The United States have not seen anything like the drought of this year in most parts of the country, at least since 1956. At the end of August the dry weather conditions have set on the 63% of the 48 USA mainland states south of Canada. And although the situation there is far from catastrophic drought of the 1930s of the last century, which has devastated areas included in the so-called American "Dust Bowl", BofA Merrill Lynch Global Research report "The global drought - opportunities and risks" dry weather conditions are defined as "a new constant".

The drought which hit USA and other regions of the planet, clearly shows that the world is facing an increasingly severe challenges in terms of food, water and energy security. It is expected that the demand for food and energy in 2030 will increase by 50%. Demand for water in the same period will increase by 40%.

All these factors can trigger the "perfect storm" of interrelated challenges. Changing conditions open up a number of new opportunities for investors, but they are fraught with significant risks.

“The extent of the drought spead worldwide shows that the challenges facing the economy of individual countries and the global economy as a whole, are long-term”, - said one of the authors of the report Sarbdzhit Nahal, a stock market strategy analyst in the Bank of America Merrill Lynch Global Research ESG. - “Food, water and energy security has become an increasingly important issue on the agenda. As governments, companies, and other players are looking for ways to adapt to and neutralize the damaging effects of dry weather conditions, investors will open new possibilities and new risks”.
All key agricultural commodity markets immediately reacted to the expected reduction in supply. Prices soared. It is expected that in the short term, prices for corn and soybeans will remain at a high level. Although we can not exclude new jumps in grain prices, the market must cool down by the end if H1 of the next year. There is a possibility that the U.S. government will temporarily cancel the mandatory inclusion of ethanol in the motor fuel. This can reduce the tension in the corn market, as 40% of all corn grown in the U.S. is used to produce ethanol. In the agricultural and chemical sectors hold both short-term opportunities and risks for investors. Suppliers of agricultural products such as seeds, fertilizers and pesticides are likely to be able to benefit from the desire of farmers to increase yields.

Thus, in all the major regions of the world, there are attractive investment opportunities. Speaking of the consumer sector, the weather conditions are likely to only have a minimal impact on the cost of packaged food.

According to AIR Worldwide, working on modeling the effects of disasters, losses from drought could be $3.1 billion after compensations, which is not too heavy for companies - insurers and their reinsurers.

Limited economic impact of the drought for the U.S.

Although drought is likely to lead to a decline in agricultural production and raise prices, its impact on the macroeconomic situation in general will be limited, for agriculture and livestock account for only a small part of the U.S. GDP and higher grain prices are only partially reflected in the prices of finished products on the consumer market.

Drought should not have any significant impact on the overall outlook of the economy in the coming months. The effect of weather conditions on a global scale, including a possible El Niño, should also be moderate with a limited, but wide inflationary pressures due to higher grain prices. For the most part the global emerging markets will suffer, as the share of food expenditure for them is more significant than in developed economies.

However, prices increase is likely to be an instantaneous event. Impact of drought should also be limited to the growing economies of China and India. As incomes rise, China's increasing demand for meat is likely to lead to a sharp increase in imports of corn, which goes into animal feed, and a corresponding increase in prices. In India, where the harvest has also been affected by the drought, we can expect a decrease in the rate of economic growth in the second half of 2012 to 5%. Meanwhile meteorologist are predicting rain in the near future, which should have a positive effect on the yield of the next year, iwhere the effects of drought, apparently, will not be felt.

UkrAgroConsult