Dec 182014
 
 December 18, 2014  Posted by at 11:43 am Finance Tagged with: , , , , , , , ,  3 Responses »


Lewis Wickes Hine News of the Titanic and possible survivors 1912

Fed Calls Time On $5.7 Trillion Of Emerging Market Dollar Debt (AEP)
Bankers See $1 Trillion of Investments Stranded in the Oil Fields (Bloomberg)
Oil Could Fall To $30 A Barrel: Emirates Boss (CNBC)
Oil-Led Slump Spurring Fastest Investor Exit Since 2008 (Bloomberg)
The Fracturing Energy Bubble Is the New Housing Crash (David Stockman)
Yellen Makes It Clear That Fed’s Patience on Rates Has Limits (Bloomberg)
Putin Says Russia Mustn’t Waste Reserves on Ruble as Economy Sinks (Bloomberg)
Putin Predicts Economy Will Recover In Two Years (WaPo)
Western Nations Want To Chain The Russian Bear And Have It Stuffed: Putin (RT)
Can Anybody Find Me … A Central Banker To Love? (Dmitry Orlov)
Traders Betting Russia’s Next Move Will Be to Sell Gold (Bloomberg)
Greece Faces Crisis On Rising Prospect Of Snap Election (CNBC)
EU’s Greek Drama Needs A Final Act (Bloomberg ed.)
$1.3 Trillion In Secret Cash Sneaked Out Of China In The Last 10 Years (Quartz)
Dark Pools in Spotlight as EU Moves to Bolster Markets (Bloomberg)
Uruguay Takes on London Bankers, Marlboro Mad Men and the TPP (Truthout)
Swiss National Bank Imposes Negative Interest Rate (Bloomberg)
The Fed Is Sitting On a $191 TRILLION Time Bomb (Phoenix)
2014 Warmest Year In Europe Since 1500s (FT)
‘Vast Stores’ Of World’s Oldest Water (BBC)

“World finance is rotating on its axis. The stronger the US boom, the worse it will be for those countries on the wrong side of the dollar”. [..] “Pimco’s Emerging Market Corporate Bond Fund bled $237m in November, and the pain is unlikely to stop as clients discover that 24% of its portfolio is in Russia.”

Fed Calls Time On $5.7 Trillion Of Emerging Market Dollar Debt (AEP)

The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire. They have collectively borrowed $5.7 trillion in US dollars, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries. Much of the debt was taken out at real interest rates of 1% on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are “short dollars”, in trading parlance. They now face the margin call from Hell as the global monetary hegemon pivots. The Fed dashed all lingering hopes for leniency on Wednesday. The pledge to keep uber-stimulus for a “considerable time” has gone, and so has the market’s security blanket, or the Fed Put as it is called. Such tweaks of language have multiplied potency in a world of zero rates.

Officials from the Bank for International Settlements say privately that developing countries may be just as vulnerable to a dollar shock as they were in the Fed tightening cycle of the late 1990s, which culminated in Russia’s default and the East Asia Crisis. The difference this time is that emerging markets have grown to be half the world economy. Their aggregate debt levels have reached a record 175% of GDP, up 30percentage points since 2009. Most have already picked the low-hanging fruit of catch-up growth, and hit structural buffers. The second assumption was that China would continue to drive a commodity supercycle even after Premier Li Keqiang vowed to overthrow his country’s obsolete, 30-year model of industrial hyper-growth, and wean the economy off $26 trillion of credit leverage before it is too late.

These two false assumptions have blown up simultaneously, the effects threatening to feed on each other with wicked force. Russia’s Vladimir Putin could hardly have chosen a worse moment to compound his woes by tearing up the international rulebook and seizing chunks of territory from Ukraine, a country that gave up its nuclear weapons after a pledge by Russia in 1994 to uphold its sovereign borders. Stress is spreading beyond Russia, Nigeria, Venezuela and other petro-states to the rest of the emerging market nexus, as might be expected since this is a story of evaporating dollar liquidity as well as a US shale supply-glut. Turkey relies on imports for almost all its energy and should be a beneficiary of lower crude prices. Yet the Turkish lira has fallen 12% since the end of November. The Borsa Istanbul 100 index is down 20% in dollar terms. Indonesia had to intervene on Wednesday to defend the rupiah. Brazil’s real has fallen to a 10-year low against the dollar, as has the index of emerging market currencies. Sao Paolo’s Bovespa index is down 23% in dollars in three weeks.

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Hey!, that’s my line!

Bankers See $1 Trillion of Investments Stranded in the Oil Fields (Bloomberg)

There are zombies in the oil fields. After crude prices dropped 49% in six months, oil projects planned for next year are the undead – still standing upright, but with little hope of a productive future. These zombie projects proliferate in expensive Arctic oil, deepwater-drilling regions and tar sands from Canada to Venezuela. In a stunning analysis this week, Goldman Sachs found almost $1 trillion in investments in future oil projects at risk. They looked at 400 of the world’s largest new oil and gas fields — excluding U.S. shale – and found projects representing $930 billion of future investment that are no longer profitable with Brent crude at $70. In the U.S., the shale-oil party isn’t over yet, but zombies are beginning to crash it. The chart below shows the break-even points for the top 400 new fields and how much future oil production they represent. Less than a third of projects are still profitable with oil at $70. If the unprofitable projects were scuttled, it would mean a loss of 7.5 million barrels per day of production in 2025, equivalent to 8% of current global demand.

Making matters worse, Brent prices this week dipped further, below $60 a barrel for the first time in more than five years. Why? The U.S. shale-oil boom has flooded the market with new supply, global demand led by China has softened, and the Saudis have so far refused to curb production to prop up prices. It’s not clear yet how far OPEC is willing to let prices slide. The U.A.E.’s energy minister said on Dec. 14 that OPEC wouldn’t trim production even if prices fall to $40 a barrel. An all-out price war could take up to 18 months to play out, said Kevin Book, managing director at ClearView Energy, a financial research group in Washington. If cheap oil continues, it could be a major setback for the U.S. oil boom. In the chart below, ClearView shows projected oil production at four major U.S. shale formations: Bakken, Eagle Ford, Permian and Niobrara. The dark blue line shows where oil production levels were headed before the price drop. The light blue line shows a new reality, with production growth dropping 40%.

Even $75 Oil Crashes the Shale-Oil Party

The Goldman tally takes the long view of project finance as it plays out over the next decade or more. But the initial impact of low prices may be swift. Next year alone, oil and gas companies will make final investment decisions on 800 projects worth $500 billion, said Lars Eirik Nicolaisen, a partner at Oslo-based Rystad Energy. If the price of oil averages $70 in 2015, he wrote in an email, $150 billion will be pulled from oil and gas exploration around the world. An oil price of $65 dollars a barrel next year would trigger the biggest drop in project finance in decades, according to a Sanford C. Bernstein analysis last week.

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Yeah, that strong dollar again …

Oil Could Fall To $30 A Barrel: Emirates Boss (CNBC)

The airline industry is set to reap the benefits of lower oil prices, which could fall to as low as $30 a barrel, according to the chief executive of Emirates Airline. “I’ve always thought personally it go well down to 30 again, but we’ll see,” Tim Clark, president and CEO of Emirates Airline, told CNBC in an exclusive interview. “I’ve always said the realistic price for out-of-ground: $70. Should never, ever have been above that.” Although there may be significant volatility across asset classes in the short term, Clark said that a lower oil price would bring back confidence and investment for the aviation industry in the long term. “At the moment we’ve got all sorts of issues. This gives the global economy a fighting chance in the next 18 months to 2 years to get back on a reasonable footing,” he told CNBC.

However Clark argued the gains for Emirates Airlines in particular was currently limited by the strength of the dollar, which was having an impact on the firm’s ability to realize profits in countries like Russia and Australia. In November, the Dubai-based carrier reported a net profit of $514 million, up 8% from the same period last year. Of the $12 billion in revenues, fuel prices accounted for 38% of operating costs. “But if fuel falls to 50 or goes below – then of course the business will pick up. Much will depend how long it lasts,” he said. The International Air Transport Association this month revised its outlook for 2015, forecasting the industry to post global net profit of $25 billion, up from $19.9 billion this year.

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Everything must fall.

Oil-Led Slump Spurring Fastest Investor Exit Since 2008 (Bloomberg)

Investors are exiting commodities at the fastest pace in six years, betting a slump in prices isn’t over as corn, oil and gold drop close to their cost of production. Open interest in raw-material futures and options is down 5.9% since June, heading for the biggest second-half slump since 2008, exchange data show. U.S. exchange-traded products tracking metals, energy and agriculture saw net withdrawals of $563.9 million in 2014, marking the first two-year slump since the funds were created a decade ago. Commodities are under pressure from many sides. Collapsing oil prices are driving bearish sentiment because energy is used to produce or deliver almost everything, according to SocGen. Low inflation and higher interest rates create an “ugly scenario” for gold, says Bank of America. And weaker currencies in countries that produce everything from soybeans to iron ore mean supplies will continue to climb, Goldman Sachs predicts.

“Now is not a time to be overweighting commodities,” Sameer Samana, a senior international strategist at Wells Fargo Advisors LLC in St. Louis, which oversees $1.4 trillion, said in a Dec. 17 telephone interview. “For now, the outlook is still negative. It wouldn’t surprise us to see prices go down even further. We wouldn’t be taking any tactical positions.” The Bloomberg Commodity Index of 22 products slumped 13% this year, heading for a fourth straight annual drop that will be the longest since the gauge’s inception in 1991. Brent crude tumbled 45%, the biggest loss among the raw materials, after trading below $60 a barrel this week for the first time in five years. Crude, gasoline and heating oil led this year’s declines as an increase in U.S. drilling sparked a surge in output and a price war with producers in OPEC. About 65% of the $20 billion withdrawn from passive-commodities investment this year was driven by energy losses, Aakash Doshi, a Citigroup vice president, said in a Dec. 15 report.

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Not exactly a new comparison, but a thorough analysis, especially of the housing crash.

