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All Things Considered – October 2012

Prepare for the Worst


September 17, 2012
By Jim Knisley


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If you are a grain producer, a grain user or a policy maker, it’s hard to think so far ahead, but it may be time to consider next year.

While more bad weather may still happen this year, much of the U.S. corn crop is already a weather-ravaged wreck and, with corn prices already in record territory, supplies heading into the next crop year will be tight.

The wheat supply situation will be better, but that provides little comfort because corn drives this bus. Feed wheat is being substituted for corn and if prices get high enough, wheat that could go for milling could end up in livestock rations.

Food prices are already reacting and the consensus is that North American food prices will rise about four per cent over the next 12 months. In more normal times, that would result in a shift in consumer consumption patterns. Consumers would go for less expensive cuts of meat, turn to less costly house brands and look for other ways to stabilize their spending.

But given high unemployment rates, stagnant incomes and rising gasoline prices many began doing that in 2008 and, given the painfully slow economic recovery across much of North America, have continued. In Europe, the situation is worse. And those are among the world’s richest places.

In poorer areas in Africa and elsewhere, the consequences of a spike in food prices is truly dire.

But as bad as that is, the world will likely struggle through. Next year is where the real risk lies. Stocks of grain and oilseeds will be tight before next year’s harvest and another crop disaster would be serious.

The U.S. Department of Agriculture (USDA) forecasts feed grain stocks at 19.2 million metric tonnes or seven per cent of total domestic use in the U.S at the start of the 2013/14 crop year. In comparison, stocks for the 2010/11 crop year stocks were 48.1 million metric tonnes or 16 per cent of total domestic use. Meanwhile soybean stocks are forecast to be about half what they were in 2010/11.

Prices have surged. The USDA forecasts an average farm price for corn of $7.50 to $8.90 a bushel and an average farm price for soybeans of $15 to $17 a bushel this year.

Worldwide corn stocks are expected to begin next crop year 10 per cent lower than at the start of this crop year and represent a 14 per cent decline of total worldwide domestic use. Meanwhile wheat stocks are expected to fall to 25 per cent from about 30 per cent and the USDA’s forecast for the average farm price for wheat is up more than 20 per cent over last year.

For many Canadian grain producers this adds up to a big year – a good or decent crop and good to great prices. For Canadian livestock producers, especially hog and cattle producers, it adds to their suffering. Poultry producers will get relief from their cost of production formulae, but face the question of how consumers will act when faced with higher prices.

The bottom line in all this is that grain stocks will be down entering next crop year. Another smaller-than-expected worldwide harvest will make the situation worse and pull stocks down to unsustainable levels and necessitate significant changes in how much grain is used.

One can only hope that doesn’t come to pass and that an above-average crop develops. If it does, we shouldn’t waste the opportunity to set some aside in a world grain bank to offset the damage from the next crop crisis, which may come sooner and more frequently than we might like.

James Hansen, director of NASA’s Goddard Institute, and his team have carried out an extensive and long-range study of climate change and found “extremes are actually becoming much more frequent and more intense worldwide.”

When the team plotted “the world’s changing temperatures on a bell curve, the extremes of unusually cool and, even more, the extremes of unusually hot are being altered, so they are becoming both more common and more severe.”

In effect, he wrote, the weather dice have been loaded. The likelihood of severe weather – especially hot weather – has increased and the likelihood of what would be considered normal weather has decreased.

In other words, the probabilities have shifted and Hansen attributes this to the actions of man. Even if you disagree with that attribution it is hard to disagree with the mathematics. Severe events are becoming more common and even if you conclude it is all part of nature, we should prepare.

One of the ways to prepare would be for the world to set aside part of the next bountiful harvest so that it’s available during the next disaster. This would moderate prices, which the grain producers who won the weather lottery might not like. But it would also raise prices in those years when everyone has a good crop, which livestock producers won’t like.

However, it would allow us to follow one of the oldest and wisest sayings: “Hope for the best, but prepare for the worst.”