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The impact of drought on businesses worldwide

business-articlesThe impact of drought on businesses worldwide
An unusually dry year followed by searing heatwaves has seen lakes and rivers around the world dry up, adding to the ever-growing list of challenges facing business.

Severe drought could spell disaster for the world’s already-strained supply chains as crop yields collapse, energy production falls, and freight shipping runs aground along vital trade waterways. In this article we look at the impact an ongoing drought could have on businesses worldwide.


Energy generation

At a time when energy prices are at record highs, the ongoing drought threatens to make the market even tighter.

As water levels fall, hydroelectric power production also declines. In some of China’s south-western provinces, the government has had to ration public electricity and suspend power supply to thousands of factories as falling water levels see hydropower generation slump.

Meanwhile, power plants elsewhere have had to curb production. Thermo-electric plants require cooling water to keep production safe, but a scarcity of water and warmer water temperatures have forced producers to reduce output.

As nuclear and hydropower production declines, the cost of energy – which has already hit record highs in Europe – could go even higher. For businesses this means increased costs and more intense inflationary pressures.

And these power shortages will only add to disruption further down the supply chain. If manufacturers need to halt production, it could lead to cargo delays and shortages in certain manufactured goods.


Food production

As water levels fall, all sorts of unusual discoveries are emerging, from dinosaur tracks in Texas to sunken Nazi ships, unexploded bombs, and the ruins of lost villages.

Some discoveries are more disturbing. Portentous ‘hunger stones’ have surfaced – river rocks engraved to warn future generations to beware of famine when the water levels drop this low. One stone, inscribed in the 15th and 17th centuries, reads ‘if you see me, cry’.

While in many parts of the world food production is much more resilient than it once was, there is cause for concern. Amid the current dry conditions, crops in the US, Europe, India and China are struggling. It looks increasingly likely that this year’s yields are going to fall far short of expectations.

Domestically, this could lead to shortages in particular crops. Fresh produce could be harder to find as businesses and governments prioritise grain production. Meat could also be in shorter supply, as farmers struggle to provide livestock with the water and food they need.

Globally, lower harvests could contribute to an increasingly dire outlook. Food prices are already soaring, in part due to Russia’s invasion of Ukraine. The two warring countries export almost a third of the world’s wheat and barley and more than two-thirds of its sunflower oil. Destroyed fields, blockades and sanctions mean that significantly less food is being produced and exported.

For businesses in developed countries, this means further inflationary pressure – particularly on food items. In developing countries, food inflation and dying crops could cause devastating famine.


Global trade

The world’s largest rivers also play a key role in global supply chains, providing vital trade routes for cargo-laden ships.

However, the levels in many key waterways are falling dangerously low: look at the Rhine, the Danube and the Po in Europe, the Yangtze in China, and the Paraná in South America.

As the water levels fall, some freight ships load less cargo so they can still navigate the shallower waters, while larger ships can’t be used at all for fear they may run aground.

As the cost of transporting goods increases, these costs will likely trickle down through the supply chain, prompting yet further rises in inflation.

As drought constricts traffic along trade waterways, we may also see more supply-chain snarl-ups and bottlenecks. Tighter supplies of certain commodities and products could have knock-on effects for manufacturers and retailers around the world, as we saw during the depths of the Covid pandemic. If you haven’t already, now is a good time to consider diversifying your supply chains.


Water-intensive industries

Alongside trade, energy and food, other water-reliant and -intensive industries could take a hit. The textiles industry, for instance, requires huge quantities of water for cultivating crops such as cotton and for spinning, dyeing and finishing textile fibres.

Other industries that require large amounts of water, such as automotive manufacturing and beverages, may also see conditions deteriorate. If the drought persists, governments are likely to prioritise households and food production over other parts of the economy.


More extreme weather events ahead?

When the rain does come, there could be further problems. Drought followed by heavy rainfall can cause flash floods, as we’ve seen in the south-west of the US. Unfortunately, such short, intense bouts of wet weather aren’t enough to fully replenish a drought that has been months in the making. Instead, they can cause even more humanitarian and economic damage.

The fear is that these extreme weather events will only become more common as climate change intensifies. That’s why it's vital for businesses to future-proof against climate change and build resilience.

In the meantime, the ongoing drought is likely to further strain supply chains and push inflation even higher. Let’s hope for some slow, steady rain soon.
Currencies Direct

Currencies Direct

Currencies Direct is one of Europe's leading non-bank providers of currency exchange and international payment services. Since we were formed in 1996, we've maintained our focus on providing innovative foreign exchange and international currency transfer services to corporations of all sizes, online sellers and private individuals. We have also expanded our services to provide dynamic and pioneering "business to business" solutions to help companies, tier 2/3 banks and other non-bank financial institutions to process their international payments. Our headquarters are in the City of London (United Kingdom) and we have operations in continental Europe, Africa, Asia, and the United States. Currencies Direct is jointly owned by private equity firms Palamon Capital Partners and Corsair Capital.

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