Wednesday, August 22, 2012

How the drought will impact the global economy

Pretty difficult to hide a drought that covers nearly 65% of the agricultural land in USA.  So of course, the Predators are circling this disaster look for ways to make a quick buck.  Here's the view from Hamburg.

The Cost of Hunger

Drought Only One Factor Behind High Food Prices

The severe drought in the US has been blamed the rising prices of agricultural commodities. But that is only part of the story: Biofuels, financial speculation and changing dietary habits are also playing a role. The global food supply faces pressure from all sides. By SPIEGEL Staff

Farmer Mike Geske speaks with the experience of generations. "Every major drought has its very own character," he says. It's a lesson derived from his family history. His grandfather, an immigrant from Germany, established a farm in Matthews, Missouri, and his father expanded it. Both related to Geske, now 62, several stories about droughts and what they did to keep the farm going.

This year's severe drought, says Geske, has been unusually long and hot. "It started in May of last year. First it rained like crazy. But then, suddenly, it was as if someone had turned off the water," says Geske.

The land around Matthews is as flat as a board. Geske, together with his son and two employees, farms 850 hectares (1,870 acres). The corn harvest began last week -- and the cobs don't look good, even the ones from those plants Geske has been able to irrigate. The kernels are small and there are wide gaps between them.

It is the same story across the American Midwest, which is experiencing its worst drought since the 1930s. One-sixth of the corn crop has been lost and the soybean plants and wheat stalks don't look much better. Shortages and rising prices for essential commodities are the result.

Some prices have soared by almost 50 percent within just 10 weeks, and grain warehouses are beginning to empty out. Other important supplier countries also anticipate poor harvests. Because of a prolonged dry period in Russia, wheat exports are expected to be only half of what they were last year. Brazil, on the other hand, has had too much rain, which is bad news for sugar-cane farmers. "The latest crop predictions suggest that we should fear the worst," the United Nations World Food Programme warned last week. It is the third such warning in recent years, following similar crises in 2008 and 2011. Catastrophe, it would seem, is becoming the norm.

Sudden spikes in the prices of wheat, soybeans and corn threaten the wellbeing of every individual. Economists warn of "agflation," or inflation triggered by a rise in the price of agricultural products. Poor nations, however, are disproportionately affected because people there spend a larger share of their income on food. But consumers in the industrialized world will also feel the effects.

Mills, forced to pay high prices for wheat and other grains used in making bread, pass the added cost on to bakers. The bakers' suppliers also charge more for ingredients like nuts, poppy seeds and margarine, says Amin Werner, head of the German Bakers' Association. "This can't be ignored, which is why consumers will also notice."

The G-20 has also taken notice, and plans to hold a meeting this autumn to address the crisis. First and foremost, the group of the world's strongest economies and developing nations wants to prevent countries from taking unilateral action. Two years ago, Russia temporarily suspended wheat exports, which only drove prices up even further. This time, countries like Argentina and Brazil could follow a similar path and curb their soybean exports, fears Bonn agriculture professor Ernst Berg. This would decrease supply even further. "The crisis will only get worse," Berg predicts.

Securing the food supply is becoming a key issue on the international agenda, now that a global battle for agricultural commodities has erupted. "Food is the new oil," says Lester Brown, founder of the Washington-based Earth Policy Institute, "and land is the new gold." Politicians and citizens are worried about how the food supply can be guaranteed in the future -- and at what price. Four factors play a critical role here:

Many climatologists predict that in a warming world, heat waves like the one in the United States this year will become more frequent and more severe. In a new study, agricultural economists at New York's Columbia University predict that, if the climate models turn out to be true, extreme heat could reduce crop yields in the United States by about 30 percent.

The world must be prepared for the consequences of climate change varying greatly by region, with yields shrinking in some areas and growing in others. Regions of Scandinavia that were once cold and barren will likely turn into breadbaskets. The losers will include current centers of agricultural productivity like southern Spain. The vegetation belt in Africa will also shift, with the Sahara becoming greener and severe droughts becoming more common in the south.

Since 2005, US refineries have been required to add fuel derived from renewable sources to conventional gasoline. The United States is using this approach to reduce its dependency on fossil fuels. The problem is that the country is now using more corn to produce ethanol than to make animal feed.

About 40 percent of the corn crop is converted into biofuel, and less and less farmland is available to grow other crops. Investment firm Lupus Alpha is critical of Washington's environmental strategy because by subsidizing ethanol, the government has created a "demand monster." The UN Food and Agricultural Organization (FAO) argues that the ethanol requirement should be suspended immediately so as to defuse the "food versus fuel" conflict.

German Development Minister Dirk Niebel used a similar argument last week, when he suggested imposing a sales ban on E10. Chancellor Angela Merkel's government only introduced E10, a fuel containing 10 percent ethanol, in early 2011, against the recommendations of experts.
Today German farmers use 2.2 million of the 16.7 million hectares they farm to grow plants for the production of biofuel. German fields are bright yellow in the spring, from rapeseed plants, while corn dominates the landscape in the fall. The amount of land devoted to such crops could grow to 4 million hectares by 2020.

Several politicians from Merkel's conservatives are supportive of Niebel's call for a ban on E10 sales. "It's unacceptable that people all over the world are suffering from hunger, while we incinerate biomass to make inefficient energy," says senior conservative parliamentarian Michael Fuchs.

Since the beginning of the agricultural crisis in 2008, there have been price surges that cannot be explained by normal factors. Market prices for rice, for example, sometimes shoot up by 30 percent in a single day.

Such movement is likely the result of financial market speculation. Investors, especially investment banks and pension funds, don't trade in real goods. They have no interest in physically owning corn, soybeans or wheat. By entering into futures contracts, they are merely speculating on changes in the prices of food commodities. Trading in agricultural commodity futures almost tripled between June and July.

