Friday, January 6, 2012

Peak oil and climate change hits food prices

Yesterday, temperatures shattered all high-temp records for January here in Minnesota.  In Rochester, the record was broken by 15° F.  That's not merely breaking a record—that's demolishing it.  It has been said that the further you are from the oceans, the equator, and sea level, the more noticeable the effects of climate change are likely to be.  We don't have a lot of elevation but we are in the middle of a large continent and are half-way to the north pole.  15° F!

None of this would matter so much except that we grow a LOT of food around here.  15° F hotter than usual is amusing in January.  In July, it would cause a catastrophic crop failure.  Last year, we had a difficult growing season.  Spring was cold and wet.  Some planting didn't get done until June.  Then heavy rains washed out many low spots.  Finally, by the end of July when the corn began to pollinate, the weather turned very hot.  It turns out corn does not pollinate when the temps are above 90° F.  So when the sweet corn came on the market in August, you could see the damage cause by that "minor" heat wave—the ears were not filled out with about 2" of the tip un-pollinated.  Three days of excessive heat and the corn yield suffered by 10-20%.  It turns out we don't actually need enough climate change to turn Minnesota into the Sahara.  Just a small change is enough to cause tremendous problems.  This also applies when a 2" rainfall becomes a 5" flash flood or when a 30 mph windstorm becomes a 60 mph blow.

And you watch—even with these looming catastrophes, neither Peak Oil nor climate change will rate even a passing mention in this fall's elections.

A Punch to the Mouth – Food Price Volatility Hits the World
Perfect Storms   05 JAN 12
2011 was an abysmal year for the global insurance industry, which had to cover yet another enormous increase in damages from natural disasters. Unknown to most casual observers is the fact that during the past few decades the frequency of weather-related disasters (floods, fires, storms) has been growing at a much faster pace than geological disasters (such as earthquakes). This spread between the two types of insurable losses has moved so strongly that it prompted Munich Re to note in a late 2010 letter that weather-related disasters due to wind have doubled and flooding events have tripled in frequency since 1980. The world now has to contend with a much higher degree of risk from weather and climate volatility, and this has broad-reaching implications. 
And critically, it has a particular impact on food. 
Many factors seen over the past decade have produced higher food prices: population growth, urbanization, the decline of arable land per person, and the upgrading of diets for example. But more damaging than food inflation has been the pushing of global food prices out of their long, quiet envelope of stability. From the recently released UN Report on the World Food Situation:

The FAO Index (Food and Agriculture Organization of the U.N) shows that, while prices are once again down from a peak, a troublesome volatility started to affect food prices this decade. These are the very prices that caused social instability in countries like Mexico in 2007-2008 (pressure on corn prices, owing in part to US corn ethanol mandates) and more recently in northern Africa (Arab Spring). 
Commodity observers will note the rough correspondence with oil prices, and of course that’s no mistake. Inputs to food production are heavily composed of fossil fuels. In the same way that both high (and highly volatile) oil prices play havoc with economies, food prices and marginal speculation in food have done the same. 
2011 also saw the highest average oil prices since 2008, at $94.81 per barrel. That is not far below the average high of 2008, at $99.67. In between was a crash in oil prices — and most commodities — which unfolded at a rate almost as rapid as the original run-ups from 2006-2008. What happens next? 
The USDA has just released its Food CPI readings for 2011, along with their forecast for 2012.
With 11 months of data recorded, the outlook for the 2011 Consumer Price Index (CPI) and food price inflation has become clear. The CPI for all food is projected to increase 3.25 to 3.75 percent. Food-at-home (grocery store) prices are forecast to rise 4.25 to 4.75 percent, while food-away-from-home (restaurant) prices are forecast to increase 2 to 2.5 percent. Although food price inflation was relatively weak for most of 2009 and 2010, cost pressures on wholesale and retail food prices due to higher food commodity and energy prices, along with strengthening global food demand, have pushed inflation projections upward for 2011. 
For 2012, food price inflation is expected to abate from 2011 levels but is projected to be slightly above the historical average for the past two decades. The all-food CPI is projected to increase 2.5 to 3.5 percent over 2011 levels, with food-at-home prices increasing 3 to 4 percent…
With non-existent wage growth and a dearth of investment opportunities, these price advances in food costs have much more impact than it appears. What asset classes are keeping pace with the year-over-year increases in food? Certainly not stocks, as the S&P 500 has gone nowhere in a decade. Moreover, a 3.5% increase in Food CPI this year, with more to come next year, falls on top of a deeply under-utilized US economy in which tens of millions derive income from government transfer payments, most of which are not sufficiently ratcheting higher from “inflation-adjustments.” Food Stamp recipients, for example, are not seeing food inflation adjustments in their benefit checks that would compensate for the price increases. Not even close. 
As you may have heard, milk was the top commodity performer in 2011, up 40% on the year in the futures market. A question: do you think milk is a central staple in American family diets? There’s more. On a year-over-year basis through November, according to USDA, beef prices are up 9.8%, egg prices are up 10.25%, and potato prices are up 12%. (This partly explains why junk-type grocery foods make up an ever-larger portion of food-stamp purchasers’ shopping carts. Sadly, people are buying caloric content, not nutrition). more

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