Sunday, August 19, 2012

The drought picture becomes clearer

Famine, one of the more frightening disasters that can ever threaten humanity, hovers over this fall's harvest like an ancient specter.  This is one of the disasters we thought we had figured out how to avoid.  The USA has never had anything that remotely resembles famine so there are no historical precedents to guide us. But we are going to discover soon enough just how well we can cope.

This first essay is by one of those market types who think that this drought is mainly a matter of how well you adjust your portfolio.  He is pretty cold about it too.  It is also a reminder that this drought is going to affect FAR more than the 1.5% of the economy directly tied to agriculture.

What The Threat Of A Global Food Crisis Means For World Markets

Bill Witherell, Cumberland Advisors | Aug. 18, 2012

The global food crisis of 2007-2008 is threatening to repeat in the coming months, as the worst drought in 50 years devastates the US corn crop, with 51% of the crop rated "Poor/very poor" by the US Department of Agriculture. This crop is said to be on a par with that of 1988 crop, the worst in the past thirty years. Note that the US is the top producer and exporter of corn. Our account for nearly half of the world's corn and also a third of the world's soybeans, the harvest for which will be the lowest in five years. The director-general of the UN's Food and Agriculture Organization, José Graziano da Silva, characterizes the present global food situation as "precarious," as do experts we have contacted.

The food crisis in 2008 led to riots in some 30, mainly very poor, countries and immeasurable hardships in many more. Following that crisis, governments vowed to act to improve global food security, including at a G8 Summit in Italy in 2009. The followup is reported to have been a mixture of some gains and some disappointments. Among the gains are the provision of improved strains of some crops and increased agricultural aid. There have been disappointments in the areas of humanitarian food aid and a failure to agree on binding agreements to regulate food export bans. The 2008 crisis was made more severe by export restrictions by some important agricultural producers, including Russia and the Ukraine.

The threat of a new crisis has led the governments of the twenty leading countries that make up the Group of 20 (the G20) to hold a conference call in the week of August 27, to arrange a meeting to discuss ways to avoid policies that would worsen the situation, such as export restrictions and hoarding. This would be the first meeting of the recently created Rapid Response Forum, which has the mandate to "promote early discussion among decision-level officials about abnormal international market conditions."

One issue that is sure to be raised by the UN is biofuel policies and the government-mandated biofuel production targets of the US and European Union. The US is projected to divert about 40% of its corn crop into ethanol, and about 60% of Europe's rapeseed crop goes to the production of biodiesel. Brazilian ethanol production consumes half of their sugarcane crop. This is a politically divisive issue, and we do not anticipate the G20 will be able to reach agreement on the UN's call for an immediate suspension of biofuel production mandates.

There are several factors that are more positive in the current situation, as compared with 2007-8. The demand pressure from China and India is less than it was five years ago. Stocks of rice are high and rice prices have been fairly stable, although Thailand's policy of stockpiling rice and thereby reducing exports is worrying. Wheat stocks are also said to be high, but Russia's wheat production has been hurt by a drought. Production of African crops such as cassava has increased significantly. And the global economic slowdown has had a moderating effect on the demand for food. more
This report is from the Weather Channel.  These guys are doing heroic work although at times I wish they wouldn't get quite so excited about broken records.  This is a drought, folks—NOT the Olympics.

Drought Disaster 2012 Status

Jon Erdman Aug 16, 2012, 11:57 AM EDT

The drought disaster in the nation's Heartland continues to worsen, despite pockets of recent rainfall over the past week, according to the weekly U.S. Drought Monitor report released Thursday morning.

Overall, the total areal extent of the Lower 48 States in drought ticked downward to just under 62%. However, the area in the worst drought category, so-called "exceptional" drought, ramped up to over 6% of the Lower 48 States.

(MORE: Drought rises in historical rankings)

This may not sound impressive, however, put together, this area of "worst drought" covers an area (195,304 sq. mi.) larger than the state of California (163,695 sq. mi.).

In the relatively short period of the Drought Monitor analysis (since 2000), only last summer's drought featured an areal extent of "exceptional" drought larger than what is in place this summer, peaking out at just under 12% of the Lower 48 States in mid-July 2011.

(PHOTOS: Drought Disaster 2012)

State Highlights

Among the states with "exceptional drought", the highest drought category include...

