Wednesday, August 20, 2008

Oil price hikes in India-A Necessary Step

Peak pricing
Suyodh Rao
Posted online: Thursday, August 14, 2008 at 0124 hrs
Want energy and food security? Let oil prices head towards market rates

The Chaturvedi Committee final report recommends a phased increase in crude distillates’ prices and the cutting down of subsidies, and is a step in the right direction. These include a monthly increase in the price of a litre of petrol by Rs 2.50 (until March 2009), and of a litre of diesel by Rs 0.75 (until 2010). Another recommendation of direct consequence to the middle class is the limit of 6 subsidised refills of LPG cylinders per consumer/connection over a year and the gradual removal of the LPG subsidy over a three-year period. Other recommendations attempt financial re-engineering, at the macro level, of measures already put in place after the sudden, sharp increases in global crude oil prices. These relate primarily to the medium- and long-term viability of the governments’ oil bonds and their ultimate discontinuation; the inappropriateness of taxes on any “windfall gains” accruing to oil refiners and extractors; tinkering with the excise and customs rates and moves towards replacing the cylinder-based LPG system with piped natural gas.

The loss due to the difference between cost and consumer price is currently borne by the oil marketing companies (OMCs) which are in turn compensated by oil bonds. These are little more than a band-aid, and will certainly tell on the fiscal health of the nation. When the OMCs pledge those bonds and raise money to sustain their critical operations liquidity will be sucked out of the banking system and impact investible funds across the board.

If the committee’s recommendations are not accepted, the estimated loss on sale of crude distillates will be Rs 2,11,400 crore in the current year alone. The revenue deficit in this year’s budget is about Rs 56,000 crore. These are large numbers: it is hardly surprising that the report says that “the government should disengage from the process of pricing of petroleum products, and allow pricing to be an outcome of a competitive market process”.

The steps the committee envisages will go a long way in improving India’s fiscal health. Painful as they doubtless are going to be, and as heartless as they may seem, we really do not have many options. The whole world has been taken aback by the sharp rise in crude oil prices. We were not sufficiently vigilant about our energy supply situation. There is a price to be paid for the lack of visionary leadership and a lack of awareness of the critical role of energy in our economic systems.

David Strahan, the author of The Last Oil Shock, wrote in the The Daily Telegraph out of London last week: “It is endlessly reported that the demand for oil in Asian countries has soared since the turn of the century, and that China’s thirst has been especially prodigious. What is less realised is that global oil production has been essentially stagnant, at around 86 million barrels a day, since early 2005.” He was referring to the concept geologists call “peak oil” — the time when the world reaches a maximum in oil supply and thereafter sees terminal declines in oil extraction.

No leadership saw this coming. And it is this stagnant supply encountering a growing demand that is behind the sudden, sharp price increases in crude. Need for increased efficiency of use and conservation of our precious energy resources is thus a given.

Continued subsidisation of crude distillates is financially unsustainable. Such subsidies will lead to our budget deficits, public debt and other macro variables rising to much higher levels, leaving the economy prone to macroeconomic instability. If we wish the Indian economy to withstand external shocks, the sooner we start re-engineering our production, communication, economic, political and social systems, the better. For that, we need to ensure economic agents receive appropriate signals from the market; and in this case, those are higher fuel prices.

In fact, not only do we have to allow prices do be determined by the market as the committee notes, but we also will have to seriously consider putting a floor to crude distillates’ prices. This will have to be done so that prospective alternative energy entrepreneurs can plan for assured prices for the energy they generate. Given that the crude demand-supply situation is as taut as it is, crude prices will be as volatile as they have been, in both directions. Such volatility in price will provide mixed signals since alternative energy has to compete with fossil fuels.

Taut energy markets have been having a significant impact on the most essential form of energy, namely food. Food prices have been rising in the face of rising demand, stagnant yields, rising energy, fertiliser and other input prices and finally diversion of food for bio-fuels. Delaying price increases of crude distillates will mean hampering our food security. With a population of a billion plus, that is like playing with fire.

Saturday, August 16, 2008

Bell Curve # 8 - Ocean Fisheries

Spain - the poor man's South Of France is what this story is about, but, such phenomena are being reported from all over the world.

Stinging Tentacles Offer Hint of Oceans’ Decline

Dani Cardona/Reuters
A jellyfish in the Mediterranean off the coast of the Spanish island of Mallorca

Published: August 3, 2008

BARCELONA, Spain — Blue patrol boats crisscross the swimming areas of beaches here with their huge nets skimming the water’s surface. The yellow flags that urge caution and the red flags that prohibit swimming because of risky currents are sometimes topped now with blue ones warning of a new danger: swarms of jellyfish.

In a period of hours during a day a couple of weeks ago, 300 people on Barcelona’s bustling beaches were treated for stings, and 11 were taken to hospitals.

From Spain to New York, to Australia, Japan and Hawaii, hey!!! thats my line on the housing bubble!!! and everyone's complaint regarding the credit crisis. Frickin plagiarizer!!! jellyfish are becoming more numerous and more widespread, and they are showing up in places where they have rarely been seen before, scientists say. The faceless marauders are stinging children blithely bathing on summer vacations, forcing beaches to close and clogging fishing nets.

But while jellyfish invasions are a nuisance to tourists and a hardship to fishermen, for scientists they are a source of more profound alarm, a signal of the declining health of the world’s oceans. Designing stalwarts will come up with nets that catch only jellyfish and allow all other sea-creatures to slip thru them. This is the firefighting that I think we will indulge in, and then pat ourselves on our backs. To quote a current example that millions are witnessing without the slightest clue that they are doing so - the Chinese factory shutdowns. Show blue, smog free skies to a numb, slumbering population laying on their couches, glued to their TV sets and lapping up the buy-more ads; whew!!! Hoping everything will set itself right while unknowingly existing in denial, instead of making some painful choices. The choices not taken will come back to haunt us in ways we dont like. That is a Bell Curve of population which shall shortly be covered. Going to the 'root of the problem' is not in our societal mindset. We cannot see beyond our noses. It is not our fault, it is our very nature; the way we have evolved so to say. If we could see beyond our noses, we may not have survived our hunter gatherer days. Not many philosophers made it through that evolutionary bottleneck. Often in life, one's biggest strength ironically turns into one's biggest handicap. Like the peacock trying to get away from its predator and being forced to carry along its grand plumage. Life does suck!!!

These jellyfish near shore are a message the sea is sending us saying, ‘Look how badly you are treating me,’ ” said Dr. Josep-María Gili, a leading jellyfish expert, who has studied them at the Institute of Marine Sciences of the Spanish National Research Council in Barcelona for more than 20 years.

The explosion of jellyfish populations, scientists say, reflects a combination of severe overfishing of natural predators, like tuna, sharks and swordfish; rising sea temperatures caused in part by global warming; and pollution that has depleted oxygen levels in coastal shallows. There was the recent event of dead fish floating in Mir Alam Tank in Hyderabad, cause unknown, but probably due to oxygen depletion in the lake waters they said. This was a local event and has absolutely nothing to do with global warming, but, for those unaware about ocean anoxia that could be an example close to home. Nutrition buildup leads to algal bloom. Algal dead bodies' decomposition-process sucks up and eventually depletes oxygen and leads to build-up of toxic gases in the lower levels of the water. Oxygen breathing organisms kick the bucket en masse. It has happened before in the oceans in the geological past.

