Friday, September 11, 2009

Early Identification of Risks to the Global Agricultural Supply Chain

In April 1998, a Foresight workshop was convened which focused on seasonal weather forecasting as a tool for better understanding the risks to the global agricultural supply chain. This event was represented by attendees from academia, agro/chemical companies, retailers, growers/manufacturers, and the government, and the focus was on developing a better understanding of how long and short range weather forecasts could be applied as an operational tool for the various participating sectors. A 1999 paper was published describing the objectives and outcomes from the workshop. While the workshop conclusions supported the notion that long range forecasting can provide a very useful strategic and competitive advantage, the ensuing 11 years since the workshop have not produced very much in the way as actionable follow up.

This article provides a high level view on the background information related to what will soon be a new addition to the Weather Trends International (WTI) series of applied weather/climate white papers. It should be stressed that the food supply problems have a component which extends well beyond the commercial financial and consumer goods sectors. In the forthcoming paper, we attempt apply components of our global weather and climate research to one of the most pressing global social and environmental problems facing society today – agricultural production, and more importantly, global food security. According to a recent Food and Agricultural Organization (FAO) briefing, one sixth of the Earth’s population suffers from hunger and/or malnourishment. There is no other single factor that is more important to building a more equitable global society than ensuring an adequate daily supply of food and nutrition to every mouth. While weather is usually pointed to as the cause of such events, this crisis is as much an economic problem as it is an environmental one. The incestuous cycle of poverty and hunger is predicated upon a myriad of fundamental factors which are so interconnected that it is becoming increasingly difficult for marginal populations to escape this trap once they are placed below a financial threshold that can be seen to provide an adequate standard of living. What is even more alarming is that according the US Census Bureau, global population is estimated to have increased from 6.71 billion in 2008 to 6.78 billion in 2009, which is roughly a 1 % change; during that same time, the FAO estimate of hungry people went from 902 million to 1.02 billion – an increase of 13%.

The physical side of this equation will be addressed in the paper, but here we first look at the macroeconomic drivers underlying the situation. Global food supplies, focusing primarily on commercial stocks of grains, oilseeds and rice, have been steadily increasing since the 1970s. We should note, however, that while weather variables certainly affect production and ultimately the amount of raw material which makes up physical supply to the market, food shortages are largely problems rooted in economics, geography and infrastructure. In any given year, supplies (production + stocks) of staples are in sufficient quantities to feed the planet, while the weather’s effects on crops, price, or both, become secondary factors. However, it is precisely these secondary factors that prevent many of the world’s poor from feeding their families. When a weather event triggers a supply curtailment or a price reaction, the economic ramifications then serve to feed back on the system, essentially reinforcing the primary problem, which boils down to the fact that food is not afforded by these populations. The global fiscal events witnessed over the last year included some very dramatic swings in the futures and domestic market prices associated with many staple commercial crops, including corn, soybeans, wheat and rice. What we saw after the rapid rise in prices, was that even after a retreat from the peaks seen in 2008, relative prices are still high when compared to the price levels that were common before the price spike. So while the risks associated with the 2008 financial turmoil amplified the situation, pushing more people to the brink of starvation in the process, we are now in late 2009 and real prices continue to be the primary barrier in preventing both the economic and environmental stability needed for a sustainable global agricultural production model.

The FAO has released a number of briefings and technical papers addressing the impact of the events of 2008 on the economies located in many of the world’s agricultural origins. In many of these communications, they have highlighted three points why the recent economic crisis is unprecedented. Their first point is that the global food security crisis was the result of rapid rise in food prices between 2006 and 2008. Secondly, they note that the crisis affected large parts of the world at the same time. And finally, they highlight the precarious role that the financial exposure of the developing countries played in these events. Upon closer analysis, however, we see that the details associated with high food costs are not unique to the events of 2006-2008. The paper then will also attempt to take a look back at previous food supply events which culminated in high prices, and put the most recent two years in context.

This gets to the role of seasonal weather forecasting as a tool for averting some of the negative ramifications (financial and biophysical) of the last year. While no crises can ever be predicted in absolute terms, our research into weather and food security highlights the question: what can the role of long range weather outlooks play in averting such disasters in the future? We can turn to the role that proactive weather risk management can play in (a) identifying potential physical production problems well in advance of an event, (b) promoting measures that extend from financial hedging to farm level risk management to reduce potential negative impacts, and (c) develop scenarios to quickly and effectively respond to such crises, in this case food supply shortfalls, before the event is confirmed and most of the response is reactionary. The current year’s rainfall deficit associated with the weaker Indian monsoon, where a healthy seasonal rainfall distribution is a prerequisite for a strong Indian economy, underscores this point; the potential food production disruptions that may accompany a 2009/10 El Nino event (both discussed elsewhere in WTI content) make a long view on the year ahead equally important.

As stated at the beginning of this article, global food supply, or lack thereof, is not the primary cause of the hunger problem. Prices will always react to the perceived effects of weather on supply and demand, and these events are what can be prepared for. Whenever there is a weather ‘event’ in a commercial origin, this can be either a short term disruption or a prolonged pattern. In either case, the market finds a way to react to the event, and price reactions, in either direction, typically hurt the poor growers first. Future posts and related WTI papers will start to explore these and related issues in more detail.

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