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The report below is not intended to be alarmist, or to drive strategy, it is a “keep in the back of your mind when doing your hedges head-up!”

As we all know economist and meteorologist share the same “boon” put ten in a room and none would agree on the road ahead!

With that in mind we have been doing some reading on past weather events and have attached two reports of relevance:

1. Wikipedia - Drought in the United States

2. NOAA - NORTH AMERICAN DROUGHT: A PALEO PERSPECTIVE

Summary:

Entering the us weather market, the general perspective is that betting on a drought will cost you money, “Normal” weather with patches of dry areas seems to be the trend, BUT this is where the heads up comes, it seems that dry events comes in periods rather than isolated incidence – and if you read the articles below you will notice a trend of a couple years per dry event – couple this with the “relatively cheap” prices as per the attached graph, and we feel buying some hedging calls on the Dec corn contract might not be a bad idea !?

Drought Trade

08 April 2013

Why Dec because we have a strong inverse in the American market – and we believe the Dec month does not reflect any weather risk?

Drought in the United StatesFrom Wikipedia, the free encyclopedia

A farmer and his two sons during a dust storm inCimarron County, Oklahoma, 1936. Photo: Arthur Rothstein.

Drought in the United States is similar to that of other portions of the globe. Below normal precipitation leads to drought,

which is caused by an above average persistence of high pressure over the drought area. Changes in the track

of extratropical cyclones, which can occur during climatecycles such as the El Niño-Southern Oscillation, or ENSO, as well

as the North Atlantic Oscillation, Pacific Decadal Oscillation, and Atlantic Multidecadal Oscillation, modulates which areas

would be more prone to drought and when drought develops. Warming climates are expected to increase drought frequency

due to increased evaporation. In dry areas, removing grass cover and going with a more natural vegetation for the area can

reduce the impact of drought, since a significant amount of fresh water is used to keep lawns green. Droughts are periodic,

alternating withfloods over a series of years. The worst droughts in the history of the United States occurred during the

1930s and 1950s, periods of time known as Dust Bowl years.

Causes

La Niña's impact on global climate

Generally, rainfall is related to the amount of water vapour in the Earth's atmosphere, combined with the upward forcing of

the air mass containing that water vapor. If either moisture, lift, or atmospheric instability are reduced, rain will be more scant

which in time will lead to drought. This can be triggered by an above average prevalence of high pressure

systems, winds carrying continental, rather than oceanic air masses (i.e. reduced water content), and ridges of high

pressure areas form with behaviors which prevent or restrict the developing of thunderstorm activity or rainfall over one

certain region. Oceanic and atmospheric weather cycles such as ENSO make drought a regular recurring feature of the

Americas along the Pacific coast. Droughts can develop anywhere in the United States. El Nino and La Nina alters rainfall

patterns in the West and along the Gulf coast. The North Atlantic Oscillation, Atlantic Multidecadal Oscillation (AMO), and

Pacific Decadal Oscillation (PDO) are also significantly tied to droughts in the United States. For example, 52 percent of

drought timing and location across the United States is explained by the PDO and AMO. When both in their positive phase,

the most extensive droughts occur across the United States.

Human activity can directly trigger exacerbating factors such as over farming, excessive irrigation, deforestation,

and erosion adversely impact the ability of the land to capture and hold water. While these tend to be relatively isolated in

their scope, activities resulting in global climate change are expected to trigger droughts with a substantial impact on

agriculture throughout the world, and especially in developing nations. Although global warming will result in increased world

rainfall, warmer temperatures also bring increased evaporation and increased drought frequency. Along with drought in

some areas, flooding and erosion will increase in others. Some proposed solutions to global warming that focus on more

active techniques, solar radiation management through the use of a space sunshade for one, may also carry with them

increased chances of drought.

Response

Certain regions within the United States are more susceptible to droughts than others. Droughts can be more damaging than

tornadoes, tropical cyclones, winter storms and flooding combined. Unlike a hurricane, tornado or flooding, the onset of

droughts happen gradually over a long period of time.

In the Nevada "cash for grass" program, the people are paid to remove grass and put

in desert landscaping. Xeriscaping calls for the planting of vegetation which is local in origin and more resistant to drought.

