One of the frustrations I have with just posting links is the lack of context that comes along with them. I tend to gravitate towards links talking about the bad news as because everyone has a strong tendency towards normalcy bias. Even those who are pessimists are generally in the grip of this cognitive bias. They talk as if they are expecting the worst to happen but they rarely act that way.
Having said that, I think one of the causes of normalcy bias is the fact that we tend to look at negative indicators devoid of context. Because we tend to look at negative indicators in isolation, we are not very good at figuring out when things are truly serious and when they are balanced out by positive factors that we don’t realize are connected. This trains us to disregard negative indicators without knowing why because so often they are balanced out by positive things we don’t see. Then when we are confronted by indicators of a true disaster, we disregard them even though in retrospect it should have been obvious that something bad was coming.
Part of this is an unavoidable result of our cognitive limitations. We simply can’t make all the connections that we need to make to truly understand things. But it would help if would occasionally take the time to try to look at things in context so that we can come to a better understanding of what is really bad news and what is just a wash because good news is not being reported.
In this particular case, we are going to focus on the current and projected harvests of the three major grains (wheat, corn, and rice) to try to put the good and bad news on that front into context. My primary source for the following discussion is the US Department of Agriculture August survey of world agriculture production.
Wheat
If your main source of news is links posted in the Ethereal Voice, you could be forgiven for thinking that the world is going to be experiencing a major wheat shortage. Most stories posted here that mention wheat are all about how bad the crop is in India, the EU issues with drought, and how war in Ukraine is going to lead to starvation. I think I might have done one link on how the harvest was looking good in Canada and I know I made mention that Russia was looking to have a really good harvest. But those stories are in the distinct minority. And that is why you might be surprised to find out that this “Marketing Year’s” worldwide wheat harvest is expected to be about the same as last year’s.
Now before we get into why this year’s world wide wheat harvest is supposed to be okay even though there are so many farming disasters worldwide, I have to explain the meaning of the term “Marketing Year”. A marketing year is a period of one year (or sometimes less), designated for reporting and (or) analysis of production, marketing and disposition of a commodity. In the case of wheat in the US, a marketing year runs from June to June. So we are currently in the 2022/2023 marketing year. Now you might think that means that since we are only a few months into this year that all talk about the wheat harvest this marketing year is purely speculative, but that is not true. For most of the countries we are going to talk about, the wheat harvest begins about now so in a month or two most of the wheat we are talking about should be off the fields and in the barns. Bad things like a biblical hail storms can still happen but the conditions of the fields are pretty much set in stone for most of the big producers.
With that out of the way, how is it is that with all the droughts and wars the world wide wheat crop is expected to be all right? The first country to look at is China as they are biggest wheat producing nation in the world. In a shocking change over what was expected earlier in the year, their wheat harvest came in almost exactly what it was last year. I am not sure if I believe their statistics or not, but from what I can tell they are not hitting the world wheat markets as hard as they did last year and they are never going to sell wheat no matter how good their harvest is (they hoard grain like there was going to be a war soon). So from a world prices stand point, it don’t matter how accurate their statistics are if they are not trying buy more from other countries so we will count China as a wash in terms of its impact on the worldwide wheat market.
Now the next biggest wheat growing region after China is the EU. The EU is projected to be short by over 6 million metric tons of wheat and I think is fairly reliable figure as the wheat harvest is underway in Europe. After the EU comes India and they are also expected to be short over 6 million metric tons of wheat (this is a bigger loss for them in percentage terms because they have a smaller over all harvest). Now I don’t think the projection for India is as reliable as the EU one because India is one of only major producers who will not be harvesting their wheat until 2023 but given current conditions it is hard to imagine them surprising on the upside.
So we are already looking at a drop in production (compared to last year) in two of the top 3 wheat producing regions that is projected to be over 12 million metric tons of wheat. And that seems bad (and is bad if you are the farmers impacted by the poor crop conditions) but when we get to the next major producer of wheat (Russia) they are having a really good year. So good in fact, that they are expected to produce 12.84 million metric tons of wheat more than they did last year (and they are already in harvest mode so this is a pretty good forecast). In other words, Russia alone is projected to make up for the short falls in the EU and India.
