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Wednesday
Mar272013

Drought To Slow Economy And Cause Inflation

Contributed by Chriss Street. Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. He lives in Newport Beach, CA.

Despite the hammering from a late winter storm that blanketed much of the Mid-West and East Coast with 4 to 8 inches of snow, the National Oceanic and Atmospheric Administration just predicted that the 2nd worst drought since the Great Depression will continue to lay waste to wheat and corn production across the America’s Great Plains. The compounding effects of the drought will slow the U.S. economy by up to 1% and cause food costs to rise by another 4%.

The annual spring outlook from the National Oceanic and Atmospheric Administration forecasts drier and hotter conditions across the Great Plains, including parts of Iowa, Kansas, Texas and Oklahoma, where farmers had dramatically increased plantings of winter wheat and corn in response to near record grain prices following last year’s drought. The 3 month forecast warns the late snow storms will also lead to flooding

For the past 120 years, weather observers have kept track of the climate at thousands of places across the United States and around the world. Paleoclimatologists have recorded daily temperature, rainfall, winds and other weather patterns. From this data, they have described what is normal for climate in a given place at a given time of the year. Every decade or two over the historic climate record, a given region experienced dry conditions, referred to as drought, with devastating agricultural consequences. The accumulated climate data established that there are recurring patterns of weather.

For the Great Plains in a state like Nebraska, the expected annual rainfall is approximately 20 inches during a normal year. But for Alabama, the expected annual rainfall is 55 inches. Consequently, differing areas develop different agriculture and social institutions that are geared to the expected level of rainfall. If Alabama got only 20 inches of rain, the people would suffer a catastrophic drought. In contrast, if Nebraska got 55 inches of rain, the people would suffer from catastrophic flooding.

Agricultural economists combine the weather moisture availability with vegetative conditions, agricultural productivity, soil moisture, water levels in reservoirs and streams to judge expected climatic economic impacts. Using these measures, the University of Nebraska’s Drought Mitigation Center maintains a weekly drought monitoring map, along with a host of other information to help farmers and ranchers manage their affairs.

Unfortunately, the historic man-made record for measuring climate only dates back for 120 years, so scientists study secondary climate change indicators, such as the width of tree rings, lake and sand dune sediments, archaeological remains and other environmental indicators. For example, these studies suggest that the early Virginia settlers at the infamous “Lost Colony of Roanoke Island” may have perished because the area suffered the worst drought since 1185 A.D. from 1587 to 1589.

The worst droughts in modern times were in the 1930s and 1950s. The 1930s drought was longer and more extensive than any drought in the last 300 years, but around 200 A.D., America experienced drought conditions lasted for several decades. This year’s drought will result in above-normal temperatures in the south-west and could expand to California. Only the Pacific north-west will experience below-normal temperatures.

The most obvious cost of the drought will be higher grain and corn prices, but other “knock-on” effects will cause more economic pain. Dry forests in the upper mid-west will generate wild fires and floods in the Dakotas will submerge 20,000 acres of farm land. Another dry year will intensify the low water conditions along the Mississippi River that held up barge traffic last year, at a financial cost of $300 million a day.

In a brutal example of the personal costs of drought, Cargill’s 600,000 square foot slaughterhouse that employed 2,000 workers in Plainview, Texas was closed on February 1st after 40 years of continuous operations. Higher corn prices are causing food processors, like Kraft and Conagra, to cut back and ranchers to shrink their herds.

The drought’s total financial losses last year from low crop yields, forest fires, and restricted recreation use is estimated at between $50 billion and $80 billion. In addition, food price inflation rose to 4%, costing American consumers $60 billion. Don’t forget the $10 billion in subsidies to convert 40% of America’s corn crop into ethanol based gasoline—putting more strain on food supplies. This year’s drought costs may be even higher. Contributed by Chriss Street.

CHRISS STREET & PAUL PRESTON Present
“The American Exceptionalism Radio Talk Show”
Streaming Live Monday through Friday at 7-10 PM
Follow Blogs: www.chrissstreetandcompany.com & www.agenda21radio.com
Click here to listen: http://www.ustream.tv/channel/american-eceptionalism-news

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