The Fracturing Energy Bubble Is the New Housing Crash (David Stockman)

Let’s see. Between July 2007 and January 2009, the median US residential housing price plunged from $230k to $165k or by 30%. That must have been some kind of super “tax cut”. In fact, that brutal housing price plunge amounted to a $400 billion per year “savings” at the $1.5 trillion per year run-rate of residential housing turnover. So with all that extra money in their pockets consumers were positioned to spend-up a storm on shoes, shirts and dinners at the Red Lobster. Except they didn’t. And, no, it wasn’t because housing is a purported “capital good” or that transactions are largely “financed” at upwards of 85% leverage ratios. None of those truisms changed consumer incomes or spending power per se. Instead, what happened was the mortgage credit boom came to a thundering halt as the subprime default rates became visible. This abrupt halt to mortgage credit expansion, in turn, caused the whole chain of artificial economic activity that it had funded to rapidly evaporate.

And it was some kind of debt boom. The graph below is for all types of mortgage credit including commercial mortgages, and appropriately so. After all, the out-of-control strip mall construction during that period, for example, was owing to the unsustainable boom in home construction – especially the opening of “new communities” in the sand states by the publicly traded homebuilders trying to prove to Wall Street they were “growth machines”. Soon Scottsdale AZ and Ft Myers FL were sprouting cookie cutter strip malls to host “new openings” for all the publicly traded specialty retail chains and restaurant concepts – along with those lined-up in a bulging IPO pipeline. These step-children of the mortgage bubble were also held to be mighty engines of “growth”. Jim Cramer himself said so – he just forgot to mention what happens when the music stops.

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“The second half of the year we are getting higher rates and the market has to price that in.”

Yellen Makes It Clear That Fed’s Patience on Rates Has Limits (Bloomberg)

Federal Reserve Chair Janet Yellen restored clarity to the central bank’s monetary policy plans, saying it was on course to raise interest rates, though not right away, after officials issued a statement that some Fed-watchers found confusing. Yellen told reporters following a two-day meeting that the Fed is likely to hold rates near zero at least through the first quarter. She also laid out the economic parameters that would need to be met for liftoff to begin later in the year and said that rates probably would be raised gradually thereafter. They may not return to more normal levels until 2017, she added. “The statement was a bit clumsy, while I thought Yellen was very clear,” said Eric Green, head of U.S. rates and economic research at TD Securities USA in New York, who formerly worked at the New York Fed. “The second half of the year we are getting higher rates and the market has to price that in.”

The dollar and yields on Treasury securities rose in response, as investors in those markets processed the likelihood of rate increases by the Fed. The greenback gained against most currencies, with the Bloomberg Dollar Spot Index increasing to almost a five-year high. Yellen’s comments came after a Federal Open Market Committee statement that former Fed official Robert Eisenbeis also called “clumsy.” With investors focused on whether policy makers would retain their stated intention to hold rates near zero for a “considerable time,” the FOMC instead tried to straddle keeping the phrase in and taking it out. The Fed said it can be “patient” in its approach to raising the benchmark lending rate from a range of zero to 0.25%, where it has been since December 2008. At the same time, policy makers said that language was “consistent” with their prior guidance that rates would be held near zero for a “considerable time” after they ended their asset purchases in October.

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He doesn’t even seem fazed.

Putin Says Russia Mustn’t Waste Reserves on Ruble as Economy Sinks (Bloomberg)

President Vladimir Putin said Russia shouldn’t waste currency reserves protecting the ruble as the country braces for a recession brought on by the collapse of the oil price and sanctions over the Ukraine conflict. “Under the most negative external economic scenario, this situation can last two years,” Putin said today at his annual press conference in Moscow. “If the situation is very bad, we will have to change our plans, cut some things.” The president criticized the central bank for not acting faster to support the ruble, which has dropped more than 40% since June as oil trades near a five-year low and sanctions over the Ukraine conflict hit the economy. Putin – who in his wide-ranging news conference with hundreds of reporters sparred with a Ukrainian journalist, reeled off statistics on the fall harvest and spoke about guiding gifted children – vowed to guide the country through the current crisis in the same way he steered Russia through the 2008 financial crisis.

The country’s reserves have declined by a fifth to $416 billion over the past year as the central bank tried in vain to defend the currency. Russia won’t force exporters to exchange revenue earned in foreign currency to prop up the ruble, he said. Putin, who has enjoyed near-record approval ratings since Russia annexed Ukraine’s Crimea peninsula in March, today accused the U.S. and European Union of using the Ukraine conflict as way to contain Russia as they have done since the end of the Cold War through the expansion of NATO, comparing the current situation to a new division akin to the Berlin Wall. “Our partners didn’t stop, they saw themselves as victors, an empire, and all others are vassals and have to be subdued,” Putin said. “The crisis in Ukraine should make our partners understand that it’s time to stop building walls.”

After an emergency meeting, the central bank announced the largest interest rate increase since Russia’s 1998 default in the early hours of Dec. 16, increasing the key rate by 6.5 percentage points to 17%. That failed to halt the slide in the ruble, which at one point during the day fell to a record of 80 per dollar, from 34 half a year ago. It rebounded 12% yesterday after the Finance Ministry pledged to use as much as $7 billion to support the currency. The Russian currency lost about 3% today to 62 rubles to the dollar. The central bank also announced steps yesterday to stabilize the banking system, including allowing lenders to use a third-quarter exchange rate – before the acceleration in the ruble’s decline – to value risk-weighted assets.

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“I believe about two years is the worst case scenario. After that, I believe growth is imminent.”

Putin Predicts Economy Will Recover In Two Years (WaPo)

Russian President Vladimir Putin, under pressure to show how to pull Russia out of its economic crisis, predicted Thursday the country will recover in two years at the most, despite a looming recession, a severely weakened ruble and growing fears about the country’s financial instability. Speaking at his annual year-end news conference, during which he took questions directly from the national and foreign press, Putin said the Russian central bank and the government were taking adequate measures to support the ruble. Putin’s news conference came as Russia suffers through its worst economic challenges since Putin came to power 15 years ago.

“Rates of growth may be slowing down, but the economy will still grow and our economy will overcome the current situation,” Putin said at the televised news conference. “I believe about two years is the worst case scenario. After that, I believe growth is imminent.” A steady depreciation of the ruble has been underway for the last several months, fueled by falling oil prices and Western economic sanctions over Russia’s involvement in Ukraine. But it turned into wild swings in the exchange rate over the past few days, with rates peaking at almost 80 rubles to the dollar Tuesday after the central bank dramatically raised interest rates. The ruble lost more ground against the dollar Thursday, more than 2% weaker on the day, despite central bank action to shore up the currency, which is around 45% down against the dollar this year.

Putin had been silent as the currency collapsed this week before recovering some ground. He acknowledged partly that Russia had helped to lay the groundwork for the current crisis, by having an economy that was not as diverse as it could have been. But in general, he blamed “external factors, first and foremost” for creating Russia’s situation – and continued to be defiant, blaming the West for intentionally trying to weaken Russia and foment problems, economic and otherwise, in the country. “No matter what we do they are always against us,” Putin said, one of a series of observations directed at how he said the West has been treating Russia.

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“.. even if “the Russian bear” started “sitting tight… and eating berries and honey,” this would not stop pressure being applied against the country.”

Western Nations Want To Chain The Russian Bear And Have It Stuffed: Putin (RT)

Western nations want to chain “the Russian bear,” pull out its teeth and ultimately have it stuffed, Russian President Vladimir Putin warned. He said anti-Russian sanctions are the cost of being an independent nation. Putin used the vivid metaphor of a “chained bear” during his annual Q&A session with the media in Moscow in response to a question about whether he believed that the troubles of the Russian economy were payback for the reunification with Crimea. “It’s not payback for Crimea. It’s the cost of our natural desire to preserve Russia as a nation, a civilization and a state,” Putin said. The president said that even if “the Russian bear” started “sitting tight… and eating berries and honey,” this would not stop pressure being applied against the country. “They won’t leave us alone. They will always seek to chain us. And once we are chain, they’ll rip out our teeth and claws. Our nuclear deterrence, speaking in present-day terms,” Putin said.

“As soon as this [chaining the bear] happens, nobody will need it anymore. They’ll stuff it. And start to put their hands on his Taiga [Siberian forest belt] after it. We’ve heard statements from Western officials that Russia’s owning Siberia was not fair,” he exclaimed. “Stealing Texas from Mexico – was that fair? And us having control over our own land is not fair. We should hand it out!” The West had an anti-Russian stance long before the current crisis started, Putin said. The evidence is there, he said, ranging from“direct support of terrorism in the North Caucasus,” to the expansion of NATO and the creation of its anti-ballistic missile system in Eastern Europe, and the way the western media covered the Olympic Games in Sochi, Putin said.

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“Putin said he knows who they are. I hope that they are wearing adult diapers. I wouldn’t be at all surprised if they get Khodorkovskied before too long.”

Can Anybody Find Me … A Central Banker To Love? (Dmitry Orlov)

Some people are starting to loudly criticize Putin for his inaction; but what can he do? Ideologically, he is a statist, and has done a good job of shoring up Russian sovereignty, clawing back control of natural resources from foreign interests and curtailing foreign manipulation of Russian politics. But he is also an economic liberal who believes in market mechanisms and the free flow of capital. He can’t go after the bankers on the basis of ideology alone, because what ideological differences are there? And so, once again, he is being patient, letting the bankers burn the old “wooden” ruble all the way to the ground, and their own career prospects in the process. And then he will step in and solve the ensuing political problem, as a political problem rather than as a financial one.

This strategy carries a very substantial opportunity cost. After all, if the central bank acted on behalf of regular Russians and their employers, it could take some very impressive and effective steps. For instance, it could buy out western-held Russian debt and declare force majeur on its repayment until financial sanctions against Russia are lifted. It could drop its interest rate for specifically targeted domestic industries—those involved in import replacement. And, most obviously, it could very effectively curtail the activities of well-connected financial insiders aimed at destroying the value of the ruble. Putin said he knows who they are. I hope that they are wearing adult diapers. I wouldn’t be at all surprised if they get Khodorkovskied before too long.

This conversion of an insoluble financial problem into a mundane political problem may take a bit of time, but once it has run its course the longer-term prognosis is still reasonably good. Russia has very low government debt, huge gold reserves, and in spite of the much lower price of oil its energy exports are still profitable. You see, at the wellhead Russian oil costs much less than shale oil in the US, or Canadian tar sands, or Norwegian off-shore oil, and so the Russian oil industry can survive a period of low oil prices, whereas these other producers may no longer be around by the time the price of oil recovers.

