Archive for September, 2007

New York Times Article Confirms Our Themes

Saturday, September 29th, 2007

and it adds one – the importance of water and its limited supply…

Here is the link to the article and the cut/paste of it is below that.

http://www.nytimes.com/2007/09/28/world/asia/28water.html?em&ex=1191211200&en=f4baf3bd0b6bc2d9&ei=5087%0A

Beneath Booming Cities, China’s Future Is Drying Up

Du Bin for The New York Times

A construction team works an underground tunnel that will allow water to flow beneath a local highway.

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Published: September 28, 2007

SHIJIAZHUANG, China — Hundreds of feet below ground, the primary water source for this provincial capital of more than two million people is steadily running dry. The underground water table is sinking about four feet a year. Municipal wells have already drained two-thirds of the local groundwater.

Choking on Growth

This is the second in a series of articles and multimedia examining the human toll, global impact and political challenge of China’s epic pollution crisis.

Above ground, this city in the North China Plain is having a party. Economic growth topped 11 percent last year. Population is rising. A new upscale housing development is advertising waterfront property on lakes filled with pumped groundwater. Another half-built complex, the Arc de Royal, is rising above one of the lowest points in the city’s water table.

“People who are buying apartments aren’t thinking about whether there will be water in the future,” said Zhang Zhongmin, who has tried for 20 years to raise public awareness about the city’s dire water situation.

For three decades, water has been indispensable in sustaining the rollicking economic expansion that has made China a world power. Now, China’s galloping, often wasteful style of economic growth is pushing the country toward a water crisis. Water pollution is rampant nationwide, while water scarcity has worsened severely in north China — even as demand keeps rising everywhere.

China is scouring the world for oil, natural gas and minerals to keep its economic machine humming. But trade deals cannot solve water problems. Water usage in China has quintupled since 1949, and leaders will increasingly face tough political choices as cities, industry and farming compete for a finite and unbalanced water supply.

One example is grain. The Communist Party, leery of depending on imports to feed the country, has long insisted on grain self-sufficiency. But growing so much grain consumes huge amounts of underground water in the North China Plain, which produces half the country’s wheat. Some scientists say farming in the rapidly urbanizing region should be restricted to protect endangered aquifers. Yet doing so could threaten the livelihoods of millions of farmers and cause a spike in international grain prices.

For the Communist Party, the immediate challenge is the prosaic task of forcing the world’s most dynamic economy to conserve and protect clean water. Water pollution is so widespread that regulators say a major incident occurs every other day. Municipal and industrial dumping has left sections of many rivers “unfit for human contact.”

Cities like Beijing and Tianjin have shown progress on water conservation, but China’s economy continues to emphasize growth. Industry in China uses 3 to 10 times more water, depending on the product, than industries in developed nations.

“We have to now focus on conservation,” said Ma Jun, a prominent environmentalist. “We don’t have much extra water resources. We have the same resources and much bigger pressures from growth.”

In the past, the Communist Party has reflexively turned to engineering projects to address water problems, and now it is reaching back to one of Mao’s unrealized plans: the $62 billion South-to-North Water Transfer Project to funnel more than 12 trillion gallons northward every year along three routes from the Yangtze River basin, where water is more abundant. The project, if fully built, would be completed in 2050. The eastern and central lines are already under construction; the western line, the most disputed because of environmental concerns, remains in the planning stages.

The North China Plain undoubtedly needs any water it can get. An economic powerhouse with more than 200 million people, it has limited rainfall and depends on groundwater for 60 percent of its supply. Other countries, like Yemen, India, Mexico and the United States, have aquifers that are being drained to dangerously low levels. But scientists say those below the North China Plain may be drained within 30 years.

“There’s no uncertainty,” said Richard Evans, a hydrologist who has worked in China for two decades and has served as a consultant to the World Bank and China’s Ministry of Water Resources. “The rate of decline is very clear, very well documented. They will run out of groundwater if the current rate continues.”

Outside Shijiazhuang, construction crews are working on the transfer project’s central line, which will provide the city with infusions of water on the way to the final destination, Beijing. For many of the engineers and workers, the job carries a patriotic gloss.

Yet while many scientists agree that the project will provide an important influx of water, they also say it will not be a cure-all. No one knows how m
uch clean water the project will deliver; pollution problems are already arising on the eastern line. Cities and industry will be the beneficiaries of the new water, but the impact on farming is limited. Water deficits are expected to remain.

