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SEP. 02, 2022

Stay Hungry

It has been a tough summer for Europe, because of heatwaves and droughts that, according to CNBC, the region has not experienced in the past 500 years. Besides wildfires and air quality, severe drought has an important implication on food supply.

Water is a direct or indirect input to produce virtually all agricultural commodities, but when it comes to food production, not all waters are equal: there are green water, rainwater, and water trapped in the top layer of soil, and blue water, water flowing in rivers, lakes, and reservoirs. When the ratio between blue waters and green waters employed in agriculture increases, we have a water scarcity: this is precisely what is happening in Europe right now.

The three primary agricultural commodities produced in Europe are wheat, maize, and soybean. In Europe, the production of these crops employs mostly green waters compared to other regions in the world. To provide some perspective, wheat production uses less than 10 m3/ton of blue water in Europe, while it uses 1200 m3/ton in Asia. These data picture a favorable situation, but they also highlight the dependence of Europe on rainwater. The reliance on green water is also reflected in financial markets: the futures contracts on European wheat are trading at a level 65% higher than its five years average, compared to a 50% higher price globally; European corn trades at a price 75% higher than its average compared to an increase of 64% globally.

The higher prices observed now in futures markets will translate into higher prices on supermarket shelves. The Consumer Price Index for food in Europe in July increased 12.8% compared to the previous year; the cost of bread and vegetable oils increased the most among its components. Various European governments are assessing the possible short-term measures to contain the effects of higher commodity prices, such as direct transfers to the most vulnerable households or aides to farmers.

Extreme weather events are here to stay, and longer-term measures are needed. As Europe is likely to rely more on blue waters in the coming years, a better management of its aboveground resources is required. In Europe, around 200 new dams are planned, which may provide the potential for power generation and flood protection on top of water conservation. Desalination is another alternative: Spain already gained significant expertise on how to do it efficiently. Lastly, wastewater recycling is another proven technology that helped a desert nation like Israel to achieve water security and foster its agricultural economy. The technology is available, but it is essential to act faster than the already fast changes in climate.

We thank you for your continued support.

The FAM team