These problems are pronounced in the Mediterranean, a sea bounded by more than a dozen countries that rely on it for business and pleasure. Left unchecked in the Mediterranean and elsewhere, these problems could make the swarms of jellyfish menacing coastlines a grim vision of seas to come.

“The problem on the beach is a social problem,” said Dr. Gili, who talks with admiration of the “beauty” of the globular jellyfish. “We need to take care of it for our tourism industry. But the big problem is not on the beach. It’s what’s happening in the seas.”

Jellyfish, relatives of the sea anemone and coral that for the most part are relatively harmless, in fact are the cockroaches of the open waters, the ultimate maritime survivors who thrive in damaged environments, and that is what they are doing. I have heard it said, that, if anything survives a nuclear holocaust, it is going to be the cockroach. One needs to give that statement zero credence, but, just mentioning it.

Within the past year, there have been beach closings because of jellyfish swarms on the Côte d’Azur in France, the Great Barrier Reef of Australia, and at Waikiki and Virginia Beach in the United States. Where are the goddarn net designers???

In Australia, more than 30,000 people were treated for stings last year, double the number in 2005. An inverse doubling of the stock market would concern us or scare the freakin daylights out of us, but a doubling of jellyfish stings to some others.....nah, couldnt care less. As a species, we have survived by recognizing immediate dangers to our group as distinct from other groups. If we had gone to help Johnny over on the other side of the mountain, we wouldnt have returned from the mission and The rare but deadly Irukandji jellyfish is expanding its range in Australia’s warming waters, marine scientists say.

While no good global database exists on jellyfish populations, the increasing reports from around the world have convinced scientists that the trend is real, serious and climate-related, although they caution that jellyfish populations in any one place undergo year-to-year variation. these are the riders in science that will always be there. There is never certainty in biological phenomenon until 2 minutes before noon. At noon there is little we can do.

“Human-caused stresses, including global warming and overfishing, are encouraging jellyfish surpluses in many tourist destinations and productive fisheries,” according to the National Science Foundation, which is issuing a report on the phenomenon this fall and lists as problem areas Australia, the Gulf of Mexico, Hawaii, the Black Sea, Namibia, Britain, the Mediterranean, the Sea of Japan and the Yangtze estuary. Yeah, alright, I heard you. But i need more proof.

In Barcelona, one of Spain’s most vibrant tourist destinations, city officials and the Catalan Water Agency have started fighting back, trying desperately to ensure that it is safe for swimmers to go back in the water. I told you!!! Wait and watch - anyone willing to place a bet that some pharma company, somewhere, is burning the midnight oil, developing an antidote for jellyfish stings!!!

Each morning, with the help of Dr. Gili’s team, boats monitor offshore jellyfish swarms, winds and currents to see if beaches are threatened and if closings are needed. They also check if jellyfish collection in the waters near the beaches is needed. Nearly 100 boats stand ready to help in an emergency, said Xavier Duran of the water agency. Wow!!! what a boost to our economy!!! Increase In Boat Demand Stretches Boat Manufacturers: Stock Values Rise - Boosts in employment we could do with, given Spain's real estate & banking woes.The constant squeal of Dr. Gili’s cellphone reflected his de facto role as Spain’s jellyfish control and command center. Calls came from all over.

Officials in Santander and the Basque country were concerned about frequent sightings this year on the Atlantic coast of the Portuguese man-of-war, a sometimes lethal warm-water species not previously seen regularly in those regions.

Farther south, a fishing boat from the Murcia region called to report an off-shore swarm of Pelagia noctiluca — an iridescent purplish jellyfish that issues a nasty sting — more than a mile long. and we get nightmares about snakes with a sting of a couple of inches in length :) A chef, presumably trying to find some advantage in the declining oceans, wanted to know if the local species were safe to eat if cooked. If life deals you lemons, make, and drink, lemonade. Much is unknown about the jellyfish, and Dr. Gili was unsure. Dr. Gili will get back to you, Mr. Curious Chef.

In previous decades there were jellyfish problems for only a couple of days every few years; now the threat of jellyfish is a daily headache for local officials and is featured on the evening news. As if we were short of fodder for the idiot-box. “In the past few years the dynamic has changed completely — the temperature is a little warmer,” Dr. Gili said.

Though the stuff of horror B- movies, jellyfish are hardly aggressors. They float haplessly with the currents. They discharge their venom automatically could pretty much be describing the harmless homo sapiens (home colossus) !!! when they bump into something warm — a human body, for example — from poison-containing stingers on mantles, arms or long, threadlike tendrils, which can grow to be yards long.

Some, like the Portuguese man-of-war or the giant box jellyfish, can be deadly on contact. Pelagia noctiluca, common in the Mediterranean, delivers a painful sting producing a wound that lasts weeks, months or years, depending on the person and the amount of contact.

In the Mediterranean, overfishing of both large and small fish has left jellyfish with little competition for plankton, their food, and fewer predators. Unlike in Asia, where some jellyfish are eaten by people, here they have no economic or epicurean value.

The warmer seas and drier climate caused by global warming work to the jellyfish’s advantage, since nearly all jellyfish breed better and faster in warmer waters, according to Dr. Jennifer Purcell, a jellyfish expert at the Shannon Point Marine Center of Western Washington University.

Global warming has also reduced rainfall in temperate zones, researchers say, allowing the jellyfish to better approach the beaches. Rain runoff from land would normally slightly decrease the salinity of coastal waters, “creating a natural barrier that keeps the jellies from the coast,” Dr. Gili said.

Then there is pollution, which reduces oxygen levels and visibility in coastal waters. While other fish die in or avoid waters with low oxygen levels, many jellyfish can thrive in them. And while most fish have to see to catch their food, jellyfish, which filter food passively from the water, can dine in total darkness, according to Dr. Purcell’s research.

Residents in Barcelona have forged a prickly coexistence with their new neighbors.

Last month, Mirela Gómez, 8, ran out of the water crying with her first jellyfish sting, clutching a leg that had suddenly become painful and itchy. Micro level system interplay? Her grandparents rushed her to a nearby Red Cross stand. “I’m a little afraid to go back in the water,” she said, displaying a row of angry red welts on her shin.

Francisco Antonio Padrós, a 77-year-old fisherman, swore mightily as he unloaded his catch one morning last weekend, pulling off dozens of jellyfish clinging to his nets and tossing them onto a dock. Removing a few shrimp, he said his nets were often “filled with more jellyfish than fish.” Hey!! Relax Padros, Mr Curious Chef may yet come up with an innovative, seminal, path-breaking recipe, and that will be the end of your woes.

By the end of the exercise his calloused hands were bright red and swollen to twice their normal size. “Right now I can’t tell if I have hands or not — they hurt, they’re numb, they itch,” he said.

Dr. Santiago Nogué, head of the toxicology unit at the largest hospital here, said that although 90 percent of stings healed in a week or two, many people’s still hurt and itched for months. He said he was now seeing 20 patients a year whose symptoms did not respond to any treatment at all, sometimes requiring surgery to remove the affected area. arent we good at fire-fighting!!!

