As The US Drought Spreads To India, Will The Black Swan Be Deep Fried

Tyler Durden's picture

By now it should be more than clear that the entire hope-based, short-squeeze driven, algo-mediated rally is the result of the last traces of hope: with the US economy openly in free-fall mode, housing supported only by once again increasing shadow inventory (and even that myth is starting to falter following today's existing home sales update), corporate profits just barely holding in as a result of the last possible cuts into the bone via personnel terminations now that YoY revenue numbers have once again sloped lower and the corporate growth cycle has turned, there is little sustaining the market aside from the mysterious seller of endless vol, which could be well, anyone, and some quiet prayer that China may step in and once again, like back in 2009, be the marginal economic dynamo that restarts the global economy one more time. It would do that in the conventional way, of course: by easing as much as it possibly can. There is, however, one problem with this: food prices. As everyone knows the product the PBOC pays more attention to than anything else is food: pork, soy, corn, etc., and particularly food prices. Because if there is one thing that can cause social upheavals in the world's most populous country, it is a rerun of the spring of 2011 when as a result of global easing, we saw not only the Arab Spring, but violent flare ups throughout China. Which brings us to today's topic: black swans. Deep fried black swans.

As UBS explains the record drought that has gripped America may well have far-reaching implications beyond just the price of corn in the US. If, indeed, adverse US climatic conditions spread, and it appears they already have as "the monsoon season, which is critical for that country’s agricultural production, is 22% below normal conditions for the year" it means that Asian food prices will broadly be the next commodity sector to go sky high, and with that kill any hope of either an RRR cut, or an outright reduction in the PBOC's Interest Rate.

And with that the last leg behind the hope-rally will be gone, leaving only Simon Potter doing his magic until he finally sells enough VIX to bring it to single digits. And then what?

From UBS:

Asian food prices have generally trended down since late last year, but that could change. US agricultural prices are on course to increase a whopping 25%m/m in July due to a severe drought. That translates into about a 6%y/y gain. If US agricultural prices stop rising sequentially they should finish the year up 20%y/y. By itself that doesn’t justify panicking over Asian food inflation based on the traditional relationship with US agriculture (not yet anyway). Chart 1 shows the relationship is positive, but far from one-to-one. There have been times over the last decade when US agricultural prices and Asian food inflation have even decoupled. That could happen for example if weather conditions in Asia are favourable (particularly in India and China) or in other parts of the world that compensate for US agricultural output. However, our  fear is that poor weather on one side of the world tends to be followed by poor conditions on the other side.



If you’ve been following Philip Wyatt’s work on India then you know that the monsoon season, which is critical for that country’s agricultural production, is 22% below normal conditions for the year. That’s not a catastrophe, but it’s also not helpful given what’s happening in the US. The good news is that Chinese weather conditions have remained favourable for agriculture so far and that’s a positive. So this is where we stand. Recent US agricultural price increases are a negative for Asian food inflation, but not necessarily disastrous as long as local agricultural production can be sustained and that in turn depends mainly on the weather – something nobody seems very good at predicting.

Then again, praying for rain is oddly more appropriate and realistic than hoping that the central bankers will ease more with the US stock market at its 2012 highs.

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malikai's picture

This year has been pretty wet throuhout China and Russia. Russia has seen severe flooding in some places which might bring its own problems for their AG.

Skateboarder's picture

South India saw positive change w.r.t.normal monsoon rainfall this year, but North India did not. Rice should remain stable and wheat should become more expensive.

MillionDollarBoner_'s picture

Indian Drought.

Brought to you by Raytheon, Honeywell, HAARP and JP Morgan Chase.

Sponsored by the President's Working Group.

Gotta keep that evil AU down ;o)

shokdee's picture

Rubbish! Planet Earth is undergoing tremendous energetic changes due to huge amounts of energy streaming into our solar system. ZeroHedge readers should be familiar with "plasma cosmology", "space weather", the "electric sun", and the general concept of Gaia. It is important to understand that the so called Powers That Pee, are a pathetic bunch of clueless losers. You give them way too much credit. Take control of you own destiny.


But, in general this is a bad article.

 - How does a drought "spread" (sic) from the USA to India?

 - India has stockpiles and other countires can step in, no?

 - If you can clearly see the unfolding situation, then is it a "black swan"?