- Almost two-thirds of Kansas (63%), including Topeka. In the short history of the Drought Monitor analysis (since 2000), this is by far the largest areal extent of this worst drought category in the Sunflower State.

- Over half of Arkansas (53%), including the city of Little Rock.

- Over one-third of Oklahoma (39%), including Okla. City, Tulsa, and Norman. At its peak, last summer's exceptional drought covered roughly two-thirds of the Sooner State.

- Over one-third of Missouri (36%), including Kansas City. Since 2000, no part of Missouri had been classified in the worst drought category prior to this summer.

- Almost one-quarter of Nebraska (23%), including North Platte. This is the most expansive "exceptional" drought in the Cornhusker State in 10 years.

- Just under 17% of Georgia, including Macon and parts of the south Atlanta metro area. Recent rain has hacked away at this "exceptional" drought near the S.C. border and also in southwest Georgia.

- Over 16% of Indiana, including Evansville. Again, this is a small improvement from last week's analysis, when 25% of the state was classified in the worst drought category. more
As someone who has actually participated in a political action to stop an ethanol plant from being built in my small town, I am not in any way objective about turning food into low-grade fuels.  I think making ethanol from corn is easily the goofiest idea that ever got traction in agriculture.  There was a stunning amount of infrastructure built in spite of the fact that producing ethanol from corn is thermodynamically insane—a hint that it will always be economically insane.  This is the sort of mistake Producers are NOT supposed to make.

Nearly Half Of Corn Devoted To Fuel Production Despite Historic Drought

Bloomberg View | By The Editors  08/18/2012

Record-high corn prices should be sending a clear message to policy makers in Washington: Requiring people to put corn-based fuel in their gas tanks is a bad idea.

Since 2005, the U.S. government has mandated that gasoline contain ethanol, almost all of it derived from corn. The policy, ostensibly aimed at reducing the country’s dependence on foreign oil and at improving the environment, has been a bonanza for farmers. Land planted with corn soared by a fourth after Congress passed the Energy Independence and Security Act of 2007, which required that gasoline producers blend 15 billion gallons of ethanol into the nation’s gasoline supply by 2015.

Now the drought of 2012, the worst in more than 50 years, is making clear the downside of a policy that leads the U.S. to devote 40 percent its corn harvest to fuel production. With this year’s crop expected to be the smallest in six years, corn prices have jumped 60 percent since June. The ethanol requirements are aggravating the rise in food costs and spreading it to the price of gasoline, which is up almost 40 cents a gallon since the start of July.

The damage is far-reaching. Beef and pork producers are slaughtering their stocks at a record pace to cut use of corn feed that costs two-thirds more than three months ago. This week, President Barack Obama told a campaign rally in Iowa that the federal government will buy $170 million of meat to prop up the market. U.S. cattle herds next year are forecast to be the smallest since 1952, a guarantee of more expensive food in years to come.

Ethanol production and the drought are hardly the only forces contributing to higher prices. Exports of corn to China and other countries also play a role, as do ethanol policies in Europe. And it is true that ending the ethanol mandate might cut food prices by no more than 5 percent at best.

Still, the drought lays bare the folly of trying to expand an industry where the economic fundamentals don’t make much sense. Based on its energy content, ethanol is roughly 50 percent more expensive than gasoline, and the acreage required to produce it distorts land prices. Farmers this year planted the largest corn crop in 75 years, according to the U.S. Agriculture Department. The price of an acre of prime farmland in Iowa -- the nation’s biggest corn producer -- has more than doubled in the past five years, a time when other real estate prices tumbled.

Researchers at Texas A&M University have estimated that diverting corn to make ethanol forces Americans to pay $40 billion a year in higher food prices. On top of that, it costs taxpayers $1.78 in subsidies for each gallon of gasoline that corn-based ethanol replaces, according to the Congressional Budget Office.

As for the environmental virtues of ethanol, those were debunked long ago. True, gasoline-ethanol blends can lower greenhouse emissions by 20 percent, and ethanol can replace toxic additives such as benzene that make gasoline more combustible. But growing corn is energy intensive. Tractors that run on diesel fuel must plow fields, plant seed, spread fertilizer and pesticides (that run into local waterways), harvest the crop and haul it to refining plants. Unlike oil, ethanol is highly corrosive and can’t be transported by pipeline. Trucks or trains must carry the finished product to gasoline blenders. By some calculations, ethanol takes more energy to produce than it yields, negating the environmental benefits. more

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