Sunday, July 22, 2012

Who should be sweating about Ontario's drought?

Here in Ottawa it’s been hot and dry for weeks now. The grass in most parks and back yards is burnt crispy brown, the lilacs are wilting, and the mosquitoes are few and far between. It’s the same situation across southern Ontario and western Quebec, and conditions are even worse across much of the Midwestern and eastern US. With the exception of a few intense thunderstorms rumbling along to bring flash amounts of rain to particular locations, there’s no precipitation in the long term forecast.

By this time in July, the corn should have pollinated and begun to form ears, and the soybeans should be growing nicely in their pods. But that’s not happening. The corn is stunted and under stress, and the soybeans are looking poorly. Dry spells can occur at any time of the year, but mid-June through mid-July is an especially bad time, since it comes when most of our main field crops here in the east are setting seed heads, pods or fruit. If it gets dry in August or after, that’s less critical, since the crops are well under way. Without rain soon, many farmers in the east can expect very poor harvest, if they get much of anything at all. We’ve already lost most of the apple crop and many of the soft fruit crops because of an early spring heat wave and a late frost; I have yet to see a locally grown field tomato or a cuke at my local farmstand. About the only crop that seems to have done OK is the winter wheat, which had already formed a seed head before the drought came, at least in the fields I’ve seen. But wheat’s a minor player on the Ontario crop scene, most people grow a mix of corn and soybeans. It’s just not a good year to be an Ontario farmer.

The stock markets have already taken notice. The futures price of most crops has soared, even for crops like wheat, which is not being affected by the current drought. North American export wheat is primarily grown on the Great Plains, where rain hasn’t been scarce this year (except for Colorado and Wyoming, where they’ve had terrible fires as a result). The market speculators are assuming that the price of so many different crops will go up this fall and winter, they’ll drag the price of other crops along with them. The markets are probably right. Sugar harvests were poor in Brazil this past year, and have sent prices of that basic staple up. Corn is the other main sweetener and bioenergy crop in the western hemisphere, plus it’s a key feed crop for livestock and poultry, so expect meat prices to go up over the next year, too. If you can call an economic downturn “fortunate”, we can say we’re fortunate that, because the US and Canadian economies are slowing down, less gasoline is being consumed, and so there’s less demand for corn to make ethanol, a gasoline additive.

At a global scale, this eastern North American drought promises to be problematic. For the last two decades or so, the world has been locked into a very dangerous dynamic. On average, global production has been growing steadily over the last twenty years, but so has global demand for food. The demand comes from a combination of a growing global human population generally plus growing rates of per capita food consumption in middle-income countries like India and China. For global food prices to be stable, we need an average annual increase of about 2-3% in global grain production just to maintain a stable market price. Any failure to achieve this annual increase can trigger rapid spikes in global food prices, which in turn can lead to panic hoarding and riots in countries heavily dependent on food imports. It’s not enough to simply produce as much food as we did last year; we must always produce more year in, year out. Failure to achieve last year’s output, as increasingly looks to be the case for corn and soybeans this year, spells trouble. Expect greater political instability in Mexico in particular over the next year, where corn is a key staple. Mexico’s already struggling with the fallout of hotly contested elections and a seemingly never-ending war between the authorities and organized crime; higher corn prices will not help matters.

We’re pretty fortunate here in Ontario. A 10% increase in food prices here means a box of macaroni and cheese rises from $1.50 to $1.65, and most of us hardly notice it. We spend only a fraction of our household income on food (with the exception of residents of the north, where food must be shipped in at some expense). A great many Mexicans (and people elsewhere) must spend a much larger portion of their incomes on food. If you only earn a couple dollars a day and the price of your lunch goes up 15 cents, you notice it. So while Ontarians will feel a pinch because of the drought (Ontario’s farmers more so), many people beyond our borders are going to feel much more than a pinch.

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