“Many people are asking the question: What can they do?” said Zheng Chunmiao, a leading international groundwater expert. “They just cannot continue with current practices. They have to find a way to bring the problem under control.”

A Drying Region

On a drizzly, polluted morning last April, Wang Baosheng steered his Chinese-made sport utility vehicle out of a shopping center on the west side of Beijing for a three-hour southbound commute that became a tour of the water crisis on the North China Plain.

Mr. Wang travels several times a month to Shijiazhuang, where he is chief engineer overseeing construction of three miles of the central line of the water transfer project. A light rain splattered the windshield, and he recited a Chinese proverb about the preciousness of spring showers for farmers. He also noticed one dead river after another as his S.U.V. glided over dusty, barren riverbeds: the Yongding, the Yishui, the Xia and, finally, the Hutuo. “You see all these streams with bridges, but there is no water,” he said.

A century or so ago, the North China Plain was a healthy ecosystem, scientists say. Farmers digging wells could strike water within eight feet. Streams and creeks meandered through the region. Swamps, natural springs and wetlands were common.

Today, the region, comparable in size to New Mexico, is parched. Roughly five-sixths of the wetlands have dried up, according to one study. Scientists say that most natural streams or creeks have disappeared. Several rivers that once were navigable are now mostly dust and brush. The largest natural freshwater lake in northern China, Lake Baiyangdian, is steadily contracting and besieged with pollution.

What happened? The list includes misguided policies, unintended consequences, a population explosion, climate change and, most of all, relentless economic growth. In 1963, a flood paralyzed the region, prompting Mao to construct a flood-control system of dams, reservoirs and concrete spillways. Flood control improved but the ecological balance was altered as the dams began choking off rivers that once flowed eastward into the North China Plain.

The new reservoirs gradually became major water suppliers for growing cities like Shijiazhuang. Farmers, the region’s biggest water users, began depending almost exclusively on wells. Rainfall steadily declined in what some scientists now believe is a consequence of climate change.

Before, farmers had compensated for the region’s limited annual rainfall by planting only three crops every two years. But underground water seemed limitless and government policies pushed for higher production, so farmers began planting a second annual crop, usually winter wheat, which requires a lot of water.

By the 1970s, studies show, the water table was already falling. Then Mao’s death and the introduction of market-driven economic reforms spurred a farming renaissance. Production soared, and rural incomes rose. The water table kept falling, further drying out wetlands and rivers.

Around 1900, Shijiazhuang was a collection of farming villages. By 1950, the population had reached 335,000. This year, the city has roughly 2.3 million people with a metropolitan area population of 9 million.

More people meant more demand for water, and the city now heavily pumps groundwater. The water table is falling more than a meter a year. Today, some city wells must descend more than 600 feet to reach clean water. In the deepest drilling areas, steep downward funnels have formed in the water table that are known as “cones of depression.”

Groundwater quality also has worsened. Wastewater, often untreated, is now routinely dumped into rivers and open channels. Mr. Zheng, the water specialist, said studies showed that roughly three-quarters of the region’s entire aquifer system was now suffering some level of contamination.

“There will be no sustainable development in the future if there is no groundwater supply,” said Liu Changming, a leading Chinese hydrology expert and a senior scholar at the Chinese Academy of Sciences.

A National Project

Three decades ago, when Deng Xiaoping shifted China from Maoist ideology and fixated the country on economic growth, a generation of technocrats gradually took power and began rebuilding a country that ideology had almost destroyed. Today, the top leaders of the Communist Party — including Hu Jintao, China’s president and party chief — were trained as engineers.

Though not members of the political elite, Wang Baosheng, the engineer on the water transfer project, and his colleague Yang Guangjie are of the same background. This spring, at the site outside Shijiazhuang, bulldozers clawed at a V-shaped cut in the dirt while teams of workers in blue jumpsuits and orange hard hats smoothed wet cement over a channel that will be almost as wide as a football field.

“I’ve been to the Hoover Dam, and I really admire the people who built that,” said Mr. Yang, the project manager. “At the time, they were making a huge contribution to the development of their country.”

He compared China’s transfer project to the water diversion system devised for southern California in the last century. “Maybe we are like America in the 1920s and 1930s,” he said. “We’re building the country.”

