Are you sure?

Drought drives up prices worldwide

This year’s droughts in Eastern Europe and the United States have driven global food prices up. Beyond food, a poor harvest in grains and other crops affects land fees and fuel prices as well.

For Hungarian winemakers, last year was exceptional. Weather conditions, sunshine, and precipitation were just right: anyone tasting a good brand from 2011 can easily confirm that. This year, however, the climate has not spared vintners. Drought conditions across the country has meant less liquid in the grapes, which may be sweeter, but overall smaller and fewer. “The lack of rain dried grapes, which will yield less as a result,” said Mrs. László Mészáros, secretary to the wine community of the Balatonboglár wine region. Tramini, or Gewürztraminer, a grape variety with thin skin and about 80% liquids, had just 70% this year. As a result, from 320 kg of grapes, only 190 liters of must could be made. (On average, 1 kg of grapes makes 0.68 liters of wine.) Based on location, conditions and variety, rates have been even lower. “Sugar levels are fine, but with less water content and, in some places, fewer acids, the harvest is going to be poorer.”  

Even so, the Balaton region was relatively fortunate with its yield of 0.8-0.9 tons per hectare. In the Great Hungarian Plains region, growers can hardly harvest 0.4 tons a hectare. It provides small comfort that growers from this region are likely to receive some disaster funds that the other wine regions will not. The Agriculture and Rural Development Ministry (FVM) has declared a drought disaster for the country and will make funds available from mid-October to those whose yield drops by at least 30%. By the second half of August, some 8,100 farmers had claimed damages affecting 727,000 hectares, said state secretary György Czerván. Compensation paid early next year will total HUF 8.3 million.

Among crops, grains have been hardest hit. As opposed to 8 million tons a year ago, only 4.7 million tons of maize will be harvested this year, a more than 40% decline. The harvest should accommodate the country’s needs but will hardly allow for exports. The average yield of maize in the European Union, on the other hand, is forecast to be 60 million tons, 2% better than the five-year average. The EU is expected to export 10 million tons more than a year ago. Unfortunately, not even a good European harvest will be able to offset the losses suffered in crops in the United States. A staple food and an essential raw material, corn can hardly be replaced by anything else in the States. According to the United Nation’s Food and Agriculture Organization, global corn prices surged nearly 23% in July, exacerbated by the severe deterioration of U.S. maize crop prospects due to drought. Poor wheat prospects in Russia also contributed to a 17% rise in the global cereal price index (260 points) in August, creeping closer to the all time record of 284 points set in April 2008. Although heavy rains in the United States and the announcement that the Russian Federation would not impose export restrictions helped ease some of the tension, the poor harvest will increase prices globally.

Food prices are bound to go up, but not only for goods that contain grains. Other crops, fruits and vegetables will all be more expensive to grow for Hungarian farmers who use land other than theirs. Land rental fees are tied to global grain prices: it is always the wheat commodity market price on August 31 that serves as a baseline for calculations. The higher the price, the higher the rent.

Meat products will also be impacted, though tangible effects will not become visible as quickly. “As a rule of thumb, we can say that 70% of the costs of livestock derive from feed,” said Tamás Éder, head of the Hungarian Meat Association. This year’s crop may be enough to feed the Hungarian livestock, unless a lot is exported. Yet this is very unlikely as farmers sign export contracts well ahead of harvest, expecting better yields. “If feed prices surge, extra costs will be added to the costs of livestock and meat products.” The timeline for this may vary, though. In the poultry sector, where the lifespan of broiler chickens is around six weeks, the effects will emerge sooner as animals have been fed with the more expensive crop. With pork, the process is taking place more slowly, pigs having been reared on cheaper feed. The price hikes in pork meat in the first half of 2012 are the result of a feed shortage two years ago, Éder explained.

To manage fluctuations in feed prices, the government is planning to create a feed reserve system. Yet the implications of these on the meat sector, according to Éder, can be harmful in the short-term. Were the government to buy feedstock, it could hike prices. Selling these reserves at a subsidized price would be regarded as hidden intervention and would be penalized by international authorities, the expert warned.

Using genotypes that have long been available in Hungary and that are resistant to heat and extremes in conditions could help avoid swings in maize crop production. They have been crossbred by researchers in Martonvásár, at the Agricultural Institute and Center for Agricultural Research of the Hungarian Academy of Sciences (ATK-MTA). The institute has also experimented with maize genotypes for bioenergy purposes.

Biofuel production encouraged by the United States and Europe are factors that have contributed to the increase in corn price. The current U.S. policy towards ethanol mandates that nearly 10% of the nation’s fuel supply come from corn. With today’s price hikes, this is likely to change, some experts suggest. At a recent informal meeting of the European Agricultural Ministers in Nicosia, Cyprus (the country currently holding the EU presidency), questions on a potential shift from fuel back to food have also been raised.

Heat resistance may work for corn, but the majority of horticultural products cannot make do without water. “In a dry year like this, the quality of my grapes would have deteriorated so much that, had it not been for irrigation, I would be unable to sell them,” commented György Friedrich, head of Vinitor Kft. Friedrich is one of the very few growers in Hungary who owns irrigated grape fields. He started his career in 1976 and has been dealing with grapes ever since. He installed a watering system worth HUF 7 million in 2008 (with about 35% state subsidy), a pricey investment the return of which is difficult to calculate. “In 2010, we had much rain, but last year it was useful on dry days,” Friedrich recalled. “When I will recuperate the investment I cannot tell, as the weather makes calculations uncertain in this business.”

Friedrich grows Hungarian varieties including Opus, Fanni and Helikon szépe on a 1.3-hectare field near Balatonabadi. Without irrigation, yields would be 40% lower, he claimed. “With eating grapes, the size of the cluster, ripeness and water content of grapes are crucial. Who would buy dried, small, thick-skinned varieties when Italians flood the market with excellent quality grapes?” Friedrich asks. Italy is undoubtedly a strong competitor. In the Dolomites, where annual precipitation is 1,000 mm, they use irrigation as well. Friedrich sells much of his produce at the market hall in Siófok. The price-per-kilogram is close to that of Italian grapes (approximately HUF 450), but Hungarian grapes sell better, he said. “They are so fresh and ripe and taste so good. Of course, there is a lot more work and planning ahead, irrigation alone would not do it.”