Black swan - This term has now lost all meaning on ZH, it's become a cliche.



Falkor's picture

Kyoto !!! Remember Mr. Bush, the POTUS

WhyDoesItHurtWhen iPee's picture

All of your rain are belong to us!

Stuck on Zero's picture

Canada's prarie belt is in drought conditions, too.  I wonder if the U.S. Government is still paying farmers not to grow crops.


Cognitive Dissonance's picture

Time to go long commodities regardless of your view on inflation in general. Food prices are going up up up.

Of course ex food and oil, inflation will not move at all per the Fed.

Al Huxley's picture

Yes, that's the great thing about the economy today.  No inflation at all, other than in the 2 things I have no choice but to consume (food and energy).  But I guess that's why they don't include those items in CPI - don't want to skew the index by introducing reality.

Cognitive Dissonance's picture

Inflation in what you need. Deflation in what you want (but can no longer afford without credit).

Food, energy, clothes etc going up in price. Widescreen TVs, computers and other doodads going down in price.

Housing (something you need) is going down if you are buying and up if you are renting. Can't buy without credit, but you can rent.

LawsofPhysics's picture

Hey, if India has some gold to trade, I have some soybeans for them.  Awesome!!! 

Xibalba's picture

Paging Mr. Potter.....paging Mr.'re needed on isle one. 

MillionDollarBoner_'s picture

Did you say iStuff is a'goin down?


fonzannoon's picture

I think China should sell some treasuries. Repatriate that money. Then hand it out like we do in the US. What harm could that do to anyone?

Al Huxley's picture

I was thinking that they might do exactly that, if things start getting tight for them.

LawsofPhysics's picture

They already have been and are already discussing another round of stimulus.

geewhiz190's picture

or just let the short maturities roll off without rolling over

Sudden Debt's picture

I guess you guys can have some of our Belgian rain which hasn't stopped for weeks now.
Glad that I'm in italy right now :)

t_kAyk's picture

How 'bout some of them famous waffles? 

Hype Alert's picture

But the good news is, no matter how bad things really are, we are only 3.02% off the S&P's high for the year!

iDealMeat's picture

Long ice-berg towing companies..

Shizzmoney's picture


I really do believe that the majority of the "elites" (they really aren't; all they have are tons of imaginary zeros in their bank accounts) are really scared to shit if Romney get elected.

You think the populace dislike the President now? At least they give the guy the benefit of the doubt (which they shouldn't, but I digress).

If SHTF, espeically with gas/fool while Romney is in office, 99% of us won't listen to him.  He'll be the biggest laughing stock of a stooge, ever.  Even Bush has more clout than this clown.

SheepDog-One's picture

Theres no chance of that, banksters have already decided who will 'win'. No way they'd ever leave their gravy train up the the whims of the peasants.

MillionDollarBoner_'s picture


As a neutral outsider (British born 'n' bred)...

Are these FOOLS really the BEST you can do?


You're shittin' us, right?

And they say Yanks don't do ironic :O)

Cosimo de Medici's picture

I know what you mean.  You Brits got all the good ones like Tony Blair and Gordon Brown.  And our Prince just wanted to be some silly symbol, unlike yours who wanted to be Carmilla's Tampon.

Randall Cabot's picture

The Northeast US has to be close to drought-the grass and even the weeds are freaking brown.

hedgeless_horseman's picture



...not necessarily disastrous as long as local agricultural production can be sustained and that in turn depends mainly on the weather – something nobody seems very good at predicting...

...except for Joseph.

56 When the famine had spread over the whole country, Joseph opened all the storehouses and sold grain to the Egyptians, for the famine was severe throughout Egypt. 57 And all the world came to Egypt to buy grain from Joseph, because the famine was severe everywhere.

LFMayor's picture

well, it surley the hell isn't that half-wit Joe Biden.

cherry picker's picture

The sad reality of the human species today is this, the market values the price of food higher as demand is greater than supply. 

Our currencies are for the most part fiat.

Those who have the post fiat coin gets to eat, other than the farmers who grow it.

Those who don't have the funny paper bills or in Canada's case, plastic bills which can melt away, are going to go without eating, unless they take it by force from thos who have, probably destroying the producer at the same time.

Is there a way around this?  Sure.