China’s disadvantage, compared with the United States, is that it has a smaller water supply yet almost five times as many people. China has about 7 percent of the world’s water resources and roughly 20 percent of its population. It also has a severe regional water imbalance, with about four-fifths of the water supply in the south.

Mao’s vision of borrowing water from the Yangtze for the north had an almost profound simplicity, but engineers and scientists spent decades debating the project before the government approved it, partly out of desperation, in 2002. Today, demand is far greater in the north, and water quality has badly deteriorated in the south. Roughly 41 percent of China’s wastewater is now dumped in the Yangtze, raising concerns that siphoning away clean water northward will exacerbate pollution problems in the south.

The upper reaches of the central line are expected to be finished in time to provide water to Beijing for the Olympic Games next year. Mr. Evans, the World Bank consultant, called the complete project “essential” but added that success would depend on avoiding waste and efficiently distributing the water.

Mr. Liu, the scholar and hydrologist, said that farming would get none of the new water and that cities and industry must quickly improve wastewater treatment. Otherwise, he said, cities will use the new water to dump more polluted wastewater. Shijiazhuang now dumps untreated wastewater into a canal that local farmers use to irrigate fields.

For years, Chinese officials thought irrigation efficiency was the answer for reversing groundwater declines. Eloise Kendy, a hydrology expert with The Nature Conservancy who has studied the North China
Plain, said that farmers had made improvements but that the water table had kept sinking. Ms. Kendy said the spilled water previously considered “wasted” had actually soaked into the soil and recharged the aquifer. Efficiency erased that recharge. Farmers also used efficiency gains to irrigate more land.

Ms. Kendy said scientists had discovered that the water table was dropping because of water lost by evaporation and transpiration from the soil, plants and leaves. This lost water is a major reason the water table keeps dropping, scientists say.

Farmers have no choice. They drill deeper.

Difficult Choices Ahead

For many people living in the North China Plain, the notion of a water crisis seems distant. No one is crawling across a parched desert in search of an oasis. But every year, the water table keeps dropping. Nationally, groundwater usage has almost doubled since 1970 and now accounts for one-fifth of the country’s total water usage, according to the China Geological Survey Bureau.

The Communist Party is fully aware of the problems. A new water pollution law is under consideration that would sharply increase fines against polluters. Different coastal cities are building desalination plants. Multinational waste treatment companies are being recruited to help tackle the enormous wastewater problem.

Many scientists believe that huge gains can still be reaped by better efficiency and conservation. In north China, pilot projects are under way to try to reduce water loss from winter wheat crops. Some cities have raised the price of water to promote conservation, but it remains subsidized in most places. Already, some cities along the route of the transfer project are recoiling because of the planned higher prices. Some say they may just continue pumping.

Tough political choices, though, seem unavoidable. Studies by different scientists have concluded that the rising water demands in the North China Plain make it unfeasible for farmers to continue planting a winter crop. The international ramifications would be significant if China became an ever bigger customer on world grain markets. Some analysts have long warned that grain prices could steadily rise, contributing to inflation and making it harder for other developing countries to buy food.

The social implications would also be significant inside China. Near Shijiazhuang, Wang Jingyan’s farming village depends on wells that are more than 600 feet deep. Not planting winter wheat would amount to economic suicide.

“We would lose 60 percent or 70 percent of our income if we didn’t plant winter wheat,” Mr. Wang said. “Everyone here plants winter wheat.”

Another water proposal is also radical: huge, rapid urbanization. Scientists say converting farmland into urban areas would save enough water to stop the drop in the water table, if not reverse it, because widespread farming still uses more water than urban areas. Of course, large-scale urbanization, already under way, could worsen air quality; Shijiazhuang’s air already ranks among the worst in China because of heavy industrial pollution.

For now, Shijiazhuang’s priority, like that of other major Chinese cities, is to grow as quickly as possible. The city’s gross domestic product has risen by an average of 10 percent every year since 1980, even as the city’s per capita rate of available water is now only one thirty-third of the world average.

“We have a water shortage, but we have to develop,” said Wang Yongli, a senior engineer with the city’s water conservation bureau. “And development is going to be put first.”

