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How Drought Affects Crop Prices

Economists are using satellite data to help refine market prices of important crops.

A prolonged heatwave in northern Europe created havoc in the summer of 2018. Sweden was blazing with uncharacteristic wildfires; swaths of the United Kingdom turned brown; and Germany endured a summer-long drought. Now, experts say the prolonged hot and dry conditions affected this year's European wheat production, influencing global wheat prices.

“This is a pretty noticeably bad year for crop conditions as far as Europe is concerned,” said Brian Barker, a geospatial scientist at University of Maryland. "In Germany, the Czech Republic, Norway, and Lithuania, crop yields have significantly dropped and are in poor condition— and prices do not respond well to drought.

But exactly how much will the price change?

Barker is one of several researchers from the from the G20 GEOGLAM initiative, working to bring satellite data to the economics community in order to better anticipate crop prices. At the end of every month, Barker gathers information from close to 35 different GEOGLAM partners through 150 to 200 different crop condition entries covering 28 countries that are the world's leading agricultural producers, consumers, and exporters of wheat, maize (corn), rice, and soybeans. The results and analysis are published on the GEOGLAM Crop Monitor, one of several initiatives supported by a NASA-funded program called Harvest. Led by the University of Maryland, Harvest is working with NASA's Food Security Office and the broader international GEOGLAM community to increase the use of satellite data in decision-making related to food security and agriculture.

“There is a huge potential in the uptake and use of satellite data to improve our ability to better anticipate crop yields,” said Inbal Becker-Reshef, who leads the GEOGLAM Crop Monitor initiative. “Therefore, we are advocating, at the national level, for ministries of agriculture around the world to routinely use satellite data to support their crop condition and production assessments ahead of harvest and help inform their policies. We are advancing the message of how we can use satellite information.”

The turning point, Becker-Reshef notes, is that more timely satellite information is readily available than even a few years ago. The Crop Monitor includes data from NASA satellites as well as from a range of partner agencies.  The initiative analyzes a region's temperature anomalies, precipitation anomalies, soil moisture anomalies, and the evaporative stress index, pairing them with measurements from the ground as well.

The map above shows the Normalized Difference Vegetation Index (NDVI) anomaly, one of several satellite-derived products that the Crop Monitor uses to assess crop conditions, in northern Europe. NDVI measures the health, or “greenness,” of vegetation based on how much red and near-infrared light the leaves reflect. Healthy vegetation reflects more infrared light and less visible light than stressed vegetation. The data was provided by Moderate Resolution Imaging Spectroradiometer (MODIS) on NASA's Terra satellite.

For the summer of 2018, the Crop Monitor closely examined conditions for winter wheat, which is usually harvested in the summer. Conditions in much of the European Union were “poor” this summer, meaning the crop yield is expected to be 10 percent or more below average and not likely to bounce back. This information is shared with the Agricultural Market Information System (AMIS), a related G20 initiative that provides timely market relevant information in a report called the Market Monitor - published 10 times a year and available to the public. .

“Market supply is led by crop production, and production is led by the weather,” said Abdolreza Abbassian, secretary for AMIS and a senior economist for the UN Food and Agriculture Organization. Abbassian refers to the satellite data from the Crop Monitor to improve production and price forecasts. Satellite imagery can help assess environmental conditions in a more timely and accurate manner than reports or anecdotal evidence from farmers, and help economists reduce the uncertainty in crop forecasting.

“Let's say a forecast says Germany will produce a certain amount of wheat, but then the country produces 10 percent less: You don't want volatility in your forecast because that translates into more volatility in markets” said Becker-Reshef. For producers, price volatility creates large income fluctuations and makes future planning difficult. It also lowers food security for consumers, causing people to reduce consumption or switch to cheaper, unhealthier food.

Since the heatwave struck Europe at the end of the winter wheat season, the numbers for the forecasted crop yield have progressively been coming down. Consequently, prices of wheat rose to three-year highs in early August.

While the winter wheat harvest has ended in northern Europe, the Crop Monitor is now looking at maize (corn), which was planted in the spring. The monitoring program has classified corn conditions to be “poor” in France, Germany, and Poland, which rely on rainfall that has been sparse this summer.

News Date
Oct 1, 2018