But greed and Wall Street economics and paper fiat will have to go.  A bit of compassion for our less well off brothers and sisters wouldn't hurt either.

reader2010's picture

how do you know the drought is not brought to you by HARRP?

Cyrano de Bivouac's picture

If it is HARRP, who is in control-everyone is getting zapped?

magpie's picture

There has to be a rationale expropriating the kulaks or something.

MillionDollarBoner_'s picture

Who is in control?

Why...the aborted rat-foetuses which refused to die...commonly known as The Honourable This 'n' that...


Silversem's picture

perhaps there will be some good trading opportunities becouse of this drought. In wheat for instance.

SheepDog-One's picture

BUY BUY BUY!! Whats that? Everyones buying? Then SELLLL!!! SELLLL!!!!

MillionDollarBoner_'s picture

Buy Products! Sell Phones?

Or was that byproducts and cellphones?

Now I am confused. Better watch CNBC - that'll fix it :O)

slackrabbit's picture

Shorted cotton and that got me a new PC....price was at a 150 year high!

Shorting Corn...still thinking that one out.

The good thing though, is that crops have a short cycle - so even a couple of bad years is still worth the wait if the current price is high enough.


Jack Burton's picture

Don't forget the Koreas, they both are experiencing severe drought in certain agricultural areas. Large enough to cause concern.

Russia has had heat and drought but way out in Siberia where large forest fires burned recently.

It's odd here in the USA, where I live we got a record rainfall event just a few weeks ago, broke every record in the book! But now, after only two weeks of this heat, record heat, my lawn is dead as a doornail almost overnight. They are calling these things flash droughts, where the heat is so intense that it drys out everything in days, even if record rain fell on a few weeks back. Crazy stuff!

Flakmeister's picture

Its called Global Warming.... weather gets more with it...

Here is a statistical analysis that shows it

What was once 3 sigma i.e. 1 in 100 is now 1 in 10....

Overfed's picture

The globe has been warming continuously since the end of the last ice age, and will continue to do so until the beginning of the next one.

Flakmeister's picture

So, what was the driving mechanism for the Ice Age cycles?

Is it still dominant?

What is the measured rate of temperature change for those cycles?

What was the maximum C02 level over the past 400,000 years?

Where do we stand now on C02 levels?

How fast did C02 levels change over that period?

When you can correctly answer the above questions, we may pay more attention to what you type, not before....

LFMayor's picture

Sorry Flak.  your boi Albert up and "released the 2nd chakra" on the rug.  The whole game is bust now, it was a nice try at a saving dive with the switch to "Climate Change", but really we already have that, sometimes as often as four times a year.

When the hungers come, it will be the last days of the hipster, save the whales and hug the trees crowds.  They'll have to catch that last boat to Valinor, or be consumed.  The world is fresh out of other peoples monies to waste on fantasies, utopian or otherwise.

Flakmeister's picture

I know better than to pose the same questions about basic climate science to you...

You are typical of posters here on any matters scientific, light on facts and long on meandering bullshit, bluster and ideology...

Overfed's picture


"What was the driving mechanism for the ice-age cycles?"

Betcha anything it wasn't humans.


The whole man-made climate change thing is just one more contrivance to get the little people to give up their cars (freedom), become more dependant on gov't (i.e., public transportation), and vacuum more $$ out of the pockets of the poor to middle class and send it to the rich via "green energy".

Flakmeister's picture

Did you just make my argument for me???  

BTW, you should acquaint yourself with the argumentative fallacy Argumentum ad baculum and rephrase your rant.... 

MillionDollarBoner_'s picture

Global warming?

That's sooooo 1970's, dude!

Flakmeister's picture

Oh, really.... Do you think that it is only the ENSO?

Could you explain why past ENSO episodes have not brought such extremes?

Could you also explain what the typical effect of a La Nina phase is on global temperatures?

Could you remind us of where the past 10 years have been on average with regard to the cycle?

Just wait until an intense El Nino hit, things are lining up for 2013 collision of sorts...


I'll give you a headstart, in a La Nina phase, the ocean "hides" a lot of heat in lower layers, in an El Nino, that heat is released....

And since you can find NOAA, you might like this

  • June marked the 36th consecutive June and 328th consecutive month with a global temperature above the 20th century average. The last below-average temperature June was June 1976 and the last below-average temperature month was February 1985.