We've all seen the images on the evening news: wilted cornfields, skinny cattle and raging wildfires. These things are all results of the current drought. Spread across 29 states, it is the worst drought the U.S. has experienced in nearly 60 years. More than 1,000 American counties have been declared disaster areas. This drought is being called the largest natural disaster in U.S. history. While we are all very aware of its immediate impact on food and the resulting increase in prices, we may not be aware of its far-reaching impact.
In the short-term, food prices will rise. They are already up 6% since July, but in the long-term those prices could soar, with the largest increases coming in six months. Food processors have contracts with prices already locked in, so the biggest impact won't be felt until next spring.
The corn and grain crops that have withered in the fields not only feed livestock, but are used in many other applications from cereal to snack foods and soft drinks. Nearly 75% of the products in the grocery store contain corn. Even some fabrics contain cornstarch in their manufacturing. Books have cornstarch in their bindings and ink contains corn oil. All of these products will be impacted in the long-term by the effects of the drought.
Farmers are the first to bear the drought's economic impact. Although many crop farmers do have insurance against drought, it doesn't cover all their losses. Ranchers too are being hit hard, and there are no insurance plans for them. When feed rises in price, ranchers much chose between selling stock and taking a loss, or holding out and paying more for feed, again taking a loss.
In the food industry the drought can also cause unemployment in the industries that supply farmers and ranchers. This creates a loss of income that generates tax revenue for cities, towns and smaller municipalities. Less tax dollars in an already struggling economy could be disastrous.
The drought is reaching into Canada as well, where ranchers are facing the same dilemma. The Ontario Federation of Agriculture notes that the average age of a rancher is around 52 years old. The drought could force many of them to sell. Experts worry that if these ranchers leave the profession, it will create a large hole in the industry that may never be filled, again impacting food prices in the long-term.
Even in this technologically advanced era, you'd be surprised how much goods move by American waterways. News stories are zeroing in on the Mississippi River and its historical lows, yet they have failed to show the other rivers that feed into the Mississippi are at all-time lows. Let's break it down.
Traffic on the Mississippi
Moving goods along the Mississippi is a billion-dollar-a-year industry. Each day, the river moves thousands of tons of steel, ore, coal, grain, gas and oil. In some areas where the river is normally three-miles wide, it is now three-tenths of a mile wide, and is 13 feet below normal depths. At Vicksburg, it is 20 feet below normal.
This means barges cannot navigate the river. The Army Corps of Engineers has been waging a battle against the drought, dredging the river in attempts to keep the waterway open. Barge captains are lightening their loads to prevent running aground. These short-term fixes are helping, but if the drought continues, even these solutions won't work. In economic terms, this could cost millions in losses. If the river faces a complete shut-down of traffic, estimates put the economic losses at $300 million per day. Tugboats alone cost $10,000 per day to operate. If these losses weren't enough, consider that all the freight normally moved by water would have to be transported by truck or train.
"Tows south of St. Louis would be loaded to 12 feet or more of draft and made up of some 45 barges linked together," said Lynn Muench, vice president of American Waterways Operators. "Now they're down to 9 feet of draft. One inch of draft in a single barge is about 17 tons of cargo, and that's almost enough to fill a semitruck. Combine that with carrying about 30 barges instead of the more typical 45, and the drought is decreasing the cargo carried per tow by more than 500 semitrucks worth of goods."
The price of this additional transportation will be directly reflected in what you pay for those products. Another major issue of the drought on the Mississippi is the surging of sea water from the gulf into the river. At Plaquemines Parish, La, the U.S. Army Corps of Engineers is working around the clock to construct an underwater levee to block saltwater. The water is moving upriver into the Mississippi. If this saltwater can't be blocked, it will affect the drinking water of the entire area.
Heat takes its toll on all life and fish are no exception. Thousands of fish have been found dead along most rivers in the Midwest. In Iowa, 40,000 shovelnose sturgeon have been killed by the heat. In Nebraska, sturgeon, catfish and carp are being washed up on the shore of the Lower Platte River. The impact on U.S. fisheries could be staggering, when you consider sturgeon are selling for $110 per pound.
This leads directly to the recreation industry that depends on boaters, fishermen, canoers and kayakers. The drought will cause significant losses to river rafting businesses, nursery and garden stores, and their suppliers. Sales and rentals of these types of equipment are down, leading to more economic woes.