The sea, however, has long been central to life in Barcelona, and that is unlikely to change. Recently when the beaches were closed, children on a breakwater collected jellyfish in a bucket. The next day, Antonio López, a diver, emerged from the water. “There are more every year — we saw hundreds offshore today,” he said. “You just have to learn how to handle the stings.” Alright!!! there is hope!!!

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Bell Curve # 7 - Credit

Credit is a potential Bell Curve, meaning that henceforth credit will be tighter than we have seen in the recent past. Add to that the fact that we are going to see a contracting economy. A contracting economy means reduced output or reduced availability of goods and services. It is a given that, if one doesnt want to add fuel to the fire, then, we also need reduced money supply to transact that reduced output. I rest my case for a strong possibility of a bell curve of credit. The only assumption it rests on is a sane monetary policy but that is a weak assumption. Central Bankers of the world acting responsibly (curtailing money supply in this case) isnt borne out very strongly, needless to say the prime example of that being, Greenspan.

To sum up, what i mean by that is - in order to rein in the current cost-push inflation, curtailing money supply is a necessary condition, but by no stretch of imagination is it a sufficient one. If on the other hand, Central Banks decide to not tighten money supply and we go into an era of high inflation and inflation expectations that is a different ball game.

Monetarists warn of crunch across Atlantic economiesBy Ambrose Evans-Pritchard
Last Updated: 11:40pm BST 11/07/2008
Page 1 of 2

The lifeblood of countries' economies is draining away - with grim consequences for us all, writes Ambrose Evans-Pritchard The money supply data from the US, Britain, and now Europe, has begun to flash warning signals of a potential crunch. Monetarists are increasingly worried that the entire economic system of the North Atlantic could tip into debt deflation over the next two years if the authorities misjudge the risk.

The key measures of US cash, checking accounts, and time deposits - M1 and M2 - have been contracting in real terms for several months. A dramatic slowdown in Britain's broader M4 aggregates is setting off alarm bells here. Money data - a leading indicator - is telling a very different story from the daily headlines on inflation, now 4.1pc in the US, 3.7pc in Europe, and 3.3pc in Britain.

Paul Kasriel, chief economist at Northern Trust, says lending by US commercial banks contracted at an annual rate of 9.14pc in the 13 weeks to June 18, the most violent reversal since the data series began in 1973. M2 money fell at a rate of 0.37pc."The money supply is crumbling in the US. There was a very sharp lending contraction in the second quarter lending. If the Federal Reserve is forced to raise rates now to defend the dollar, it would be checkmate for the US economy," he said.Leigh Skene from Lombard Street Research said the lending conditions in the US were now the worst since the Great Depression. "Credit liquidation has begun," he said.

The Fed's awful predicament does indeed have echoes of the early 1930s when the bank felt constrained to tighten into the Slump in order to halt bullion loss under the Gold Standard. Investors - notably foreigners - dictated a perverse policy. Over 4,000 US banks collapsed. This time a de facto "Oil Standard" is boxing in Ben Bernanke. Benign neglect of the dollar has started to backfire. It is pushing up crude, with multiple leverage.

The monetary picture is highly complex. The different measures - M1, M2, M3, M4 - have all given false signals in the past. Each tells a different tale, and monetarists fight like alley cats among themselves.

The Federal Reserve stopped paying much attention to the data a long time ago. It has abolished M3 altogether. The US economic consensus is New-Keynesian (dynamic stochastic general equilibrium model). Delving into the money entrails is derided as little better than soothsaying. one should not pay too much attention to money is right, but, by no means does that imply money does not matter. All it means is that, using money supply to achieve results in the real economy due to the money illusion that economic agensts suffer from, has terrible consequences. This is what G'span did.

Friedman said it well in his Role of Monetary Policy paper.
...Monetary policy cannot peg these real magnitudes at peredetermined levels. But monetary policy can and does have important effects on these real magnitudes. The one is in no way inconsistent with the other.....

...But money has one feature that these other machines do not share. Because it is so pervasive, when it gets out of order, it throws a monkey wrench into the operation of all the other machines....

What Friedman is saying is that money (supply) cannot achieve results that one wants in terms of pegging real variables like output, employment etc. where we want them to be. BUT, by no means does that imply it cannot take those variables in undesirable directions and peg them in undesirable locations. Funny thing uh this money???

That attitude, retort monetarists, is the root cause of the credit bubble. The money supply almost always gives advance warning of big economic shifts. Those who track the data are now calling on central banks to move with extreme caution. If the rate-setters overreact to an inflation spike caused by oil and food - or confuse today's climate with the early 1970s - they may set off an ugly chain of events. monetarists dont want a credit contraction now cuz they know what contraction it can cause. But, what were they doing when the money spigot was being opened like crazy, enjoying the higher stock valuations and the higher house valuations? both of them of course nominal in nature.

"The data is pretty worrying," said Paul Ashworth, US economist at Capital Economics. "US lending is shrinking dramatically in real terms, and we know from the Fed's survey that banks want to tighten further. People are clamouring for higher rates but we think deflation is now the biggest threat. The idea that the Fed should tighten with unemployment soaring is preposterous," but what choice does the Fed have? he said. The jobless rate jumped from 5pc to 5.5pc in May.

In Britain, the Shadow Monetary Policy Committee - hosted by the Institute for Economic Affairs, and a refuge for UK monetarists - issued its own alert this week. The focus is on "adjusted M4", which covers loans to "private non-financial corporations" and may offer the best insight into the health of British business.

The growth rate has dropped from 16.1pc a year ago to minus 0.5pc in April. It is the suddenness of the decline that matters most. The data reeks of recession. Professor Patrick Minford from Cardiff Business School called for an immediate rate cut, arguing that the credit crunch is a more powerful and long-lasting force than the oil inflation.

Professor Tim Congdon from the London School of Economics said the UK was lurching from boom to bust. "Real money growth is virtually nil. The British economy is taking a thrashing and it is going to get worse. Corporate money balances have contracted 3pc over the last three months, which is double digits on an annualised basis. This is a serious squeeze for companies," he said.

Mr Congdon warned three years ago that surging M4 would lead to a "dangerous" bubble, which is what occurred. He now fears the MPC will react too late as the process goes into reverse.

Roger Bootle from Capital Economics said Britain could be facing a "real economic crisis and a financial collapse. The MPC does not have the luxury of waiting until all is absolutely crystal clear. By that time the bird will have flown."

The eurozone is at a later stage of the credit cycle. Even so, house prices are collapsing in Spain, and falling in Germany and France. india is a little further behind in the cycle German industrial orders have dropped for the last six months in a row. A joint IFO-INSEE survey said eurozone growth had stalled to zero in the second quarter.

'Credit liquidation has begun'

"Consumer lending has fallen off a cliff. It is contracting in real terms," said Hans Redeker, currency chief at BNP Paribas. Core inflation has fallen from 1.9pc to 1.7pc over the last year.

Unlike the Fed, the European Central Bank keeps a close eye on money data (though not on real M1, now shrinking). It looks at the broader M3 figures. There is a raging debate in Europe over the signals now being sent by this indicator.

