Drought in the USA: Inflation worries and water shortages

Not only the inflation trend is proving to be a serious aspect from the point of view of more and more players on the financial markets, but also the ongoing drought in large regions of the American West is leading here and there to comparisons with the Dust Bowl era in the 1930s. Does history always repeat itself in the end?

The recently published price indicators on the markets for agricultural commodities and soft commodities widely pointed to prices climbing in many segments, in some cases significantly.

This includes, among others, the Bloomberg Agri Spot Index, one of the most important global barometers of food price inflation, which last week climbed to its highest level in the last six years.

To put things in a nutshell, this is just another problem in the current environment because food is one of the most important and meaningful components in consumer price indices on the Asian continent.

Inflation, which is accompanied in part by significantly rising food prices, thus threatens to have a highly detrimental effect on a region that is home to more than half of all the inhabitants of our planet.

It is to be expected that rising food prices in this region will translate into demands for higher wages and salaries. In the long term, we must therefore also expect factory and purchasing prices in Asia to continue to climb.

In addition to consumer price indices, this development can already be seen in most producer prices on the Asian continent, which – like food prices – are climbing. What is the result of this development?

The answer is that Asia will export at least part of its domestic inflation to the rest of the world in the course of the next few months, which means that rising prices can also be expected in the USA and Europe.

Among others, Jim Reid of Deutsche Bank AG warns of impending turmoil, referring to a presentation showing that the Bloomberg Agri Spot Index is up about 76 percent compared with the same period last year.

According to Reid, this is the largest increase on an annualized basis in nearly a decade. Historically, he said, there are only a few comparable periods when looking at this trend. The Bloomberg Agri Spot Index was created in 1991.

Reid credits policymakers at the Eccles Building, home of the Federal Reserve, in part for this. The significance of the currently observable record increases in the agricultural and soft commodity markets goes far beyond what those responsible for political and monetary policy are willing to admit, he said, because food price increases have historically been accompanied by periods of social unrest.

This was also recently pointed out by perma-bear Albert Edwards of the major French bank Societé Generale. According to him, the last time there was a comparable development was in 2011, which was followed by the “Arab Spring” in North African countries and some other regions of the world.

In Tunisia, for example, these events led to the fall of the government around ten years ago. Referring to the chart above, the rise in food prices associated with these events in 2010 and 2011 is very clear to see.

Of course, emerging and developing countries are proving to be even more susceptible to such developments than classic industrialized nations. This is because the inhabitants of emerging and developing countries continue to spend a far higher proportion of their disposable income on buying food than is the case in industrialized nations.

According to Reid, the link between rising food prices and the outbreak of social unrest can be traced far back in history. It is not uncommon for nations, their governments and entire societies to face major turning points at these times.

One of the best examples, he said, was the outbreak of the French Revolution in 1789, which went hand in hand with an overthrow of the ancién régime and a deposing of the monarchy. Contributing to this development was a multitude of crop failures that preceded this revolution.

In the course of this, food prices climbed unceasingly – also, of course, due to a bankrupt court, exorbitant debts and a steadily growing money supply. Who would not remember Marie Antoinette’s recommendation that “if they have no money for bread, they should eat cake”?

Things would have been similar at the time of the revolutions in 1848 on the European continent, which could be traced back to a failure of the potato harvests in the 1840s and a related famine in large parts of Europe.

The fall of the tsarist regime in Russia in 1917 was also connected with a food shortage after a quasi lost world war. It therefore remains to be seen what the consequences of the currently observable rise in food prices might be, as Reid warns.

Given the many difficulties that have already arisen in the wake of the ongoing pandemic and are continuing in many places, it would not be a great surprise from a historical perspective if there were a wave of new social unrest around the globe, Reid says.

On the other hand, it can be argued that clean fresh water also seems to be becoming another major shortage these days. This problem is likely to worsen in a not too distant future.

It is enough to look to the American West these days, as the region is facing a water crisis that has not been seen in this form since those days of the Great Depression and the infamous Dust Bowl days.

It is perhaps fate, or perhaps simply irony, because from today’s perspective, many similarities can be inferred with those events at the time of the Great Depression. On the web page of the University of Columbia it says to this topic among other things as follows:

Researchers state that rising temperatures were responsible for about half of the speed of the spread of the current drought as well as its significance. From today’s perspective, however, it no longer matters whether or not this is the worst drought ever, according to a study whose authors are associated with the Lamont and Goddard Institute for Space Studies.