Because the ruble has dropped even more than oil, the Russian treasury is going to be flush with tax receipts, and won’t have to try to finance a budget deficit. The 18% or so of revenue that the Russian treasury gets from energy exports is significant, but even more significant are the remaining 82%, much of which come from payroll taxes (some of the lowest in Europe, by the way). And therein lies a bigger danger: that because of loss of access to western sources of financing due to the sanctions, coupled with central bank shenanigans with hiking rates instead of dropping them, Russia’s domestic economy will experience a severe downturn.

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Not impressed by the experts here. Russia’s access to dollars has been cut, and they need something to trade in. Moreover, they’ve seen this coming, hence the tripling of reserves over the past decade.

Traders Betting Russia’s Next Move Will Be to Sell Gold (Bloomberg)

Russia’s surprise interest-rate increase failed to stop the plummeting ruble. Another tool available to repair economic havoc caused by sanctions and falling oil prices: selling gold. Russia holds about 1,169.5 metric tons of the precious metal, the central bank said last month. That’s about 10% of its foreign reserves, according to the London-based World Gold Council. The country added 150 tons this year through Nov. 18, central bank Governor Elvira Nabiullina told lawmakers. The Bank of Russia declined to comment on its gold reserves. Russia’s cash pile has dropped to a five-year low as its central bank spent more than $80 billion trying to slow the ruble’s retreat. The currency’s collapse combined with more than a 40% tumble in oil prices this year is robbing Russia of the hard currency it needs in the face of sanctions imposed after President Vladimir Putin’s annexation of Crimea. A fall in gold prices signals that traders are betting that the country will tap its reserves, according to Kevin Mahn at Hennion & Walsh Asset Management.

“Russia is at a critical juncture and given the sanctions placed upon them and the rapid decline in oil prices, they may be forced to dip into their gold reserves,” Mahn said. “If it happens it will push gold lower.” “There are a number of ways that they could use their gold,” Robin Bhar, an analyst at SocGen in London, said today by phone. “They could use it as collateral for bank loans, or for loans from multi-lateral agencies. They could sell it directly in the market if they want to raise foreign-exchange” reserves, including to get more dollars, he said. If Russia decides to sell, the figures to confirm the move wouldn’t be available for a few months, Bhar said. Selling gold is usually “one of the last weapons” for central banks because some use the metal to help back their currencies, George Gero at RBC Capital Markets in New York, said in a telephone interview.

“They are probably still accumulating gold and keeping it for a bigger crisis,” he said. Russia has tripled its gold reserves since 2005, according to data compiled by Bloomberg. Its holdings compare with about 70% for the U.S. and Germany, the biggest bullion holders, the World Gold Council data show. “Russia has been adding to their gold through the turmoil, and it’s their reserve asset, so they would utilize it ultimately,” Michael Widmer, metals strategist at Bank of America Corp. in London, said in a phone interview. “Utilizing can mean a whole range of things. They could use it to raise cash, or use it as swap, or use it as collateral.”

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Time to hike up the fear campaign.

Greece Faces Crisis On Rising Prospect Of Snap Election (CNBC)

An early general election in Greece is looking more likely than ever after the first round of a snap presidential election failed to win the government support on Wednesday. Prime Minister Antonis Samaras’s preferred candidate for president – Stavros Dimas – failed to gain the required 200 votes in the first round of a snap presidential election, gaining only 160 votes. The result raises the chance of a general election, and there is a distinct possibility that the left-wing, anti-austerity party Syriza could win such a vote – potentially putting the country’s international bailout into jeopardy. Syriza currently holds a 3.6-percentage-point lead over the ruling conservatives, a poll published after the first round of a presidential vote on Wednesday showed, Reuters reported. “There’s no doubt that Syriza has had all the momentum politically in the last year to 18 months in Greece and the unpopularity of the bailout is something that is very (prevalent) with Greeks,” David Lea, senior analyst at Control Risks, told CNBC’s “Capital Connection” on Wednesday.

The party has always said it would scrap Greece’s tough austerity policies which were a condition of its two 240 billion euro ($296 billion) bailouts implemented by the International Monetary Fund, European Central Bank and European Commission. Greece is approaching the end of its bailout program, but still needs to implement further austerity measures in order to receive a last tranche of aid from lenders. There will be two further rounds of voting on December 23 and December 29, and if the Greek parliament fails to elect a new president in those votes, a general election will automatically be called. The number of votes a candidate needs drops to 180 in the final round on December 29, but with Greece’s political system as fractious as ever, it looks unlikely that Dimas will gain the support that he needs, analysts said. Lea said it was not “realistic” to expect that Dimas could gain enough votes in the presidential election.

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A load of baloney from Bloomberg’s editorial staff. That new editor in chief certainly hasn’t raised quality so far. Calling Syriza ‘neo-marxist’ is simply emptily leading and insinuating. There’s a lot of that at Bloomberg.

EU’s Greek Drama Needs A Final Act (Bloomberg ed.)

Judging from Wednesday’s vote in the Greek parliament, Prime Minister Antonis Samaras may not get the mandate he wants to keep economic austerity measures in place and avoid defaulting on the country’s debt. His would be the responsible path, but it’s easy enough to see why Greeks wouldn’t want to follow it. The dispute is haunting international investors again because the European Union in general, and Germany in particular, refuses to write off any part of Greece’s sovereign debt. Yet, as most economists acknowledge, the country can never emerge from under its current debt pile -now close to 180% of gross domestic product. And the prospect of endless years of austerity spent in the attempt is political poison. Samaras brought forward Wednesday’s vote for a new president, the first of three, as a vote of confidence. He is essentially daring members of parliament to reject his candidate, Stavros Dimas, because that would force new parliamentary elections – elections that the anti-austerity, neo-Marxist Syriza coalition might win.

Judging by this first vote, in which Dimas secured just 160 votes, it’s going to be an uphill struggle. To win in the third round later this month, Dimas will need 180 votes. Greece, Europe and the bond markets have been on this brink before. Yet each time the circumstances are a little different. For one thing, after six years of austerity policies mandated by the bailout agreement – which have shrunk output and real wages by 20% – the country is now exhausted. The Greek economy may be growing again, but 1 in 4 Greeks are still out of work, and more than 70% of them are long-term unemployed. Those are just numbers, of course, and Greece had certainly been living beyond its means. But what has austerity meant for ordinary Greeks? For one thing, they have gone without adequate health care. Budget cuts have slashed state spending on health by 25%, and on mental health, in particular, by half. Suicides have risen by 45%. HIV infections have increased 10-fold (as needle and condom programs have been reduced). And malaria has returned after 40 years.

With mainstream political parties offering more of the same austerity – even now that the government is running a primary budget surplus – many Greeks are looking to Syriza. It promises to boost spending, reverse the budget cuts, provide free electricity, and yet somehow avoid a formal default or a return to the drachma from the euro. The party says it will persuade international creditors to restructure Greece’s debt and fund Syriza’s spending spree. That’s nuts, of course, except for the restructuring part, which is exactly what Greece’s creditors should do. The country has already secured some debt relief, from private creditors, not to mention €240 billion in bailout loans from the EU and the IMF. Yet the bailout also rescued the German and French banks that loaned Greece money. So restructuring would not only be good for the euro area, but it would also fairly share more of the pain.

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“.. the government’s June 2013 crackdown on fake trade invoicing caused a seize-up in liquidity, pushing banks close to a meltdown.”

$1.3 Trillion In Secret Cash Sneaked Out Of China In The Last 10 Years (Quartz)

China’s capital account might be closed—but it’s not that closed. Between 2003 and 2012, $1.3 trillion slipped out of mainland China – more than any other developing country – says a report by Global Financial Integrity (GFI), a financial transparency group. The trends illuminate China’s tricky balancing act of controlling the economy and keeping it liquid. GFI says the most common way money leaks out in the developing world is through fake trade invoices. The other big culprit is “hot money,” likely due to corruption – which GFI gleans from inconsistencies in balance of payments data. In China, both activities have picked up since 2009. In fact, $725 billion – more than half of the outflows from the last decade – has left since 2009, just after the Chinese government launched its 4 trillion yuan ($586 billion) stimulus package.

Even after that wound down, the government encouraged investment to boost the economy, prodding its state-run banks to lend. Since loan officers dish out credit to the safest companies—those with political backing—this overwhelmingly benefited government officials and their cronies. That’s left small private companies so starved for capital that they’ll pay exorbitant rates for shadow-market loans, which a lot of China’s sketchy trade invoicing outflows likely sneaked back in to speculate on shadow finance and profit from the appreciating yuan. Corrupt officials, meanwhile, shifted their ill-gotten gains into overseas real estate and garages full of Bentleys. Those re-inflows inflate risky debt and had driven up the yuan’s value, threatening export competitiveness.

China’s leaders were not exactly happy about this, and in March its central bank drove down the value of the currency in order to discourage hot money speculation on the yuan’s appreciation. China’s policies leave it with few other options. To avoid the economic nosedive that likely would follow if the bad debt got written down, China’s leaders have the banks extending and re-extending loans, hoping to deleverage gradually. That requires an ever-ballooning supply of money, though. The slowing of China’s trade surplus and foreign direct investment inflows leaves the financial system dependent on new sources of money—like speculative inflows from fake trade invoicing. The danger of this is apparent already. For example, the government’s June 2013 crackdown on fake trade invoicing caused a seize-up in liquidity, pushing banks close to a meltdown.

Read more …

“If you play poker with all your cards showing, you can’t bluff.” Told you it was a casino …

Dark Pools in Spotlight as EU Moves to Bolster Markets (Bloomberg)

If you play poker with all your cards showing, you can’t bluff. Traders accustomed to operating in Europe’s dark pools, where buy and sell orders are hidden, say a transparency drive by regulators may similarly deprive them of the secrecy they need to shield their trades from competitors. That could drain the liquidity, and the life, from some of the region’s biggest markets, they say. The European Securities and Markets Authority plans to release draft standards as early as tomorrow that flesh out European Union law. Regulators say the rules, which seek to cap equity trading in dark pools and push more swaps trades on to regulated platforms, will make markets more resilient during crises and less prone to abuse. Some brokers counter that the move will backfire by making trading too expensive.