When California suffered a severe drought from 1985 to 1991, a California company, Sun Belt Water Inc. was established

for the purpose importing water from Canada in marine transport vessels formerly used for oil transport and converted to

water carriers. The idea was commercially viable and Sun Belt Water Inc., was selected by the Goleta Water District to enter

a long term contract. When the government of British Columbia a province of Canada reversed its existing bulk water export

policy, the change in government policy led to a claim by Sun Belt Water Inc. against Canada under the provisions of

Chapter 11 of the North American Free Trade Agreement (NAFTA).

The National Integrated Drought Information System (NIDIS) Act was signed into law in 2006 (Public Law 109-430). The

Western Governors' Association described the need for NIDIS in a 2004 report, Creating a Drought Early Warning System

for the 21st Century: The National Integrated Drought Information System. The NIDIS Act calls for an interagency, multi-

partner approach to drought monitoring, forecasting, and early warning, led by the National Oceanic and Atmospheric

Administration (NOAA). NIDIS is being developed to consolidate data on drought’s physical, hydrological and socio-

economic impacts on an ongoing basis, to develop drought decision support and simulation tools for critical, drought-

sensitive areas, and to enable proactive planning by those affected by drought. NIDIS (www.drought.gov) draws on the

personnel, experience, and networks of the National Drought Mitigation Center, the NOAA Regional Climate Centers, and

the Regional Integrated Sciences and Assessments (RISAs), among others. Federal agencies and departments partnering

in NIDIS include the U.S. Army Corps of Engineers, the Bureau of Reclamation, the U.S. Geological Survey, NASA, the U.S.

Department of Energy, the U.S. Environmental Protection Agency, the National Science Foundation, and the Natural

Resources Conservation Service.

Events

Pre-1900

Drought apparently struck what is now the American Southwest back in the 13th century, which may have affected the

Pueblo cities, and tree rings also document drought in the lower and central Mississippi River basin between the 14th and

16th century. The droughts of that period may have contributed to the decline and fall of the Mississippian cultures.

The 18th century seems to have been a relatively wet century in North America, but there were apparently droughts in Iowa

in 1721, 1736, and from 1771 to 1773.

There were at least three major droughts in nineteenth century North America: one from the mid-1850s to the mid-1860s,

one in the 1870s, and one in the 1890s. There was also a drought around 1820; the periods from 1816 to 1844 and from

1849 to 1880 were rather dry, and the 19th century overall was a dry century for the Great Plains. While there was little rain-

gauge data from the mid-19th century in the middle of the US, there were plenty of trees, and tree-ring data showed

evidence of a major drought from around 1856 to around 1865. Native Americans were hard hit, as the bison they depended

upon on the Plains moved to river valleys in search of water, and those valleys were full of Natives and settlers alike. The

river valleys were also home to the humans' grazing animals, which competed against the bison for food. The result was

starvation for many of the bison.

The 1870-1877 drought brought with it a major swarm of Rocky Mountain Locusts, as droughts benefit locusts, making

plants more nutritious and edible to locusts and reducing diseases that harm locusts. Locusts also grow more quickly during

a drought and gather in small spots of lush vegetation, enabling them to swarm, facts which contributed to the ruin of much

of the farmland in the American West. The evidence for this drought is also primarily in tree-ring, rather than rain gauge,

data.

The 1890s drought, between 1890 and 1896, was the first to be widely and adequately recorded by rain gauges, with much

of the American West having been settled. Railroads promised land to people willing to settle it, and the period between

1877 and 1890 was wetter than usual, leading to unrealistic expectations of land productivity. The amount of land required to

support a family in more arid regions was already larger than the amount that could realistically be irrigated by a family, but

this fact was made more obvious by the drought, leading to emigration from recently settled lands. The Federal government

started to assist with irrigation with the 1902 Reclamation Act.

