Four years after riots over the cost and shortage of tortillas and the corn flour used to make them, the Mexican government has moved to protect against a repetition caused by the current crisis in the huge US grain industry caused by the worsening drought. Late last week, Mexico revealed the largest individual corn purchase from the US in more than 20 years to try to limit the cost and improve the availability of flour in the northern winter and spring.

It is the first sign of a major food consumer (Mexico is the second largest buyer of US corn after Japan) moving to shore up supplies as the US corn and soybean crops wither and die in the worst drought for more than half a century, sending prices to record levels.

The Mexican deal could see other major buyers, such as Japan, move to follow suit with the most important monthly update on the size and health of the US grain crops (including wheat and soybeans) due this Friday night, our time. The growing crisis in the world grains markets will take centre stage if that report is as bad as many in the US industry suspect.

After the unexpected “good” news from the July jobs report from the US (163,000 net new jobs), markets rallied madly on Friday and that will continue into Asia today, offsetting falls late last week after the US Fed and European Central Bank disappointed. Our interest rates won’t be cut tomorrow by the Reserve Bank. The Australian dollar ended last week at closer to $US1.06 than it started.

But as Mexico showed, there are growing concerns that a new global food crisis is slowly building and it would pay the worriers in the markets to keep a close eye on reports from the US Department of Agriculture in the coming week. They will give a clearer view of the damage being done to the size and quality of the huge US corn and soybean crops. The grain crisis is slowly widening to other parts of the world (and could see Australia’s position downgraded). Mexico is already low on supplies after suffering its own devastating drought in 2011, which also badly hit farmers in Texas.

Tonight we get the weekly crop condition report that will tell us how the US corn and soybean crops survived another week in which some rain did fall in the grain areas of the US, but not enough in the right places. Thursday sees details of US food exports, especially grains. But the most important will come on Friday when the monthly update on agricultural supply and demand estimates for the US and the rest of the world will be  released at 10.30 and 11.30pm, our time. The news will move markets. Last month’s report saw the USDA cut the size of its corn crop estimate by 12%. A bigger cut is forecast this time. Soybeans (which are later than corn), saw a 4.8% cut and that will be added to, but not as much as for corn, which has failed to pollinate in huge areas of the midwest because of the drought and heat waves.

Late last week the the US Drought Monitor reported that moderate to exceptional drought had spread across 63% of the lower 48 states of the US by July 31. The USDA cut its US corn harvest outlook to 12.97 billion bushels and reduced its soybean projection to 3.05 billion bushels on July 11. Now there are estimates the corn crop could fall to 11.043 billion bushels, the lowest since 2006 and 25% below the government’s June forecast for a record crop, according US commodities broker FC Stone. The soybean crop will be 2.73 billion bushels, it also said in a report. Bloomberg said that Credit Suisse Group AG and Morgan Stanley have forecast that crop yields will probably be lower than current USDA forecasts.

But there are new worries emerging. We already know that drought in southern Brazil and northern Argentina cut soybean supplies earlier in the year. Now heat waves have hit crops across Europe, building on the impact already seen in parts of southern Russia, the Ukraine and Kazakhstan. Northern Italy, Greece, the Balkans and parts of France have been hit by a prolonged heat wave and dry period in the past 6-8 weeks. The monsoons have failed across wide stretches of India (but China has had very heavy rain across many rice- and wheat-growing regions). Now dry weather and frosts in Western Australia could cut the 2012-13 WA wheat crop by 40%, which would cut the amount of wheat available for export to less than 20 million tonnes in the next year against the 26 million tonnes exported in 2011-12.

There could be some respite early next year with South American farmers reporting big grain and soybean harvests in early 2013 after record plantings following the droughts earlier this year. Brazil is looking for its biggest soybean harvest ever and Argentinean farmers are forecast to harvest a record 31 million tonnes of corn, up from the drought hit 2011-12 crop. But there are reports that wheat plantings have been cut by farmers switching to corn and soybeans to take advantage of the drought in the US. Should wheat crops be hit in Australia and Europe, and the US 2013 crop be cut by farmers boosting their plantings of corn and soybeans, then wheat supplies will be the food problem next year.

Peter Fray

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