JGeropoulas
The Living Force
Here's a good example of how weather changes will affect the value of essential resources, and subsequently, affect the balance of power among nations, depending upon which natural resources they possess (assuming they can keep them out of the possession of The Imperial State of America).
From an investment perspective, he makes a good case for investing in Brazilian bonds denominated in their local currency (vs. the dying dollar).
From an investment perspective, he makes a good case for investing in Brazilian bonds denominated in their local currency (vs. the dying dollar).
Food, Water Shortages Threaten Economic Stability
By James Dale Davidson
Financial Intelligence Report
One of the perennial confusions in economics is that between monetary inflation and relative price increases. This was in play again with the announcement that Chinese inflation jumped by 4.1 percent in December over its rate a year earlier. On its face, that seems to represent about a 25 percent improvement over the average Chinese inflation rate of 5.4 percent in 2011. But look more closely. The same report reveals that Chinese food prices jumped 9.1 percent year-on-year in December. This is quite ominous for China - but very bullish for Brazil.
Here is why. In recent years, China has been the world's largest agricultural power, producing more food than any other country. The trouble is that China's farm output is unsustainable. Soil erosion as a consequence of over planting, land mismanagement, and an acute shortage of water for irrigation is undermining the productivity of Chinese cropland.
Satellite photos compared to those 40 years ago show a huge new dust bowl crossing western China and western Mongolia. Wang Tao, a leading Chinese desert scholar, has estimated each year 1,400 miles of former cropland in northern China turns to desert. Grain harvests in Northern China and Mongolia have shrunk by half or more in the last 20 years.
The problem is not isolated to the Mongolian border region. In China's grain-growing plains, as well as large parts of the grain growing areas of India, there is not nearly enough natural rainfall for rechargeable aquifers. This means that irrigation-supported crop growth over the second half of the 20th century has been fed by water pumped up from deep underground "fossil aquifers" in addition to water channeled from river systems.
In those areas of China without access to the river systems, irrigation water is pumped from underlying fossil aquifers filled over hundreds of millions of years. As these aquifers do not readily recharge when they are drained annually for irrigation, they rapidly run dry.
More than 70 percent of the world's population, including billions living in China and India, are being supported by crops irrigated from falling water tables. As a result, thousands of square miles of former cropland are turning to desert annually. In China, over-pumping in the Fossil aquifers in the north is rapidly turning a region responsible for half of China's wheat production and more than one third of its corn production into desert.
Dust Bowl Redux
Almost four-fifths of China's total grain harvest comes from irrigated land. Symptomatic of the increasingly arid conditions is the drying up of multiple lakes in China. In western China, Quintal province, through which the main branch of the Yellow River flows, once had 4,077 freshwater lakes. But in the last two decades more than 2,000 of those lakes have disappeared. In Heber Province, which surrounds Beijing, of 1,052 freshwater lakes, 969 have vanished in the past 20 years.
According to Issues in Science and Technology, "Water tables are falling as aquifers are pumped at rates exceeding their ability to recharge. Even the water in deep-fossil aquifers, laid down millions of years ago and which can't be recharged, is being depleted. Nearly 90 percent of all fresh water used by humans goes for irrigation. According to the United Nations Food and Agriculture Organization (FAO), just 16 percent of the world's cropland is irrigated, but this 16 percent produces 36 percent of the global harvest."
The report points out that, in many regions, "inadequate drainage has increased the salt content of the soil, leading to a loss of productivity and sometimes abandonment of agriculture altogether. The once-fertile crescent of the Middle East is a striking example, and similar salinization is accelerating in the United States, China, and elsewhere."
Dust bowls and desertification are serious in many parts of the world. Depletion of the fossil aquifer under the North China plain, for example, has led to huge dust storms that choke South Koreans every year. But dust storms aren't the main worry.
The upshot of the issues are rapidly rising food prices, posing a threat to stability in China and elsewhere. Remember, per capita income in China is on par with Tunisia's. What appeared to be a stable dictatorship in Tunisia was overthrown early in 2011 when food prices surged. China has a long history of dynasties overturned during times of dearth.
A Global Phenomenon
A verse from Deuteronomy 28:12 suggests a link between rainfall and deficit spending: "The Lord shall open unto thee his good treasure, the heaven to give the rain unto thy land in his season, and to bless all the work of thane hand: and thou salt lend unto many nations, and thou salt not borrow."
In the modern context, the imperative to deplete fossil aquifers when rainfall is inadequate closely parallels the political imperative to borrow in order to finance spending when tax revenues are inadequate. In both cases, the overriding importance of achieving a near-term goal - in the former case, greater prosperity for farmers - trumps the threat of long-term ruin.
Note that China is not the only country that is rapidly depleting its fossil aquifers. Shortages of water for irrigation are undermining the productivity of one-third of the world's cropland. At least 18 countries now have "food production bubbles" based on the depletion of water from no rechargeable fossil aquifers.
Between 1968 and 1998, India's food production surged due to unsustainable pumping of groundwater aquifers. Experts estimate that over 15 percent of India's population is being fed wheat, rice, and barley irrigated with water pumped from fossil aquifers.
In India's "bread basket," Punjab and Mariana, water tables are falling three feet a year. In the western Indian state of Gujarat, the water table has fallen from 50 feet below the surface to 1,300 feet below the surface in 30 years.
The situation in the Midwestern United States isn't much better. As you'll remember if you read Steinbeck’s The Grapes of Wrath, large sections of the U.S. were transformed into a "Dust Bowl" due to inadequate rainfall during the Great Depression.
