Prices Soar on South America Drought

By LIAM PLEVEN in New York and MATT MOFFETT in Buenos Aires WSJ Scorching summer heat in South America is cutting harvest forecasts in one of the world's key farm belts, helping propel crop prices to two-year highs and fueling concerns about tight global supplies. Dry weather caused by the La Niña weather pattern already is damaging fields in Argentina, which will be the world's second-largest corn exporter this crop year and third-largest soybean exporter, according to U.S. data. With temperatures reaching into the 90s, weather also is threatening crops in southern Brazil and Uruguay, which declared a state of emergency last week for farmers in the north of the country. The region's role in world food markets means any production problems there could be felt around the globe. Weather forecasters see more heat and little rain on the immediate horizon. That could limit production further as recently planted corn and soybeans have reached key stages of development with only one-quarter of the amount of rainfall they normally need in some regions. "If we don't get rains by Three Kings Day [Jan. 6], we will be looking at even more severe problems," said Ernesto Ambrosetti, chief economist at the Argentine Rural Society, that nation's farmers' organization. Prices of corn, soybean and wheat crops remain well below 2008 peaks. But analysts figure prices for some crops could rise further as the extent of any lost production becomes clear. The result could be higher consumer prices at grocery stores. The rise in food prices could pose a threat to global growth if fast-growing nations try to slow their economies to contain food inflation. China has raised interest rates twice in just over two months to fight inflation. "Food inflation is becoming a problem in emerging markets," said Hussein Allidina, a commodities analyst at Morgan Stanley. He said corn prices could hit $7 a bushel in the first quarter of next year, compared with $6.24 a bushel on Wednesday, which he said would start to ration demand. Smaller harvests also raise concerns that governments could limit crop exports rather than risk higher inflation or even food shortages, because of the threat of political unrest. Crop prices spiked several months ago when a drought led Russia to ban wheat exports, and Argentina already controls some crop exports. India this week announced plans to help consumers cope with high food prices by selling additional grains at subsidized rates and maintaining a ban on pulse exports. Food inflation in India surged to 12.13% year-on-year in the week ended Dec. 11, from 9.46% a week before. Finance Minister Pranab Mukherjee last week said inflation, led by high food prices, remains the biggest concern for the country. Corn and soybean futures prices have both rallied amid the high temperatures in the southern hemisphere, rising 18% and 9.9% this month, respectively, to their highest levels since the financial crisis undercut commodity prices in 2008. Corn is up 51% year to date, and soybeans are up 31%. Wheat is up 23% this month due in large part to excessive rain in Australia, though rains there recently eased, and Argentina's wheat crop, planted earlier in the year, appears strong. For the year, wheat is up 48%. The latest price rises show how precarious the global food situation has become. Argentina's corn crop had been expected to surge this growing season because of an expansion in the planted area to four million hectares (9.9 million acres), from 3.25 million last season, according to the Agritrend consultancy in Buenos Aires. But the dry weather could reduce the crop by 16% from last year to 19 million metric tons, said Ramiro Castineira of the Econometrica consultancy in Buenos Aires. Analysts are also cutting their soybean forecasts. Demand from China—a key agricultural trading partner of both Argentina and the U.S—and elsewhere is helping stretch supplies thin. Anything short of bumper crops raises the specter of inadequate supplies. While harvests are likely to remain large in the U.S., South America and elsewhere, the U.S. Department of Agriculture sharply reduced expectations for the U.S. corn crop this fall, saying at the time that inventories after the season could be at their lowest level in years. "The demand side is not falling, so the supply side has to keep up," said Kona Haque, an agricultural commodities analyst at Macquarie. But the weather is limiting farmers' expectations. "Some farmers haven't had enough rain to put in their second soybean crops and are seeing very poor development of their corn crops," said Martin Lorenzo, a subcontractor in the hard-hit northern Buenos Aires province. He said he feels fortunate that a small shower in recent days permitted him to plant a second soy crop after the wheat harvest. He said he has seen some farmers who have already given up on their withered corn crops and turned cattle loose to graze in the fields. Argentina has maintained controls on exports of corn and wheat for the past several years, as the leftist Peronist government tries to hold down inflation by keeping the domestic market amply supplied. Inflation is currently running at around 25% annually. Corn supply is controlled in part because much of the crop is used as animal feed by the domestic livestock industry. In the last crop year, Argentine corn farmers produced 23.5 million metric tons and were allowed to export 13 million. So far this crop year, they have been allowed to export five million. Argentina's soybean crop, meanwhile, will fall to 48 million metric tons from 55 million last year, a nearly 13% decline, said Gustavo Lopez, director of Agritrend. The USDA currently forecasts the Argentine soybean crop at 52 million metric tons. Soybeans are the largest cash crop in Argentina, and export taxes contribute about $7 billion a year to state coffers. The government needs that revenue with spending growing by more than 30% ahead of a presidential election year. Argentina isn't the only agricultural producer in the region affected by La Niña. With Brazil, Paraguay and Uruguay also suffering from heat, the soybean crop in South America could be 11 million to 12 million metric tons smaller than last year, which would represent a decline of around 8%, Mr. Lopez said.