The M3 growth is still 10.5pc, down from 11.5pc in January. However, the data has been badly distorted by the closure of the capital markets. Firms have been forced to draw down existing credit lines from banks, which shows up as M3 growth. (It is the same story with America's M3 since the collapse of the Commercial Paper market).

"The credit lines are expiring. Companies cannot roll over loans. We are going to see the entire private credit multiplier go into a slowdown," said Mr Redeker.

Jean-Claude Trichet, the ECB's president, said last week that the M3 data "overstates the underlying pace of monetary expansion". The ECB nevertheless pressed ahead with a rate rise to 4.25pc, setting off a storm of protest. This may go down as one of the most unwise monetary decisions of modern times.

The strain on eurozone banks is growing by the day. They bid a record $85bn (£43bn) at the ECB's last auction for dollars. Only $25bn was available. The spreads on Euribor interbank lending are still at extreme stress levels.

Few dispute that "global inflation" is taking off. Over 50 countries now face double-digit price rises. Ukraine (29pc), Vietnam (27pc), and the Gulf states are out of control, with Russia (15pc), and India (11pc) close behind. China (7.1pc) is on the cusp. Interest rates are still below inflation across much of the emerging world. This is the driving force behind spiralling commodity prices. negative real rates of interest, meaning interest rate minus inflation is negative. Someone said, something like ...inflation, almost always, almost everywhere, is a monetary phenomenon...

The oil spike is already squeezing real wages in the Atlantic region. The debate is whether the Fed, Bank of England, and ECB should squeeze them further, trying to off-set energy rises with a deflationary bust in the rest of the economy. If and when oil peaks in this cycle, they may find inflation crashing faster than they dare to imagine. this can happen, a drastic and sudden turn in world output creats a sharp drop in oil demand, (assuming the decline in oil supply is less than the drop in oil demand) and leads to an oil price crash. and then a recovery begins from a far lower baseline, and again leads to a rise in oil price, this is the see sawing of oil prices that we are going to see

The 9th Circle in Dante's Inferno - starring Judas and Brutus - is a frozen lake. Cold can be more frightful than heat. "Blue pinch'd and shrined in ice the spirits stood," (Canto XXXIII). Such awaits the victims of debt deflation. whatever that means

Bell Curve # 6 - Food

Expect A Secular Rise In Food Prices

There are enough number of reasons why we should be ready for a secular rise in food prices in the near term. I shall go into what in my opinion are the main drivers of this process.

Low stocks of food products are a significant contributor to this rise in prices. Lester Brown of the earth Policy institute has said that the per capita stock availability /inventory of food are at the lowest level since 1972. When stocks are low, prices go up significantly at the slightest unanticipated event/s that can reduce production which replenish those stocks. These events could be geopolitical, weather related or something else.

The other main driver of rising prices for food is the move towards bio-fuels in the US and Europe. President Bush famously said in his state of the union address in 2006 that the US is addicted to oil. Hence the US is now resorting to making ethanol. This ethanol is then blended into gasoline/petrol. It is estimated that the ethanol production capacity is set to double in the next 18 months from the current 5.6 billion gallons (as of February 2007). The feedstock for this in the US is corn, unlike in Brazil where it is sugarcane. The amount of corn required as feedstock for this quantity of ethanol production is estimated to be 40% of US production.

We live in a world where markets are increasingly interdependent. Prices in one geography/ market get reflected almost instantaneously elsewhere. The US is the world’s largest producer (40% of global production) and exporter (60% of global exports) of corn. This diversion of corn to ethanol production has been reflected in the price of corn, which is currently at about $4 compared to the usual range of $2-3 a bushel. The upper limit of the price is anybody’s guess. In today’s prices about $12 of plastics can be made from a bushel of corn.

Such a diversion affects not only the price of corn. Corn acreage is at a 63 year high in the US. Some of this increased acreage has come at the expense of other food crops. Acreage devoted to soy is expected to be down 11% in 2007 from last year. Wheat acreage is also less. What follows is less production and hence exportable surplus of multiple food crops for the rest of the world. Consider this – corn is a more fertilizer intensive crop than soy. Fertilizer prices have an extremely high correlation to natural gas prices – and that is not coming down anytime soon.

Add to this, the fact that corn has many uses. As a sweetening agent in aerated drinks to chickenfeed, there are a number of other uses including as a feed to dairy animals. Now one need not wonder why milk prices are going up! Point is, this rise in the price of corn will feed other price increases.

Add to this the situation in India. 2006 saw significant rises in food prices. This is again due to the declining per capita production levels.
Subhash Narayan of The Economic Times had this to day recently on the issue.

According to estimates prepared by the Planning Commission, the annual per capita production of cereals has declined from 192 kg during 1991-95 to 174 kg during 2004-07. Similarly, per capita production of pulses has also dropped from a high of 19 kg during 1971-75 to just 12 kg during 2004-07.

One such unanticipated event that is now unfolding is climate change. How this will play out is not yet clear. It is a given though that from the US to Europe to Australia warmer weather is having an impact on food output. Larger acreage will be able to make a dent on this problem to a certain extent.

Fertilizer requirement, natural gas reqments, urea wildcard .

Bell Curve # 5 - Fresh Water

Warming Leads to Water Shortage and ‘Africanization’ of Spain

Monica Gumm for the International Herald Tribune
The combination of resort-building and intensive farming has put new pressures on the land and its dwindling supply of water.

Published: June 3, 2008

FORTUNA, Spain —Lush fields of lettuce and hothouses of tomatoes line the roads. Verdant new developments of plush pastel vacation homes beckon buyers from Britain and Germany. Golf courses — 54 of them, all built in the last decade and most in the last three years — give way to the beach. At last, this hardscrabble corner of southeast Spain is thriving.

There is only one problem with the picture of bounty: this province, Murcia, is running out of water. Spurred on by global warming and poorly planned development, swaths of southeast Spain are steadily turning into desert.

Murcia, traditionally a poor farming region, has undergone a resort-building boom in recent years, even as many of its farmers have switched to more thirsty crops, encouraged by water transfer schemes, Krishna - Godavari water for twin cities of Hyd-Secunderabad, tunnel from Srisailam to drylands of Nalgonda which have become increasingly untenable. The combination has put new pressures on the land and its dwindling supply of water.

This year farmers are fighting resort developers over water rights. They are fighting one another over who gets to water their crops. And in a sign of their mounting desperation, they are buying and selling water like gold on a burgeoning black market, mostly from illegal wells.

Southern Spain has long been plagued by cyclical drought, but the current crisis, scientists say, probably reflects a more permanent climate change brought on by global warming. And it is a harbinger of a new kind of conflict.

The battles of yesterday were fought over land, they warn. Those of the present center on oil. But those of the future — a future made hotter and dryer by climate change in much of the world — seem likely to focus on water, they say.
rightly so

“Water will be the environmental issue this year — the problem is urgent and immediate,” said Barbara Helferrich, a spokeswoman for the European Union’s Environment Directorate. “If you already have water shortages in spring, you know it’s going to be a really bad summer.”