But what about Ukraine? The situation there is undoubtedly bad. They are expected to be down almost 14 million metric tons of wheat this year. That is more than losses projected to be caused by bad weather in the EU and India combined and both of those areas are a lot bigger producers then Ukraine is even back when Ukraine was having normal harvests. In the current environment, war is proving to be more destructive then bad weather.
But as bad as that is, Canada is having a really good wheat year (best in the world in terms of percentage increase over last year). They are having such a good year that they are expected to produce over 13 million metric tons of wheat more than they did last year. In other words, Canada alone is almost making up for the loss of Ukrainian wheat.
And so it goes for the rest of the world. Australia is expected to be down 3.3 million metric tons of wheat this marketing year (although that is mostly because Australia had a really good wheat year last year) but the US is expected to be up 3.73 million metric tons of wheat this marketing year. Pakistan is expected to be short a million metric tons of wheat this marketing year (though I expect this figure to get worse after analysts factor in the impact of the recent floods) but Turkey is expected to be up 1.25 million metric tons of wheat. In fact, everything is so finally balanced that if you add everything up the world is expected to be up just .05% in terms of total wheat production.
In reality, even good projections given while wheat harvest is underway are not going to be accurate with that level of precision. I expect that after all the sums are done and the marketing year is over, we will find out that the 2022/2023 marketing year was down slightly from the previous year in terms of overall production (mostly because I expect India to come in worse than currently expected in the official forecasts). But that is hardly world ending stuff particularly as many countries have some stockpiles of wheat to tide them through these kinds of minor changes.
However, looking at total wheat productions alone does not tell you the entire story. There are a number of other factors at play.
The first factor is geography. Canadian wheat might exist but it is more expensive to get it to the Middle East and large parts of Africa then Ukrainian wheat. This is a particular problem for aid agencies as they will be reluctant (or not allowed by law) to buy Russian wheat instead. That is why you hear so much wailing from aid agencies about how people are going to starve as a result of the fighting in Ukraine.
The second factor is geopolitics/economics. The figures for Ukraine are how much the crop is expected to be down from what was grown last year. But nothing says that Ukraine will be able to sell any of the crop that they do manage to grow. Also, there might be grain for Pakistan to buy, but will they have the money to buy it? They are already struggling to come up with hard currency to buy fuel.
The third factor is demographics. As long as the world’s population keeps going up (which thanks to Africa and Central Asia it is) food production needs to keep going up or their will be starvation. So that the fact that wheat production might be around the same as last year is not as good as it sounds.
But the factor most likely to impact middle class Americans is that wheat does not exist in a vacuum. The need for it is partially dependent on the availability of other grain. In other words, if corn is cheap, you feed chickens corn. If wheat is cheap, you feed chickens wheat. And right now, corn is having problems and that in turn will impact the wheat market.
Corn
There is a lot more corn produced then wheat (expected to be about 400 million metric tons more corn then wheat produced this year even with all the problems) and the corn is more concentrated as to where it is grown. The difference between the largest wheat grower (China) and the fourth largest wheat grower (Russia if you count EU as its own region as I do) is expected to be about 50 million metric tons. The difference between the largest corn growing region in the world (The US) and the second largest (China) is expected to be 93.73 million (and for those wondering, the larger concentrations of corn still holds true in percentage terms even if you allow for the fact that total wheat market is smaller than the total corn market). And the gap between China and the third largest (Brazil) is even bigger at 145 million metric tons. All this concentration means it is harder for losers to make up for the gainers if one of the bigger growers of corn has a bad year.
That concentration explains part of the problem the corn market is having this year. The US is not having a particularly good year and its production of corn is expected to be down about 20 million metric tons this year. That is not good, but it should not be oversold as it so often is in headlines. For example, if you pay too much attention to the headline in this Zero Hedge article, you might miss the little factoid buried in the article that the US corn harvest is expected to be as low as the one in 2019. If you only have to go back three years to find a harvest that is as low as the current year, you are hardly experiencing the apocalypse. That said, the demand for corn has been growing year over year because the world’s middle class is growing and they want more meat. So going back three years is worse relative to demand is worse then simple arithmetic would suggest.
