Article

Pakistan Floods To Exacerbate Food Insecurity, Further Strain Global Rice Market

Fitch Solutions / Agribusiness / Pakistan / Fri 02 Sep, 2022

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Key View

  • Flooding and mudslides in Pakistan since June will severely hamper the country's food security, crop harvests, infrastructure and economy in 2022.
  • The deleterious impact of floods on domestic agricultural production will serve to further stress Pakistan’s food security, which was in a relatively perilous condition prior to the onset of the flooding
  • The events in Pakistan of the last two months poses a strong upside to rice prices, which have already acquired upward momentum due to events elsewhere.
  • At Fitch Solutions, we consider the flooding in Pakistan to be a considerable downside risk to the majority of our agribusiness production forecasts for the country, and we will most likely revise them downwards in the coming weeks.

We expect the severe monsoon rainfall that has led to flooding and mudslides in Pakistan since June 2022 to severely hamper the country's food security, crop harvests, infrastructure and economy. Preliminary estimates suggest that the flooding could result in a USD10bn hit to the economy, with Prime Minister Shehbaz Sharif stating that eventual losses will likely be higher.

The Government of Pakistan estimates that 33mn people across the country have been affected by the rains, with almost 1,100 killed between June 14 and August 27, and has declared at least 72 districts (out of 160) as calamity-stricken. As of August 25, cumulative rainfall during the kharif crop season (start-May through to end-October) exceeded normal levels by 44.3% – in fact, cumulative rainfall by August 25 exceeded that normally expected over an entire crop season by 14.7mm, with about three months still to go. To date, in excess of 0.8mn hectares (ha) of crops and orchards have also been affected: 76.1% located in Sindh, 15.1% in Baluchistan, and the majority of the remainder in Punjab, Pakistan. In addition, almost 720,000 livestock have been killed in the flooding while 3,500km of roads and 150 bridges have also been damaged. It is expected that conditions will worsen in the near-future as rains are set to continue, falling on already-sodden land, further increasing the likelihood of flash floods and landslides. According to the Global Climate Risk Index 2021, Pakistan was the eighth most affected country by extreme weather events globally between 2000 and 2019.

From a macroeconomic viewpoint, any increase in agricultural import demand will also add further stress to Pakistan’s foreign exchange reserves, which have been below the level of monthly import cover recommended by the IMF since Q222, falling to close to one month’s import cover in July 2022, and weigh on the PKR, which has lost 23.9% of its value against the USD YTD. On August 29, the IMF approved a USD1.1bn disbursement to Pakistan, as part of a broader USD6.5bn assistance package initially secured in 2019 that had appeared to be losing momentum in the face of public and political opposition in Pakistan, accompanied by a statement that made no direct reference to the flooding.

Rainfall To Date Exceeds Total For Normal Season

Pakistan Cumulative Precipitation (MM)

Source: CHIRPS/UCSB, USDA, Fitch Solutions

Food Insecurity To Rise Sharply

On August 30, the ‘2022 Pakistan Floods Response Plan’ was launched by the Government of Pakistan and the UN, with close to one-third of the USD160.3mn funding requirement earmarked for food security and agriculture assistance. At present, 1.9mn people in Pakistan are estimated to be in Integrated Food Security Phase Classification (IPC) phases 3 or 4 (either in Crisis or Emergency) and the number of food insecure people is expected to rise further in the short term. In August 2022, monthly food price inflation in Pakistan rose to 29.5% (y-o-y), led by a 33.9% increase in the price of perishable food items, the supply of which to date has been most vulnerable to the weather conditions and the disruptions to Pakistan’s internal transport infrastructure to date. For instance, in month-on-month terms, the price of tomatoes (a kitchen staple) in Pakistan rose by 52.9% in August, pulse moong (mung beans) by 15.3%, and vegetables by 13.4%. Moreover, August in Pakistan is the mid-season (the time between crop planting and harvest) for much of its grains production (including corn, millet, rice, and sorghum) as well as its cotton production.