“The new transparency requirements in the non-equity markets have the capacity to introduce fundamental change to the way dealers do business,” said Peter Bevan, a financial regulation partner at law firm Linklaters LLP in London. “Pre-trade transparency is not such a novelty in the equity markets, but nevertheless there are important changes such as the availability of waivers for the so-called dark pools.” The push to shine light into dark pools is part of a broader overhaul of financial-market rules that takes effect in 2017. While the updated Markets in Financial Instruments Directive, known as MiFID II, has been approved, a host of technical details are still needed for its implementation.

The law expands market disclosure on multiple fronts. For equities, it seeks to cap dark-pool trading by forcing transactions on to recognized platforms and curbing an existing system of waivers from pre-trade transparency rules. These plans include a “double volume cap” that restricts how much traders can rely on two of the waivers. For over-the-counter derivatives, the EU rules will force trading in standard types of contacts on to regulated platforms and require traders to make public some price information before and after the trade. A system of waivers will apply to limit the scope of the disclosure rules, including exemptions for less often traded – known as illiquid – instruments and bulk orders.

Read more …

Uruguay has become an interesting nation.

Uruguay Takes on London Bankers, Marlboro Mad Men and the TPP (Truthout)

What the hell is happening in tiny Uruguay? South America’s second smallest country, with a population of just 3.4 million, has generated international headlines out of proportion to its size over the past year by becoming the first nation to legalize marijuana in December 2013, by welcoming Syrian refugees into the country in October 2014 and by accepting the first six US prisoners resettled to South America from the Guantánamo Bay prison on December 6, 2014. Outgoing President Jose Mujica, a colorful former Tupamaros rebel who was imprisoned and brutally tortured by the military during the era of the disappeared in the 1970s under US-supported Operation Condor in Uruguay, Chile, Argentina and other nations of the Southern Cone, is a favorite media subject and has been at the center of these actions.

Yet an even larger story with deeper historical roots and global implications is unfolding simultaneously in Uruguay with minimal media attention. Uruguay has spent the last decade quietly defying the new transnational order of global banks, multinational corporations and supranational trade tribunals and is now in a fight for its survival as an independent nation. It is a rich and important story that needs to be told. For the past 10 years, Uruguayans have been conducting a left-leaning experiment in economic and social democracy, turning themselves into a Latin American version of Switzerland in the process. Under the leadership of the left-leaning Broad Front party, the International Monetary Fund (IMF) reports that Uruguay has enjoyed annual economic growth of 5.6% since 2004, compared to 1.2% annual growth over the last five years in Switzerland.

The Swiss have decriminalized marijuana and gay marriage. Uruguay has legalized both. Prostitution is legal in both countries, and each provides universal health care. According to the Happy Planet Index, Uruguay has the same low per capita environmental footprint as Switzerland, with a similarly widespread sense of well-being among its people in spite of significantly lower per capita GDP. Yet unlike Switzerland, with its highly developed financial services sector and, until recently, safe haven tax policies for global capital, Uruguay has become a prime target for the wrath of multinational corporations and the London bankers who fund them.

Read more …

Switzerland feels quite cramped these days.

Swiss National Bank Imposes Negative Interest Rate (Bloomberg)

The Swiss National Bank imposed the country’s first negative deposit rate since the 1970s as the Russian financial crisis and the threat of further euro-zone stimulus heaped pressure on the franc. A charge of 0.25% on sight deposits, the cash-like holdings of commercial banks at the central bank, will be introduced as of Jan. 22, the Zurich-based institution said in a statement today. That’s the same day as the European Central Bank’s next decision. The SNB move follows Russia’s surprise interest-rate increase earlier this week and hints at the investment pressures that resulted after that decision failed to stem a run on the ruble. Combined with the imminent threat of quantitative easing from the ECB, Swiss officials acted at a time when the franc was stuck too close for comfort near its 1.20 per euro ceiling. [..]

“This is not the magic bullet, but will buy them time,” said Peter Rosenstreich, head of market strategy at Swissquote in Gland, Switzerland. “This will relieve pressure from the floor in the short term, but not in the long term.” “Over the past few days, a number of factors have prompted increased demand for safe investments,” the SNB said. “The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate.”

Read more …

But I still think a rate hike is exactly what’s coming.

The Fed Is Sitting On a $191 TRILLION Time Bomb (Phoenix)

Stocks are bouncing today because the Fed will wrap up its monthly FOMC meeting and make a public statement this afternoon. Stocks have been rallying into FOMC meetings for the last three years, so traders are now conditioned to buy stocks in anticipation of this. The prime focus for the markets is whether the Fed continues to state that it will raise rates after “a considerable time.” The reality is that the Fed cannot and will not raise rates anywhere near normal levels at any point because doing so would blow up the financial system. Let’s walk through this together. Currently, the US has over $17 trillion in debt. The US can never pay this off. That is not some idle statement… we issued over $1 trillion in NEW debt in the last eight weeks simply because we don’t have the money to pay off the debt that is coming due from the past.

Since we don’t have that kind of money, the US is now simply issuing NEW debt to raise the money to pay back the OLD debt. This is why the Fed NEEDS interest rates to be as low as possible… any slight jump in rates means that the US will rapidly spiral towards bankruptcy. Indeed, every 1% increase in interest rates means between $150-$175 billion more in interest payments on US debt per year. So the Fed wants interest rates low because it makes the US’s debt load much more serviceable. This is why the Fed keeps screwing around with language like “after a considerable time” despite the fact that rates should already be markedly higher based on the Taylor Rule as well as the state of the US economy: it’s all a ruse to pretend the Fed has a real choice in the matter.

However, there’s an even bigger story here. Currently US banks are sitting on over $236 trillion in derivatives trades. Of this, 81% ($191 TRILLION) are based on interest rates. Put another way, currently US banks have bet an amount equal to over 1,100% of the US GDP on interest rates. Guess which banks did this? The BIG FIVE: JP Morgan, CitiGroup, Goldman Sachs, and Bank of America. In other words… the Too Big To Fails… the very banks that the Fed has bailed out, and done everything it can to prop up. What are the odds that the Fed is going to raise rates significantly and risk blowing up these firms? Next to ZERO. Forget about the Fed’s language and its FOMC meeting. The real story is the $100 trillion bond bubble (more like the $200 trillion interest rate bubble based on bonds). When it breaks, it doesn’t matter what the Fed says or does.

Read more …

And globally.

2014 Warmest Year In Europe Since 1500s (FT)

Climate change is very likely to have helped make 2014 Europe’s warmest year since the 1500s, scientists have found. In a move that could eventually pave the way for law suits against companies burning fossil fuels, researchers at Oxford university found global warming had increased the risk of such a record being set by at least a factor of 10. Other teams working independently in The Netherlands and Australia said the odds had been boosted by 35 to 80 times. Though there are still two weeks of the year left, temperatures have already been so high in so many countries that 2014 is expected to be the hottest on record in Europe and globally. Climate scientists have said for decades the carbon dioxide emissions produced by burning coal, oil and gas are warming global temperatures. But until recently they have been reluctant to blame global warming for specific weather extremes.

This is starting to change as researchers deploy increasingly sophisticated computer models to compare the chances of such anomalies occurring with and without the influence of humans on the climate. Environmental lawyers are already watching developments in this emerging field of so-called climate attribution science closely, to see if it opens the way for legal action against large fossil fuel companies. “In the early 1900s, before global warming played a significant role in our climate, the chances of getting a year as warm as 2014 were less than 1-in-10,000. In fact, the number is so low that we could not compute it with confidence,” said Geert Jan van Oldenborgh, a climate scientist at KNMI, the Royal Netherlands Meteorological Institute. The institute calculated global warming made this year’s high temperatures in Europe at least 80 times more likely.

Read more …

Fascinating story.

‘Vast Stores’ Of World’s Oldest Water (BBC)

The world’s oldest water, which is locked deep within the Earth’s crust, is present at a far greater volume than was thought, scientists report. The liquid, some of which is billions of years old, is found many kilometres beneath the ground. Researchers estimate there is about 11m cubic kilometres (2.5m cu miles) of it – more water than all the world’s rivers, swamps and lakes put together. The study was presented at the American Geophysical Union Fall Meeting. It has also been published in the journal Nature. The team found that the water was reacting with the rock to release hydrogen: a potential food source. It means that great swathes of the deep crust could be harbouring life. Prof Barbara Sherwood Lollar, from the University of Toronto, in Canada, said: “This is a vast quantity of rock that we’ve sometimes overlooked both in terms of its ability to tell us about past processes – the rocks are so ancient they contain records of fluid and the atmosphere from the earliest parts of Earth’s history.

“But simultaneously, they also provide us with information about the chemistry that can support life. “And that’s why we refer to it as ‘the sleeping giant’ that has been rumbling away but hasn’t really been characterised until this point.” The crust that forms the continents contains some of the oldest rocks on our planet. But as scientists probe ever deeper – through boreholes and mines – they’re discovering water that is almost as ancient. The oldest water, discovered 2.4km down in a deep mine in Canada, has been dated to between one billion and 2.5bn years old. Prof Chris Ballentine, from the University of Oxford, UK, said: “The biggest surprise for me was how old this water is. The water reacts with the rocks to create hydrogen – a potential food source for life. “That water is down there is no surprise – water will percolate down into the rock porosity. “But for it to be preserved and kept there for so long is a surprise. “So when you think about what’s down beneath your feet, it’s more exciting than just some rock.”

Read more …

May 222014
 
 May 22, 2014  Posted by at 10:49 am Earth Tagged with: , , ,  14 Responses »


Dorothea Lange Sons of Negro tenant farmer, Granville County, North Carolina July 1939

This is the second installment of Nicole’s series on food security.

