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Thursday, 26 July 2012

US Drought Could Cause Global Unrest

US Drought Could Cause Global Unrest

|Tue Jul. 24, 2012 12:21 PM PDT

Twice in the last five years, rising food prices triggered global waves of social unrest. With drought baking US crops, another round of soaring, society-straining price spikes may happen in coming months.

According to researchers from the New England Complex Systems Institute (NECSI), commodity speculation—investors betting on food prices—will amplify the drought's market signals, creating a new food bubble and the crises that follow.

"The drought is clearly going to kick prices up. It already has. What happens when you have speculators is that it goes through the roof," said NECSI president Yaneer Bar-Yam. "We've created an unstable system. Globally, we are very vulnerable."

The ongoing drought, the United States' worst since the Dust Bowl, is expected to last until October and will decimate US harvests. America is the world's largest exporter of corn, wheat, and soybeans; global prices for those commodities have already surged to record levels.

While the United States is relatively insulated from food price increases, people in developing countries, who spend far more of their budgets on food and rely on agricultural imports, are extremely vulnerable. For them, high prices are a catastrophe.

Since 2004, global food prices have slowly but steadily increased, with drastic and socially destabilizing spikes in 2007 and again in 2010. Economists argued over the causes, with blame cast on poor regional harvests, supply shortages caused by converting food crops to biofuels, and—most controversially—speculation.

Until the late 1990s, food markets in the United States were mostly limited to people with direct interests in food prices, such as farmers and crop buyers. Deregulation allowed hedge funds and investment banks to start betting, changing market dynamics and making them prone to sudden, massive fluctuations.
In earlier research, Bar-Yam's group developed mathematical models of global food market behavior that found biofuels responsible for a slow upward rise in prices, and speculation for the spikes. That model anticipated a new food bubble in early 2013, but couldn't have foreseen the drought.

In the new analysis, released July 23 on NECSI's website, Bar-Yam's group added drought-triggered price increases to the model. With those figures included, the already grim forecast becomes even darker. "The drought may trigger the third massive price spike to occur earlier than otherwise expected, beginning immediately," wrote the NECSI team.

"We've created an unstable system. Globally, we are very vulnerable."

According to Bar-Yam, excessive speculation acts as an amplifier, exaggerating whatever signal the market receives. Left alone, a highly speculative market would naturally experience boom-and-bust cycles, but this summer's drought-precipitated surge in food prices will accelerate the next bubble's formation.

Models are, to be sure, always tricky, but this one does seem to have predictive power.

"The work they are doing on food prices is pathbreaking," said agricultural economist Peter Timmer of the Center for Global Development, who is familiar with NECSI's modeling. "I don't think their empirical model 'proves' that biofuels and speculation are the main causes of volatile food prices, but their model is the only one that's empirically tracked those prices accurately over the last eight years."

What happens after another bubble is a pressing question, said Bar-Yam. In both 2007 and 2010, massive unrest almost immediately followed food price surges, tracking market behavior with uncanny synchronization. Some Middle East experts say that rising prices even triggered the Arab Spring, providing a spark that ignited long-simmering tensions and resentments.

While the exact role played by food is difficult to isolate, a new NECSI analysis of the 2008 Yemeni uprising supports the spark hypothesis. In a paper released July 24, NECSI found that the geographical character of violence changed immediately after the price spikes, shifting from ethnically localized to widespread.

"I think the analysis has merit," said political geographer Charles Schmitz of Towson University. "The food prices did disturb things. The legitimacy of the government was undermined."

While some might see the Arab Spring's catalysis as a positive side effect, food shortages and panicked riots are hardly the most desirable path to social change. To keep prices under control, experts have recommended limiting financial speculation in commodity markets and using biofuel crops for food instead.

"In the short run, USDA needs to figure out a way to remove the mandate on ethanol use from corn," Timmer said. "If we could free up 20 to 30 percent of the US crop, reduced as it is, it would bring corn prices down very quickly."

New speculation limits are scheduled to be enacted by year's end, but drought means that may be too late, said Bar-Yam. In the meantime, the USDA has rebuffed all requests to reduce corn biofuel allotments.

"These are new tools for understanding social change," said Bar-Yam of NECSI's modeling. "The thing we're worried about is that they're pointing to global catastrophe in a short period of time."

US Drought Could Spell Another Global Food Crisis

As the Midwest bakes and food prices soar, threats of a ripple effect in the Middle East could lead to more uprisings.

 Tue Jul. 24, 2012 3:00 AM PDT

This story first appeared on the Guardian website and is reproduced here as part of the Climate Desk collaboration.

America's drought threatens a recurrence of the 2008 global food crisis, when soaring prices set off riots and unrest to parts of Africa, the Middle East, and Latin America, food experts warn.

Corn prices reached an all-time high on Friday, as the drought expanded across America, trading at $8.24 a bushel on the Chicago exchange. Soybeans were also trading at record levels.

The US Department of Agriculture meanwhile predicted there would be less corn coming onto global markets over the next year, because of a sharp drop in US exports.

America is the world's largest producer of corn, dominating the market. Corn is also connected to many food items—as feed for dairy cows or for hogs and beef cattle, as a component in processed food—expanding the impact of those price rises.
That means the effects of the drought will travel far beyond the Midwestern states baking under triple-digit temperatures, said Robert Thompson, a food security expert at the Chicago Council of Global Affairs.

"What happens to the US supply has an immense impact around the world. If the price of corn rises high enough, it also pulls up the price of wheat," he said.

He went on: "I think we are in for a very serious situation worldwide."

Some analysts are predicting a repetition of the 2008 protests that swept across Africa and the Middle East, including countries like Egypt, because of food prices.

In 2008, the food shock was due to rising prices for rice and wheat. This time, it's because of corn and soybeans, and there were no signs of shortfall in rice or wheat production.

But the full effects of the American drought will likely take several months to emerge. Its severity will be determined by a number of additional risk factors.

Global grain stocks have reached a new low, with the US and other countries running down their reserves. "There are no reserves of these foods in the US anymore," said Sophia Murphy, a fellow at the Institute for Agriculture and Trade Policy.

That means there is no room for maneuver for countries forced to import grains.

Thompson also warned that countries could make matters worse by stockpiling—putting further pressure on prices. That was the pattern during the 2008 food crisis when Russia, Ukraine, India, and Argentina all cut off grain exports.

It was unclear as well whether America's demand for ethanol would further limit the amount of corn on the world market. About 40 percent of America's corn is used for ethanol—which helps drive up the price of corn, analysts say. But there were some reports that American ethanol plants were in shutdown across the Midwest, because high corn prices made production uneconomic.

"What's difficult is that we see a drought happen today but people really are going to be feeling that six months from now, possibly a year from now," said Marie Brill, a policy analyst at ActionAid.

But she said it was already clear the reduced supply and high prices of corn and soybeans were set to cause serious hardship—especially among poor people in poor countries which depend on imported grain.

Countries that are net importers of corn could be hit the hardest, including South Korea, Japan, Peru, Guatemala, El Salvador, and Columbia. Much of East Africa will be badly affected, she said.

Even those African countries that produce their own corn will suffer because they are locked into the higher global prices, she said. West Africa is already in food crisis. "If supply is as awful as the US government is predicting we're going to see another round of high prices and another increase in hunger," Murphy said.