Rising Wheat Price Could Undermine Food Security

19 July 2017 Caleb Gorton, Research Assistant, Global Food and Water Crises Research Programme

Background

Poor growing conditions in key wheat producing countries are placing upward pressure on the global wheat price. The Cereal Price Index from the Food and Agriculture Organization (FAO) of the United Nations is at a one-year high and 4.2 per cent above the May level, largely due to the global price increase in high-protein wheat. In June, the benchmark United States wheat price averaged US$226 ($293.43) per tonne, a 14 per cent rise from last year. Production levels for this season in the US, Canada, Australia and Europe are predicted to be lower than average due to drought conditions and high temperatures.

Comment

The global output of wheat is set to decline for the first time in five seasons. Predictions for US spring wheat growth are far below average after farmers planted the lowest amount of the grain since 1919. Conditions have deteriorated in the northern plains, where the US Drought Monitor has declared either “extreme” or “severe” drought in parts of North Dakota, South Dakota and Montana. American high-protein spring wheat has experienced its worst crop conditions in nearly 20 years and the US Government expects output to be 21 per cent less than last year. Lower yields are predicted for the hard red winter crop, placing further pressure on the price of high protein wheat.

While US prices are less dire than previously predicted, Chicago Board of Trade wheat futures remain high. Wheat futures for September fell to US$5.17 ($6.68) per bushel on 13 July, down from the 5 July peak of US$5.74 ($7.42). The current price, however, is 15.8 per cent higher than two months ago and has risen by more than 26 per cent since the beginning of the year.

Higher US prices and poor weather conditions in several key wheat producing regions has pushed the global wheat price upward. Australian wheat yields are forecast to decline by over one-third from last year following a dry start to the winter season in key growing regions. Europe has experienced heat wave conditions. In Argentina, around 100,000 hectares of wheat might not be planted due to waterlogged fields. Russia, on the other hand, is expected to overtake the US as the top global wheat exporter following another season of ideal weather conditions. High productivity in Russia and Turkey, however, is unlikely to adequately offset the declines in other major producing countries.

Current conditions are less severe than the global food crises in 2008 and 2010-11, but remain a potential threat. The FAO’s Food Price Index reached its highest level in two decades in February 2011 at 237.9 points, surpassing the previous peak in June 2008. In comparison, the Food Price Index for June 2017 is 26.4 per cent lower than the February 2011 peak. Supply conditions are also less volatile this year. In August 2010, Russia banned all grain exports following widespread fires and its worst drought in a century, where around one-quarter of all grain area was destroyed.

While world wheat surpluses remain high, low production levels and rising prices pose threats to global food security. Previous food price crises in 2008 and 2010-11 had severe global impacts. Price growth in staple grains such as wheat disproportionately affects poorer and less food secure people. The World Bank estimates that between 130 million and 155 million people were forced into poverty from the 2008 crisis. Higher food prices often cause poorer households to reduce food portions and decrease spending on education and healthcare. In addition to food security, high food prices frequently contribute to social and political instability in fragile states; the 2010-11 food crisis was arguably a major factor in the Arab Spring uprisings in the Middle East and North Africa.

The long-term trends that contributed to the 2008 and 2010-2011 crises remain in place, adding pressure to global food security and increasing the likelihood of future price hikes. The strong yield growths of the Green Revolution from the 1960s to 1980s have slowed and the population is growing at a faster rate than the food supply. Global agricultural land only increased by eight per cent between 1967 and 2007, yet changing consumer trends means that higher proportions of agricultural production are set aside for animal feed and ethanol. Current wheat prices are unlikely to result in crises of a similar magnitude to those of the previous decade, but as some of the global population remains vulnerable to price hikes, rapid increases in the cost of food remains a persistent threat to food security.

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