Agriculture & Food

According to data released by the Brazilian Ministry of Health, since the outbreak of the new crown pneumonia, the cumulative number of confirmed cases of new crown pneumonia in Brazil has exceeded 17.96 million, and the cumulative number of deaths has exceeded 500,000. While the epidemic has not reached an inflection point, Brazil, the “granary of the world”, is experiencing its worst drought in 91 years.

This drought has severely affected the output of coffee, corn, soybeans, sugar cane and other crops, or will threaten the food security of Brazilian citizens. According to data from the Brazilian Research Institute, less than half of the population can continue to get adequate food, and about 19 million people will face hunger.

The rise in electricity and food prices makes the country also face severe inflationary pressures. In order to curb inflation, the Brazilian central bank raised the benchmark lending rate by 75 basis points to 4.25%, which is the third rate hike in the year.

Experts pointed out that the drought may be related to the increasing deforestation of the Amazon. What the market is worried about is that, as a “world’s granary,” Brazil’s drought may cause violent fluctuations in the prices of global agricultural products, which will affect the global economy.

A severe drought hit once in a century, Brazil faces a shortage of water and electricity

The leaking of the house happened to rain overnight. After being hit by the epidemic, Brazil encountered a drought of once in a hundred years.

Earlier, the Brazilian government sounded a water scarcity warning and classified it as a "serious" category. This is the first time Brazil has triggered such a warning since 1910. Brazil is facing its worst drought in 91 years.

Brazil is still in the rainy season, but the water storage capacity of the Paraná River Basin has been stretched. Many reservoirs in this river basin have less than 50% of the normal water capacity, and some upstream reservoirs even have only 10% of water storage capacity, which is almost dry. After July, all parts of Brazil will enter the dry season, when the country's water shortage pressure will be even greater.

The latest emergency drought warning issued by the Meteorological Monitoring Service of the Brazilian Ministry of Agriculture predicts that rainfall in five Brazilian states from June to September 2021 may still be scarce.

As hydropower accounts for about 65% of Brazil’s total power generation, the drought has led to a sharp drop in hydropower generation in Brazil, forcing people to switch to more expensive thermal power. Statistics show that the electricity prices of Brazilian companies and consumers have risen by as much as 40% this year.

In recent years, Brazil’s agriculture has developed rapidly and has become the backbone of the country’s economy. Agriculture accounts for about 30% of Brazil’s GDP. At present, Brazil is the world’s largest supplier of sugar, coffee, soybeans, and oranges. Both legumes and tropical fruits account for the top three in the world.

Once the drought continues, it will significantly reduce local crop production and even threaten the food security of Brazilian citizens. According to data from Brazilian research institutes, less than half of the people have continuous access to adequate food, and 19 million people (9% of Brazil's total population) will face hunger.

Expert: Deforestation of the Amazon rainforest is the main cause of drought

According to CCTV News, the five states where the drought occurred this time are concentrated in the southeastern and midwestern part of Brazil, belonging to the Paraná river basin. This is the core area of Brazil's agriculture and hydropower production, and it is also the most populous area in the country. Brazil’s National Meteorological Agency believes that the La Niña phenomenon has caused the sea surface temperature in eastern Brazil to continue to be abnormally cold, affecting normal rainfall, which is the most direct cause of this drought.

However, many researchers also point the problem to the increasingly serious deforestation of the Amazon rainforest. Known as the "Lungs of the Earth", the Amazon rainforest plays a very important role in the climate and hydrological regulation of the entire South American continent.

Meteorological data over the past ten years show that the reduction of forest cover has led to a trend of drier and less rain in the entire Amazon rainforest. Forest fires have become more frequent, which has also weakened the climate regulation function of the rainforest in the surrounding area.

Marcelo Laterman, a climate activist from the Brazilian branch of the environmental organization Greenpeace, said that in 2020, the deforestation of the Amazon has soared to the highest level in more than a decade, which is directly related to drought, because the forest's water cycle system rains in South America. Plays a vital role in distribution.