Growing demand causes futures prices to rise, which ultimately affects the real market -- which is precisely the problem. Many studies show that futures contracts affect prices on real markets, and experts only disagree on how large the effect is.

Criticism of making money in a way that ultimately exacerbates hunger has convinced a few banks to rethink their approach. Three German banks, Commerzbank, Deka-Bank and Landesbank Baden-Württemberg have decided to stop engaging in speculation related to agricultural commodities. But according to aid organization Oxfam, the big players are not following suit, including German insurance giant Allianz and Deutsche Bank, which have €6.2 billion and €4.6 billion, respectively, invested in food commodities speculation.

To undermine speculation, experts propose the establishment of a sort of central bank for grain. Under the plan, the important agricultural countries would establish a joint reserve. In the event of sudden price spikes, they would be able to throw grain onto the market to bring down prices and force speculators out of the business. more
And from the UK.  They're getting their info from HSBC.  So the focus is banking.  They claim the central banks won't use the drought as an excuse to raise interest rates.  Good thing for if they did, they would quickly transform this disaster into an utterly calamity.  Most folks are barely making as it is.  Coping with soaring food costs won't be any easier if credit costs go up at the same time.  But you watch—the calls to raise interest rates will be deafening before this is over—if it ever gets over.  It's the only "solution" the Leisure Class has for any economic question, after all.

US drought will lead to inflation and higher food prices, says report

HSBC warns that central banks are unlikely to raise interest rates to counter higher living costs due to softening labour market
Larry Elliott, economics editor, 20 August 2012

America's worst drought in half a century will push up inflation and put a fresh obstacle in the path of the struggling global economy, one of the UK's leading banks has warned.

Senior global economist at HSBC, Karen Ward, said sharp rises in the cost of wheat, corn and soya beans came when growth was slowing but said the weakness of wage pressure meant there was no need for central banks to raise interest rates in response to a higher cost of living.

Blistering heat in the US has destroyed 45% of the corn and 35% of the soya bean crop in the worst harvest since 1988. Russia and Ukraine have also had poor crop yields. Ward said higher food prices would result.

"This is another dampener for the global economy at a time when the headwinds are already acute," Ward said. She added that workers were unlikely to press for higher wages to compensate for dearer food at a time when labour markets were softening and this would allow policy makers to ignore the increase in inflation as an external shock.

"Even if prices stabilise at these levels, we are likely to see headline inflation rates rise across the world in the coming months, particularly in the emerging economies where food accounts for a larger proportion of household spending. Latin America is more susceptible than Asia, where rice is the more common staple. So far rice prices remain subdued. more 
This is not, of course, the first time the Mississippi has been closed to barge traffic.  But it is a clear demonstration how far below normal rainfall is in the Mississippi watershed.  One of the main users of Mississippi barges are the big grain shippers.

Drought Forces An 11 Mile Section Of The Mississippi River To Be Closed

Sam Ro | Aug. 20, 2012

The AP's Adrian Sainz reports:

Nearly 100 boats and barges were waiting for passage Monday along an 11-mile stretch of the Mississippi River that has been closed due to low water levels, the U.S. Coast Guard said.

New Orleans-based Coast Guard spokesman Ryan Tippets said the stretch of river near Greenville, Miss., has been closed intermittently since Aug. 11, when a vessel ran aground.
Tippets said it is not immediately clear when the river will re-open.

The Mississippi River is a crucial trade route for coal and agricultural goods. Low water levels had already been disrupting trade flows due to bottlenecking along the river. more
And a reliable source of water is necessary for more things than growing corn

The US Drought Is Now Disrupting Trade And Boosting Fracking Costs

Russ Winter, Wall Street Examiner | Aug. 19, 2012

The buzz now is that transport on the Mississippi River is facing greater expense, delay and disruption. Increasingly the Mississippi is a one-way river as barges heading north have to wait for traffic headed south, adding to the costly delays. The big issue relates to the use of ports (see video). The river itself resembles a clogged artery. In the U.S., 60 percent of grain, 22 percent of oil and natural gas and 20 percent of coal travels down the river. If the Mississippi River is closed to water traffic, these goods will need to be transported by truck or train – costing the U.S. an additional $300 million per day. Even if temporary, this would be disruptive to critical re-industrialization supply lines. MSNBC has a thorough article about this. NOAA has a stream flow projection (28 day forecast for each station) that suggests the river will gradually drop an additional two feet through mid- September based on current rainfall forecasts.

Beyond the CHK blow-up potential, it also seems the markets may not be taking into account the impact of the drought on fracking operations. Delays are already being reported and the cost of water is heading much higher, adding to expenses (CNN: Drought Hurting Oil Fracking Production). Fracking uses 4.5 million gallons of water per well. Just one more reason to back away from any bullish speculation right now in this sector.

If you are thinking the strange weather is transient, according to Professor Marco Tedesco of the Cryosphere Processes Laboratory, at The City College of New York, the cumulative melting index for the entire Greenland ice sheet on August 8th surpassed the record value that was set in 2010 for the entire melt season, which normally ends in early-mid September.

China Daily reports the wholesale prices of 18 types of vegetables in 36 cities rose for the fourth consecutive week, up 2.9 percent week-on-week and 15.4 percent cumulatively over the past four weeks. Last week, the retail price of eggs rose 1.1 percent from a week earlier, but remained down 5.2 percent from the same period last year. The price of pork, a staple meat in China, rebounded 0.4 percent from a week earlier, the ministry said. Food prices account for nearly one-third of the prices used to calculate China’s consumer price index. more

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