Global Crop Stock Drying Up

The U.S. Department of Agriculture forecasted that the amount of crop in reserve for this summer would only reach 14.6 percent. This is even lower than the 15-percent-level figure recorded during the food crisis in 1973 and the lowest since the 1960s when authorities began compiling relevant data.

The recent imbalance in the supply of crops comes from the structural rise in demand rather than from temporary factors such as changes in weather patterns. Therefore, crop prices are expected to climb up for more than 10 years.

○ Record-high Prices for Major Crops

According to a report titled “Global Crop Supply, Demand and Price Trends” released by the Korea Rural Economic Institute (KREI) on March 2, the U.S. Department of Agriculture recently lowered their outlook for this summer’s crop reserve rate from 14.7 percent to 14.6 percent, a significant fall from 19.1 percent in 2006 and 16.5 percent in 2007.

The percentage of wheat stored as inventory is expected to drop to 17.7 percent this May from 23.6 percent in May 2006. The current supply of wheat is falling increasingly far behind the demand.

The percentage of other major crops reserved as inventory for this year is also likely to plunge; 13.2 percent for corn and 19.5 percent for beans from 17.6 percent and 24.6 percent in August 2006, respectively. The figure for rice is also expected to fall to 17.0 percent this year from 18.4 percent in August 2006.

As the consumption of major crops began to surpass their production by a large margin, their prices have also skyrocketed. The futures prices of wheat, bean and corn traded at the Chicago Board of Trade (CBOT) rose by 79.9 percent, 95.8 percent and 25 percent, respectively, in 2007.

○ Structural Problem Rather Than Temporary

The surge in crop prices is attributable to the rise in meat consumption in emerging economies and the production of bio-fuels across the globe.

Per capita consumption of meat in China rose to 50 kilograms in 2006 from a mere 20 kilograms in 1985. Since 8 kilograms of stock feed is needed to produce a kilogram of beef, the rise in meat consumption naturally translates into higher demand for stock feed.

As the U.S. began to expand its production of corns, a third of which goes into ethanol production, the size of the land dedicated to growing wheat and beans have shrunken. Nonetheless, bio-fuel production which mainly uses corns and sugar canes is expected to grow.

Researcher Seong Myeong-hwan of the KREI said, “The global food crisis in the past occurred from temporary factors such as changes in weather patterns. However, the recent surge in crop prices is a completely different story. It is not a simple supply crunch. It should be referred as a structural crisis.”

○ Fears of “Agflation”

In terms of independent crop supply rate, South Korea is the third from the last at 28 percent in 2006 among the OECD nations. Therefore, crop shortage and the price surge pose serious threats to its economy. Fears of “Agflation” where the rise in crop prices lead to an overall price surge have also surfaced.

The flour industry has already raised the price of flour by 24 percent to 34 percent last December. Accordingly, manufacturers of instant noodles, bread and confectionaries are also considering raising the price of their products. Numerous instant noodle manufacturers already added 50-100 won to the price of some of their products in March 2007.

The government is seeking ways to increase crop production for stock feed and expand the foreign supply of food in cooperation with the Agriculture Ministry. The ministry organized a taskforce team to tackle the recent surge in global crop prices under the command of Deputy Agriculture Minister Kim Dal-joong. The team is trying to come up with measures on three sections including providing support for stock feed and fertilizers, developing foreign agricultural projects and establishing other mid- to long-term plans in the nation.

The team dedicated to providing support for stock feed and fertilizers is currently pushing for short-term measures such as providing 1 trillion won to ranchers for stock feed purchases. The mid- to long-term measures team plans to expand the areas for growing stock feed crops by 60 percent by 2015. The team for developing foreign agricultural projects is looking for ways to foster Korean agriculture abroad by organizing a forum consisting of relevant academics and business leaders.

tesomiom@donga.com