When I decided to dedicate a few hours a week to sharing some insights on the energy world at large, I told myself that I would try to post about a different topic each week - at least for the first few months, before I covered the basics of all of major components of the energy world and started explaining how they fit together. But with respect to the current climate situation in America today, that cannot be the case this week. Right now the most important story is the drought, and most people are still missing it. Crop projections should continue to worsen until harvest, and agricultural commodities of all stripes are going to end up far more expensive once the dust settles.
The worst U.S. drought since the dust bowl.
This is the Dust Bowl of 2012, that was clear by mid-July. The full impact of the drought hasn't unfolded yet, but that doesn't change the magnitude of this event. I first attempted to publish an article on the drought the weekend of July 20-22. I succeeded in publishing an article a week later - with a few hastily updated statistics and a heavier tie-in to ethanol.
But as the situation in the Midwest has gotten increasingly dire, discussion concerning the drought has consistently held a tone of dismissal, with many Seeking Alpha contributors treating this extraordinary climate event as though it were some form of media hype. Many of the published articles are rife with warnings of market corrections and whispers of possible rainfall. The media has also been slow to react and far less concerned than an event of this magnitude warrants. This is akin to dismissing the earthquake/tsunami that hit Fukushima last year as "just another earthquake in Japan."
So only four articles into my new hobby I've chosen to re-address something that I had treated last week. I apologize to those that have already encountered the brief summary I previously offered.
The big problem that most analysts are having with understanding the magnitude of the crisis is the extreme rapidity with which it occurred. The following map is taken from the U.S. Drought Monitor's May 31 report:
As you can see, at the start of June there was a drought in the Rockies and the Southwest, but no drought and little abnormal dryness in the corn belt or the breadbasket. The crop reports at the time projected record yields for 2012.
June news was dominated by the health care brouhaha and the record heat wave - and of course the ever-present crisis in Europe. The news showed a few shots of dry corn in early July and then there was an evil nut-job in Colorado who showed us all that we still can be shocked by horror in the real world, and then the Olympics started ramping up…
In the end, this just hasn't taken hold in the media, and it therefore just doesn't feel like a big deal. Besides, it's only been two months! Worst case is the corn belt is shy around 10 inches of rain. Right?
This is the map from the current Drought Monitor report:
It's clear that things have changed, and have changed quickly. There are now 1,452 counties in America that have been designated as disaster areas due to drought - a list that encompasses more than half the counties in America, a list that grew by 218 counties just last week.
For corn (CORN) specifically, I produced the following table (you can check my last article to compare a similar data set last week), specifically to track the impact on corn. The 20 states listed here are responsible for ~94% of the total corn production in America:
% of the total 2011 U.S. corn for grain production
% of the state suffering drought conditions:
% of state suffering severe drought conditions
% of state suffering EXTREME drought
% of state suffering EXTRA-ORDINARY drought
If you assume that the corn growth is evenly distributed throughout the states, you can get a rough estimate of the percentage of the corn that is suffering under the varying drought levels in America. As of this most recent report: 78.9% of the nation's corn crop is suffering under drought or worse; 68.9% is under severe drought or worse; 40.7% is under extreme drought or worse, and 4.8% is under extraordinary drought.
Technically, this analysis is not valid, because the corn crop is not spread evenly over each state. (A more thorough state-by-state analysis should show far greater exposure to drought then this simplified methodology expresses.)
For a better understanding of how quickly this "flash drought" has taken hold, the following data was obtained using this same data set and the same assumptions over the last six weeks.
A similar chart could be made for soybeans, as many of the states overlap, but the situation for soybeans would probably be worse, as states like Arkansas, Missouri, and Kansas have a much greater share (~13.6%) in the national soybean production than they have in the national corn production - but I haven't tabulated the data to know for certain.
The data also looks very bad for hay production, and grazing has become so poor that the federal government has opened up protected wetlands and parks for grazing for the first time in history.
The lack of grazing for hay will force ranchers to purchase far more corn, oats, barley, wheat, or whatever else they can per pound of meat they produce forcing higher demand for all food staples.
Many of the drought-blighted states are also large producers of wheat, oats, barley, peanuts (Georgia did not make the list - as the focus was corn, but the state of Georgia is one of the hardest hit by drought in the U.S.), and rice, all of which will see far lower yields this year (though not nearly as significant as corn and soybeans).
A quick international note:
There are quite a few rumors that Russia's drought may reduce their wheat export by 18 million tons.
It's not Rain, it's Heat!
While my prior article drew some criticism for over-simplification (no factoring for vapor lift, condensation into water droplets for clouds reducing partial vapor pressure, high and low pressure columns, or partial humidity levels), the purpose wasn't to accurately predict exact desertification rates. There are so many variables that such a feat would be the work of entire research teams.
The purpose was to show the correlation between temperature and the amount of moisture that is drawn from the land into the atmosphere. Much of the complexity was removed from the discussion (because it was tedious and bogged the reader down in details that were not central to the discussion). However, the maximum concentration (saturation level) in the first 10,000 [ft] (~3 km) of atmosphere still serves as a useful generalization (ignoring the upper 6 [km] of cloud formation more than balances out ignoring partial humidity levels).
You are free to read my earlier work which explains this in greater detail, but if we use this generalization we can show the drying impact that heat has on the land in a kind of "rainfall equivalent" - which will help put the current drought in clearer context.