But if you want to see what a really bad corn harvest looks like, you only have to look at the EU region’s forecasted corn harvest. Typically their corn production is only roughly a fifth of the US production. So the fact that they are expected to be down almost 11 million metric tons of corn even though they are a much smaller producer shows that they are having a really bad year. Even worse is what Ukraine is experiencing. They are typically producing just over half of what the EU produces but this year they are expected to be down almost 12 million metric tons. As I already noted in the wheat section, war is worse than bad weather this year.
Everyone else in the top 10 is more or less expected to do as well as last year with some being down slightly and others being up slightly. The only one having a real positive year who is big enough to make a difference is Brazil but they are only expected to be up 10 million metric tons of corn. When the analysts total everything up (and not just the big players that I have mentioned), they expect that this marketing year, the entire world will be down almost 40 million metric tons of corn from last year. That is bigger in both absolute and percentage terms then any likely movement in the wheat market.
Having said all that, this is not a major disaster all by itself. You only have to go back to the 2020/2021 marketing year (all figures above are for the 2022/2023 marketing year) to find a slightly smaller harvest then we are expected to get this year. And granting all the usual caveats about demand always growing and so standing still or going backwards being worse then it seems, this is still not a mass starvation event.
But corn does not exist in a vacuum any more then wheat does. All the same qualifiers that we mentioned for wheat also apply to corn. But with corn there are few more complicating factors then there are with wheat.
One of the biggest complicating factors is that roughly 40% of the US corn crop is used for Ethanol. Thus, looking at the raw numbers of corn production you would be proud of the US feeding the world. But in actual fact, China produces more corn that people and animals eat then the US does. We burn most almost of half of our corn in cars. Even worse (from a feeding the world perspective at least) the ethanol mandates don’t change in response to bad harvests. So as long as gasoline demand is normal (or even high) the percentage of the US corn harvest turned to fuel will go up with a bad harvest. This means that the percentage drop in US corn available for food uses will be greater than simple arithmetic suggests assuming gasoline productions stays the same.
To understand why, just imagine that the US corn harvest is made up of a 100 parts. Normally 40 parts go to fuel and 60 parts go for food uses. If production drops 4 parts (about the expected percentage drop in US corn production) the US is still going to set aside 40 parts for fuel because that is tied to mandates and gas use, not the state of the harvest. So only 56 parts are now going for food. Thus a 4% drop in corn production results in a 7% drop in food production assuming gasoline production remains the same (and there is no real sign of that slowing down right now in spite of the high prices).
Another complicating factor is the heavy use of corn in producing meat. Right now a lot of US ranchers are having trouble keeping their cattle alive because of the lack of water. There are two ways that the market typically reacts to this issue. The first is to ship cattle off the feedlots early (this uses more corn). The other way is that consumers shift more over to pork and chicken as beef gets more expensive (and both pork and chicken are primarily raised on corn). This means that the drought impacting pasture all across America, is likely to cause a greater than normal desire for corn to be turned into animal protein even as that same drought drives down US corn production.
On top of these issues, there is some doubt in my mind about China’s figures. Unlike with wheat, I have seen stories about them snapping up corn this year (in previous years they have bought a lot of wheat but I have not seen a lot of sign of that this year which is why I am more inclined to believe the wheat harvest numbers). Perhaps these purchases are just an attempt to make up for the problems in Ukraine as they were apparently a big buyer of Ukrainian corn in addition to being a big grower of their own. Regardless of the reason, China buying means it is that much harder for the other people scrambling for corn to get it at a price they can afford.
Over all the corn numbers are bad and even worse if you consider ethanol demand and the problems that ranchers are having. But you need to understand that the US could fix the entire projected shortfall of corn foodstuff and even provide for a surplus just by cutting the amount of corn set aside for ethanol. The US sets aside so much for ethanol that we would not even need to end its use to fix all those problems so this a really a political problem and not a weather disaster.
But since reality no longer has any bearing on US politics, it is a pretty sure thing that meat is going to get a lot more expensive in part because of issues in the corn market. It is also a pretty sure thing that countries that are having trouble affording wheat will have a harder time substituting cheap corn for their food needs.
Honestly though, most of the world’s poor people don’t look to corn to substitute for wheat when wheat gets expensive. Most corn is grown for animal feed and even though feed corn it is fine for eat, it is not the first choice when wheat gets expensive. Instead, most people on the lower end of the world’s economic ladder look to rice when bread is expensive.
