U.S. Drought Could Cause Global Unrest

The ongoing drought, the United States' worst since the Dust Bowl, is expected to last until October and will decimate U.S. harvests.

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Aerial view of drought-affected farmland near Strasburg, Colorado, on July 21, 2012. (USDA/Lance Cheung/Flickr)

Twice in the last five years, rising food prices triggered global waves of social unrest. With drought baking U.S. crops, another round of soaring, society-straining price spikes may happen in coming months.

According to researchers from the New England Complex Systems Institute, commodity speculation -- investors betting on food prices -- will amplify the drought's market signals, creating a new food bubble and the crises that follow.

"The drought is clearly going to kick prices up. It already has. What happens when you have speculators is that it goes through the roof," said NECSI president Yaneer Bar-Yam. "We've created an unstable system. Globally, we are very vulnerable."

The ongoing drought, the United States' worst since the Dust Bowl, is expected to last until October and will decimate U.S. harvests. America is the world's largest exporter of corn, wheat and soy beans; global prices for those commodities have already surged to record levels.

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FAO Food Price Index (blue line) and NECSI's model of food market behavior (red line). Grey line is July 2012; lines beyond that point show NECSI's predictions of food price behavior without the drought (yellow), with the drought and low speculation (green) or current speculation (red). (NECSI)

While the United States is relatively insulated from food price increases, people in developing countries, who spend far more of their budgets on food and rely on agricultural imports, are extremely vulnerable. For them, high prices are a catastrophe.

Since 2004, global food prices have slowly but steadily increased, with drastic and socially destabilizing spikes in 2007 and again in 2010. Economists argued over the causes, with blame cast on poor regional harvests, supply shortages caused by converting food crops to biofuels, and -- most controversially -- speculation.

Until the late 1990s, food markets in the United States were mostly limited to people with direct interests in food prices, such as farmers and crop buyers. Deregulation allowed hedge funds and investment banks to start betting, changing market dynamics and making them prone to sudden, massive fluctuations.

In earlier research, Bar-Yam's group developed mathematical models of global food market behavior that found biofuels responsible for a slow upwards rise in prices, and speculation for the spikes. That model anticipated a new food bubble in early 2013, but couldn't have foreseen the drought.

In the new analysis, released July 23 on NECSI's website, Bar-Yam's group added drought-triggered price increases to the model. With those figures included, the already grim forecast becomes even darker. "The drought may trigger the third massive price spike to occur earlier than otherwise expected, beginning immediately," wrote the NECSI team.

"We've created an unstable system. Globally, we are very vulnerable."

According to Bar-Yam, excessive speculation acts as an amplifier, exaggerating whatever signal the market receives. Left alone, a highly speculative market would naturally experience boom-and-bust cycles, but this summer's drought-precipitated surge in food prices will accelerate the next bubble's formation.

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