1930sMain article: Dust Bowl

The Dust Bowl or the Dirty Thirties was a period of severe dust storms causing major ecological and agricultural damage

to American and Canadian prairie lands from 1930 to 1936 (in some areas until 1940). The phenomenon was caused by

severe drought coupled with decades of extensive farming without crop rotation, fallow fields, cover crops or other

techniques to prevent erosion. Deep plowing of the virgin topsoil of the Great Plains had displaced the natural grasses that

normally kept the soil in place and trapped moisture even during periods of drought and high winds.

During the drought of the 1930s, without natural anchors to keep the soil in place, it dried, turned to dust, and blew away

eastward and southward in large dark clouds. At times the clouds blackened the sky reaching all the way to East

Coast cities such as New York and Washington, D.C. Much of the soil ended up deposited in the Atlantic Ocean, carried by

prevailing winds which were in part created by the dry and bare soil conditions itself. These immense dust storms—given

names such as "Black Blizzards" and "Black Rollers"—often reduced visibility to a few feet (around a meter). The Dust Bowl

affected 100,000,000 acres (400,000 km2), centered on the panhandles of Texas and Oklahoma, and adjacent parts of New

Mexico, Colorado, and Kansas.

Millions of acres of farmland became useless, and hundreds of thousands of people were forced to leave their homes; many

of these families (often known as "Okies", since so many of them came from Oklahoma) traveled to California and other

states, where they found economic conditions little better than those they had left. Owning no land, many traveled from farm

to farm picking fruit and other crops at starvation wages. Author John Steinbeck later wrote The Grapes of Wrath, which won

the Pulitzer Prize, and Of Mice and Men about such people.

1950s

Other severe drought years in the United States happened through the 1950s. These droughts began in the Southwestern

United States, New Mexico and Texas during 1950 and 1951; the drought was widespread through the Central Plains,

Midwest and certain Rocky Mountain States, particularly between the years 1953 and 1957, and by 1956 parts of

central Nebraska reached a drought index of -7, three points below the extreme drought index. From 1950 to

1957, Texas experienced the most severe drought in recorded history. By the time the drought ended, 244 of Texas’ 254

counties had been declared federal disaster areas.

1960s

The Northeastern United States were hit with devastating drought which lasted almost four to five years in the 1960s. The

drought affected multiple regional cities from Virginia into Pennsylvania, New Jersey and New York; the drought also

affected certain Midwest States.

1970s

Short term droughts hit particular spots of the United States during 1976 and 1977, which foretold the drought events that

would affect many portions of the USA during the 1980s.

1980s

Droughts also affected the Northeast US, Corn Belt and Midwest States during 1980 and 1983. The 1983 Midwestern States

Drought was associated with very dry conditions, severe heat and substandard crop growth which affected prices and

caused hardship for farmers. Multiple disaster declarations went out in Indiana and neighboring states because of the 1983

drought. Readings of 100 °F (38 °C)or higher became prevalent in 1983 during these dry spells across the Midwest, Ohio

Valley Regions and Great Lakes. Kentucky declared the 1983 drought their second worst in the 20th century; the drought

forced many trees and shrubs into dormancy and created water shortages in many towns. The associating heat waves killed

between 500-700 people in the United States. Similar spells during 1980 caused between 4000 to 12000 deaths in the

United States along with $24 billion in damage 1980 USD.

A severe drought struck the Southeast from 1985 through 1987. It began in 1985 from the Carolinas west-southwest

into Alabama, when annual rainfall was reduced by 5 to 35 percent below what was normal. Light precipitation continued

into the spring of 1986, with Atlanta, Georgia recording their driest first six months on record. High amounts of precipitation

during the winter of 1987 ended the drought.

Another significant drought in the United States occurred during 1988 and 1989. Following a milder drought in

the Southeastern United States and California the year before, this drought spread from theMid-Atlantic,

Southeast, Midwest, Northern Great Plains and Western United States. This drought was widespread, unusually intense and

accompanied by heat waves which killed around 4800 to 17000 people across the United States and also killed livestock

across the United States. One particular reason that the Drought of 1988 became very damaging was farmers might have

farmed on land which was marginally arable. Another reason was pumping groundwater near the depletion mark.