Rice
Rice is the grain that you should be watching. Unlike wheat and corn, forecasting rice output for this year is still uncertain at this stage. In the case of wheat and corn most of the major producers are either harvesting or almost ready to harvest. So even though you can’t be 100% sure what is out there, the final condition of the fields is pretty much known. But with rice, the two major producers, China and India are not ready for their major rice harvest in yet for this marketing year (both countries have rice crops that come in at different times of the year so some rice has been brought in). Both of them are struggling with drought but as I understand it, there is still time for fall rains to salvage the situation to some extent so it is still up in the air as to how bad it is going to be.
Given the uncertainty, there is no point in going into the level of detail that we did with wheat and corn. It is worth noting that if you look at the forecast history, the forecast for India’s crop keeps going down. If that trend continues and India’s rice crop has the type of issues that India has had with wheat and other crops, then a lot of people are going to go hungry.
In fact the state of the harvest in India matters more to the world at large then anything that might happen with China’s crop. This is because while China is the biggest rice grower in the world but they don’t export and they have huge stockpiles if their crops should falter. India is only the second biggest rice grower in the world but they are by far the largest rice exporter in the world. Based on last year’s marketing year, you would have to add up the next four biggest exporters of rice (Vietnam, Thailand, Pakistan, and the US) to equal India’s rice exports. So there are a lot of other countries that depend on India for rice.
Another factor likely to have a negative impact on the rice market is that Pakistan’s rice crop is looking to be down significantly in the 2022/2023 marketing year. Last year was an excellent year for Pakistani rice but the major flooding is almost certainly to change that for this Marketing year (although to be fair, Pakistan’s major rice harvest is towards the end of the marketing year so you could argue that is too early to say).
All this would not matter if the other major grain markets were doing better. But with corn being down and wheat likely to flat to slightly down, a large down turn in the rice production would hit the poor people of the world really hard.
Having said all that, the current USDA forecast is for global rice production to be pretty much the same as last year. However, if you look at their forecast history, their forecasts have been revised downward as the year progresses (particularly for India). So this is the grain to watch as the year goes forward.
So What Is The Point?
I wrote this because I was seeing a lot prepping sites talking about how we are going to run out of food and everyone should go stock up now. And I know that they were overselling the extent of the crisis but I realized that anyone who get their news from the links that I post or even just casually reads the headlines of the their favorite MSN source might not realize that things are not all that bad.
Yes, food prices are way up but that is largely because of high energy prices, labor shortages, and governments handing out free money to try to make up for COVID restrictions. We have not experienced true food shortages driving massive price increases yet and likely will not in the case grain based products for the foreseeable future (i.e. the next year or so). Other food groups like meat and vegetable crops like tomatoes are a different story and worth their own analysis but it is grain that actually keeps people alive (poor people in particular) and the grain situation is not all that bad at the moment. It may get worse if the rice crop in certain countries go south, but we are a long ways from worldwide famine.
There has been enough food grown this year already to feed the entire world. Economics (supply chain issues, labor shortages, and general lack of hard currency) and political issues (the US choosing to burn corn as fuel and Russia preventing Ukrainian grain from going to market) will mean that not everyone gets this food. But we should not blame that on droughts or imagine that it means that the middle class are likely to starve in the coming year.
That said, various regional foods issues are exacerbating other problems. For example, the EU is plenty wealthy enough to buy grain on the open market and support the farmers whose crops failed (as they are required to do by their own regulations) during normal times. But right now they are dealing with a energy crisis so the crop failures are a real burden to deal with. It is not much comfort that you can buy Canadian grain if you are struggling to find the money to heat your house.
This goes double for poor countries like Pakistan. Pakistan was already on the edge of going bankrupt and having to buy wheat on the world market is not helping. If Pakistan goes the way of Sri Lankan you are faced with the prospect of them losing control of their weapons of mass destruction. And if that happens, they could very well end up in a city near you.
The bottom line is that I don’t mean to discourage anyone from stocking up on food. There could be a war between America and China that disrupts supply chains and causes harm. Certain groups could finally achieve their dreams of setting off a nuke in New York City and the resulting disruption could empty stores all over the northeast. A major volcano could go off depressing food production world wide as happened in the late 1800s. But let us not confuse what might happen with the current reality. The tendency to hype every bad event only blinds us to the warning signs that really matter when they come.