American Drought May Have A Global Impact

America’s drought is likely to threaten the recurrence of the 2007-08 global food inflection. The current situation in the U.S. is supposed to be worse since the epic droughts of the 1930s and 1950s. According to the United States Department of Agriculture (USDA), two-thirds of the U.S. is in a mild to extreme drought situation.

This has taken everyone by surprise as the USDA had been forecasting a record year for the corn crop until this drought materialised. Experts are predicting the U.S. corn stock to go down to an unprecedented 40-year low. The corn futures on the Chicago exchange have already increased by 44 per cent and the soybean futures by 26 per cent since June 1. Food prices typically increase by 1 per cent for every 50 per cent increase in the average corn price, according to agricultural economists. Corn, soybeans and wheat are used as animal feeds. An increase in these grains will push up the cost of agricultural produce, eventually leading to higher prices on the grocery store shelves.

Milk, egg and meat prices are also expected to increase by 3 to 4 per cent above the normal rate of inflation due to this rise in animal feed while the price of beef is expected to increase by 5 per cent in 2013. The normal inflection in the U.S. for groceries is 2.8 per cent per year traditionally. Hence, higher food inflation at a time when economic recovery is faltering is definitely a matter of concern. However, this high food inflation is not expected to translate into higher overall inflation as lower freight and energy cost is expected to offset the production cost.

Other countries in the world will definitely feel the impact of the American drought situation as the U.S. is the world’s largest exporter of corn, soybean and wheat. Any further rise in food inflation is probably the last thing the global economy wants when overall growth is slowing down.

However, the emerging markets appear to be better placed to cope with the higher food cost. Inflation in most of the emerging markets seems to be sliding down for a while due to a correction in the energy prices. Further, the dollar is also weaker as against many EM currencies than it was in 2008. However, India appears the most vulnerable due to its relatively weak economic outlook and the growing likelihood of a poor monsoon season.