Those are pics of the Great Drought of 2012, America’s worst drought since 1936. More than half (54.6%) of the contiguous 48 states was in drought by the end of June.
That kind of extensive and extended drought has consequences, and we’ll all be experiencing one of them soon. Brace yourself for higher food prices coming to your local supermarket, of a projected 15% increase. If your weekly grocery bill is $200, this means it’ll go up to $230.
Along with rising food prices will be social-political unrest. Last summer, two researchers from the New England Complex Systems Institute published a short paper examining the correlation between rising food prices and civil unrest.
Emma Rowley and Garry White report for the UK’s Telegraph, Sept. 23, 2012, that the world is “on track” for “agflation” — agricultural commodity inflation (of grain and oilseed) that will translate into record food prices within a year due to the US drought and similar water shortages in the farming belts of Russia and South America.
World food prices look set to hit an all-time high in the first quarter of next year – and then keep rising, according to the analysis from Rabobank, a specialist in agricultural commodities. By June 2013, the basket of food prices tracked by the United Nations could climb 15% from current levels.
Rabobank predicts “the coming year will see the world economy re-enter a period of agflation as grain and oilseed stocks decline to critically low levels, pushing the FAO [Food and Agricultural Organization] Food Price Index above record nominal highs set in February 2011.” The index offers a useful proxy for the prices paid by world consumers for food.
For policy-makers, the pick up in food inflation signals problems, as high food prices tend to magnify social unrest. “Politics and economics are inextricably linked as exemplified by the Arab Spring, which was preceded by a rise in food prices,” note Hermes fund managers in a recent report.
The good news is that Rabobank thinks the consumer impact could be less painful this time around compared to 2008, when there were severe shortages of wheat and rice. That is because today’s shortages are being seen more in crops used as animal feed, such as corn and soybeans, whereas in 2008, falling wheat stocks and various bans on rice exports capped the amount of grains available for direct consumption by people.
However, rising prices in animal feed crops will lead to higher meat and dairy prices, although consumers feeling the squeeze can switch from animal protein to staple grains.In the shorter term, higher slaughter rates as producers respond to rising feed costs should temporarily increase the meat supply. But the ultimate result will be smaller animal herd sizes, which will reduce meat and dairy production and ramp up prices.
None of this will translate into a rise in official inflation because, conveniently, the federal government does not include food and gas prices in its inflation calculation.
Simon Black of Sovereign Man has some advice for us:
Individuals can hedge their exposure in a number of different ways. The simple option is to invest in agricultural ETFs or long-term futures contracts. But I can hardly recommend this as a course of action given the massive systemic risk in the financial system.
Just as we often recommend holding physical gold and silver rather than owning a gold ETF, it’s much better to own physical agricultural assets.
If you’re on a budget, small gardens can be planted for a pittance as long as you’re willing to roll up your sleeves. Even if you live in an urban area surrounded by a sea of concrete, tabletop hydroponic and aquaponic systems can be set up on the cheap… and they’re easy to maintain.
If you have more capital to deploy, consider buying agricultural property, preferably overseas. Buying foreign real estate is a great way to move money overseas, plus it gives you a place to go if you really need to escape.