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May Temperatures, Economic Implications

Menzie Chinn, Econbrowser
From NOAA:

The United States reported its warmest spring since records began in 1895,…

… with 31 states in the eastern two-thirds of the country observing record warmth. The national temperature was 2.9°C (5.2°F) above its long-term average, surpassing the previous record by 1.1°C (2.0°F).

Note in particular the land temperatures.

Well, not to panic. We can easily adjust to the temperature changes. Just change what we’re planting and where. And crank up the air conditioning. Or will it be so easy? From WSJ:

A year after historic flooding brought the Mississippi River up to record levels, the severe drought hitting the central U.S. has caused water levels along parts of the waterway to plummet, disrupting barge traffic from Cairo, Ill., to Natchez, Miss.

Barge operators have sharply reduced their loads to get through tightening river passages. They say major rain is needed soon or they would have to reduce commerce even more, causing shipment delays and driving up transportation costs. With forecasts showing little prospect of significant rain, hydrologists see no relief in sight for the giant inland waterway that also includes the Ohio River.

Some river ports have been forced to close temporarily or shut down parts of their operations because of the low water levels. At the port of Rosedale in the Mississippi Delta, port director Robert Maxwell Jr. said water levels are about 50 feet below what they were last year, when flooding shut down the port. If the water falls any lower, there was a “high likelihood” he would have to close, he said. One of the port’s public loading docks is inoperable, with equipment normally in the water now hanging the air. The Army Corps of Engineers is supposed to come this week to dredge, where heavy equipment is used to dig out sediment from waterways to make them passable for shipping.

“This is absolutely not normal,” Mr. Maxwell said.

Crops are also being hit hard [1].

Here is a meta-analysis of the scientific consensus on the reasons why global climate change is happening.

Forecast temperatures for Madison, WI are for 99 degrees tomorrow. And the day after. Which wouldn’t be so strange except for the many other days we’ve been in that range over the past months.
(14 July, 2012)

Aid Welcomed By Drought-Stricken States Facing Crop Loss

Alan Bjerga and Elizabeth Campbell, Bloomberg
State leaders welcomed a pledge of U.S. aid for the worst drought in decades, even as the assistance paled in comparison to potential losses and a forecaster said weather conditions may not improve in some areas until September.

The U.S. Department of Agriculture yesterday named 1,016 counties in 26 states natural-disaster areas, the agency’s biggest such declaration ever. Substantial rains that would relieve the worst-hit areas may not arrive for months, said Mike Pigott, meteorologist at Accuweather Inc.

“When you are one of the biggest agricultural-producing states in the nation, a monumental drought causes enormous losses,” said Bryan Black, a spokesman for the Texas Department of Agriculture. “The disaster-relief assistance from USDA will help Texas farmers and ranchers recover from devastating losses.”

The federal action makes farmers and ranchers eligible for low-interest loans to help weather the drought, wildfires and other disasters. The projected cost to the federal government is about $4 million as loans are ultimately repaid, according to Agriculture Secretary Tom Vilsack. Still, with a budget-cutting farm-policy bill going through Congress and prospects for other disaster aid slim, officials say the low-cost loans and reduced penalties for grazing livestock on land set aside for conservation announced yesterday are better than nothing…
(12 July, 2012)

$10 Corn and $20 Soybeans to Pit Food Against Fuel

Fran Howard, Agweb
The average corn yield in the United States this year could drop to as low as 115 bu./acre and the soybean yield could drop below 37 bu./acre unless it starts raining soon and continues to rain hard every week across a wide swath of the central Corn Belt. If yield damage is as extensive or worse then analysts think, corn prices could break through $10/bushel and soybean prices could pierce $20/bushel.

Some of the driest areas of the Corn Belt would need as much as 20 inches of rain to stabilize the corn crop, says Dan Basse, economist and president of AgResource Company, Chicago. Basse was a commentator on a simulcast for the CME Group Tuesday, July 10.

“We are seeing corn plants in the field that are literally dying,” says Basse. The plants can’t find soil moisture and are cutting back on kernel formation. “Most farmers in the worst hit areas are fearing 40 to 80% yield losses,” he says.

Basse and others are not quite that pessimistic on the national corn crop—at least not yet. “The loss of crop is the largest I’ve ever seen in such a short period of time,” says Basse. A 10% overall yield loss would put the U.S. average yield at 141 to 144 bu./acre, which equates to overall production of less than 12 billion bushels…

…The dramatic drop in corn and soybean yields will soon turn into a global food issue. “The markets will not top until we see potential for good rains that can save the soybean crop from a becoming a total disaster and stabilize the corn crop,” Roggensack says. Potential average yields between 114 and 140 bu./acre for corn are reasonable using historical studies, he says.

Falling corn and soybean yields will force more feeding of wheat, which could tighten world food supplies further, particularly if a developing El Nino strengthens, causing drought in the Southern Hemisphere’s wheat-growing regions.
(12 July, 2012)

Potential Impacts of Poor Corn Crop on Ethanol Market

Consumer Energy Report, Robert Rapier
I have long felt that one of the biggest threats to the U.S. ethanol industry is a major drought/crop failure in the heart of corn country. This year we may be experiencing such an event. Recent reports indicate that what had been expected to be a record crop of corn has been downgraded such that only 40% of the corn crop is being classified as in good or excellent condition. This is down 48% versus last week and 69% versus a year ago.

Corn prices are naturally surging in response; current corn prices are 21% higher than they were a year ago. Because so much of the corn crop is devoted to meeting ethanol mandates, there is a potential supply conflict being set up between food producers and ethanol producers.

This was always the risk in my mind; that a major drought could reduce the corn crop and result in surging fuel and food prices at the same time. This creates a situation that politicians who are not friendly to the ethanol industry will likely exploit. It won’t likely lead to an end to the mandates, but support for a 15% ethanol mandate (E15) — something the industry desperately wants — will likely erode in the face of the weak corn crop.

As you might expect, ethanol prices are moving higher, but I don’t think the price fully reflects the situation with the corn crop. It has been clear for at least two weeks that ethanol prices should move up in response, but the response has been slow and is just now gaining momentum. Normally, one would expect demand to fall in response to higher prices, and for that to mitigate the price rise, but gasoline blenders do not have the option of reducing their ethanol usage because of the mandate in place…
(16 July, 2012)