USA: Heat, drought & water shortages threaten to drive up food prices

An increasingly serious drought is spreading across the western U.S., with not only farmers but also ranchers suffering more and more. In some places, widespread water rationing could occur in the foreseeable future for the first time in history. This would further fuel inflation.

Consideration is being given to shutting down California’s largest hydroelectric plant
The mega-drought in the western United States continues, which has now led to considerations of shutting down one of the largest hydroelectric plants in the state of California. It would be the first time in the last five decades that such an event would occur, should officials actually decide to do so.

According to local media, not only did current water levels prove too low to keep the Edward Hyatt hydroelectric plant, located in the northern part of the state on Lake Oroville, online, but recent measurements also showed that water levels were continuing to drop.

The main problem is that some of the lake’s water inflows have dried up. At the current time, the average water level in Lake Oroville is 213 meters. Should the 195-meter mark be reached, those responsible would have no choice but to shut down the hydroelectric plant for the first time since it was commissioned in 1967.

California Department of Water Resources with a negative outlook
Similar observations are currently being made in a number of other states in the Midwest and Southwestern United States. Already in early May, attention was drawn to these developments in our report Drought in the USA: Inflation worries and water shortages.

In early June, local officials ordered at least one hundred and thirty houseboats evacuated in the face of continuing declining water levels on Lake Oroville. Experts warn that if the Edward Hyatt hydroelectric plant had to be shut down and taken off the grid by August, the already extremely fragile power grid in the state of California, threatened by wildfires, would be impacted.

After all, the local hydroelectric plant supplies power to about 800,000 homes in the northern part of the state. From the perspective of California Department of Water Resources officials, it seems almost a foregone conclusion that the hydroelectric plant will be shut down by late summer for the first time in its history, given the continuing decline in water levels in Lake Oroville.

The reason for this is that, by that time, water levels in the lake will in all likelihood no longer prove sufficient to continue operating the hydroelectric plant’s power-generating turbines. From the perspective of the downstream power generation companies in the region, such a development would mean that the electricity needed to supply their own customers would have to be obtained elsewhere.

Electricity prices could skyrocket – tourism industry also affected
So, similar to what was seen in the state of Texas last winter, electricity prices in the state of California could still literally go through the roof over the course of this year’s summer unless quick and workable solutions are found to mitigate the impacts associated with a potential shutdown of the Edward Hyatt hydroelectric plant.

In addition to power generation, however, Lake Oroville plays a prominent role in an entirely different economic sector. This, of course, is the tourism industry. Prior to the outbreak of the Covid pandemic, at least a million visitors a year flocked to Lake Oroville to engage in water sports activities and to enjoy sunbathing and boat parties.

Heat emergency: increased demand for electricity and renewed risk of wildfires
Just a few days ago, the acting governor of the state of California, Gavin Newsom, declared a state of emergency due to the ongoing heat across the state. In many places in the state of California, the measured temperatures had marked new record highs in the past week.

As might be expected, this situation has had a drastic impact on local electricity consumption, which has increased in many places, in some cases significantly. The power grids, which are already under heavy pressure, are threatened with a blackout in the worst of all cases. This is no longer even something unusual in California, as the electricity supplier PG&E has been the subject of massive criticism for years now.

In the last three years, severe wildfires had threatened and paralyzed parts of the power grid in California. In some places at the time, PG&E, the utility, ordered local power grids to be taken offline and shut down as a preventative measure, as spreading winds led to dangerous sparking, which in turn could start other fires.

While Governor Newsom and the Democratic leadership in the state of California, as well as environmental activists, blamed climate change for last year’s events in California, longtime critics, Republican opposition, and even forestry activists flatly rejected that explanation.

Rather, according to numerous critics, the political leadership in the state of California had been advised many years ago to clear the local forests of their undergrowth and branches, but this had not been taken seriously, had been opposed by environmental activists, and had therefore not been done.

It is precisely this partially bone-dry undergrowth that now provides the best breeding ground imaginable for the massive spread of local forest fires. This summer, such events threaten to repeat themselves.

First ever declaration of a water emergency possible!
Returning to the current events at Lake Oroville, it is now becoming apparent that the federal government in Washington could officially declare a water emergency in certain parts of the USA for the first time in the country’s history in the coming months. It is easy to imagine that such a measure would be accompanied by water rationing from the perspective of the homes and businesses affected by it.

Already, federal government agencies, including the Federal Emergency Management Agency (FEMA), are involved in current planning in the states most affected by drought and water shortages to maintain local water and food supplies during emergencies.

In sum, parts of the Midwest and Western United States are facing a water crisis the likes of which have not been seen since those days of the Great Depression and the parallel raging Dust Bowl.

University of Columbia: Must prepare for further droughts
The University of Columbia, commenting on the latest developments on the ground, said (pdf) that rising temperatures were responsible for about half of the speed of the current drought’s spread, as well as its significance, according to researchers. From today’s perspective, however, it no longer matters at all whether this is the worst drought ever or not, because the task now is to be prepared for the possible consequences of such a crisis and to combat them in the best possible way.

