Even though the mainstream media seems to have lost some interest in the drought, all of us should continue to be aware of it since its ramifications are far-reaching.
As we discussed in this report, it's all connected to a larger pattern of exponential growth that is simply no longer sustainable. At stake is nothing less than the traditional American way of life.
This monumental drought has already led to sharply higher grain prices, increased gasoline costs (via the pass-through of higher ethanol costs), impeded oil and gas drilling activity in some areas (due to a lack of water), caused the shutdown of a few operating electricity plants, temporarily reduced red meat prices (but will also make them climb sharply later) as cattle are dumped in response to feed- and pasture-management concerns, and blocked and/or reduced shipping on the Mississippi River.
All this and there's also a strong chance that today's drought will negatively impact next year's winter wheat harvest, unless a lot of rain starts falling soon. Hurricane Isaac certainly helped, but didn't go far enough.
Here's an in-depth look at why the U.S. Drought of 2012 is far from over...
Bigger Than Expected Crop LossesCertainly the number one story around the U.S. drought centers on its impact on grain production, specifically corn and soybeans. In a minute we'll discuss the other impacts, but we'll start with the one that has the greatest potential to cause both suffering and strife over the coming months (and possibly years), especially for those on limited budgets.
In 2011, the U.S. reaped a corn harvest of some 314 million tons. In 2012, the USDA has estimated a harvest of 274 million tons - a shortfall of 40 million tons - despite record acreage being planted.
While the USDA has been steadily reducing their crop estimates, practically with every passing week, it seems likely that the USDA remains behind the curve today, as it has been every step of the way. A different source for information comes from the Pro Farmer Midwest Crops Tour, which is coming in slightly under the current USDA estimates:
The summary here is that the Pro Farmer Tour is reporting crop yields to be 2% - 3% lower than current USDA forecasts, which is a big deal when it comes to food. We're talking a few tens-of-millions-of-bushels' difference.
The somewhat sour note in this unfolding drama is the fact that 40% of the nation's corn crop goes to ethanol producers, which means that food will be burned in the nation's auto fleet instead of helping to keep prices down for consumers and animal feed. Another 40% goes to animal feed (chicken, cattle, hogs, etc.), and the remaining balance goes to direct human consumption.
However, the ethanol mandate is a congressional requirement for our fuel blenders, so they do not have a choice in the matter. It would literally take an act of Congress to even temporarily suspend the ethanol requirement - and in an election year, that's just not going to happen, given the powerful constituencies invested in preserving that mandate.
Of course, higher input costs will ripple through the entire chain, so perhaps Bernanke will get the inflation he seeks, although it won't be the one he wants. The inflation he wants is simple monetary-driven inflation. The inflation he will get is nothing more than a supply/demand mismatch.
Still, the USDA has a handy calculation for estimating the future impacts:
Because corn is the base unit for so many things (especially in the form of high-fructose corn sweetener), and because it's a primary feed component for finishing cattle and raising chickens and hogs, it tends to have a pretty decent impact on food prices.
However, it takes time for those price hikes to work through the system. So it will not be until 2013 sometime that we really begin to feel it in the U.S. And for the rest of the world that lives more directly on grains? They're not as lucky. The price hikes hit them almost immediately.
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