In the past 20 years, Brazil has been deforestation and widening the area of arable land. The area of arable land in Brazil is increasing at a rate of 1.84% per year, from 34.4 million hectares to the current 49.5 million hectares in just a few decades. , Brazil has transformed from a food importing country to a world granary.

According to a report by Chinanews.com, a monitoring project called the "Andean Amazon" estimates that the Amazon rainforest will lose more than 2 million hectares of virgin forest in 2020, and the main purpose of logging is to open up pastures. The World Wide Fund for Nature warned that the forest coverage rate in the Amazon region has been reduced from 80% to 58%, leading to the destruction of plant and animal resources and a series of environmental problems such as soil erosion, heavy rains, drought, and land desertification.

The researchers pointed out that when the rainfall falls below a certain threshold, the rainforest will lose the ability to recover from damage such as fires and become a drier ecosystem. Shrinking forests will further reduce rainfall, leading to droughts and more fires, thus entering a vicious circle.

Are global agricultural product prices going to soar again?

According to CCTV News, Brazil is the world's largest supplier of sugar, coffee, soybeans, and oranges. The output of corn, tobacco, various beans and tropical fruits all account for the top three in the world.

Some analysts pointed out that Brazilian coffee production has continued to decline in recent years, and the average price of Starbucks coffee in the United States has risen by 17% compared to four years ago. Looking at the situation this year, Starbucks may be raising prices again.

As the "world's granary", Brazil's drought is obviously not a country's misfortune. The rise in food prices caused by it has already caused waves all over the world.

According to recent data released by the United Nations Food and Agriculture Organization, since May this year, the "food price index" has averaged 127.1, a month-on-month increase of 4.8%, and a year-on-year growth rate of as high as 40%. This means that the food price index has risen 12 consecutively. It climbed to the highest level in the past 10 years.

In fact, since April, Brazil’s prolonged drought has intensified market concerns about reduced production of sugarcane, soybeans, corn, and coffee, which has already caused price shocks on the global industrial chain.

At present, the price of corn in China has risen sharply, even exceeding the historical high of 1.5 yuan/jin. Since April, the international ICE raw sugar contract price has risen from 14.67 US cents/lb to 18.25 US cents/lb, a maximum increase of 24%.

Affected by the drought in Brazil, one of the coffee producing areas, since the beginning of 2021, the main contract coffee price as calculated by the Intercontinental Exchange in the United States has risen by more than 20%, especially the recent increase. The average price in May this year has risen by 10.4. % To 134.78 cents/lb.

China is more dependent on soybean imports or may be affected by imported inflation

For the past 13 years, China has been the largest purchaser of Brazilian agricultural products. Under the situation of the 2020 epidemic and global trade downturn, China's agricultural trade with Brazil is still growing against the trend. Brazil’s agricultural exports to China increased by nearly 10% year-on-year to US$34 billion, which is equivalent to Brazil’s total agricultural exports to the EU, the United States, Argentina, Japan, and South Korea, and it accounts for one third of Brazil’s total agricultural exports. , Accounting for 50% of total exports to China.

Among them, China's soybeans are highly dependent on imports, with more than 80% of soybeans dependent on imports. According to data disclosed by the Ministry of Agriculture and Rural Affairs, in 2020, the cumulative number of imported soybeans reached 100.33 million tons, exceeding 100 million tons for the first time, accounting for 60% of the global soybean trade.

China's soybeans are mainly imported from Brazil, the United States, and Argentina, accounting for about 95% of total imports. According to the latest data released by the Chinese Customs, in May this year, China imported 9.23 million tons of soybeans from Brazil, a surge of 82% compared to April.

The U.S. Department of Agriculture recently predicted that China’s strong demand for soybeans and soy products will prompt US soybean exports in fiscal 2021 to increase by 5% year-on-year to a record US$28.9 billion.

Wang Jialu, a sovereign analyst at China Chengxin International, said that if the drought continues, there may be a shortage of soybeans in Brazil, leading to an imbalance between supply and demand in the international market. China is more dependent on soybean imports, which may be affected by imported inflation. As a commodity, soybeans also have certain financial attributes. Financial markets such as futures may magnify price fluctuations, causing inflation to rise in the short term.