It is clear that the heat conditions associated with severe droughts have worsened in recent years, regardless of climate change. Further temperature increases are expected in the future, making it likely that droughts and dry spells will persist in the region. From the U.S. perspective, this is certainly not a problem that can be ignored, as the state of California proves to be the bread, vegetable and fruit basket of the entire nation.

It would be even worse if average temperature increases over time were to lead to even more widespread and prolonged droughts. Similar to Lake Oroville and other standing waters in the western United States, the Colorado River itself, among others, has been suffering from drought for some time now, adversely affecting several states.

Threatened food supply and topographical changes
Researchers warn that not only is the food supply in the affected regions at risk of being affected, but the topography of the American West could also change. For example, the water level of the largest reservoir in the Colorado River region, Lake Mead, has also dropped dramatically over the course of the last twenty years.

This summer, Lake Mead’s water level will most likely drop to its lowest level since it was filled in the 1930s. Since Lake Mead supplies much of the Las Vegas metropolitan area with water and power, the current observations could soon lead to widespread intervention by the Washington federal government here as well.

According to experts and observers, it can by no means be ruled out that these potential interventions could be accompanied by orders regarding a drastic lowering of the water deliveries to the states of Nevada, New Mexico and Arizona that have been permitted to date.

Similar to the case of Lake Oroville tributaries in northern California, the amount of water carried by tributary streams and rivers in the headwaters of the Colorado River in the Rocky Mountains has been consistently shrinking for several years. The water level of Lake Powell on the state border between Arizona and Utah could also drop below 45 percent of the long-term average this summer due to little or no precipitation.

Farming and livestock: Meat prices threaten to take off, water rationing as price driver
It is easy to imagine the impact such a development would have on local farming and ranching. One look at the U.S. Midwest is enough to see that large parts of the state of Nebraska, among others, are currently suffering from the worst drought ever.

As a result, local cattle farmers and ranchers are being forced to sell off large portions of their own livestock at auction. One of the main reasons for these forced sales is the fact that prices for oats, corn and feed grains have skyrocketed over the past few months.

For this reason, many cattle farmers have no choice but to sell off at least parts of their herds. In the report linked above, reference is made to statements by local farmers and cattle breeders, according to which many ranchers would have to decimate their herds by 25 to fifty percent, since no more affordable feed could be found far and wide.

The result of this would be that in the course of this year the meat prices would threaten to take off, because in many places the demand could no longer be met by the available supply. The absolute nail in the coffin would be an announcement by the Washington federal government to ration water supplies in the region.

Water restrictions in California – driving up crop prices
The farm and ranch deaths that accompany this could dwarf those seen in those Dust Bowl days, according to regional farmers and growers. Finally, to review the developments in California, many farmers in the state have already been informed that they will be subject to water restrictions this year.

For this reason, California will also see far fewer crops and vegetables planted in the current year than in previous years. This factor alone hangs like a sword of Damocles over food price development in the United States, which, as recent statistics show, has already reached a very high level at the current time.

More than one-third of all crops and vegetables harvested in the United States are grown in California, while more than two-thirds of all fruits and nuts from the Pacific state are shipped to the rest of the country. Making reference to recent statements by California Secretary of Agriculture Karen Ross, over 500,000 acres of tillable land will not be able to be used at all this year due to a water shortage.

Meanwhile, questions are being raised not only among local farmers themselves, but also within the ranks of the local Chamber of Agriculture and Commerce, about what will happen if the drought in the region continues for the next several years or even gets worse.

Imagine the economic impact such a development would have on the entire state of California. Not only the agricultural sector, but also the local tourism sector would face another serious problem after the devastating Covid crisis.

Latin America also suffering from drought
In some places it is already being suggested that in this case the food producer California would have to import more fruits and vegetables from Latin American countries, some of which are themselves currently suffering from an acute drought. For example, Brazil is currently suffering from the most severe drought in the past one hundred years.

According to researchers, this ongoing drought will by no means end in the foreseeable future. Once again, the drought currently affecting the western United States and some of the largest agricultural nations in the Latin American hemisphere is expected to drive food prices.

DepthTrade Outlook

In particular, low- and moderate-income earners, of which there are millions in the U.S. – not to mention Latin America – will suffer the most. In anticipation of a food crisis intensifying worldwide, let it be said again that it certainly cannot be wrong to have the most important products on hand in sufficient quantities and to stockpile. From today’s perspective, who wants to anticipate how the covid crisis will continue? There is a threat of inflation in many areas of the economy, and in some cases even serious shortages. So it is important to keep an eye on these things, and to prepare adequately for any problems that may arise in connection with them.

Christian Zürcher Send an email

From 1990 to 2005, Mr. Zürcher was a risk analyst in the institutional swiss banking sector - thereafter, he specialized exclusively in private trading of financial products. He is a certified real estate agent and studied economics. For more than thirty-five years, Mr. Zürcher has been intensively involved in the observation of financial markets, globalization, and the monetary system. Mr. Zürcher enjoys an excellent reputation as a political analyst and commentator related to finance.
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