Bloomberg News

Europe Heat Wave Wilting Corn Adds to U.S. Drought: Commodities

July 24, 2012

Europe Heat Wave Wilting Corn Adds to U.S. Drought

The heat wave in Europe is adding to concern about global food supplies as U.S. farmers face the worst drought since 1956, India delays sowing because of a late monsoon and Australian crops endure below-average rainfall. Photographer: Daniel Acker/Bloomberg

Heat waves in southern Europe are withering the corn crop and reducing yields in a region that accounts for 16 percent of global exports at a time when U.S. drought already drove prices to a record.

Temperatures in a band running from eastern Italy across the Black Sea region into Ukraine reached 35 degrees Celsius (95 degrees Fahrenheit) or more this month, about 5 degrees above normal, U.S. government data show. Corn, now in the pollination phase that creates kernels, risks damage above 32 degrees, said Cedric Weber, the head of market analysis at Bourges, France- based Offre et Demande Agricole, which advises farmers on sales.

The heat wave in Europe is adding to concern about global food supplies as U.S. farmers face the worst drought since 1956, India delays sowing because of a late monsoon and Australian crops endure below-average rainfall. Soybeans and corn rose to all-time highs yesterday and wheat surged 46 percent since June 1. The United Nations says food prices will probably rebound after falling the most in three years in the second quarter.

“Everyone is looking to the U.S., but clearly in Europe we’ll need to import a lot of wheat and corn,” said Weber, whose company advises about 5,000 farmers. “That’s just adding to the problems we’ve got everywhere.”

Agricultural Commodities

Corn rose 54 percent to $7.775 a bushel on the Chicago Board of Trade since mid-June, and traded yesterday at an all- time high of $8. Goldman Sachs Group Inc. is predicting a record $9 a bushel within three months. Wheat was at $9.4725 a bushel yesterday, the most since August 2008. Soybeans advanced 32 percent to $15.91 a bushel since the start of the year, reaching an all-time high of $16.915 yesterday.

Agricultural commodities are this year’s five best performers in the Standard & Poor’s GSCI gauge of 24 raw materials, which dropped 2.3 percent. The MSCI All-Country World Index (MXWD) of equities gained 2 percent and Treasuries returned 3 percent, a Bank of America Corp. index shows.

Corn yields in the European Union are forecast to slide 12 percent from last year to an average 6.73 tons per hectare (2.47 acres), down 8.8 percent from a June outlook after hot weather hurt crops in Italy, Romania and Hungary, the bloc’s crop- monitoring unit wrote in a report published yesterday. The yield would be the lowest since 2007, based on USDA data.

IGC Report

Damage from Europe’s heat wave has yet to be reflected in forecasts by the International Grains Council, which next reports July 26. The London-based group raised its global corn harvest estimate by 4 million metric tons to 917 million tons July 2. While the U.S. Department of Agriculture cut its U.S. output figure by 12 percent July 11, it raised the forecast for the European Union by 2.1 percent and left predictions for Serbia and Ukraine unchanged. It reports again on Aug. 10.

While yields may be falling across southern Europe, crops in France and Germany are doing better. French farmers will produce 5.8 percent more soft wheat this season, the government forecast July 9. German farm group Deutscher Raiffeisenverband e.V. raised its output estimate by 3 percent on July 17. France was the second-biggest wheat exporter after the U.S. last year, and Germany ranked seventh, World Trade Organization data show.

“Both in France and Germany, the situation has been very good,” said Abdolreza Abbassian, an economist at the United Nations’ Food & Agriculture Organization in Rome. “It’s the only place where things are reasonably predictable right now.”

Near Record

Even after the USDA cut its prediction for domestic corn output, farmers in the world’s biggest agricultural exporter are still expected to raise production by 5 percent to 329.5 million tons, second only to the record in 2010. They started the season with the most acres since 1937. The department also anticipates bigger harvests in Argentina, Canada, China and Mexico.

Global food prices tracked by the UN would have to jump 18 percent to match the record set in February 2011 and wheat is still 34 percent below its all-time high of $13.495 reached in February 2008. Meat may retreat as higher feed costs spur farmers to slaughter more animals. Goldman Sachs Group Inc. cut its three and six-month estimates for cattle and hog prices by as much as 20 percent on July 16 and lean-hog futures tumbled 17 percent since July 2 in Chicago.