Dozens of world leaders will be meeting at the United Nations Food and Agriculture Organization headquarters in Rome starting Tuesday to address a global food crisis caused part by water shortages in Africa, Australia and here in southern Spain.

Climate change means that creeping deserts may eventually drive 135 million thats got to be a best case scenario people off their land, the United Nations estimates. Most of them are in the developing world. But southern Europe is experiencing the problem now, its climate drying to the point that it is becoming more like Africa’s, scientists say.

For Murcia, the water crisis has come already. And its arrival has been accelerated by developers and farmers who have hewed to water-hungry ventures highly unsuited to a drier, warmer climate: crops like lettuce that need ample irrigation; resorts that promise a swimming pool in the backyard; acres of freshly sodded golf courses that sop up millions of gallons a day.

“I come under a lot of pressure to release water from farmers and also from developers,” said Antonio Pérez Gracia, the water manager for Fortuna, sipping coffee with farmers in a bar in the town’s dusty square on a recent morning. He rued the fact that he could provide each property owner with only 30 percent of its government-determined water allotment. the sooner we realize that it is not govts that allocate water but the ecosystem that does so, the better

“I’m not sure what we’ll do this summer,” he added, noting that the local aquifer was sinking so quickly that the pumps would not reach it soon. “I come under a lot of pressure to release water, from farmers and also from developers. They can complain as much as they want, but if there’s no more water, there’s no more water.”

Rubén Vives, a farmer who relies on Mr. Pérez Gracia’s largess, said he could not afford the current black market water prices. “This year, my livelihood is in danger,” said Mr. Vives, who has farmed low-water crops like lemons here for nearly two decades. those who conserve will also suffer. unfortunately ecological forces have poor ability to differentiate between those responsible and those who are innocent

The hundreds of thousands of wells — most of them illegal — that have in the past provided a temporary reprieve from thirst have depleted underground water to the point of no return. Water from northern Spain that was once transferred here has also slowed to a trickle, as wetter northern provinces are drying up, too.

The scramble for water has set off scandals. Local officials are in prison for taking payoffs to grant building permits in places where there is not adequate water. half of HUDA would be in prison :) for acts of commission and omission to protect the water resources Chema Gil, a journalist who exposed one such scheme, has been subject to death threats, carries pepper spray and is guarded day and night be the Guardia Civil, a police force with military and civilian functions.

“The model of Murcia is completely unsustainable,” said Mr. Gil. “We consume two and a half times more water than the system can recover. So where do you get it? Import it from elsewhere? Dry up the aquifer? With climate change we’re heading into a cul-de-sac. All the water we’re using to water lettuce and golf courses will be needed just to drink.”

Facing a national crisis, Spain has become something of an unwitting laboratory, sponsoring a European conference on water issues this summer and this year announcing a national action plan to fight desertification. That plan includes a shift to more efficient methods of irrigation, as well as an extensive program of energy intensive desalinization plants to provide the fresh water that nature does not.

The Spanish Environment Ministry estimates that one-third of the county is at risk of turning into desert from a combination of climate change and poor land use.

Still, national officials visibly stiffen when asked about the “Africanization” of Spain’s climate — a term now common among scientists.

“We are in much better shape than Africa, but within the E.U. our situation is serious,” said Antonio Serrano Rodríguez, the secretary general for land and biodiversity at Spain’s Environment Ministry. silly dude; ecology doesnt respect political borders

Still, Mr. Serrano and others acknowledge the broad outlines of the problem. “There will be places that can’t be farmed any more, that were marginal and are now useless,” Mr. Serrano said. “We have parts of the country that are close to the limit.”

While southern Spain has always been dry and plagued by cyclical droughts, the average surface temperature in Spain has risen 2.7 degrees compared to about 1.4 degrees globally since 1880, records show.

Rainfall here is predicted to fall 20 percent from this year to 2020, and 40 percent by 2070, according to United Nations projections.

The changes on the Almarcha family farm in Albanilla over the past three decades are a testament to that hotter, drier climate here. Until two decades ago, the farm grew wheat and barley, watered only by rain. As rainfall dropped, Carlo Almarcha, 51, switched to growing almonds.

About 10 years ago, he quit almonds and changed to organic peaches and pears, “since they need less water,” he explained. Recently he took up olives and figs, “which resist drought and are less sensitive to weather.”

Mr. Almarcha participates in a government water trading system, started last year, in which farmers pay three times the normal price — 33 cents instead of 12 per cubic meter — to get extra water. The black market rate is even higher. Still, his outlook is bleak.

“You used to know that this week in spring there will be rain,” he said, his work boots standing on parched soil of an olive grove that was once a wheat field. “Now you never know when or if it will come. Also, there’s no winter any more and plants need cold to rest. So there’s less growth. Sometimes none. Even plants all seem confused.”

While Mr. Almarcha has gradually moved toward less thirsty crops, the government’s previous water transfer plans have moved many farmers in the opposite direction. The farmers have shifted to producing a wide range of water-hungry fruits and vegetables that had never been grown in the south. Murcia is traditionally known for figs and date palms.

You can’t grow strawberries naturally in Huelva — its too hot,” said Raquel Montón, a climate specialist at Greenpeace in Madrid, referring to the nearby strawberry capital of Spain. “In Sarragosa, which is a desert, we grow corn, the most water thirsty crop. It’s insane. The only thing that would be more insane is putting up casinos and golf courses.” Which, of course, Murcia has. think of Vegas, hey but they said the madness thats done there stays there!!! obviously isnt the case

In 2001, a new land use law in Murcia made it far easier for residents to sell land for resort development. Though southern Spain has long had elaborate systems for managing its relatively scarce water, today everyone, it seems, has found ways to get around them.

Grass on golf courses or surrounding villas is sometimes labeled a “crop,” making owners eligible for water that would not be allocated to keep leisure space green. Foreign investors plant a few trees and call their holiday homes “farms” so they are eligible for irrigation water, Mr. Pérez Gracia said.

“Once a property owner’s got a water allotment, he asks for a change of land use,” he explained. “Then he’s got his property and he’s got his water. It’s supposed to be for irrigation, but people use it for what they want. No one knows if it goes to a swimming pool.”
While he said his “heart goes out to the real farmers,” he does not have the personnel to monitor how people use their allotments.

With so much money to be made, officials set aside laws and policies that might encourage sustainable development, Mr. Gil, the journalist, said. At first, he was vilified in the community when he wrote articles critical of the developments. Recently, as people are discovering that the water is running out, the attitude is shifting. nothing works as effectively in shaping attitudes as a bite on the wallet does

But even so, people and politicians tend to regard water as a limitless resource. “Politicians think in four-year blocks, so it’s O.K. as long as it doesn’t run out on their watch,” Ms. Montón of Greenpeace said. “People think about it, but they don’t really think about what happens tomorrow. They don’t worry until they turn on the tap and nothing flows.” Back to evolutionary psychology. We have not evolved highly enough to think of tomorrow. Its just our bad luck that these resource constraints are biting us at an inconvenient time on the evolutionary clock. We are tuned to react to a big cat / snake in our immediate vicinity not to a distant danger. Problem is that of the three responses that we possess 1) fight, 2) flight, 3) freeze when we face danger; lack of early recognition of the danger can make us freeze akin to the deer staring into the headlights and ending up as roadkill

Problem with large scale water transfer schemes is that many underlying assumptions have to be fulfilled in order for them to work in the long run. If any of those assumptions breakdown so does the water transfer scheme. The extent of the breakdown depends on the criticality of the assumption. By then however, 'production, economic, social, political, livelihood etc systems' in the area that water is being transferred to, have been built on the assumption that the water transfer scheme is a 'forever gift'. For example the availability of water in a river at Point A of its flow is assessed today. If tomorrow a dam is built upstream of Point A, all calculations are not worth the paper they were printed on.

