Today’s printed edition of the Financial Times features a rather disturbing headline, U.S. drought triggers world food crisis alert. (paid subscription or free metered view) The report is sobering and should not be a surprise to our readers residing in the certain farm belt regions of the U.S… The worst drought in 50 years is now spiking U.S. agricultural commodity prices to record highs. The latest update posted on the U.S. Department of Agriculture (USDA) web site indicates that the drought conditions have rapidly expanded and now includes 64 percent of the contiguous U.S., a doubling of impact in three months. Of most concern, 88 percent of corn and 87 percent of soybean crops are currently impacted.
The FT reports that corn and soybean prices have surpassed the peaks of 2007/2008 that sparked food related riots in 30 countries. Last week, the USDA was forced to slash its annual corn production forecast and further reduced its forecast for U.S. corn exports by 300 million bushels. Wheat prices have already risen 50 percent in five weeks. The article quotes a senior executive of a commodity trading firm as indicating that this is the most serious weather related issue and supply and demand imbalance that he has observed in his 30 year career.
Beyond the concern for human tragedy is the effect that the current U.S. drought conditions will have on other food based supply chains in the form of increased inbound costs. Also impacted will be bulk commodity transportation carriers who move these food products to other stages of supply chains including export markets.
Procurement teams were breathing some signs of relief in a trend toward lower commodity prices brought about by a slowdown in global economic activity but the current situation, especially if conditions worsen in the U.S., or other countries suffer weather related setbacks, should be a major concern. Already there is a call for “demand rationing” of corn and for cutbacks in corn-based ethanol fuel production.
Supply chain executive, procurement and product planning teams residing within food-related industries should be contemplating contingency plans directed at extraordinary price spikes or outright shortfalls of supply. This is areas that requires close monitoring, and by all means, pray for rain in the U.S. farm belt.