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Update on the US drought – this WILL affect global commodity prices for quite some time

28 Aug

Corn futures surged 58 percent since mid-June, soybeans were up 31 percent and wheat 41 percent. The US drought may push food inflation as high as 4 percent in 2012, the USDA said last week.

The department has declared natural disasters in more than 1,800 counties in 35 states, more than half of the country’s total, mostly because of the dry, hot weather.

The following extract from Jeremy Granthams Quarterly Investor Letter “Welcome to Dystopia” certainly makes a valid point.

“Globally, 2010 looked to me like a 1-in-150-year event with heroic heat in Russia and elsewhere and biblical floods in Pakistan and Australia. It really hurt global grain output. I suggested then that surely the following season had to be at least less bad, and what did we get? Thailand, the largest rice exporter was knee-deep in floods overhalf the country, 80-year floods occurred in the Mississippi, Texas sweltered in way-above record heat, and quite severe droughts gripped many other places. Perhaps in total a 1-in-50-year event globally. So, after all, perhaps Iwas right; it was “less bad” but hardly what I meant. And now, quite suddenly, even while I was thinking about this letter, 1-in-50-year drought and heat have hit our major growing areas. So let’s call this a 1-in-20-year globally, for Brazil, Argentina, Russia, and several other areas are also having unusually bad weather. Any statistician starts to getjumpy when looking at 1-in-150, 1-in-50, and 1-in-20 back to back. Long-term weather records are poor and a lot ofthis is judgmental, but this three-year stretch is, shall we say, very unusual. (The National Oceanic and Atmospheric Administration has said that the chance that this year’s heat in the Midwest was not affected by a warming climate was over 1 in 1 million. Other sources have used much punier odds, such as 1 in 100,000. I will settle for “very unusual.”) We really have to start factoring into the investment equation increased odds of difficult and volatile growing weather.”

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