Nicole Foss: In part one of this series, we looked at finance as a major causal factor in the development of food insecurity. The boom and bust cycles that result from over-financialization are, however, only one aspect of a food crisis already present for many, and looming for many more in the years to come. Finance can, and does, generate artificial scarcity, initially through the manipulation of land and commodities for profit and, and latterly by over-reaching itself and crashing the human operating system, with tremendous negative impact on the supply of all goods and services. Food is one of the vital factors that will be substantially affected in a financial crash where connecting producers and consumers will be extremely difficult due to lack of money in circulation.

The inherent instability of our human operating systems is only one of a large number of limiting factors for food production and distribution. The very real scarcity coming as a result of limiting factors grounded in the physical world is far more serious in the longer term. While we can make changes capable of addressing both human and physical limits, we are highly unlikely to do so in a timeframe, or on a scale, that would prevent us from experiencing the consequences of of over-shooting our natural carrying capacity. Nevertheless, whatever we can achieve in the time available will be an improvement.

This series is not meant to be a comprehensive assessment of each limiting factor in relation to food supply, but an overview of vulnerability in its many forms, clarifying the imperative for re-engineering our food systems. Given the extent of the over-stretch of the current model, the possibility of rapid collapse in response to very predictable system shocks is uncomfortably high. We are at risk of cascading system failure. We cannot expect facilitation of this transition to come from the top down, however – far from it. The larger scale centralized human construct, highly over-stretched and inflexible, can only be expected to look after itself and defend the status quo at the expense of decentralization initiatives. Meaningful change will have to come from the bottom up, one local initiative at a time.

There is a considerable urgency to making this transition to a human-scale food system. While many are generally aware that our current means of producing and distributing food is unsustainable, few seem to realize that what cannot continue will not continue, that the limits are already being reached, and that the effects will most certainly be felt in our lifetimes, even in what are now wealthy countries. This is not an issue where we can continue business as usual and expect the impact to be felt only by distant populations or by subsequent generations. It will be one where we must take personal responsibility for change, both for our own benefit and that of society in general.

We are facing non-negotiable physical limits in terms of water and climate, which are the subject of this instalment, but also energy, soil fertility and carrying capacity, the subjects for the next part of the series. Our human systems for trade and agricultural regulation are frequently exacerbating the scope of the problems we face and will be covered subsequently. Ultimately we are going to have to face the root of the problem, which lies in the inherently expansionist nature of agriculture itself, as practiced not just in the industrial age, but from the dawn of the neolithic period. We will need to develop polycultural food production systems along permaculture lines if we are to avoid the worst consequences of over-reach. We will need to learn to live within limits.


Farming and Water

Fresh, clean water is the ultimate precious resource – the lifeblood of the planet – yet it is increasingly scarce in many places already and set be become far scarcer in the foreseeable future. Only a tiny percentage of the Earth’s fresh water is sufficiently accessible to be available for human use, and of that, agriculture consumes the lion’s share. It takes 1000 tons of water to grow a ton of wheat for instance.

Irrigated land is far more productive in the short term, allowing us to use the cheap energy we have had access to to expand the areas under cultivation and increase yields in order to feed our expanding population. However, in the longer term, irrigation leads to soil water-logging and salinization, as evaporation of mineralized water leaves salts behind in the soil. Land can be badly damaged and eventually abandoned, while new land is then subjected to the same treatment:

Although only 17% of all cropland is currently irrigated, it provides 40% of the world’s food….But much existing irrigated land is threatened by salinization — a build-up of salts in the soil. This lowers yields and can damage the land beyond economic repair. Salinization is reducing the world’s irrigated area by 1-2% every year, hitting hardest in the arid and semi-arid regions. “No one is really certain of the figures, but it seems that at least 8% of the world’s irrigated land is affected,” says FAO water expert Julián Martínez Beltrán. “In the arid and semi-arid regions, it’s somewhere around 25%.”

In this way, land is being consumed as a non-renewable resource. Needless to say, there is a finite supply of land available, and with irrigation damage occurring most quickly in the most water-stressed regions, the risk of food insecurity is compounded.

Some 60% of irrigation draws on surface water sources, but chronic over-use has led to major rivers no longer reaching the sea, destroying the health and productivity of formerly fertile delta lands which had previously been substantial food sources for local populations:

For six million years, the Colorado River ran its course from its soaring origins in the Rockies to a once-teeming two-million-acre delta, finally emptying 14 million acre-feet of fresh water into the Sea of Cortez. But now, a multitude of straws are drinking from the river….Indeed, the Colorado River has not reached the sea since 1998 but ends rather in a cracked and desolate expanse of barren mud flats and abandoned boats — a “dry river cemetery.”….

….Referred to as the Nile of North America, the Colorado River is the arid West’s lifeline. It provides water to more than 30 million Americans, including people in cities like Phoenix, Denver and Los Angeles. Over 100 dams and thousands of miles of canals divert the river to nearly every farm, industry and city within a 250-mile radius of its banks. It is one of the most diverted and dammed rivers in the world.

Dry Rivers are increasingly common worldwide.

Where irrigation depends on aquifers, draw-down often exceeds the natural recharge rate. We are depending on fossil water that is also effectively a non-renewable resource, and when the limit of feasible extraction is reached, whole regions are at risk of becoming unable to support either the human population or what remains of the existing ecosystem. Water tables are falling by several feet per year in many parts of the developing world dependent on groundwater sources, notably beneath rapidly growing urban centres with an insatiable demand for water, but also beneath agricultural regions:

Shijiazhuang, China — Hundreds of feet below ground, the primary water source for this provincial capital of more than two million people is steadily running dry. The underground water table is sinking about four feet a year. Municipal wells have already drained two-thirds of the local groundwater. Above ground, this city in the North China Plain is having a party. Economic growth topped 11% last year. Population is rising. A new upscale housing development is advertising waterfront property on lakes filled with pumped groundwater. Another half-built complex, the Arc de Royal, is rising above one of the lowest points in the city’s water table. “People who are buying apartments aren’t thinking about whether there will be water in the future,” said Zhang Zhongmin, who has tried for 20 years to raise public awareness about the city’s dire water situation….

….The North China Plain undoubtedly needs any water it can get. An economic powerhouse with more than 200 million people, it has limited rainfall and depends on groundwater for 60% of its supply….But scientists say [the aquifers] below the North China Plain may be drained within 30 years.

The same phenomenon is occurring under the major breadbaskets of the world, for instance the Punjab in India and the Ogallala Aquifer underlying the great plains of the US:

The Ogallala Aquifer, the vast underground reservoir that gives life to these fields, is disappearing. In some places, the groundwater is already gone. This is the breadbasket of America—the region that supplies at least one fifth of the total annual U.S. agricultural harvest. If the aquifer goes dry, more than $20 billion worth of food and fiber will vanish from the world’s markets. And scientists say it will take natural processes 6,000 years to refill the reservoir….

….With a liquid treasure below their feet and a global market eager for their products, farmers here and across the region have made a Faustian bargain—giving up long-term conservation for short-term gain. To capitalize on economic opportunities, landowners are knowingly “mining” a finite resource.

As with so many aspects of our human systems, short term gains trumps long term ability to provide that which sustains existence. Unfortunately, as the shared resource diminishes, competition over what remains intensifies, and the potential for conflict increases enormously. Resources previously used in common often become privatized and used for the exclusive benefit of a dominant group. The land grabs we discussed in relation to financial aspects of food insecurity are also reflections of this competition over water resources, and in fact are often water grabs in disguise:

Water grabbing refers to situations where powerful actors are able to take control of or divert valuable water resources and watersheds for their own benefit, depriving local communities whose livelihoods often depend on these resources and ecosystems. The ability to take control of such resources is linked to processes of privatisation, commodification and take-over of commonly-owned resources. They transform water from a resource openly available to all into a private good whose access must be negotiated and is often based on the ability to pay. Water grabbing thus appears in many different forms, ranging from the extraction of water for large scale food and fuel crop monocultures, to the damming of rivers for hydroelectricity, to the corporate takeover of public water resources….

….The causes of water grabbing are similar to those of ‘land grabbing’: the phenomenon whereby investors acquire or lease vast tracts of land, with negative socio-economic and environmental effects. An investor’s control of land usually comes with a corresponding control of water resources. Indeed, access to water could be the most valuable part of the deal. This is especially so given that host governments seek to entice investors by offering them concessions with regards to water use….

….Acquiring land in order to access and control water is especially relevant to countries facing water scarcity. Renewable water resources in the Gulf states for example are set to run out in the next three decades. The implications of this water scarcity are profound. Saudi Arabia, once a net exporter of wheat, intends to phase out domestic production of wheat by 2016 due to the depletion of fresh water reserves in the country. It seeks to compensate for this loss in domestic food production by acquiring farmland abroad, thereby transferring much of the pressure on water resources caused by agricultural production to other countries. This is a strategy likely to be pursued by other water deficit countries as they seek to ‘lock in’ access to water reserves and resolve their own water constraints by acquiring land abroad.

The problem is compounded by the use to which acquired land is put, as this use, generally by absentee land owners, does not reflect a condition of resource scarcity. Water resources, which may already be under stress as local populations rise, are all too often being rapidly squandered in the pursuit of short term profit, with the result that ecosystems are damaged or destroyed and local populations forced to migrate:

All of the land deals in Africa involve large-scale, industrial agriculture operations that will consume massive amounts of water. Nearly all of them are located in major river basins with access to irrigation. They occupy fertile and fragile wetlands, or are located in more arid areas that can draw water from major rivers. In some cases the farms directly access ground water by pumping it up. These water resources are lifelines for local farmers, pastoralists and other rural communities. Many already lack sufficient access to water for their livelihoods. If there is anything to be learnt from the past, it is that such mega-irrigation schemes can not only put the livelihoods of millions of rural communities at risk, they can threaten the freshwater sources of entire regions.

The concept of virtual water trade refers to the quantity of water effectively exported when countries export agricultural products, which consume local water resources. Importing countries can save water at the expense of exporting ones:

When a country imports one tonne of wheat instead of producing it domestically, it is saving about 1,300 cubic meters of real indigenous water. If this country is water-scarce, the water that is ‘saved’ can be used towards other ends. If the exporting country is water-scarce, however, it has exported 1,300 cubic meters of virtual water since the real water used to grow the wheat will no longer be available for other purposes.

In 2007, the global water trade was estimated to be some 567 billion litres, double that in 1986 as the water trade has become increasingly globalized.