With reference to last year’s observations, the only thing that matters is that this development has worsened by far – independently of climate change. Further temperature increases are to be expected in the future, which is why it is likely that the drought in the region will continue for the foreseeable future.

After temporary recoveries, there could then always be a relapse, researchers are convinced. As average temperatures rise, there will be more and, above all, increasingly long periods of drought. With a little luck, there could be higher rainfall for a while.

But in the future, this degree of dependence on the factor called luck would grow in order to get out of these droughts. At the same time, it would take a lower and lower degree of bad luck to experience a relapse into drought again. At worst, it could even lead to the region suffering from drought for centuries. This is not the case at the current time, he said.

Meanwhile, in the mainstream media and among a wide range of ecologists, so-called climate change is blamed for the droughts. From today’s perspective, however, it almost begs the question, when will anyone or anything else ever be blamed for imbalances if not climate change, persistent racism along with the alleged claim to white supremacy, Covid-19, or the evil Ivan in the Russian Federation…!

There are probably numerous causes for the drought observable in the American West. These may be some man-made as well as a number of natural occurrences.

Droughts can sometimes be attributed entirely to extreme weather conditions or occur in a combination of other occurrences with them. The additional reasons for such a development may well be economic or political.

Population trends and management practices in regional agriculture may also be contributing factors. Be that as it may, the fact is that the drought is here and it is continuing in time.

It is the Colorado River itself, among others, that has been suffering from drought for some time, and it is impacting several states. Needless to say, this continuing trend will impact regional food supplies, economic production, and the topography of the American West.

The water level of the river’s largest reservoir, Lake Mead, has dropped dramatically over the past twenty years. This water level is currently at only forty percent of its full capacity.

This summer, following the construction of Hoover Dam, Lake Mead is expected to drop to its lowest water level since it was filled in the 1930s.

Located near the Las Vegas metropolitan area, the reservoir is rapidly approaching a point that could lead to the first interventions by the Washington federal government.

With these potential interventions could come significant reductions in previously permitted water deliveries to the states of Arizona, Nevada, and New Mexico. From Arizona’s perspective, an agreement has already been in place since 2019 to prevent Lake Mead from sinking to even more critical lows.

That’s because tributary streams that feed the river in its headwaters in the Rocky Mountains have shrunk, in some cases considerably, over the past year. The dry soil in the area of the watershed also soaks up the melting snow.

Precipitation totals calculated to find their way into Lake Powell on the Arizona-Utah state line over the next four months under all probability could advance to the lowest totals in many years (45 percent of the long-term average).

This drought has worsened significantly again in the past year, and not just from a Colorado River perspective, but across the American West.

Just over a year ago, about four percent of the American West faced severe drought. That figure has now skyrocketed to a whopping 58. This is a 58 percent share of an entire region that is in a moderate, extreme or even exceptional drought.

Along with this trend, pastureland in particular has dried up and withered, causing some ranchers to sell livestock and reduce their own herds.

A large number of farmers who rely on rain have watched crops wither. In the state of Arizona, officials are warning of potentially particularly severe wildfires.

The Salt and Verde rivers, which supply drinking water to metropolitan Phoenix, have experienced below-average inflow due to below-average snow levels, reducing the amount of water draining into and collecting in reservoirs. This link is to a page at the Yale School of the Environment that discusses this phenomenon in depth.

At the Arizona Department of Water Resources, the explanation is that residents may have to learn to live permanently with less water inflow from the Colorado River.

The big challenge, they say, will be finding a way out of this situation. As part of this, Lake Mead will need to be protected, so the sustainability of water withdrawals from the Colorado River will have to increase significantly in the future.

At the same time, plans must be developed to reconcile this situation with the needs of the people living in the region. It is important to understand, he said, that this is not just a limited system, but rather a declining system.

Several years ago, the state of California had already restricted local water use, in some cases significantly. Nevertheless, the associated regulations still proved to be exceedingly generous when the situation prevailing there is compared with that in Cape Town in South Africa, for example.

DepthTrade Outlook

Regardless of the cause, or with reference to the proposed solutions now on the table, individual regions in the United States will likely soon face a water crisis.

The crop failures and potential migration resulting from this shortage could dwarf anything seen so far in the course of American history.

Moreover, due to privatization of water resources and the struggle to control water independence, American farmers may soon find themselves once again in a precarious situation that has feudal overtones. Might the general drinking water supply also be in danger of becoming another casualty of the Great Reset in 2021?