This problem was "solved" not by increased precipitation but by the development of more powerful diesel and electric pumps capable of mining water from the deep Ogallala fossil aquifers.
In the words of water alarmist Lester R. Brown, writing for World watch Institute, "The world has a huge water deficit. Using data on over pumping for China, India, Saudi Arabia, North Africa, and the U.S.” Sandra Posies, author of Pillar of Sand: Can the Irrigation Miracle Last?, calculates the annual depletion of aquifers at 160 billion cubic meters, or 160 billion tons.
Using the rule of thumb that it takes 1,000 tons of water to produce 1 ton of grain, this 160-billion-ton water deficit is equal to 160 million tons of grain or one-half the U.S. grain harvest."
Unfortunately, current and looming water shortages are not a figment of Brown's imagination. It is particularly notable that in much of America's grain crop is irrigated with water mined from the Ogallala fossil aquifer. While Americans tend to take for granted the superiority of American farming, agricultural prosperity in the United States may prove to be as unsustainable as the federal deficit.
As reported in The New York Times in an article published on May 4, 2011, "the (Ogallala) aquifer is dropping lower and lower, and some geologists fear it could dry up in as soon as 25 or 30 years. This is a major issue confronting not just those eight states but the entire country."
The Economic Winner? Brazil
According to United Nations estimates, the population of the world will expand to 9.1 billion by the year 2050. But long before that happens, a global shortage of fresh water is likely to push food prices to destabilizing heights.
While water is potentially one of the world's most valuable commodities, because of its importance in the cycle of life, water is not easily exported directly. For one thing, water is heavy. It is heavier than all but the heaviest grades of crude oil, also known as bitumen, with an API gravity less than 10.
Although freshwater isn't susceptible to long-distance export - at least not directly - the "virtual export" of water is destined to be a major informing factor in Brazil's prosperity. While water and food shortages threaten economic and political disruption in failing states across the globe, and even emerging market powerhouses India and China are threatened, one country stands alone as likely to benefit.
According to the U.N.'s world water assessment report of 2009, Brazil has more than 8,000 cubic kilometers of renewable water each year, or about 1,919 cubic miles, "easily more than any other country." Brazil alone with a population of 203 million has "as much renewable water as the whole of Asia (population 4 billion), and again, this is not mainly because of the Amazon. Pique is one of the country's driest areas but still gets a third more water than America's corn belt."
As stated in a recent article in The Economist, "Brazil has almost as much farmland with more than 975 mm of rain each year as the whole of Africa and more than a quarter of all such land in the world."
Speaking of the Amazon, more than 20 percent of the world's fresh water flows through the Amazon basin alone, about 133,000 m3 per second. And this is only the most spectacular part of the world's most dense hydrological system. Brazil's embarrassment of riches where water is concerned was highlighted in August 2011 by a presentation at the International Congress of the Society Brasilia Geophysical in Rio de Janeiro.
Researchers described a heretofore unknown "underground river," the "Rio Hams" that flows to the Atlantic 4 kilometers beneath the Amazon.Some scientists disputed that the Rio Hamza is actually a river rather than a porous aquifer through which a substantial volume of water is trickling. According to a Wired (UK) article published on Aug. 26, 2011, it has "a flow rate calculated to be around 3,000 cubic metres per second - which is a mere 3 percent of the Amazon river itself. That's still plenty, though because it’s more than 46 times the flow of the Thames."
So while the aquifers supplying other important economies, including the United States, dwindle toward the vanishing point, Brazil has 8,000 cubic kilometers of renewable water each year. For an investor with forward vision, this is a fact with great portfolio implications.
For one thing, it suggests that Brazil's recent prominence as a driver of world growth will continue. From 2007 through 2010, Brazil contributed 10.03 percent of total world market growth at current exchange rates - more than that the United States, which added 8.2 percent due mainly to exchange rate gains for the dollar and infinitely more than Europe, which subtracted 9.2 percent from the world growth, according to statistics presented by financial expert, author and former director of economic and business policy for London, John Ross.
Together, China and Brazil contributed 43.4 percent of world growth from 2007 through 2010. Brazil's lavish natural endowment of fresh water, in combination with China's receding ability to feed itself, guarantee a deepening of the trade ties between the two countries.
Looking ahead to the middle of this century, Brazil is destined to increase its virtual exports of water in the form of grains and proteins. No other country has both the freshwater and the spare farmland required to convert water into food at the scale that Brazil can. According to the U.N.'s Food and Agricultural Organization, Brazil's total potential arable land is more than 400 million hectares, of which only about 50,000,000 hectares are currently in use.
This is incredibly bullish for investors in Brazilian government debt. In an increasingly crowded, urbanized, and hungry world, Brazil's terms of trade should improve dramatically. Almost uniquely among all the globe's economies, Brazil will have the capacity to export food at a scale capable of filling the deficits destined to emerge elsewhere.
The 2011 Arab Spring revolutions, in which four dictators whose regimes had lasted decades were overthrown, underscores the imperative politicians will feel to purchase Brazilian food at prices that would seem staggering in comparison to those of a few years ago. In that light, Brazil seems destined to become one of the globe's leading creditor countries, profiting from what appears to be inflation elsewhere and ultimately lending "unto many nations."
That should make longer-term Brazilian government debt denominated in real, and currently paying 12 ½ percent, potentially one of the world's greatest investments.