It is pertinent to note here that:
Carrying Capacity of Regions (A+B) > Carrying Capacity of Region A + Carrying Capacity of Region B

Resource transfer schemes essentially integrate regions. This integration is dependent on energy. Energy shortfalls alone can impact resource transfer schemes, leave aside availability constraints of the resource being transferred.

More Articles in World »

Bell Curve # 4 - Potash

Scientists warn of lack of vital phosphorus as biofuels raise demand
Leo Lewis, Asia Business Correspondent
From The TimesJune 23, 2008

Battered by soaring fertiliser prices and rioting rice farmers, the global food industry may also have to deal with a potentially catastrophic future shortage of phosphorus, scientists say.

Researchers in Australia, Europe and the United States have given warning that the element, which is essential to all living things, is at the heart of modern farming and has no synthetic alternative, is being mined, used and wasted as never before.

Massive inefficiencies in the “farm-to-fork” processing of food and the soaring appetite for meat and dairy produce across Asia is stoking demand for phosphorus faster and further than anyone had predicted. “Peak phosphorus”, say scientists, could hit the world in just 30 years. Crop-based biofuels, whose production methods and usage suck phosphorus out of the agricultural system in unprecedented volumes, have, researchers in Brazil say, made the problem many times worse.

Already, India is running low on matches as factories run short of phosphorus; waiting for confirmation of this news from Sivakasi the Brazilian Government has spoken of a need to nationalise privately held mines that supply the fertiliser industry and Swedish scientists are busily redesigning toilets to separate and collect urine in an attempt to conserve the precious element. the Swedes were always a step ahead

Dana Cordell, a senior researcher at the Institute for Sustainable Futures at the University of Technology in Sydney, said: “Quite simply, without phosphorus we cannot produce food. At current rates, reserves will be depleted in the next 50 to 100 years.

Related Links
Hunger crisis pact as biofuels clash set aside
Biofuels make useful villain for food crisis

She added: “Phosphorus is as critical for all modern economies as water. If global water supply were as concentrated as global phosphorus supply, there would be much, much deeper concern. It is amazing that more attention is not being paid to ensuring phosphorus security.” we of the human species dont bother about problems in the distant future. Ass long as the fan is running and the shit hasnt hit it, we are OK with that.

In the past 14 months, the price of the raw material - phosphate rock - has surged by more than 700 per cent to more than $367 (£185) per tonne. were you sleeping all this while, why didnt u tell me earlier, could have made some money trading in this. As well as putting pressure on food prices, some researchers believe that the risk of a future phosphorus shortage blows a hole in the concept of biofuels as a “renewable” source of energy. whats one more hole? Ethanol is not truly renewable if the essential fundamental element is, in reality, growing more scarce, researchers say. Says WHO??? Come again... Within a few decades, according to forecasts used by scientists at Linköping University, in Sweden, a “peak phosphorus” crunch could represent a serious threat to agriculture as global reserves of high-quality phosphate rock go into terminal decline. yada yada yada

Because supplies of phosphates suitable for mining are so limited, a new geopolitical map may be drawn around the remaining reserves - a dynamic that would give a sudden boost to the global importance of Morocco, which holds 32 per cent of the world's proven reserves. Beyond Morocco, the world's chief phosphorus reserves for export are concentrated in Western Sahara, South Africa, Jordan, Syria and Russia. these darn russians have plenty of all the goodies!!!

Natural distribution of phosphorus could create a small number of new “resource superpowers” with a pricing control over fertilisers that some suspect could end up rivalling Opec's control over crude oil. didnt you know? OPEC has no damn control over the price of oil. who are u kidding here? The economic battle to secure phosphorus supply may already have begun. China, according to US Geological Survey estimates, has 13 billion tonnes of phosphate rock reserves and has started to guard them more carefully. Beijing has just imposed a 135 per cent tariff on phosphate rock exports to try to secure enough for its own farmers, alarming the fertiliser industry, as well as Western Europe and India, which are both entirely reliant on phosphorus imports. ah aah With America's own phosphorus production down 20 per cent over the past three years, it has begun to ship phosphorus in from Morocco.

American projections suggest that global phosphorus demand could grow at 2.3 per cent annually just to feed the growing world population, an estimate that was made before the growth of biofuels.

Few observers hold out hope of a discovery of phosphorus large enough to meet the continued growth in demand. it is the same story again, demand cannot increase forever, price at some point kills demand growth. use the same oil logic here. The ore itself takes millions of years to form, and the prospect of extracting phosphorus from the sea bed presents massive technological and financial challenges. sounds eerily similar to the oil saga - millions of years to form, and offshore extraction of oil / phosphorus presents massive tech and financial challenges

The answer, say crop scienctists, lies in better husbandry of phosphorus reserves: humans havent demonstrated the ability of good husbandry of any natural resource, name it and we have been myopic and screwed up an effort that may require the creation of an international body to monitor the use and recycling of phosphorus.

Wednesday, August 13, 2008

Bell Curve # 3 - Fertilizers

Lofty Prices for Fertilizer
Put Farmers in a Squeeze

May 27, 2008; Page A1WSJ
(See Corrections & Amplification item below.)
At a time when food prices are soaring world-wide, so is the price of fertilizer, producing huge profits for leading fertilizer makers and stirring anger among farmers in the U.S. and India.

Fertilizer prices are rising faster than those of almost any other raw material used by farmers. its weight in the basket of costs is rising In April, farmers paid 65% more for fertilizer than they did a year earlier, according to the U.S. Department of Agriculture. That compares with price increases of 43% for fuel, 30% for seeds and 3.8% for chemicals such as weedkillers and insecticides over the same period, according to Agriculture Department indexes.

Those skyrocketing costs are making it harder for farmers to expand their harvests in response to the global food crisis that has sparked rioting, rationing and export controls in many countries. Food prices have soared in recent months as the world's growing demand for grain, coupled with stagnant yields, inclement weather which has exceeded production for much of this decade, has reduced stockpiles to extremely low levels.

That's helped to draw attention to farm-production costs, including fertilizer. Farmers say too much market power is concentrated in the hands of a small group of companies in the U.S., Canada and Russia that dominate global production of potash and phosphate. Along with nitrogen, potassium, usually in the form of potash, and phosphorus, in the form of phosphate, are the main ingredients of fertilizer.

