For food companies, it will be a balancing act between raising prices and losing customers. For the agriculture business, it may be a boon.
This summer is on track to be the hottest recorded on Earth. But the impact goes far beyond keeping cool: Extreme high temperatures are creating risks to food production.
The standout example of how extreme weather can drive up food prices is olive oil. The Mediterranean staple has more than doubled over the last 12 months to $8,000 a metric ton, a record high according to statistics tracked by the International Monetary Fund back to 1990. Extreme heat was the culprit as Spain, the world’s largest producer, was hard hit by drought.
Olive oil has a relatively limited knock on effect in the food chain, although fans of Starbucks’s range of olive-oil infused coffees might need to brace themselves for a price increase. However, a whole range of major food ingredients are at risk. Argentina’s soybean crop fell by more than half this year due to prolonged drought, according to the Buenos Aires Grains Exchange. Kansas had its smallest wheat crop since 1966 this summer after dry conditions caused many fields to be abandoned.
That was also a theme picked up by Oreo maker Mondelez, which said that its volumes of sales in Europe were down in the second quarter due to contentious negotiations with grocers, which included its products being temporarily removed from some supermarkets. “Sugar, cocoa, coffee are very much at risk and so are the grains,” said Kathy Kriskey, a Commodities ETF strategist at Invesco. Cocoa prices hit a 12-year high in New York trading this summer with harvests in West Africa hit by extreme wet weather.
That could have an effect on agricultural equipment suppliers such as Deere. They generally benefit from rising crop prices, which leave farmers with more profit to spend on tractors and other machinery. Drier conditions can therefore be helpful in supporting crop prices and farming profits but only if they don’t tip over into severe drought.
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