WHY THE FAO NEEDS NUANCE / THE FINANCIAL TIMES COMMODITIES ( VERY HIGHLY RECOMMENDED READING )

Note from the editor


With global agricultural markets on the edge after a string of bad crops, the UN’s Food and Agriculture Organisation shocked policymakers with a warning of another jeapordised harvest.


On its Global Information and Early Warning System (Giews), the FAO said that a “severe winter drought in the North China Plain” might put wheat production there at risk.


The announcement caused surprise, if not shock: it is the first ever carried by the Giews on China since at least 1995. Observers and pundits rapidly concluded that food Armageddon was around the corner. China is self-sufficient in wheat, but if the country suffers a crop failure it will need to import, pushing up prices globally.


But there is a case for calmer and closer reading of the FAO report.


True, it carries an alarmist headline, but the fine print is not as worrisome. The report says that the drought has “not affected winter wheat productivity”; in other words, China’s wheat production remains as good as it was a few months ago. When I spoke with the author of the note, he told me the FAO has kept its China wheat output forecast unchanged at 112m tonnes. China also has wheat stocks of around 60m tonnes, enough to cushion a drop in production.


Of course, the FAO says that “if a spring drought follows the winter” then the crop will be at risk. Hardly surprising. The FAO could have said the same for every winter gain crop in the Northern Hemisphere: a spring drought is always bad news in China, but also in the breadbaskets of the US, Europe or the Black Sea region!


The market rightly interpreted the report that way. Yes, wheat prices rose the same day that the FAO put out its report, but only because new signs of extra demand for the grain in North Africa and the Middle East. The Chinese drought caused headlines, but traders in Chicago and Paris wheat pits have so far largely ignored it.


The good news is that China’s central plain region has received some rain and snow recently. Even so, the drought continues and Beijing is rightly concerned. But observers and pundits appear to have overplayed the FAO’s report.


Don’t get me wrong - If it does not rain by April and May, when wheat goes into the reproduction and grain filling stage, China will have a huge problem. Historically, rainfall over those two months had been crucial for the crop, as the US Department of Agriculture, in a far more nuanced report about the drought noted a month ago.


But to conclude right now that because the current drought China will tap the global market, soaking up surpluses elsewhere and pushing up prices, is a bridge too far.


China’s winter wheat areas suffered a drought in 2009-10, which at the peak put 11m hectares of the crop at risk – out of a total 24m hectares. But intensive irrigation – Beijing enlisted millions to water the crop, by bucket in some cases – and the arrival of heavy rains in late February through March ended the drought.


The knee-jerk reaction to the FAO report is largely the fault of the Rome-based organisation itself. It is commendable that it tries to warn the world of potential risks, particularly after it missed Russia’s crop failure last year. The Giews network never carried a similar alert for Russia last summer, in spite of the severity of the drought there. It has yet to carry a drought alert for Argentina, even as the La Niña weather phenomenon right now cuts the size of the production there. Yes, Argentina, the world’s second largest corn and soyabean exporter, is losing production, rather than be at risk of losing it. And global corn and soyabean prices are rising because of it.

As the FAO tries to pick up the ball – under huge pressure from the French presidency of the G20 to improve its crop forecasting – it risks creates problems. With global agricultural markets on the edge, the world is looking at the FAO for guidance. It needs timely and accurate information, but also nuance and perspective.