Southern Europe’s heat wave, heavier-than-normal rainfall in western Europe and the U.S. drought are linked through the Arctic jet stream, a fast-moving band of wind used by aircraft to shorten travel times, according to Gail Martell, the president of Martell Crop Projections in Whitefish Bay, Wisconsin, and Jim Dale, a senior risk meteorologist at British Weather Services.

Jet Stream

The jet stream moved north over the U.S. and Canada and south under Europe, pulling in warm air from Africa over southern Europe. With the hot weather in southern Europe and the U.S. mixing with cooler air, “you’re likely to see some fireworks in terms of tornadoes, huge deluges, that sort of thing,” High Wycombe, England-based Dale said.

Heat combined with drought during the flowering and pollination phases of corn growth can reduce yields by as much as 13 percent a day, according to the National Corn Handbook published by Purdue University. Europe probably lost 6 million to 8 million tons of output since June, Weber estimated. The EU predicted a total harvest of 66.8 million tons at the end of that month.

Italy’s Weather

In Italy, the EU’s third-largest corn grower as well as its third-biggest importer, high temperatures and lack of rain caused flowering and leaf expansion to be “significantly below” average, according to the EU crop-monitoring unit.

Bulgaria reported its hottest day in a century on July 15. Romanian Agriculture Minister Daniel Constantin told a conference in Bucharest on July 20 that the country was facing a “profound drought” and “pretty big losses” are possible if rains fail to return. Temperatures may reach 39 degrees Celsius through July 27, the national weather agency estimates.

Neighboring Serbia has had heat waves throughout June and July, with temperatures 3.3 to 5 degrees Celsius higher than usual and below-normal rainfall, according to Republic Hydrometeorological Service of Serbia, the national weather service. The corn crop will be 3.5 million to 4 million tons, from an earlier estimate of 7 million tons, the national grain association forecast July 17.

Average temperatures in Ukraine have been 2 to 5 degrees Celsius above normal for three months, the worst in a decade, according to the country’s Hydrometeorology Center. Hot and dry weather has been “hammering” the country’s crop in the past three weeks and yields will probably be 23 percent lower than a year ago, Agritel, a Paris-based farm adviser with an office in Kiev, wrote in a report July 13.

Ukraine Production

Ukraine will produce 20.3 million tons of corn this year, according to Agritel. Ukraine was Europe’s largest corn grower last season and together with Romania, Hungary, Serbia and Bulgaria exported 16.3 million tons in 2011, or about 16 percent of global shipments, according to the WTO and UN.

The 27-nation EU will probably need to import 7.5 million tons of corn this season, from 6 million tons a year earlier, Weber said. That would be the second-highest amount according to USDA data going back 12 years. Record temperatures were set in 21 places last month in Spain, already the world’s third-biggest corn importer.

Kazakhstan has an “alarming” drought in grain-growing areas, Agriculture Minister Muslim Umiryayev was cited by the Kaztag news agency as saying last week.

Russia’s Grains

Heat and dry weather that may harm crops was reported by Russia’s Federal Hydrometeorological Center on July 20 in parts of the Volga, Urals and Western Siberian regions. The government estimated total grain output of as little as 80 million tons this season on July 17, having initially predicted 94 million tons. The country barred all cereal exports in August 2010 for almost a year as drought seared fields. Ukraine introduced quotas on shipments in the same year because of drought.

The weakest monsoon rainfall in three years is delaying sowing of rice, oilseeds and lentils in several parts of India, Agriculture Secretary Ashish Bahuguna told reporters July 21. Most of Western Australia, the biggest wheat-growing region, had below-average rainfall from April to June and was exceptionally dry in July, said David Jones, the Melbourne-based head of climate monitoring and prediction at the Bureau of Meteorology.

“With this changing landscape, the pressure is up,” said Jaime Miralles, a Dublin-based commodity-risk manager at FCStone Commodity Services (Europe) Ltd., a unit of a company that handled $75 billion of physical commodities trade last year. “Focus is very much shifting to the overall balance sheet for grains. If we continue to see production disappearing, you’re going to see an additional knock-on effect on prices.”

To contact the reporter on this story: Rudy Ruitenberg in Paris at rruitenberg@bloomberg.net.

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net


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