The Drought of 1988 destroyed crops almost nationwide, residents' lawns went brown and water restrictions were declared

many cities. The Yellowstone National Park fell victim to wildfires that burned many trees and created exceptional

destruction in the area. This drought was very catastrophic for multiple reasons; it continued across the Upper

Midwest States and North Plains States during 1989, not officially ending until 1990.

The conditions continued into 1989 and 1990, although the drought had ended in some states thanks to normal rainfalls

returning to some portions of the United States. Dry conditions, however, increased again during 1989, affecting Iowa,

Missouri, eastern Nebraska, Kansas and certain portions of Colorado. The drought also affected Canada in certain

divisions. The Drought of 1988 became the worst drought since the Dust Bowl 50 years before in the United States; 2008

estimates put damages from the drought somewhere between $80 billion and almost $120 billion in damage (2008 USD).

The Drought of 1988 was so devastating that in later years it was compared against Hurricane Andrew in 1992 and

against Hurricane Katrina; in addition, it would be the costliest of the three events: Hurricane Katrina comes second with

$81 billion (2005 United States Dollars), Hurricane Andrew coming in third. The Drought of 1988 qualifies being the costliest

natural disaster in the history of the United States.

1990s

During 1993 the Southeastern United States experienced high temperatures and conditions of drought for extended periods.

The heatwaves associated caused the deaths of seventeen people and overall damage from the Southeastern State

Drought of 1993 was somewhere between $1 billion and $3 billion in damage (1993 United States Dollars).

Similar drought conditions hit the Northeast United States during 1999 - the Northeast, including Kentucky, New York, New

Jersey, Pennsylvania and Maryland were pummeled by extensive heat waves which killed almost 700 people across the

Northeastern US and unusually dry conditions caused billions of dollars in destruction during 1999. This unusually damaging

drought was reminiscent of the Northeast United States Drought of the 1960s considering it affected similar states within the

Northeast United States and New England.

2000s

The Midwest and Rocky Mountains became victims during 2002; the regions fell victim under exceptional drought which was

accompanied by dry conditions, wildfires and hot temperatures over theWestern US and Midwestern State areas. The US

Drought of 2002 turned a "normal" fire season to very dangerous, treacherous and violent. Denver was forced to impose

mandatory limits regarding water for the first time in twenty one years. The Drought of 2002 was very bad in Colorado

and certain other States in the West. Also, the Quad Cities had around eight inches (203 mm) below average during 2002

(normal precipitation is 38.06 inches (967 mm) every year); during 2002, 30.00 inches were recorded.

The US Drought of 2002 was so reminiscent of the 1988 Drought and compared against the Droughts of the 1930s, the

1983 Drought and the Dry Spells of the 1950s. The drought also affectedSaskatchewan, Manitoba and Alberta in Canada.

Although the Western United States and Southwestern US are most likely to be hit, droughts can also happen over the

Upper Midwestern States, the Central Great Plains, Southeast United States, theMiddle Atlantic, the Great Lakes Region,

the Ohio River Valley, Northeastern United States and even New England. Droughts vary in severity and have potential for

causing elevated to exceptional damage wherever they focus their area toward.

There were extensive droughts through the 2000s (decade) all over the Southeastern United States, continuing as far

westward as Texas. The Southeastern United States were affected by heavy droughts extending from the Carolinas

toward Mississippi and even into Tennessee and Kentucky. Droughts affecting Florida were so severe lakes were actually

drying out. Wildfires, forest fires and brush fires were very prevalent in association with the 2000s (decade) Drought in the

Southeastern United States.

Missouri, Arkansas, (portions of) Louisiana, Tennessee, southeast Iowa and northern Illinois were hit with severe droughts

and heat during 2005 The conditions caused $1 billion in overall damage, there were no deaths attributed to the drought and

associated heat spells. The Quad Cities themselves received only 17.88 inches (454 mm) of precipitation during 2005.

In 2008 and 2009, much of south and south-central Texas were in a state of exceptional drought.

From 2008-2011 the state of California endured through a three-year drought. First declared by Governor Arnold

Schwarzenegger in 2008, as he tried to win voter support for an $11 billion bond to build new water projects, like new dams

and peripheral canals. Voters will decide on this measure in 2012. California officially ended its drought in March 2011, when

Governor Jerry Brown deemed the "drought emergency" over.

