Poor weather hits global agricultural output

Poor weather hits global agricultural output

The Russian government has lowered its forecast grain harvest as poor weather conditions look set to damage the region's crop output. The news will concern the food industry, adding to spiking grain prices amid concerns over a supply shortfall. Katy Askew reports.

Russia's agriculture sector has felt the adverse impact of a long cold spring and is currently in the grips of a dry spell that is having an adverse impact on crop production. These factors prompted Russia's agriculture ministry to revise its grain harvest forecast downward from 85m tonnes to a range of 80-85m tonnes yesterday (17 July).  

According to Ian Luyt of emerging market strategic advisory firm NOViROST, the picture in Russia is mixed - with different regions and crops facing varying degrees of problems.

"I did a run through farms in the central grain regions in Russia last week and it is hard to say what the eventual outcome will be," he tells just-food.

"The wheat crop is due for harvesting now, so I think [it is a case of] 'what is there is there'. The bigger issue now may be sunflower and rapeseed and some corn which need rain now," he suggests.

While the reduction in Russia's forecast may not seem that steep, the move comes hot on the heels of news from the US that corn and soybean harvests across the farm belt are likely to be poor due to a drought that has wrecked crops.

Last week, the US Department of Agriculture lowered its forecast for domestic corn and soybean production, confirming market fears the country's worst drought in almost 25 years has hit yields.

The USDA said 30% of corn in the 18 states where the majority of the nation's crop is grown are now in a "poor" of "very poor" condition, while 27% of soybeans were rated "poor" or "very poor". Only 40% of corn and soybean crops are rated "good" to "excellent".

According to Matthew Roberts, an associate professor of agriculture at Ohio State University, the outlook for production in the US ranges from "mediocre to frightening".

Poor crop outlooks are adding to pricing pressure in a period of constricting supply, Roberts tells just-food.

"We are in an era of tighter supply than that to which we've been accustomed, primarily because demand growth for agricultural production has been so strong over the past decade. While I don't believe that the decade ahead will bring such strong growth, I do believe demand for food will continue to grow," he predicts.

Poor grain harvests are particularly bad news for the protein industry, which is heavily exposed to the swings of the commodities market through feed prices.

The likes of protein giants JBS and Smithfield Foods have already seen profits dented by escalating input costs. During the last financial year, Smithfield - for example - reported an 18% increase in the cost of hog rearing.

Protein groups have largely responded by increasing their focus on value-added packaged meats in an attempt to bolster margins. They have also looked to push higher costs along to consumers.

"Consumers are most likely to notice these effects through meat prices, especially pork and poultry. Pork producers are undergoing massive financial stress right now, and much higher feed costs are only making it worse," Roberts says. 

A steep increase in feed costs would quickly feed through to the bottom line of these firms. Protein manufacturers are likely to meet with retailer resistance to price increases as they battle on price to woo cash-strapped consumers. For this reason, there is often a delay between when a jump in input costs hits and when a manufacturer is able to pass increased prices down the supply chain.

Meanwhile, any move to hike prices could also result in falling demand. Potentially, this could have a knock-on effect that would leave the market over-supplied, forcing prices down and adding to margin pressure.