Perils of drought go beyond the US

PUBLISHED : Friday, 03 August, 2012, 12:00am
UPDATED : Wednesday, 15 August, 2012, 10:54pm


The drought-stricken US Midwest seems far removed from the world's meal tables, but the interconnectedness to the global economy of the corn and soya beans it grows will be noticed in coming months. Prices will rise, particularly for meat, threatening inflation and social and political uncertainty. The consequences will be especially noticeable in food-importing developing countries, which need only look to the riots that flared in Indonesia, Egypt and Mexico during shortfalls of rice and wheat in 2008 for lessons. How severely we will be impacted may well be in the hands of American policymakers.

There has not been a worse drought for 56 years and the weather outlook remains severe. No state is untouched and the lack of rain is so widespread that comparisons are being drawn with the dust bowl of the 1930s. The loss to the nation's 1.2 million farmers is already in the billions of dollars, further bad news for an economy struggling to recover from the global financial crisis. With the possibility of a European financial meltdown looming and one-third of the world's staple grains coming from the hardest-hit area, the Midwestern states, foreign governments have a vested interest in minimising the impact.

Prices of corn and soya on futures markets are at record levels and continue to soar. In coming months and next year, the cost of food from grain-fed animals will surge. The UN Food and Agriculture Organisation, worried about the global impact of crop output shortfalls and the possibility of runaway prices, has warned that the situation is serious. Given the fragility of the world's economy and the political uncertainty of the Middle East - hit hard by the food insecurity four years ago - there is good cause to be worried.

China has little immediate concern. It imports less than 5 per cent of its corn and can make up for the shortfall by switching to domestic production, while soya imports from the US can be sourced from elsewhere. China's fiscal reserves ensure it a less bumpy ride than other developing and poor nations, but the country will still be prone to global price rises. The complications and long-term challenges of climate change mean that a knee-jerk response is more a problem than a fix - a solution has to be carefully thought out.

That has to be especially so for US policymakers. An overly narrow focus on the interests of farmers has to be avoided. Many more Americans are involved in food processing, packaging and retailing, and job losses are inevitable with price rises. So energies have to be put into trying to improve general economic conditions. Rules that 40 per cent of all corn produced has to be used for ethanol production should be reviewed. Although domestic concerns are legislators' priority, they have to remember that how they respond has a global impact.