The price of fertilizer "defies rational explanation," says Robert Carlson, president of the North Dakota Farmers Union, one of the state's most influential farmers' groups. In a May 8 letter to North Dakota's three-member congressional delegation, he accused fertilizer companies of "price gouging," and asked for an investigation. Clear indicator that when events are beyond 'rational explanation' then one takes action against the perceived perpetrator of the wrong. But, if one sees the problem in the correct light then one can take mitigatory steps. Action against the incorrectly perceived perpetrator can make things worse, whereas, correct identification of the problem, will lead to working towards a solution. Something like being part of the problem vs being part of the solution. (I witnessed the most appropriate use of that phrase by Nik). :) will explain offline :)

On Friday, Sen. Byron L. Dorgan, a North Dakota Democrat, said he is asking the Federal Trade Commission to scrutinize the industry's business practices. Sen. Dorgan heads the Senate Commerce subcommittee that oversees the FTC.

Tight Supplies Blamed
Major fertilizer producers deny any allegations of gouging. They say they are simply raising prices to reflect tight supplies and growing demand after years of relatively low prices.

But there's an unusual piece in the pricing puzzle: In several countries, obscure laws shield makers of potash and phosphate from certain antitrust rules. In the U.S., for example, phosphate makers are among a handful of industries empowered by the 1918 Webb-Pomerene Act to talk with competitors about pricing and other issues. 1918 was a time when fertilizer was a new and valuable commodity. Maybe thats why they were given priveleges; pure speculation on my part. Point is, the 1918 Act or collusion between producers doesnt explain the rapid rise in prices. All cartels / collusions / market manipulations can be thought of only if there is a fundamental short supply.

Some legal experts think that law has outlived its usefulness. "It's an obscure act that's moribund," says Jim Mongoven, an attorney in the FTC's Bureau of Competition.

In India, the head of one of India's largest buyers of fertilizer is appealing to the United Nations for help. "The fertilizer prices are artificially going up due to the manipulation of traders and suppliers," said Udai Shanker Awasthi, president of Indian Farmers Fertilizer Co-operative Ltd., in an interview Friday. Chidambaram too complained about a year ago, I think it was in Davos, that the Middle East countries were manipulating the price af oil and jeopardizing development of the poorer countries; fear of facing reality and slithering into denial hamper the ability of folks to face reality. Result of that denial is a Rs. 200000 Crore Deficit staring into his face with less than a year for the elections. Who is the loser?

China, after initial protests, recently agreed to pay $576 per ton of potash, up $400 from its previous deal in 2007, to Canpotex, a potash export cartel protected by an exemption in Canada's Competition Law.

In March, Russian antimonopoly regulators required the country's largest potash maker, Uralkali, to cut domestic prices of the plant nutrient after wrangling with the company over its pricing behavior in court. Brazil's government is considering nationalizing the country's fertilizer deposits to help reduce farmers' production costs.

Helped by soaring potash prices, Potash Corp. of Saskatchewan Inc., one of the companies that make up Canpotex along with Minnesota-based Mosaic Co. and a smaller Canadian producer called Agrium Inc., posted first-quarter net income of $566 million, or $1.74 a diluted share, nearly triple the year-earlier figure. The company's stock has risen nearly eightfold to around $200 from about $25 three years ago. For those interested in Peter Lynch’s multi-baggers there couldn’t have been an easier eight-bagger Mosaic's latest quarterly earnings came in at $520.8 million, up more than 10-fold from a year earlier.

Phosphate, a mineral found in fossilized marine life, provides essential nutrients for plant-cell development, while potash, a rock mined from the earth, helps plants grow strong. Prices of both are climbing faster than those of nitrogen, which is manufactured in a process that requires lots of natural gas.

In North America, nitrogen fertilizers are applied liberally to corn and wheat fields. Urea, a nitrogen-carrying fertilizer, is selling for around $600 a ton, twice the price a year ago, mostly because of a steep run-up in natural-gas prices. 94% correlation between nat gas and fert prices
The price of phosphate has climbed to about $1,000 a ton, up from $365 last year, according to Green Markets, a trade publication, while the price of a ton of potash is now more than $700, up from $230. people have talked about the visibility of bell curves in potash and phosphates in the not too distant horizon

Industry executives say their companies are trying to ramp up production by making their mines run more efficiently, but there are few new mines on the drawing board.

Michael R. Rahm, vice president of market and economic analysis at Mosaic, said his company's prices are a true reflection of supply and demand. "The industry was not equipped to deal with the surge" in demand, he said. Still, he said he understands how farmers might be concerned as prices continue to rise. Once again it is not so much the surge in demand as the supply constraints; wrong framing of the issue. It isn’t a problem necessarily.

Bill Doyle, chief executive of Potash Corp., told investors in April on a conference call about quarterly earnings that buyers could soon be paying $1,000 a ton for potash. He added during the call that continued price rises will "be a shock" to some consumers.

In an interview Monday, Mr. Doyle called recent complaints about prices an emotional reaction. Fertilizer prices began rising in earnest about a year ago after a nearly decadelong period of stability. "People don't like higher prices," Mr. Doyle said. But "you never hear from anyone complaining when prices are low."

Mr. Doyle said he welcomes any investigation into his business but added that regulators will come to realize that the higher prices are "a pure function of the marketplace."

Outside analysts say the industry has plenty of supply. Even today there are registered members of the Flat Earth Society!!! "There's not really a supply issue at the moment," said Steve Jesse, an agriculture economist at Rabobank Group of the Netherlands, a large lender to agribusiness around the world. The U.N.'s Food and Agriculture Organization said in a forecast in February that the world's supply of nitrogen, phosphate and potash is "comfortably sufficient to cover demand growth" through at least 2012. markets do price in constraints (at times) beyond a 4 year time-frame

Chemical fertilizers are so effective in raising crop yields that I think he WSJ is missing the word “few” here economists figure farmers would be able to feed billions fewer people without them. Fewer than a dozen countries have substantial potash reserves, while more than 160 countries consume the fertilizer.

“This is a basic problem, to feed 6.6 billion people,” said Norman Borlaug, an American scientist who was awarded a Nobel Peace Prize in 1970 for his role in spreading intensive agricultural practices to poor countries. “Without chemical fertilizer, forget it. The game is over.”

Fertilizer manufacturers say they intend to focus on increasing the productivity of their existing mines. Mosaic, in which Cargill Inc. of Minneapolis holds a controlling stake, said it plans to "de-bottleneck" some of its Florida phosphate mines to boost supply.

Phosphate Mining
Potash Corp. said it can raise production to 15.7 million tons by 2015 from its current capacity of 10.2 million tons by improving the operation of its existing mines.
Opening a new potash mine can cost more than $2.5 billion and take about seven years, the company said.

"Developing new production takes a long time, a lot of money, and an expertise that few possess," Potash Corp.'s Mr. Doyle recently told investors.

In the U.S., Potash Corp. and Mosaic are the sole surviving members of a phosphate export cartel called the Phosphate Chemicals Association. Under a 90-year-old law designed to promote American exports, the companies are allowed to legally market and sell their product overseas as a single entity at a price set in consultation with one another. Similarly, Canada has Canpotex, and Russia has Belarus Potash Co., another export cartel.

While the individual cartels can't legally collaborate among themselves on pricing, they regularly -- and legally -- follow each others' price increases. After the Russian cartel recently said potash prices would rise to $1,000 a ton, Potash Corp.'s Mr. Doyle said Canpotex would soon match that price.