Several Midwest states are already implementing water-rationing procedures. Indiana has issued a warning to the entire state, and counties in Kentucky and Nebraska have ceased irrigation. Farmers, ranchers and the public are all competing for the same diminishing supply of water.
A large percentage of the U.S. depends on hydroelectric power. As the water level drops, so does the power. Alternative sources will need to be found. What power that is generated will increase in price, and there may be a need for even stricter conservation of power.
The Tennessee Valley Authority (TVA) has already been affected by the drought, causing it to cut the power it uses. The TVA is only able to generate about half of its normal power. This results in having to find alternatives in the form of coal or natural gas. These extra resources will increase the energy bills for the entire area.
Fracking, that controversial practice of drilling for natural gas, uses an extremely large amount of water in its production. The drought will increase the cost of fracking, subsequently increasing your home utility bills.
Only two ears of corn out of 10 are eaten by consumers. The other eight are split between livestock feed and ethanol fuel. The U.S. now uses more corn for fuel than it does for feeding livestock. By law, 10% ethanol must be included in our gasoline. With the increase in corn prices, gas prices have risen. With continued reduction in corn yield, these prices will continue to rise. The U.S. is a large exporter of corn to China. Dwindling supplies of corn mean we won't be able to export as much, and this will directly impact corn futures from the loss of sales.
The drought's immediate effects are minor compared to the long-term effects that could be suffered if the drought continues. Reduced rainfall on plant life won't be seen for several months, perhaps years. Lack of water stunts new growth in hardwood trees, affecting the root systems of forest plants and increasing their susceptibility to insects. Although these things may not show up for 12 to 18 months, these impacts could be felt for years after the drought.
Wildlife deaths from lack of water and the heat wave will affect the balance of the ecosystem, leading to numerous issues. The drought will produce an even greater threat of wildfires, and the pasture land that has been left scorched could take years to recover.
The Bottom Line
Don't rush out to buy everything on store shelves. Few of us have the means to store food items for extended periods of time. Buy some items that you can freeze and that you will use, such as flour, corn meal and rice. Be prepared to pay extra for those items that are directly affected by the drought. Also, note that some crops have done well in this weather, especially the fruit crops and garden-type vegetables that enjoy the hotter weather. You can save money by eating less meat and corn based foods, and consuming more vegetables and fruit.
Investing NewsIs one of the world’s healthiest superfoods terribly unhealthy for its country's economy?
Home & AutoRoofing your home is very important, that’s why you should choose a roof specifically designed to handle your area’s climate.
Chart AdvisorTraders are turning to these exchange-traded notes and exchange-traded funds to analyze key commodities and determine what could be coming next.
Investing NewsNot sure where oil and gold are headed? The answer is complex.
InvestingUse Fibonacci studies to analyze gold by picking out hidden harmonic levels that can provide major support or resistance.
InvestingSome companies have strong earnings year round, while others see a seasonal spike in revenue during different times of the year.
Stock AnalysisLearn whether PotashCorp will make a comeback. Potash was in a major bull market from 2000 to 2008 before falling over 50% in 2008.
InvestingNow might not be the right time, but investing in these assets may eventually prove to be good hedges against inflation.
Investing BasicsIs America producing more crude oil than it is consuming? How is technology changing the American oil industry? What will domestic oil industry look like in the near future?
EconomicsWill gold move higher or lower over the next year?
A federal law that makes federal disaster relief and federal ...
A type of insurance that insures against crop damage caused by ...
Reinsurance purchased by an insurance company that reduces the ...
An amount a homeowner must pay before insurance will cover the ...
The artificial modification of an organism’s genetic composition. ...
The business sector encompassing farming and farming-related ...
The countries driving most of the growth of the food and beverage sector are the primary emerging market economies of China ... Read Full Answer >>
Besides gold and silver, the other precious metals are platinum, palladium, ruthenium, rhodium, osmium, rhenium, germanium, ... Read Full Answer >>
The United States holds the largest stockpile of gold reserves in the world by a considerable margin. In fact, the U.S. government ... Read Full Answer >>
Every five years, new legislation is introduced and passed through the U.S. Congress to subsidize farmers and agricultural ... Read Full Answer >>
As of February 2015, commodities that are not tradable include diamonds, tomatoes, carbon dioxide, lemons, eggs, potatoes, ... Read Full Answer >>
Benchmarks serve as initial points of reference against which portfolios, individual stocks or stock sectors can be compared ... Read Full Answer >>