It’s hard to believe, but yesterday, European Central Bank President Mario Draghi left many confused after he failed to elaborate on his previous commitment to do “whatever it takes to preserve the euro.” Business leaders in London eagerly awaited specific measures to protect their economic interests, but instead, they received vague assurances. As a result, the DOW dropped 92 points, marking its fourth consecutive day of losses.
However, let’s shift our focus away from financial markets for now. There’s a significant drought occurring that warrants attention…
Back in 2007, Georgia faced severe drought and water rationing, leading the state’s government to run out of ideas on how to provide relief to thirsty residents in Atlanta. In a moment of desperation, they gathered on the steps of the state Capitol to pray for rain. Miraculously, their prayers were answered, and rain soon followed.
Now, once again, drought conditions have returned, this time affecting the Midwest and the Mississippi Basin. Experts are calling it the worst drought since 1956.
Last week saw the first rain since mid-June, but unfortunately, the relief was short-lived, and dry conditions returned swiftly. On Monday, Oklahoma Governor Mary Fallin declared a state of emergency for all 77 counties due to “extreme or exceptional drought conditions.”
Brown Corn Stalks
Along the Mississippi River, barge operators are lightening their loads to avoid grounding on low water levels. Compounding these woes, numerous fish have perished as lakes and rivers dry up. In addition, the U.S. Army Corps of Engineers has halted the release of water from Kansas River reservoirs. If conditions persist, navigation on these rivers may become impossible.
As if that weren’t enough, drought conditions threaten to decimate corn and grain crops, prompting fears of soaring global food prices…
The combination of intense heat and lack of rainfall has led to brown corn stalks. Many do not have any grain ears, and those that do are often half their normal size. The situation is only getting bleaker.
According to the U.S. Department of Agriculture’s crop progress report released Monday, “24 percent of the domestic corn crop was rated as good to excellent as of Sunday, a decline from 26 percent the prior week.” Unfortunately, this represents the USDA’s lowest corn crop rating since 1988.
“Grain analysts surveyed by Reuters estimate a U.S. corn crop of 11.2 billion bushels, the smallest in six years and down 14 percent from the USDA’s latest projection of 12.97 billion. Initial predictions expected a crop exceeding 14 billion bushels.”
It’s clear that as supplies diminish, prices are set to rise…
What You Can Do About the Drought and Rising Food Prices
This July alone, corn prices surged by 20 percent. Since mid-June, prices have nearly doubled. For instance, at the start of July, three ears of corn could be bought for $0.99 at a local market; just last weekend, two ears of corn cost the same. This translates to a 50 percent increase on a per-unit basis.
Nonetheless, two ears of corn for $0.99 still seems like a fair deal. The impact on our grocery budget may be minimal. But how will rising feed prices affect the costs of meat and dairy?
“Next year,” reports CNBC, “the USDA predicts beef prices will rise by 4 percent to 5 percent, among the largest increases for food. Dairy prices are expected to increase by 3.5 percent to 4.5 percent, poultry and egg prices by 3 percent to 4 percent, and pork prices by 2.5 percent to 3.5 percent.”
From what we observe, the current drought and rising food prices could trigger a repeat of the global food crisis witnessed in 2008. Recall that during previous spikes in food prices, civil unrest erupted across Africa, the Middle East, and Latin America. Moreover, U.S. ethanol policies, which allocate almost 40 percent of America’s corn for ethanol production, restrict the availability of corn on international markets, further driving up prices.
“What’s difficult to grasp is that while we recognize the drought today, its true impact will be felt six months to a year from now,” says Marie Brill, a policy analyst at ActionAid.
So, what can you do?
Between May 2007 and June 2008, the PowerShares Multi Sector Agricultural ETF (NYSE: DBA) saw a remarkable rise of 75 percent. Similarly, from June 2010 to March 2011, it surged by 54 percent.
Since June 1 of this year, DBA has increased by 16 percent. Drawing on past experiences from 2008 and 2011, this current price escalation could persist for an additional 7 to 11 months, potentially increasing by another 38 to 59 percent.
While past performance doesn’t guarantee future results, it’s certainly worth considering as a potential investment strategy.
Best regards,
MN Gordon
for Economic Prism
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