Exporting virtual water becomes problematic where exporting nations are water scarce. The decision to export virtual water anyway is generally a matter of short term economic gain, either for wealthy foreign purchasers of land, as we have seen in Africa, or for large domestic land owners. For instance, Australia is the driest inhabited continent, but also, according to UNESCO, the largest net exporter of virtual water in the world, with agricultural exports feeding 60 million people worldwide. This is currently possible due to the availability of the necessary energy to supply the water when and where needed, but it is obviously unsustainable. Australia has only just established an independent agency tasked with monitoring and setting sustainable limits on water use.

Similarly, drought-stricken California uses artificially cheap water provided with temporarily affordable energy to export thirsty hay and rice crops to Japan:

In the Imperial Valley of California, a region drier than part of the Sahara Desert, farmers have found a lucrative market abroad for a crop they grow with Colorado River water: They export bales of hay to land-poor Japan….Container ships from Japan unload electronics and other goods in the Port of Long Beach, and the farmers fill up the containers with hay for the trip back across the Pacific. Since the containers would otherwise return empty, it ends up costing less to ship hay from Long Beach to Japan than to California’s Central Valley.

“Everything is done for economics,” said Ronnie Leimgruber, an Imperial Valley hay grower who is expanding into the export market. “Japan cannot get hay cheaper. The freight is cheaper from Long Beach than from anywhere else in the world.” Water is cheap for valley farmers, too: urban rates there are four times as high. It costs only $100 to irrigate an acre of hay in the desert for a year. But what makes economic sense to farmers may not be rational behavior for California in the third year of a severe drought, say some conservationists. At the very least, they contend, the growing state debate over water allocation should take into account the exports of crops such as hay and rice — two of the most water-intensive crops in the West — because they take a toll on local rivers and reservoirs.

“This is water that is literally being shipped away,” said Patrick Woodall, research director at Food and Water Watch, an international consumer advocacy group with headquarters in Washington, D.C. “There’s a kind of insanity about this. Exporting water in the form of crops is giving water away from thirsty communities and infringing on their ability to deal with water scarcity.”

Increasingly, limits are going to be reached and hard choices are going to have to be made. The current pursuit of individual or corporate economic benefit at the expense of rational resource use cannot continue where the resources in question are increasingly limited and therefore subject to competing interests. Those competing interests will increasingly make themselves know in a highly socially disruptive manner destined to force change.

Competition over water access is already inflaming regional tensions in areas of water scarcity, with unequal provision reflecting relative power. The powerless may be prevented, by lack of sufficient water, from growing food at all, cementing a state of dependency where the powerful hold hostage the ability to provide basic essentials:

Published Monday by the Ramallah-based human rights organization Al-Haq, “Water for One People Only: Discriminatory Access and ‘Water-Apartheid’ in the Occupied Palestinian Territory”, reports that Israel has claimed up to 89% of an underground aquifer that is largely located in the West Bank, giving Palestinians only access to the remaining 11%. The water grab has fueled increased discrepancy in water usage in the region with the 500,000 Jewish settlers consuming approximately six times the amount of water used by the 2.6 million Palestinians living in the West Bank—with the discrepancy growing even greater when agricultural water use is accounted for.
“There is a grave injustice in the division of water, and the results have been catastrophic,” Tawfiq Salah, mayor of West Bank village al-Khader, told Al-Monitor….

….Writing about the report, Al-Monitor’s Jihan Abdalla quotes Musa, a Palestinian father of six, who had attempted to build a rainwater cistern in his field before the Israeli authorities quickly issued it with a demolition order. Abdalla continues: Musa says if they had access to sufficient, affordable water, his family would be able to live off their ancestral field, selling their grapes, olives and fruit in nearby markets. That, he says, is the reason why Israeli authorities prevent them from building a cistern, and why they do not have any running water. “They don’t want us to plant or grow anything, they just want us to have barely enough water for drinking and that’s it,” Musa says looking at the unfinished, empty hole in the ground.

It is not only in situations of long term ethnic conflict where actions such as collecting rainwater for self-sufficiency are seen as competing with established interests. In drought prone regions of the US southwest, precious water rights are considered to be threatened by domestic rainwater capture, even though the water captured would otherwise have been more likely to have evaporated than to have made its way to the fully allocated river:

The Rocky Mountain state uses a convoluted mix of first-come, first-serve water rights, some of which date back to the 1850s, and riparian rights that belong to the owners of land lying adjacent to water. A single person catching rain wouldn’t make a difference to water rights holders, according to Brian Werner of the Northern Colorado Water Conservancy District. But if everyone in Denver captured rain, he says, that would upset the state’s 150-year-old water-allocation system. The Colorado Department of Natural Resources estimates that 86% of water deliveries go to agriculture, which is already stressed by dwindling supplies. And because 19 states and Mexico draw water from rivers that originate in the Colorado Rockies, backyard water harvesting can have widespread implications….

….With water systems across the country already highly or fully appropriated, and with drought aggressively depleting supplies, Aiken predicts that legal battles over who owns the rain won’t go away anytime soon. Old water-allocation systems remain in direct conflict with a growing movement for DIY water conservation, including rainwater collection.

Bulk water transfers are being contemplated in a number of locations, but these are highly controversial as they would have significant environmental impacts. They are so highly capital and energy intensive that limits on those parameters may prevent this kind of development, although it would depend on which critical resource first became limiting in a given location. Both farms and cities, increasingly competing for water in arid regions, could prioritize water over money and energy if the latter remain available.

An illustration of the emerging tension between critical resources can be seen in relation to the water requirements of fracking for unconventional fossil fuels:

The move to tap petroleum-rich shale reserves in some of the country’s driest regions, including Colorado, may be setting up a battle between oil and water. The water is needed for hydraulic fracturing, a process that pumps millions of gallons of sand and water into a well to crack the hard shale and release oil and gas. Nearly half of the 39,294 reported “fracked” wells drilled in the U.S. since 2011 are in regions with high or extreme water stress, according to a report by Ceres, an investor and environmental-advocacy group….

….In Colorado, 86% of the state’s water is used by agriculture. Municipalities and industry use 7.4%. While oil and gas companies have created a small market for water, it hasn’t had a major impact on farms, said Bill Midcap, a spokesman for the Rocky Mountain Farmers Union. “There are cases where companies have bid up water to more than farmers can afford, but it is in a few cases,” Midcap said.

Over-use of water sources and inappropriate or uncontrolled land use has had a substantial impact on water quality in many regions, damaging both surface water sources and also the oceans into which those surface waters emerge. Both urban pollution and agricultural runoff have major impacts. Fertilizers and animals wastes from agricultural land wash into water courses, causing eutrophication – the nutrient enrichment of the water to an extent that allows algal blooms to form. As these decay, the available oxygen is consumed, suffocating the inhabitants of the river and creating dead zones at river mouths. For instance, the one at the mouth of the Mississippi is the size of New Jersey.

Of China’s 23,000 miles of large rivers, 80% are no longer able to support fish and aquatic ecosystems are on the brink of collapse. This will have a profound effect on food security is the world’s most populous country. Of course, food security is hardly the only issue with regard to rampant mis-use of water resources. Water-borne diseases are also going to prove to be strongly limiting factors in many places where more and more people have no access to safe drinking water.

Given the critical nature of water availability for drinking, for food security and for ecosystem health, a global water crisis represents a systemic threat.


Farming and Climate:

Climate change is already proving to be a factor in food insecurity, and is likely to have an increasing impact over time. The effects are complex, interacting with, and exacerbating, other factors, most notably the availability of water. Water will be affected by climate disruption through melting glaciers reducing surface water, increased evaporation, shifting rainfall patterns, droughts, an increasing number of extreme weather events and instances of coastal flooding. Where changes happen relatively quickly, they are much more difficult to adapt to, particularly in places where the local food system is already operating near a number of limits. This could easily lead to conflict:

“Battles over water and food will erupt within the next five to 10 years as a result of climate change,” said World Bank President Jim Yong Kim of the IPCC report. “The water issue is critically related to climate change. People say that carbon is the currency of climate change, water is the teeth. Fights over water and food are going to be the most significant direct impacts of climate change.”

Droughts have have had an increasing impact in recent years, with the shifting of of atmospheric jet stream patterns being a contributing factor. These upper level rivers of air guide low pressure systems and determine the storm track, with its attendant rainfall patterns. Where there are jet stream disturbances, weather patterns can be substantially altered:

Scientists expect the amount of land affected by drought to grow by mid-century—and water resources in affected areas to decline as much as 30%. These changes occur partly because of an expanding atmospheric circulation pattern known as the Hadley Cell—in which warm air in the tropics rises, loses moisture to tropical thunderstorms, and descends in the subtropics as dry air. As jet streams continue to shift to higher latitudes, and storm patterns shift along with them, semi-arid and desert areas are expected to expand.

For instance, the historic drought in California this past winter is a reflection of exactly this dynamic in action:

From November 2013 – January 2014, a remarkably extreme jet stream pattern set up over North America, bringing the infamous “Polar Vortex” of cold air to the Midwest and Eastern U.S., and a “Ridiculously Resilient Ridge” of high pressure over California, which brought the worst winter drought conditions ever recorded to that state. A new study published this week in Geophysical Research Letters, led by Utah State scientist S.-Y. Simon Wang, found that this jet stream pattern was the most extreme on record, and likely could not have grown so extreme without the influence of human-caused global warming. The study concluded, “there is a traceable anthropogenic warming footprint in the enormous intensity of the anomalous ridge during winter 2013-14, the associated drought and its intensity.”

California is a major food producing region, and the lack of water is already reducing production, with on-going effect.

Farmers in the state probably will leave as much as 500,000 acres unplanted, or about 12% of last year’s principal crops, because they won’t have enough water to produce a harvest, which will mean fewer choices and higher prices for consumers, said Mike Wade, executive director of the California Farm Water Coalition, a Sacramento-based group of farmers, water district managers and farm-related businesses. “Any job that’s associated with agriculture is hurting,” Wade said. While some farmers were able to conserve water in years past, they won’t get “any preferential treatment” over uses by municipalities, he said.

