USDA disaster declaration:

Foretelling futures of instability

USDA map of US drought 2012

While the USDA declaration last week was lost in the salacious summer media spin cycle – the US Department of Agriculture’s announcement last week that over half the US is considered a disaster zones from severe drought – was by far the most significant news of the summer season. That’s probably obvious for the US – after all, this is the worst drought the United States has faced in over half a century – and the USDA’s designations amounted to the largest total area ever declared a disaster zone by the USDA in its history. But while the USDAs announcement is clearly bad for the US domestically – it is also less obviously bad news for the world. US production of corn and soybeans accounts for a significant share of the world’s agricultural output. The US share of corn production represents 52.5 % of total corn export and 42.9% of total soybean export. Late July this year saw corn prices rise 30% in one week. If the US drought continues through August – corn prices will be pushed even higher – and soybean prices will also skyrocket.

For most Americans living on the east and west coast this will mean higher poultry, beef and pork prices as “livestock producers face rising feed bills.” Americans won’t notice this until the fall and winter – when they discover the beef they’ve bought for their Christmas roast is double the price it was only three months before. But for the global food supply and the countries that depend on it’s robustness and stability – these droughts could mean much more. If the drought goes on through the summer –and droughts in other large corn exporting regions like South America and Ukraine stay as severe – large corn importers in Asia – could “scare nervy Asian countries into a rice-export ban.” This is what happened in 2007-08 leading to the food crisis in Africa, East Asia and the Middle East.

The US drought could signal deeper effects rippling to the surface in the upcoming years. Destabilizing political systems in fragile middle-east governments is possible, or a food crisis in the poorer nations of Africa and Central Asia as high corn and soybean prices choked supply to Asia causing countries like Japan and South Korea who depend on corn imports to ban rice exports to ensure adequate cereal stock. The shortage of rice brought on a global food shortfall that hit impoverished and food short regions with famine and emerging nations with food riots.

Countries in the Middle East are particularly sensitive to food shortages. Many don’t realize how significant the 2007-2008 food crisis was to the desperate act of self immolation by the Tunisian street vendor Mohamad Bouazizi, whose act of defiance sparked the 2010 Arab Spring, a revolution ongoing in Syria nearly two years on.

Behind the scenes – higher food prices sowed the seeds of political destabilization among the poorer Middle Eastern nations in 2007. Unlike other regions – the Middle East is unique in its “dependence on imported food more than anywhere else in the world.” In fact most Arab countries import as much as half of their total food supplies from abroad. When food prices spiked in 2007 – it “triggered a wave of bread riots (in Middle Eastern countries) as citizens saw local food prices rise as much as 37% in countries like Egypt. These dramatic spikes in food prices were years earlier – but today they are acknowledged by experts as the first significant factor in what would three years later lead to the revolutions in Tunisia, Libya, Egypt and Syria.

It is unlikely we will see anything quite so catastrophic as the perfect storm witnessed from 2007 through 2008. Not only did food prices balloon – but major financial systems in the west were brought to their knees as large banks folded beneath unsustainable debt instruments. At that time instability infected every corner of the world economy.

As the US drought drags on and corn crops are lost for the year – economists and soybean farmers will have their eyes on US precipitation forecasts for August and September. It is becoming clear that if Soybean production is dealt a similar blow as corn in 2012, we may be in for another food crisis in 2013 – and perhaps even major political and social instability in the years that follow.

A final variable this equation is America’s bizarre divvying of its corn crop. The US splits the corn harvest roughly in thirds: one goes to the production of bio-fuels, a third sold for domestic livestock feed, and finally a third for international export. The third that goes to ethanol production is mandated by the federal government and set at an artificial minimum based on the total annual corn crop. Organizations concerned with world food supply trends like OXFAM believe the US mandate to turn corn into bio fuels leads to higher world prices that if exacerbated can cause shortages. If no corn mandate existed for the production of bio-fuel, that same corn would bolster the current share sold to national corn importers and to livestock feed. Corn farmers would not suffer if the mandate was killed, and without a mandate the increased supply to Asia would lower the likelihood the countries with a high demand for corn would resort to export bans on rice.

It is irresponsible and in bad international form for the US to maintain a policy requiring corn be used to make bio-fuels – especially when those same ears of corn could be shifted to more useful sectors of the economy without any negative impact on the producers of US corn. Support for our corn farmers is not something that will change. Yet the US should consider to what extent supporting the corn industry is worth exposing the global world to instability and potential food shortages into the future.

To learn more – got the USDA website:
August 2012 USDA disaster zone press release

Posted in commodity, economics, Uncategorized.

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