Planning Minister Ahsan Iqbal has stated that as much as half of Pakistan’s current cotton crop has been damaged, while the outlook for Pakistan’s rice crop is also bleak. The deleterious impact on domestic agricultural production will serve to further stress Pakistan’s food security, which was in a relatively perilous condition prior to the onset of the flooding: the country ranked 75th (out of 113) in the 2020 edition of the Global Food Security Index, the prevalence of undernourishment stood at 12.9% in 2018-2020 (up 0.7% from 2017-2019), and, in 2020, Pakistan generated its first wheat trade deficit since 2014 (of USD661.03mn), which then expanded by 23.3% in 2021.

Rice Price Hits YTD High On Negative Harvest Outlooks ...

Rice Futures Price (USD/Tonne)

Note: Rice Futures Contract = RR2 COMDTY. Source: Bloomberg, Fitch Solutions

Pakistani Rice Harvest Under Immense Threat, Exacerbating Global Supply Woes

Of particular importance for agricultural commodity markets will be the eventual fate of Pakistan’s rice crop: in 2021, Pakistan was the third largest global exporter of rice, accounting for 8.2% of total sales by value, behind India (36.7%) and Thailand (12.8%). In terms of exports, we expect the impact of the flooding on rice production to weigh on Pakistan’s exportable rice surplus in 2022/23 and note that the humanitarian situation inside the country may see a higher volume of rice consumed domestically, further weighing on exports.

... And Now Trades Higher Than Corn And Wheat Relative To January Levels

Grains Futures Price Index (January 2022 Average = 100)

Note: Rice Futures Contract = RR2 COMDTY; Corn Futures Contract = C 2 COMDTY; Wheat Futures Contract = W 2 COMDTY. Source: Bloomberg, Fitch Solutions

Floods Driving Up Rice Prices, As Weather Issues Bite Other Major Producers As Well

On August 01, rice futures reached USD17.87/tonne, a high for 2022 YTD – and a high since the 2007-08 food price crisis. As a commodity largely produced and consumed within Asia, rice was insulated from the full impact of the Ukraine crisis in H122, which led to surges in the prices of other grains but since July 11 the price of rice relative to its average in January has exceed that of both wheat and corn. The global rice market is experiencing a high degree of stress as adverse weather conditions reduce harvest expectations in a number of key markets, including: India, where erratic monsoon rains have led to delayed plantings, and China, where heatwave and drought conditions have led to a worse outlook for crop yields. In addition, reports that India is considering implementing export restrictions on 100% broken rice, which makes up about one-fifth of its total rice exports, have further added to fears of market tightening.

As a result, we see the events in Pakistan of the last two months as posing an upside to rice prices, which have already acquired upwards momentum due to events elsewhere.

Flooding Damage Set To Strain Economy Further

Pakistan Foreign Reserves & PKR Exchange Rate

Note: Foreign Reserves = Official Reserve Assets, Foreign Currency Reserves (in Convertible Foreign Currencies), USD. Source: Macrobond, Fitch Solutions

Pakistan Agricultural Production Forecasts To Be Revised Lower

At Fitch Solutions, we consider the flooding in Pakistan to be a considerable downside risk to the majority of our agribusiness production forecasts for the country: crops in mid-season will have been subject to a high risk of damage and crop plantings scheduled to take place through to the end of 2022, such as wheat, are now subject to a high degree of uncertainty. Our most recent update on the prospects for Pakistan’s rice harvest in 2022/23 (August 08 2022) is now thought to be rendered highly optimistic by the rainfall during recent weeks, forecasting as it did a record high crop of 8.9mn tonnes – it did, however, state that rainfall to that point had been above average and a continuation of the trend would pose a downside risk to the outlook. Moreover, damage to Pakistan’s transport infrastructure will further undermine agricultural activities, including the delivery of seeds, fertilisers, and other agricultural inputs as well as post-harvest crop distribution, and disrupt internal labour mobility.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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