Extreme weather around the world is wreaking havoc with farmers and threatening global food production. Dry weather in China turned the world’s second-biggest corn grower into a net importer of the grain in 2010, and ranchers in Texas have yet to recover from a record dry spell three years ago. One in eight people in the world go hungry, some of which can be blamed on drought, according to the United Nations.

Although California is a relatively wealthy place, food security is affecting an increasing number of people as the financial bubble leaves more and more people behind, unable to keep up with a treadmill that keeps running faster and faster. As a result, the drought is impacting food security for the poorest residents:

The effects of California’s drought could soon hit the state’s food banks, which serve 2 million of its poorest residents. Fresh produce accounts for more than half the handouts at Bay Area food banks, but with an estimated minimum of 500,000 acres to be fallowed in California, growers will have fewer fruits and vegetables to donate.

With less local supply, food prices will spike, increasing as much as 34% for a head of lettuce and 18% for tomatoes, according to an Arizona State University study released last week. With fewer fields planted, there could be as many as 20,000 unemployed agricultural workers who will need more food handouts, especially in the Central Valley. And if urban food banks like those in Oakland and San Francisco can’t get produce from the valley, which grows a third of the nation’s fruits and vegetables, their transportation costs to haul in out-of-state produce will soar.

Jet stream fluctuations are now driving the development of dangerous heat conditions further inland, exacerbating persistent drought conditions reminiscent of the 1930s. In fact the US Department of Agriculture has recently issued what is effectively a dust bowl warning:

Meanwhile, US Department of Agriculture officials issued a warning Tuesday that conditions in the US Heartland were rapidly deteriorating along lines last seen during the infamous 1930s Dust Bowl as expectations for the US domestic winter wheat crop again fell after the USDA’s most recent agricultural tour.

Even prior to the extreme early May heatwave emerging over the Central US Sunday, Monday and Tuesday, the% of the US wheat crop in either good or excellent condition had fallen another 2% to 31% late last week. Meanwhile, crops listed as ‘very poor’ rocketed from an already abysmal 34% to 39% over the same period. The net result is that the US wheat crop is in its worst condition since at least 1996, according to findings by Commerzbank analysts.

For Oklahoma, at the epicenter of current agricultural harm and flash heatwaves, only 6% of the state’s entire wheat crop was listed as in either good or excellent condition. Department of Agriculture crop scouts described the Oklahoma situation in, perhaps, the starkest possible terms during their most recent report stating: “Producers in the Panhandle continued to experience high winds … and low moisture conditions similar to the Dust Bowl in the 1930s.” Overall, analysts now expect a US wheat crop of just 762 million bushels, the third lowest in 15 years despite record areas planted.

In other parts of the world, climate-driven changes in rainfall patterns over longer periods could have catastrophic effects where rain is highly seasonal and the food security of very large numbers of people depends on its regularity. For instance, the Indian summer monsoon is critical for farming in a country of over a billion people, but is predicted to be significantly affected in a future of rising temperatures:

Global warming could cause frequent and severe failures of the Indian summer monsoon in the next two centuries, new research suggests. The effects of these unprecedented changes would be extremely detrimental to India’s economy which relies heavily on the monsoon season to bring fresh water to the farmlands. The findings have been published November 6, in IOP Publishing’s journal Environmental Research Letters, by researchers at the Potsdam Institute for Climate Impact Research and Potsdam University….

….The Walker circulation usually brings areas of high pressure to the western Indian Ocean but, in years when El Niño occurs, this pattern gets shifted eastward, bringing high pressure over India and suppressing the monsoon, especially in spring when the monsoon begins to develop. The researchers’ simulations showed that as temperatures increase in the future, the Walker circulation, on average, brings more high pressure over India, even though the occurrence of El Niño doesn’t increase.

Unfortunately, surface water resources in both India and China will also be badly affected by the on-going melting of the Himalayan glaciers, with additive effect:

The world is now facing a climate-driven shrinkage of river-based irrigation water supplies. Mountain glaciers in the Himalayas and on the Tibet-Qinghai Plateau are melting and could soon deprive the major rivers of India and China of the ice melt needed to sustain them during the dry season. In the Ganges, the Yellow, and the Yangtze river basins, where irrigated agriculture depends heavily on rivers, this loss of dry-season flow will shrink harvests.

The world has never faced such a predictably massive threat to food production as that posed by the melting mountain glaciers of Asia. China and India are the world’s leading producers of both wheat and rice — humanity’s food staples. China’s wheat harvest is nearly double that of the United States, which ranks third after India. With rice, these two countries are far and away the leading producers, together accounting for over half of the world harvest.

The Intergovernmental Panel on Climate Change reports that Himalayan glaciers are receding rapidly and that many could melt entirely by 2035. If the giant Gangotri Glacier that supplies 70% of the Ganges flow during the dry season disappears, the Ganges could become a seasonal river, flowing during the rainy season but not during the summer dry season when irrigation water needs are greatest.

The combination of shifting seasonal rainfall, disappearing glacial meltwater, and the falling water tables already discussed adds up to a major predicament for Asian food security going forward:

Asia is home to some of the world’s biggest natural-disaster hot spots, and no other continent is more prone to the cumulative impact of droughts, flooding and large storms. This fragility is compounded by the region’s unmatched population size and density, and its concentration of people living in deltas and other low-lying regions.

The specter of a hotter, drier future for Asia can be seen in the degradation of watersheds, watercourses and other ecosystems, as well as in the shrinking forests and swamps and over-dammed rivers. Such developments undermine the region’s hydrological and climatic stability, fostering a cycle of chronic droughts and flooding. To make matters worse, Asia is likely to bear the brunt — as the report by the U.N. Intergovernmental Panel on Climate Change warns — of the global effects of extreme weather, rising seas and shortages of drinking water. Water wars may only be a matter of time.

Asia’s droughts are becoming longer and more severe, and the availability of water per capita is declining at a rate of 1.6% a year. This is a troubling trend for a region where agriculture alone guzzles 82% of the annual water supply. The rapid spread of irrigation since the 1960s has helped turn a continent once plagued by food shortages and famines into a food exporter. But it has also exacted a heavy toll on the environment and resources.

Higher temperature in many locations are also set to lead to substantially higher rates of evaporation, compounding the problem:

Sure, scientists expect the changing climate to bring on more drought. There’s going to be less rainfall in already arid regions, that’s fairly certain. And that alone would be bad news for denizens of the planet’s dry zones—in some places in North Africa, the American Southwest, India, and the Middle East, water shortages could well become an existential threat to civilization. But new research shows that evaporation may be more of a problem than previously thought: Climate change could dry out up to a third of the planet.

The study, published in the journal Climate Dynamics last month, estimates that climate change will cause reduced rainfall alone to dessicate 12% of the Earth’s land by 2100. But if evaporation is factored in, the study’s authors say that it will “increase the percentage of global land area projected to experience at least moderate drying by the end of the 21st century from 12 to 30%.”

“We know from basic physics that warmer temperatures will help to dry things out,” the study’s lead author, Benjamin Cook, a climate scientist with Columbia University and NASA’s Goddard Institute for Space Studies, said in a statement. “Even if precipitation changes in the future are uncertain, there are good reasons to be concerned about water resources.”

Writing in a 2011 literature review in the science journal Nature, the physicist Joe Romm elaborates on how increased heat and evaporation can lead to a vicious cycle: “Precipitation patterns are expected to shift, expanding the dry subtropics. What precipitation there is will probably come in extreme deluges, resulting in runoff rather than drought alleviation. Warming causes greater evaporation and, once the ground is dry, the Sun’s energy goes into baking the soil, leading to a further increase in air temperature.”

Disappearing soil moisture is likely to be a greater problem than previously thought, and the occasional downpour won’t sate year-round crops. As Columbia University notes, “An increase in evaporative drying means that even regions expected to get more rain, including important wheat, corn, and rice belts in the western United States and southeastern China, will be at risk of drought.”

Australia, already the driest continent, is set to become drier as a result of reduced rainfall and higher evaporation. While the continent  current produces a huge excess of food for export, it’s ability to continue doing so is likely to be substantially compromised in an increasingly arid future:

Australia emerged from a decade-long drought in 2009, which was said to be the worst in the country’s history. The report states the drought was estimated to have caused an 80% reduction in grain production and a 40% reduction in livestock production, and climate models predict that rainfall in southern and eastern Australia will continue to decrease as the century progresses.

Increasing aridity can lead to additional risks, notably the threat of wildfires. California is facing a potentially catastrophic fire season this year following on from its recent drought:

Even before this year’s drought, forest officials were reporting a longer fire season, and more catastrophic mega-fires, in California and other western states. Half of the worst fires in recorded Californian history have occurred since 2002. Climate change and land-use patterns are adding fuel to those fires. Higher temperatures, with recurring and intensifying droughts are drying out landscapes. Pest invasions, such as the pine bark beetle, have killed off stands of trees.

California’s state fire chief, Ken Pimlott, said: “We can’t recall when we have seen this level of fire activity early in this year. “This is usually the time of year when much of the state is greening up. We haven’t even got into the months that historically are the worst in California – late August, September and October – so that’s a big red flag right there.”

Similarly, Australia is facing increased risk of major conflagrations as climatic shifts cause further drying. There have been an increasing number of hot, dry and windy days over the last 30 years, amounting to greatly increased fire risk. The country only recently emerged from the worst drought in its history, which was accompanied by huge fires. Fire has always been a feature of the arid landscape, reflected in the fire tolerance of many trees, but not on the scale seen in recent years. These intense fires are a far bigger threat. They incinerate all before them and remove all the oxygen from the air as they pass by:

The 2009 Black Saturday bushfires in Victoria were also preceded by extreme fire danger conditions: a decade-long drought and a number of record hot years, all compounded by a heatwave in the week prior. The ferocity of these fires was unprecedented, and so severe were they that they broke the record for the Forest Fire Danger Index, and a new category – ”catastrophic” or ”code red” – was added. Worryingly, since 2009, we have experienced more days of ”catastrophic” fire danger, and this number will very likely increase in the future. Fire frequency and intensity is also predicted to increase in already fire-prone areas – areas in which a large proportion of the Australian population lives. We are now also seeing the season of bushfire weather lengthening from October to March, and this will continue to extend in future….