Any day on which the temperature is warmer than average, there is more water drawn from the land than average, which means that even with average rainfall the land will be dryer than average. The dust bowl of 2012 has been caused by abnormal heat, and hoping the drought impact will lessen as we go into August (traditionally the hottest period of the year) is essentially praying for a miracle.
Using the maximum concentration of water in the first 3 km of atmosphere as a useful generalization: During the hot portion of a day with a high of 96 degrees F instead of a high of 90 degrees, the atmosphere will be attempting to suck an additional 0.59 inches of rainfall equivalent from the land and biomass in order to achieve saturation at the given vapor pressure, so if it then rained a half-inch that night, the land would be doing little more than making up for the excess heat, but still not getting the additional hydration it needs. If the day is 100 rather than 90, then the first 1.05 inches of rain serve to merely keep the heat of the day from further baking the land dray. (Again, this cannot be treated as an exact mathematical equivalent, but it is a useful generalization, and is far more of an accurate depiction of local hydration levels then looking at rainfall without consideration of temperature).
To illustrate how this works more fully, I've taken some information concerning the weather of Iowa City, Iowa; during the month of July. Iowa City was chosen for its iconic name (Cornville of The Corn State) rather than for some weather-related anomaly that exaggerates the impact we are discussing.
As you can see, there were only 4 days where the temperatures did not exceed the average high temperature and 1 night that temperatures did not exceed the average low temperature throughout the entire month. During the high temperature portions of the day, the atmosphere would have attempted to leach a cumulative total of about 22.6 additional inches of rainfall equivalent from the land (based solely on the saturation level for the difference in temperature). During the low temperature portion of the night, the atmosphere would be attempting to leach an additional around 9.0 additional inches from the land during the month.
Iowa city has an average rainfall of 4.58 inches during the month of July, and only received 0.26 inches. That's indicative of a 4.32 inch shortfall. But the scorching heat has stripped between 9 and 22 inches of rainfall equivalent from the land during that same time - which leaves the crops in a state that would be expected of a 13-26 inch shortfall (a state of "extreme drought").
The same can be shown for the entire Midwest and High Plains. The heat wave was the story of the drought - we just missed it.
This is the reason why every climate model projects some level of desertification as the climate warms - the heat has a larger impact than the rainfall. Ergo, there is no reason to suspect significant remediation in the month of August, and by the end of August there will be no time for most of the crops to recover. Waiting until the damage is done and then reporting that the damage was done is not helpful. We have to look at how damaging this drought will be. It's not over yet, and for many regions critical to corn and soybean production the worst is yet to come.
An important note: This is not about global warming. The record heat wave that has caused this "Dust Bowl of 2012" is a result of the conjunction of several strong weather systems combined with an unusually high solar maximum.
GHG forcing has certainly served to make this summer significantly warmer than the last time we had a similar convergence of strong weather patterns resulting in prolonged heat waves and high solar irradiance (1950's?), and GHG forcing will serve to make the next period when such a convergence occurs hotter still, but the Midwest has seen temperature increases this summer that exceed most projections for around 2100 AD. That is NOT indicative of average warming rates due to CO2, and there is no reason to suspect that every summer henceforth will see a similar heat wave. Warming is occurring at a gradual rate, not at 5-10 degrees per year. Global warming is a genuine global concern, but it won't kill off all life on Earth in a decade.
As long as the Summer stays hot, it's going to get dryer for much of the major agricultural states throughout the Midwest and the High Plains. While there may be some fronts moving moisture in at the periphery, the overall interior is dry enough that the moisture won't penetrate far and won't do much to save an already devastated cropland. There is little hope that the crop projections for corn, soybeans, wheat, oats, rice, or barley will do anything other than continue to degrade over the next month.
Livestock feed requirements will increase, as the hay harvest will be horrible, and livestock prices will remain extremely high.
That means the market price of all of these commodities will increase (C, S, W, O, RR, LC, LH), and there will be solid support for all grain-related funds: (CORN, SOYB, WEAT, JJA, JJG, DBA, GRU, UBC, COW, FUD). Substitution and livestock demand will continue to support higher prices in all of these products until harvest, at which point prices will stabilize as the actual damage will be clarified.
Until then, ignore the numbers-only focused analysis which constantly declares that a correction is imminent. Just wait for autumn to finally cool things off.
Some relief may come if government is wise enough to eliminate ethanol (FUE) blending mandates for a year, but it is doubtful that such a move will be made prior to the election. Ethanol is going to be far higher priced than gasoline for the next several months regardless, so ethanol refineries are going to see another period of extreme bloodletting.
When the dust settles in the fall, we'll know whether this Dust Bowl of 2012 equals or even exceeds what was seen in the 30's. But there has been little doubt since mid July that no drought since the great dust bowl of the 30's has matched this one.
Agricultural industry that is based in the U.S. Northeast, the far North, the Northwest, and/or near either the Pacific or Atlantic should be very well positioned for the next year, as will be companies that had invested heavily in agricultural storage over the past few years.
Message to the agricultural industry
I was remiss to mention this last time, but you and yours are in my prayers. I hope that in our country's hysterical push towards austerity that you don't get left to deal with the aftermath of this drought without additional support.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. While I hold no agricultural commodities or funds, I consider this subject to be extremely important to my economic portfolio because I eat food. My exposure here is more significant because I eat meat - an activity which may be pared back as a result of the coming trends discussed herein.