2010sSee also: 2010–2012 Southern United States drought and 2012 North American drought

The 2008-2011 California drought continued through 2010 and did not end until March 2011. The drought shifted east during

the Summer of 2011 to affect a large portion of the Southwest and Texas. See above for additional information on this

drought.

In 2011 intense drought struck much of Texas and a large portion of the Southwest bringing much of the region its worst

drought seen since the Dust Bowl years of the 1930s. Most of the drought in Texas ended or had it impacts ease by Spring

and Summer 2012 as precipitation returned to the region. The Texas and Southwest US drought was also accompanied by

a severe heat wave that brought record setting heat to much of Texas, including but not limited to bringing a 40 day stretch

of temperatures at or above 100 °F (38 °C) to Dallas, TX. Drought of severe magnitude also affected a large portion of the

Southeastern US, especially Georgia and South Carolina. It is believed that a combination of La Nina and climate

change had contributed to the intense drought.

In 2012, much of the US had drought conditions develop through the late Winter and Spring months and lasting into the

Summer, creating the 2012 North American drought. Meanwhile, severe to extreme drought developed in the

lower Midwest and Ohio Valley as well as the southern and central Rockies. This led to large wildfires in Colorado including

the record setting Waldo Canyon fire, the most destructive in Colorado history. Drought conditions have led to numerous

firework show cancellations and voluntary water restrictions in much of the Ozarks, Mid Mississippi and Ohio River Valleys.

An ongoing heat wave in the western US is also causing conditions to rapidly worsen in many areas affected by the drought

as daily temperatures near or over 100 °F (38 °C) and lots of sunny days dry out the soils and vegetation much faster than

normal. Lagging effects of La Nina, Climate Change, and also a large persistent upper level ridge of high pressure present

over much of North America since the late Winter have all contributed to the drought and above average temperatures since

February 2012. The combination of high heat and severe drought has resulted in weather patterns not seen since 1988,

1954, and the Dust Bowl and Great Depression years of the 1930s to some areas, especially the lower Midwest. Because

the drought conditions were forcing American farmers to sell off livestock, the Department of Defense sought to buy up meat

at "fire sale" prices in order to stockpile meals for the lean times ahead.

High wheat prices caused by the drought have discouraged farmers from investing in alternative drought-tolerant crops.

http://en.wikipedia.org/wiki/Drought_in_the_United_States

NORTH AMERICAN DROUGHT: A PALEO PERSPECTIVE

20th Century Drought

The Dust Bowl Drought

The Dust Bowl drought was a natural disaster that severely affected much of the United States during the 1930s. The drought came in three waves, 1934, 1936, and 1939-40, but some regions of the High Plains experienced drought conditions for as many as eight years. The "dust bowl" effect was caused by sustained drought conditions compounded by years of land management practices that left topsoil susceptible to the forces of the wind. The soil, depleted of moisture, was lifted by the wind into great clouds of dust and sand which were so thick they concealed the sun for several days at a time. They were referred to as" black blizzards".

The agricultural and economic damage devastated residents of the Great Plains. The Dust Bowl drought worsened the already severe economic crises that many Great Plains farmers faced. In the early 1930s, many farmers were trying to recover from economic losses suffered during the Great Depression. To compensate for these losses, they began to increase their crop yields. High production drove prices down, forcing farmers to keep increasing their production to pay for both their equipment and their land. When the drought hit, farmers could no longer produce enough crops to pay off loans or even pay for essential needs. Even with Federal emergency aid, many Great Plains farmers could not withstand the economic crisis of the drought. Many farmers were forced off of their land, with one in ten farms changing possession at the peak of the farm transfers.

In the aftermath of the Dust Bowl, it was clear that many factors contributed to the severe impact of this drought. A better understanding of the interactions between the natural elements (climate, plants, and soil) and human-related elements (agricultural practices, economics, and social conditions)of the Great Plains was needed. Lessons were learned, and because of this drought, farmers adopted new cultivation methods to help control soil erosion in dry land ecosystems. Subsequent droughts in this region have had less impact due to these cultivation practices.

