Northwestern Europe is experiencing one of the hottest and driest summers on record. Ruud Schers, RaboResearch Analyst for Food & Agribusiness, explains how drought affects crops, farmers, and the prices we see at the supermarket.
How does the dry weather in Europe impact agriculture?
The situation we are facing across Northwestern Europe is quite exceptional. As it looks now, 2018 may go in the books as one of the driest years on record. Some arable crop farmers are struggling to protect their crops by irrigation. And due to the dry conditions we are increasingly seeing irrigation bans across the bloc.
Crop yields are down significantly. Potato farmers, for example, are reporting losses of 20 to 25%, and significant losses – some creeping above 30% – are also being reported for wheat, corn, and rapeseed. Losses in arable crops like grass, which is used to feed dairy cows, can also affect other farming sectors.
The dry and hot weather is largely in the UK, Belgium, the Netherlands, Germany, Poland and the Nordic countries. Farmer organizations in several countries are calling on their governments for support, seeking compensation for those farmers that have been most affected. German farmers, for example, are asking for EUR 1 billion of support. In the meantime, we see futures markets for crops reacting to the foreseen lower output with price increases.
“Price increases may not compensate for farmers’ losses in output”- Ruud Schers, RaboResearch
What will be the consequences for farmers?
A bad crop is not necessarily a bad financial year for farmers. A loss of 10% of the crop may be compensated by higher crop prices. However, for a farmer who has more than average losses – due to extreme weather, less water availability, etc. – this price increase may not compensate for the loss in output. Moreover, many farmers have already contracted with processors or sold forward a certain part of their output at a set price through futures markets, so they won’t really benefit from higher market prices.
In some regions, irrigation is restricted to save water.
Will the drought affect future crops, or are damages really limited to this dry season?
The effect for future crops is hard to tell at this point. The situation is still developing as we speak. However, what we can expect is that farmers who have lower earnings due to lower output might have less spending power in the coming season. That may affect the sales of farm inputs, such as fertilizers.
Another point that will be on farmers’ minds is how they will be able to combine risk management through contracts and forward-selling without losing the possibility of benefitting from higher prices in a bad crop year. They will be trying to find a balance between securing earnings on the one hand and trying to benefit from unexpected price movements on the other.
“The impact of the drought on consumers may be limited”- Ruud Schers, RaboResearch
What will consumers notice in supermarkets? Will our food become more expensive?
Ultimately, the impact for consumers may be limited, as food processors, retailers, and off-takers secure an important part of their produce in advance. For instance, in the Netherlands and Belgium around 70-75% of the potato crop has been contracted in advance. The impact of the drought and rising prices will not directly translate into higher prices for consumers.
In the case of wheat and bread, analysis shows that the impact of price movements in the wheat market is fairly limited for the price of bread. However, if we experience a longer period of higher crop prices – say, more than a year – consumers would feel the effect.
So, it’s not time to panic (yet)?
No, we don’t need to panic about this summer’s weather. That said, we are increasingly witnessing the weather get more extreme: hotter or colder, wetter or dryer. The weather is also becoming more volatile, which is a challenge for growers and farmers, who all depend on the weather in one way or another.