….So, while bushfires are part of the Australian story, more intense and frequent bushfires are part of the Australian climate change story. The current environment in which we experience bushfires is changing. The lengthened bushfire season, and increased frequency and intensity of heatwaves, mean that the overall risk of bushfires in Australia has amplified.

Bushfires are capable of wiping out areas of food production. This is of particular concern for tree crops which take many years to re-establish. Intense fires can also cause soil damage.

Apart from the problem of too little water, climate change can also lead to too much. Flooding can inflict enormous damage on food production, often in areas where food insecurity is already prevalent:

The impact of extreme weather events on food production and consumption are well documented. For example, extreme floods in Pakistan in 2010 destroyed an estimated two million hectares of crops, killed 40% of the livestock in affected areas, and delayed the planting of winter crops, causing the price of basic foods such as rice and wheat to rocket. As a consequence, an estimated eight million people reported eating less food and less nutritious food over an extended period of time.

Increasingly intense storms can bring deluges, but also damaging winds and storm surges high enough to cause serious coastal flooding. For instance, Typhoon Haiyan, which hit the Philippines in late 2013 was the most powerful to make landfall since records began, with winds reaching 310km/h. While one cannot say definitively that any one event is caused by climate change, warmer air and oceans, leading to greater evaporation and therefore more moisture in unstable air masses, would be expected to raise the probability of increasingly intensity of storm events. Storms draw their energy from warm water, and their impact is enhanced by rising sea levels, the disappearance of protective coastal wetlands and coastal over-development.

Storms threaten not only land crops, but also the biologically diverse and highly productive coastal food production relied upon by so many people. Some 95% of marine food production originates from coastal ecosystems, but damage to mangrove forests and coastal wetlands destroys spawning and feeding grounds for fisheries.

Increasing temperature, even in the absence of acute threats such as drought, wildfires and severe storms, are capable of lowering crops yields, particularly for grains:

Warmer temperatures may make many crops grow more quickly, but warmer temperatures could also reduce yields. Crops tend to grow faster in warmer conditions. However, for some crops (such as grains), faster growth reduces the amount of time that seeds have to grow and mature. This can reduce yields (i.e., the amount of crop produced from a given amount of land).

Yield declines are expected to be significant as heat and aridity increase:

“Almost everywhere you see the warming effects have a negative affect on wheat and there is a similar story for corn as well. These are not yet enormous effects but they show clearly that the trends are big enough to be important,” Lobell said. Wheat is the first big staple crop to be affected by climate change, because it is sensitive to heat and is grown around the world, from Pakistan to Russia to Canada. Projections suggest that wheat yields could drop 2% a decade….

….Declines in crop yields will register first in drier and warmer parts of the world but as temperatures rise two, three or four degrees, they will affect everyone. In the more extreme scenarios, heat and water stress could reduce yields by 25% between 2030 and 2049.

In addition, seasonal boundaries, and therefore vegetation zones, are shifting, which is making it far more difficult to produce food in the ways people have traditionally done in a given area:

Paul Roberts has been producing wine in Friendsville in Garrett County for 17 years. Last year, for the first time, his growing season began in March — six weeks earlier than the historical timeline. It was “unprecedented,” he said. For farmers and gardeners, climate change is making the art of coaxing a flower to blossom or fruit to grow precarious and unpredictable….

….A midwinter thaw or an early frost can kill many plants and ruin crops. With increasingly extreme and unpredictable weather due to climate change, plants’ health is at the whim of the weather. An early warm spell triggers fresh growth that is vulnerable to frost, Roberts said. When the growing season starts early, it means more nights for him to worry about the temperature dropping below freezing and damaging his crops….

…The mismatch of pollinators’ and plants’ schedules also threatens plants’ ability to reproduce and produce food. Plants and insects respond to changes in hours of sunlight and temperature. But if a pollinator emerges during an early temperature spike, the plants it pollinates may not be in blossom. Crops rely heavily on insects such as bees, whose populations have struggled in recent years.

Very rapid change can destabilize ecosystems in this way, as climate sensitivities for different species can vary. As prime growing temperatures shift to higher latitudes, they may no longer coincide with suitable soils and nutrients. In addition insect and plant pests may thrive without cold winters to control their populations. Novel pests may also invade with shifting temperature and humidity. Over time, land use patterns are expected to change as ecosystems shift:

Vegetation around the world is on the move, and climate change is the culprit, according to a new analysis of global vegetation shifts led by a University of California, Berkeley, ecologist in collaboration with researchers from the U.S. Department of Agriculture Forest Service….“This is the first global view of observed biome shifts due to climate change,” said the study’s lead author Patrick Gonzalez, a visiting scholar at the Center for Forestry at UC Berkeley’s College of Natural Resources. “It’s not just a case of one or two plant species moving to another area. To change the biome of an ecosystem, a whole suite of plants must change.”…

….Some examples of biome shifts that occurred include woodlands giving way to grasslands in the African Sahel, and shrublands encroaching onto tundra in the Arctic. “The dieback of trees and shrubs in the Sahel leaves less wood for houses and cooking, while the contraction of Arctic tundra reduces habitat for caribou and other wildlife,” said Gonzalez, who has served as a lead author on reports of the Intergovernmental Panel on Climate Change (IPCC). “Globally, vegetation shifts are disrupting ecosystems, reducing habitat for endangered species, and altering the forests that supply water and other services to many people.”

Important shifts with major implication for food security are happening not just on land, but also in the oceans. Climate change is compounding the impact of fish stocks collapsing due to over-fishing. Oceans are warming. This translates into rising sea levels due to thermal expansion, combined with the effect of melting glaciers and ice sheets. Ocean currents are being altered as temperature changes in the atmosphere drive changes in wind patterns and therefore surface currents, and ice melting changes the ocean density profile. As thermohaline circulation in the oceans provides nutrients through upwelling, changes have the potential to cause much damage to marine ecosystems by starving the base of the food chain.

Changes in ocean heat flow have the potential to alter the climate on land as well. For instance, a weaker Gulf Stream would be expected to cause substantial cooling in northern Europe. Cold periods in Europe’s past have been associated with a weaker Gulf Stream, and climate change is predicted to pose a risk this may happen to a greater extent:

“The strength of the Gulf Stream was about 10% weaker during the Little Ice Age,” David Lund, of the Massachusetts Institute of Technology/Woods Hole Oceanographic Institution, told Reuters. He and two colleagues studied sediment cores off Florida and the Bahamas, and found evidence of a weaker flow that may have contributed to the Little Ice Age from about 1200-1850, when Alpine glaciers grew and London’s Thames River froze. “The possibility of abrupt changes in Gulf Stream heat transport is one of the key uncertainties in predictions of climate change for the coming centuries,” the scientists wrote in the journal Nature.

In addition, ocean acidification, as the oceans absorb CO2 from the atmosphere, is also impacting at the base of the food chain, affecting the millions of small organisms increasingly unable to form their carbonate shells:

Ocean acidification is sometimes called “climate change’s equally evil twin,” and for good reason: it’s a significant and harmful consequence of excess carbon dioxide in the atmosphere that we don’t see or feel because its effects are happening underwater. At least one-quarter of the carbon dioxide (CO2) released by burning coal, oil and gas doesn’t stay in the air, but instead dissolves into the ocean. Since the beginning of the industrial era, the ocean has absorbed some 525 billion tons of CO2 from the atmosphere, presently around 22 million tons per day….

….When carbon dioxide dissolves in seawater, the water becomes more acidic and the ocean’s pH (a measure of how acidic or basic the ocean is) drops. Even though the ocean is immense, enough carbon dioxide can have a major impact. In the past 200 years alone, ocean water has become 30% more acidic—faster than any known change in ocean chemistry in the last 50 million years. Scientists formerly didn’t worry about this process because they always assumed that rivers carried enough dissolved chemicals from rocks to the ocean to keep the ocean’s pH stable. (Scientists call this stabilizing effect “buffering.”) But so much carbon dioxide is dissolving into the ocean so quickly that this natural buffering hasn’t been able to keep up, resulting in relatively rapidly dropping pH in surface waters. As those surface layers gradually mix into deep water, the entire ocean is affected….

….Reef-building corals craft their own homes from calcium carbonate, forming complex reefs that house the coral animals themselves and provide habitat for many other organisms. Acidification may limit coral growth by corroding pre-existing coral skeletons while simultaneously slowing the growth of new ones, and the weaker reefs that result will be more vulnerable to erosion. This erosion will come not only from storm waves, but also from animals that drill into or eat coral. By the middle of the century, it’s possible that even otherwise healthy coral reefs will be eroding more quickly than they can rebuild.

Coral bleaching, as a result of environmental stressors such as rising temperature and increasing acidification, is an indicator that highly productive marine ecosystems are under threat. Marine food webs can collapse, with reefs dying and top predators over-fished, leaving the simple organisms such as sea urchins and jellyfish to proliferate unchecked. This is a tragedy in its own right, but will inevitably have knock-on consequences for human food security as well, as so many people either make, or supplement, their living from the sea.

While specific climate impacts are only probabilistically predictable over the longer term, there is every reasons to think that these impacts are going to exacerbate the the problem of food security.


The Bottom Line

Water will be in increasingly short supply as more and more people attempt to provide for themselves in regions where the supply is diminishing and resources are being used at far greater than replacement rate. Climate change is expected to accentuate water shortages in many ways, as well as having destabilizing effects on ecosystems forced to shift latitude or altitude rapidly. The potential for conflict is already increasing, as we saw in part one of this series in relation to food prices. Water and climate change are going to add to the pressure, and this is likely to precipitate some very unfortunate situations.

Our relentless human expansion is running up against hard, non-negotiable limits to food security, which is already threatened in so many places. Our current extractive methods amount to a draw down of natural capital, allowing us to feed (most of) ourselves today, but in highly wasteful ways which are already compromising our ability to feed ourselves and our descendants tomorrow. Those in a position to do so chase short term economic gain at the expense of burning through non-renewable resources in ways which clearly make no sense with respect to any logic other than short term economic benefit. Those at the other end of the financial food chain also prioritize what could, in a sense, be called short term gain, but for them is in fact a matter of short term survival.

The next part of this series will address the equally pressing issues of energy, soil fertility and carrying capacity.