“However, the proportion of soybeans in China’s CPI and PPI is relatively low. With China’s enhanced management of bulk commodities, China’s current inflationary pressures are relatively controllable, and the bulk commodity price fluctuations caused by the drought in Brazil will affect or bias China’s price levels. short term."

At the same time, some favorable factors can hedge China's high dependence on Brazilian soybean imports to a certain extent.

Zhou Zhiwei told reporters that first, if the Sino-US trade talks progress smoothly, US soybean exports to China may rebound further; secondly, China's soybean import sources are gradually diversified, importing soybeans from Argentina, Uruguay, Russia, Ukraine, Mozambique and other countries.

How will the new "pandemic" affect the world?

In addition to Brazil, the United States and Taiwan have also been recruited. The recent drought in the United States has repeatedly made headlines.

According to data from the US Drought Monitoring Center, about 40% of the United States is currently experiencing drought. In the western United States, about 88% of the area is in drought, and some areas even reach the level of "abnormal drought".

The intensifying drought problem has become a risk that cannot be ignored. The United Nations has warned that the impact of drought and water shortages is comparable to that of the new crown pneumonia pandemic, and the risks are increasing rapidly as global temperatures rise. The UN's special representative for disaster risk reduction, Mizuki Maki, said at a press conference for the release of the drought report on June 17: "Drought will become the next pandemic, and there is no vaccine to cure it." Under the high-emission scenario, the United Nations It is estimated that about 130 countries in this century may face a greater risk of drought.

Agricultural production is undoubtedly the biggest victim of drought. As of May this year, global food prices have risen by more than 40% year-on-year, and important food producing countries such as the United States and Brazil are facing droughts that are rare in a century or even a millennium. This has made global food prices worse and may further push up the CPI. The continued drought has also made animal husbandry unprofitable. Taking the western United States as an example, about 90% of the local agriculture and animal husbandry rely on groundwater and surface water.

Nearly half of the EU's agricultural imports in the future will also be affected by climate change. An environmental study recently published in the British journal Nature Communications pointed out that in the future, more than 44% of EU agricultural imports, including coffee, cocoa and soybeans, will be severely affected by drought caused by climate change by 2050.

Zhang Zhuran, an expert on Whale Platform think tank and investment director of New Fangde Technology, told the 21st Century Business Herald reporter, “Drought has actually appeared in various countries since this year, especially in the Western Hemisphere. The United States, Brazil and other countries have all suffered from it. Since the beginning of the month, the'smart funds' have already begun to allocate grain. Food including soybeans, corn and other crops has soared, and China and the United States have seen a large-scale spike in food prices. As animal protein, the price of pork has also seen a round of soaring. ."

Zhang Zhuran also reminded, “From the current point of view, the impact of the drought on food prices should not be overstated. The price of pork has begun to plummet recently. It is expected that the high prices of soybeans and corn will be difficult to maintain in the medium and long term. The impact of the drought has already appeared in prices in advance. The high short-term food prices do not mean that they will continue to stay high in the medium and long term."

It is worth noting that the drought even hit some unexpected industries and exacerbated the chip shortage. China's Taiwan region is facing an unprecedented year of drought, but semiconductor factories need a lot of water to ensure the chip production process, which makes the global industry, especially the automobile industry, nervous.

As the world's largest chip foundry, TSMC needs 156,000 tons of water every day. In the face of the current drought and water shortage, TSMC has launched a plan to construct a wastewater treatment plant, and while waiting for the completion of the plant, it is using waterwheels to temporarily replenish it.

Looking ahead, the world will still face huge challenges. The United Nations predicts that most of Africa, Central and South America, Central Asia, southern Australia, southern Europe, Mexico and the United States will experience more frequent and severe droughts.

This year's heat has not yet ended, and as the number on the thermometer continues to rise, even greater challenges will be faced across the world.