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Recent droughts in the midwestern United States threaten to cause globalcatastrophe driven by a speculator amplified food price bubble. Here we showthe effect of speculators on food prices using a validated quantitative modelthat accurately describes historical food prices. During the last six years,high and fluctuating food prices have lead to widespread hunger and socialunrest. While a relative dip in food prices occurred during the spring of 2012,a massive drought in the American Midwest in June and July threatens to triggeranother crisis. In a previous paper, we constructed a model that quantitativelyagreed with food prices and demonstrated that, while the behavior could not beexplained by supply and demand economics, it could be parsimoniously andaccurately described by a model which included both the conversion of corn intoethanol and speculator trend following. An update to the original paper inFebruary 2012 demonstrated that the model previously published was predictiveof the ongoing price dynamics, and anticipated a new food crisis by the end of2012 if adequate policy actions were not implemented. Here we provide a secondupdate, evaluating the effects of the current drought on global food prices. Wefind that the drought may trigger the expected third food price bubble to occursooner, before new limits to speculation are scheduled to take effect. Reducingthe amount of corn that is being converted to ethanol may address the immediatecrisis. Over the longer term, market stabilization requires limiting financialspeculation.

UPDATE July 2012 | The Food Crises: The US Drought