Anatomy of a drought

Flying in over Chicago two weeks ago, it was hard not to notice the network of brown and yellow lawns and parks throughout the entire city – even in its more affluent neighbourhoods that regularly flout water conservation ordinances.

This is because Chicago, like 56% of the continental U.S. is officially in drought, with 26 states having already declared they are in a “natural disaster.”

While in the short term it means temperatures in the high 30’s and even into 40 degrees Celcius (90 and 100 degrees Farenheit)– it will have a lasting impact on world food prices.  The Guardian reported yesterday that the U.S., one of the largest producers of corn and soybean, is officially running out of its reserve stocks.

This is big, big news not just for the U.S., but also for the rest of the world, including Canada. (And yes, Montreal!)

While the livestock industry in the U.S. is already reeling from shortages of arable land and high prices of feed, immediate impacts are expected on food prices in countries like South Korea, Japan, Peru, Guatemala, El Salvador and Columbia, and East Africa that import corn.

There are already grumblings in the international media of what this could mean politically. The Arab Spring was tied to high food prices, and it’s possible there could be a second wave of global protests, according to the Guardian.

“The high prices of food have resulted in accumulations of inventories at the same time as people can’t afford food,” said Bar-Yam, who noted that the Arab spring was triggered by the food-price bubble. In fact, Necsi’s quantitative model of speculation predicted the uprisings in Tunisia, Libya and Egypt, and warned that if food prices remain inflated, riots and revolutions will go global sometime between July 2012 and August 2013.”

So, stay tuned for that.

But interestingly, it’s not just the weather that’s playing an antagonistic role. The other major factor is the way we trade corn in the U.S, which can lead to speculative practices regularly slammed by institutions like the United Nations and the World Food Programme. Institutions like the former Chicago Board of Trade/Mercantile Exchange (now merged) are credited with the last international food crisis in 2007-2008 that the WFP says “pushed millions of people deep into hunger.”

One reason for the recent spikes in corn prices is the biofuel industry, which consumes 40% of U.S. corn and has renewed interest in the crop by investors in futures markets. They essentially bet on the future price of crops – which back in the day was supposed to give farmers financing for the next years.

Last year Professor Yaneer Bar-Yam at the New England Complex Systems Institute (Necsi) told the Guardian:

“International thirst for biofuels has put a strain on arable land previously reserved for food production. At the same time as the rise of the biofuel mandate, the rise of investable commodity indexes and other electronically traded funds has offered investors of all stripes a chance to sink their cash in a sparkling new casino of derivative products. As a result, an ever-flowing spring of speculative capital sustains the status quo.”

Photo courtesy of Parker Michael Knight via Flickr 

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