingredients used in everyday foods like dinner rolls, pizza dough, and oatmeal. Despite the recent scattered rainfall that offers a glimmer of hope for the salvaging of some harvests, price increases are likely to be a reality.

In the Chicago trading scene, contracts for future deliveries of soft red wheat, a key ingredient in baked goods, have increased more than 11% since the start of June. Simultaneously, oat prices have seen an 8.5% surge. Soybean oil, used extensively in frying, baking, and low-carbon trucking fuel, has shot up by an astounding 32%. Corn prices, however, have seen a 4.5% drop after recent rains reversed a steep rally earlier in June.

The situation is dire enough that some growers are contemplating the worth of their efforts given the potential of weak harvests. It is expected that farmers across the nation will abandon scorched fields of winter wheat at the highest rate since 1917, surpassing even the rates during the 1930s Dust Bowl.

In Syracuse, Kansas, Jason Ochs, a farmer with a 20,000-acre property, expects to reap just one-third of the wheat his family sowed. For Ochs, this year, marked by drought and inflation, is the worst in his 12 years of farming. He remains hopeful that recent rains will aid the dryland corn and grain sorghum on other parts of his property.

Ochs’s predicament underscores the unique challenge faced by farmers who must bet their livelihoods on the unpredictable weather. “If you’re running a normal business, you can get pretty good information before you put money into something. Not with weather,” he said.

The situation is further complicated by geopolitical developments. Crop prices approached record highs when Russia’s invasion of Ukraine disrupted one of the world’s premier grain-exporting regions. This led to inflation and threatened food supplies in lower-income countries until the United Nations brokered a deal that allowed Ukraine to continue exporting grains via the Black Sea. However, this agreement is set to expire in July, coinciding with typically hotter, drier weather for U.S. farms.

Speculators who had bet on a bumper crop this year to keep prices low are now scrambling to cover their risk, fueling the recent price surge. “They had huge short positions in corn and wheat just a month ago,” notes Dave Whitcomb, head of research of Peak Trading Research.

Current data from the U.S. Drought Monitor suggests that nearly one-third of the High Plains and almost two-thirds of the Midwest are experiencing at least moderate drought. Extreme or exceptional drought has parched soil across parts of Kansas, Nebraska, Oklahoma, Texas, and Missouri. This drought is testing the resilience of crossbred crops in Iowa, the U.S. corn capital. State climatologist Justin Glisan warns that they could need more “million-dollar rainfalls” to survive through the summer.

In the face of all this, there may be some relief for parts of the Midwest, but it could prove to be a double-edged sword. The National Oceanic and Atmospheric Administration has predicted a band of rain across the region, which could lead to flash floods in parts of Nebraska, Iowa, and Illinois. Intense precipitation runs the risk of becoming runoff rather than sinking into the soil and providing much-needed moisture.

“We’d greatly appreciate gentle thunderstorm rainfall,” Glisan adds, highlighting the delicate balance needed between combating drought and avoiding damaging floods.

The effects of this drought are not merely local but have global implications. As the U.S. is a major exporter of various crops, the drought can potentially influence food prices worldwide. While higher food prices might benefit farmers who manage to have a successful harvest, it could lead to increased food insecurity, particularly in lower-income countries already grappling with the economic effects of the pandemic.

Agricultural uncertainty also creates turbulence in the commodity markets. Speculators, who assumed a bumper crop would keep prices down, now find themselves in a bind. As Dave Whitcomb of Peak Trading Research explains, these speculators had large short positions in corn and wheat just a month ago, but the threat of drought has flipped the script. This has contributed to the recent rise in prices as these speculators rush to cover their risk.

The interconnectedness of geopolitics, climate change, and agriculture is starkly evident in this situation. The potential expiration of the Kyiv-Kremlin deal for grain export, happening at the same time as the U.S.’s peak drought season, threatens to create a perfect storm for food inflation.

The conditions we’re seeing underline the importance of investing in agricultural resilience and sustainable farming practices. Farmers are on the front lines of climate change, and their ability to adapt to these challenging conditions is paramount for global food security.

This is an evolving situation, and the coming weeks will be crucial in determining the extent of the drought’s impact on crops and subsequent food inflation. Stakeholders across the spectrum, from farmers to commodity traders to consumers, will be closely watching how the situation unfolds.

In conclusion, while the U.S. drought poses a significant challenge, it also provides an opportunity for innovation and investment in sustainable agricultural practices. As we navigate through this difficult period, the hope is that we emerge with stronger, more resilient agricultural systems capable of withstanding future challenges.