The 1950s Drought

Fueled by post-war economic stability and technological advancement, the 1950s represented a time of growth and prosperity for many Americans. While much of the country celebrated a resurgence of well-being, many residents of the Great Plains and southwestern United States were suffering. During the 1950s, the Great Plains and the southwestern U.S. withstood a five-year drought, and in three of these years, drought conditions stretched coast to coast. The drought was first felt in the southwestern U.S. in 1950 and spread to Oklahoma, Kansas and Nebraska by 1953. By 1954, the drought encompassed a ten-state area reaching from the mid-west to the Great Plains, and southward into New Mexico. The area from the Texas panhandle to central and eastern Colorado, western Kansas and central Nebraska experienced severe drought conditions. The drought maintained a stronghold in the Great Plains, reaching a peak in 1956. The drought subsided in most areas with the spring rains of 1957.

The 1950s drought was characterized by both low rainfall amounts and excessively high temperatures. Texas rainfall dropped by 40% between 1949-1951 and by 1953, 75% of Texas recorded below normal rainfall amounts. Excessive temperatures heated up cities like Dallas where temperatures exceeded 100°F on 52 days in the summer of 1953. Kansas experienced severe drought conditions during much of the five-year period, and recorded a negative Palmer Drought Severity Index   from 1952 until March 1957, reaching a record low in September of 1956.

A drought of this magnitude creates severe social and economic repercussions and this was definitely the case in the southern Great Plains region. The drought devastated the region's agriculture. Crop yields in some areas dropped as much as 50%. Excessive temperatures and low rainfall scorched grasslands typically used for grazing. With grass scarce, hay prices became too costly, forcing some ranchers to feed their cattle a mixture of prickly pear cactus and molasses. By the time the drought subsided in 1957, many counties across the region were declared federal drought disaster areas, including 244 of the 254 counties in Texas.

The 1987 - 1989 Drought

The three-year drought of the late 1980s (1987-1989) covered 36% of the United States at its peak. Compared to the Dust Bowl drought, which covered 70% during its worst year, this does not seem significant. However, the 1980s drought was not only the costliest in U.S. history, but also the most expensive natural disaster of any kind to affect the U.S. (Riebsame et al. 1991). Combining the losses in energy, water, ecosystems and agriculture, the total cost of the three-year drought was estimated at $39 billion. Drought-related losses in western Canada exceeded $1.8billion dollars in 1988 alone.

The drought, beginning along the west coast and extending into the northwestern U.S., had its greatest impact in the northern Great Plains. By 1988, the drought intensified over the northern Great Plains and spread across much of the eastern half of the United States. This drought affected much of the nation's primary corn and soybean growing areas, where total precipitation for April through June of 1988 was even lower than during the Dust Bowl. The drought also encompassed the upper Mississippi River Basin where low river levels caused major problems for barge navigation. The summer of 1988 is well known for the extensive

forest fires that burned across western North America, including the catastrophic Yellowstone fire. In addition to dry conditions, heat waves during the summer of 1988 broke long-standing temperature records in many midwestern and northeastern metropolitan areas.

The 1987-89 drought was the first widespread persistent drought since the 1950s and undoubtedly took people by surprise. Many had not experienced the 1950s drought and others had forgotten about the harsh realities of drought. The financial costs of this drought were an indication that many parts the country are now more vulnerable to drought than ever before. This increased vulnerability was due in part to farming on marginally arable lands and pumping of ground water to the point of depletion. Although surplus grain and federal assistance programs offset the impacts of the 1987-89 drought, these types of assistance programs would be less feasible during a lengthier drought.

Another Dust Bowl?

What is the likelihood of another Dust Bowl-scale drought in the future? No one is yet able to scientifically predict multi-year or decadal droughts, but the paleoclimatic record can tell us how frequently droughts such as the 1930s Dust Bowl occurred in the past or if droughts of this magnitude are indeed a rare event. If such droughts occurred with some regularity in the past, then we should expect them to occur in the future.

On to... Paleoclimatology and Drought.

http://www.ncdc.noaa.gov/paleo/drought/drght_history.html

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