Denis Evstratenko, a UBS metals and mining analyst, said the cartels have little incentive to undercut one another in the current supply constrained environment.

To protect American consumers, members of the U.S. cartel are required by law to compete against each other in selling their wares at home. But in today's global markets, the global price sets a benchmark so American farmers pay essentially what the cartels dictate.

"That's the whole key that we're running into this year," said John Hawkins, a spokesman for the Illinois Farm Bureau. "The barriers that we have seen in the past between domestic and international prices have just fallen down. We're now participating in a global fertilizer market." In a world plagued by energy shortages, rising prices of energy will feed into other markets and drive prices up everywhere.

--Vibhuti Agarwal and Scott Kilman contributed to this article.
Write to Lauren Etter at

Peru Guards Its Guano as Demand Soars Again

Wars have been fought over Guano, aka birdshit. Some of these wars shaped political maps with lasting consequences for regional and world geopolitics and history as well as science in an abstruse way.

Published: May 30, 2008

ISLA DE ASIA, Peru — The worldwide boom in commodities has come to this: Even guano, the bird dung that was the focus of an imperialist scramble on the high seas in the 19th century, is in strong demand once again.

Tomas Munita for The New York Times
Workers collect guano on Isla Guañape off Peru, which conserves the resource to prevent depletion. Guano's status as an organic fertilizer has increased demand.

Peru's Guano Trade
The New York Times

Surging prices for synthetic fertilizers and organic foods are shifting attention to guano, an organic fertilizer once found in abundance on this island and more than 20 others off the coast of Peru, where an exceptionally dry climate preserves the droppings of seabirds like the guanay cormorant and the Peruvian booby.

On the same islands where thousands of convicts, army deserters and Chinese indentured servants died collecting guano a century and a half ago, teams of Quechua-speaking laborers from the highlands now scrape the dung off the hard soil and place it on barges destined for the mainland.

“We are recovering some of the last guano remaining in Peru,” said Victor Ropón, 66, a supervisor from Ancash Province whose leathery skin reflects his years working on the guano islands since he was 17.

“There might be 10 years of supplies left, or perhaps 20, and then it will be completely exhausted,” said Mr. Ropón, referring to fears that the seabird population could be poised to fall sharply in the years ahead. It is a minor miracle that any guano at all is available here today, reflecting a century-old effort hailed by biologists as a rare example of sustainable exploitation of a resource once so coveted that the United States authorized its citizens to take possession of islands or keys where guano was found.

As a debate rages over whether global oil output has peaked, a parable may exist in the story of guano, with its seafaring treachery, the development of synthetic alternatives in Europe and a desperate effort here to prevent the deposits from being depleted.

“Before there was oil, there was guano, so of course we fought wars over it,” said Pablo Arriola, director of Proabonos, the state company that controls guano production, referring to conflicts like the Chincha Islands War, in which Peru prevented Spain from reasserting control over the guano islands. “Guano is a highly desirous enterprise.”

Guano is also an undeniably strenuous enterprise from the perspective of the laborers who migrate to the islands to collect the dung each year. In scenes reminiscent of open-pit gold mines on the mainland, the laborers rise before dawn to scrape the hardened guano with shovels and small pickaxes.

Many go barefoot, their feet and lower legs coated with guano by the time their shifts end in the early afternoon. Some wear handkerchiefs over their mouths and nostrils to avoid breathing in guano dust, which, fortunately, is almost odorless aside from a faint smell of ammonia.

“This is not an easy life, but it’s the one I chose,” said Bruno Sulca, 62, who oversees the loading of guano bags on barges at Isla Guañape, off the coast of northern Peru. Mr. Sulca and other workers earn about $600 a month, more than three times what manual laborers earn in the impoverished highlands.

Peru’s guano trade quixotically soldiers on after almost being wiped out by overexploitation. The dung will probably never be the focus of a boom as intense as the one in the 19th century, when deposits were 150 feet high, with export proceeds accounting for most of the national budget.

The guano on most islands, including Isla de Asia, south of the capital, Lima, now reaches less than a foot or so. But the guano that remains here is coveted when viewed in the context of the frenzy in Peru and abroad around synthetic fertilizers like urea, which has doubled in price to more than $600 a ton in the last year.

Guano in Peru sells for about $250 a ton while fetching $500 a ton when exported to France, Israel and the United States. While guano is less efficient than urea at releasing nitrates into the soil, its status as an organic fertilizer has increased demand, transforming it into a niche fertilizer sought around the world.

“Guano has the advantage of being chemical-free,” said Enrique Balmaceda, who cultivates organic mangoes in Piura, a province in northern Peru. “The problem is, there isn’t enough of it to meet demand with new crops like organic bananas competing for what’s available.”

That explains why Peru is so vigilant about preserving the remaining guano, an effort dating back a century to the creation of the Guano Administration Company, when Peru nationalized the islands, some of which were British-controlled, to stave off the industry’s extinction.

Since then, Peru’s government has restricted guano collection to about two islands a year, enabling the droppings to accumulate. Workers smooth slopes and build walls that retain the guano. Scientists even introduced lizards to hunt down ticks that infested the seabirds. We don’t know if the law of unintended consequences will suddenly rear its head there

The guano administrators station armed guards at each of the islands to ward off threats to birds, which produce 12,000 to 15,000 tons of guano a year. Armed guards guarding bird-shit??

“The fishermen instigate the most mischief here,” said Rómulo Ybarra, 40, one of two guards stationed at Isla de Asia, which otherwise has no regular inhabitants. (The island has a tiny cabin called Casa del Chino, a reference to the Asian ancestry of former President Alberto K. Fujimori, who used to come here to unwind in solitude.)

“When the fishermen approach the island, their engines scare away the guanay,” Mr. Ybarra said, referring to the prized guanay cormorant. “And further out at sea, the fishing boats pursue the anchoveta, something we cannot control.”

The anchoveta, a six-inch fish in the anchovy family, is the main food of the seabirds who leave their droppings on these rainless islands. The biggest fear of Peru’s guano collectors is that commercial fishing fleets will deplete their stocks, which are increasingly wanted as fish meal for poultry and other animals as demand for meat products rises in Asia.

While the bird population has climbed to 4 million from 3.2 million in the past two years, that figure still pales in comparison with the 60 million birds at the height of the first guano rush. Faced with a dwindling anchoveta population, officials at Proabonos are considering halting exports of guano to ensure its supply to the domestic market.

Uriel de la Torre, a biologist who specializes in conserving the guanay cormorant and other seabirds, said that unless some measure emerged to prevent overfishing, both the anchovetas and the seabirds here could die off by 2030. complexity at play – human population increase led poultry demand leads to poultry feed demand leads to fish meal demand leads to overfishing leads to diminished prey for seabirds leads to them shitting less leads to less guano leads to less fertilizer for human domesticated weeds like wheat and rice leads to less grains & food for humans leads to human population ____________?

“It would be an inglorious conclusion to something that has survived wars and man’s other follies,” Mr. de la Torre said. “But that is the scenario we are facing: the end of guano.”

Andrea Zarate contributed reporting from Lima, Peru.