Mr. Wang has spent four decades charting the steady extinction of the North China Plain’s aquifer. Water in Shijiazhuang, with more than 800 illegal wells, is as scarce as it is in Israel, he said. “In Israel, people regard water as more important than life itself,” he said. “In Shijiazhuang, it’s not that way. People are focused on the economy.”

Uncertainty in Geopolitical Events Keeps Oil High

Tuesday, September 25th, 2007

The story below is reported on the Debka.com news site. As we near the fulfillment of Iran’s nuclear ambitions despite threats from the UN Security Council of economic sanctions, we will likely continue to see stories/news like this. There will always be speculation that either the US or Israel will be planning an attack on Iran’s nuclear facilities; those stories and others like them will keep a floor under oil prices for the foreseeable future.

DEBKAfile Exclusive: Hizballah hijacks case of German-Israeli citizen Daniel Sharon for propaganda

September 25, 2007, 11:28 AM (GMT+02:00)

Daniel Sharon, grist for Hizballah's mill

Daniel Sharon, grist for Hizballah’s mill

The pro-Iranian Lebanese Shiite group has seized on Sharon’s accidental detention in the course of a suspected murder probe in Beirut, to depict him as belonging to a 250-strong Israeli spy ring equipped by the German BND external intelligence with German passports. The 32-year old Sharon is said to have been on a mission to prepare the US-Israeli attack on Iran.

No source in Israel or Germany confirms this tale.

Monday, Sept 24, the Phalange leader Samir Geagea also claimed Sharon’s arrest had “foiled a big terrorist attack in Lebanon. What has Lebanon come to when an Israeli agent can operate in the heart of Beirut?” he asked.

Following these allegations, the Lebanese government cancelled the visits to the detainee scheduled by German embassy and Red Cross officials for Monday.

According to DEBKAfile’s intelligence sources, Hizballah is connecting the alleged Israeli air attack on Syria of Sept 6 to claims of US-Israeli preparations to attack Iran and trying to present the Israeli-born German Daniel Sharon as proof of those preparations.

As further grist for its mill, our sources report Hizballah is planning to hold up a purported French intelligence “document” which fell into its hands to expose the trilateral collaboration between the US, Germany and Israel. This “document” is described as the source of Hizballah’s claim that Mossad agents, armed with genuine German passports, had in the past year been sent on missions to Iran, Iraq, Syria and Lebanon. They are described as transiting Amman, flying by Royal Jordanian Airways to Irbil and Suleimaniya in Kurdish Iraq and thence to Iran and other Muslim states.

All these missions, Hizballah propagandists report, were linked to the preparations to strike Iranian nuclear installations and the Mossad’s other plans for halting Tehran’s nuclear program. They add for good measure that Israeli intelligence veterans are pushing hard for the Mossad to carry out pinpoint liquidations of Iranian and foreign nuclear scientists along the same format as Israel’s liquidations of German scientists employed in Egypt’s missile program in the late 1950s.

Gold Breaks Out

Sunday, September 9th, 2007

If you look at the weekly chart above (courtesy of Helene Meisler at RealMoney), you can see that gold has broken out above its trend line and is likely headed to the $725 area. Its a combination of inflation expectations (see the Ag discussion in previous posts) and the financial system meltdown. If you don’t own gold or gold miners, now is a good time to buy them.

Mark

Food Price Inflaiton Gathers Steam

Wednesday, September 5th, 2007

The article below is from today’s New York Times. It furthers my conviction in the investment theme we’ve discussed for several months now: Food Price Inflation will ultimately lead to higher interest rates in the US. The Ag industry is at the cusp of a multi-year bull market move. Take advantage of it and overweight Ag in your portfolio.

Mark


A Thirst for Milk Bred by New Wealth Sends Prices Soaring

Published: September 4, 2007

HAMILTON, New Zealand — After years of saving, Geoff Irwin finally scraped up enough money to buy his parents’ dairy farm near here in 2003. Now his parents have retired to a house nearby and Mr. Irwin runs the farm with its 300 cows.

It is hard work, 12 hours a day, but already it looks as though it has paid off: just four years later, the farm is worth more than twice what Mr. Irwin paid for it. Prices for dairy farms in New Zealand are soaring along with dairy incomes, thanks to a global milk boom.

“It feels really good,” said Mr. Irwin, 45. “It feels like we’re going to be earning and be rewarded the way we should.”

Driven by a combination of climate change, trade policies and competition for cattle feed from biofuel producers, global milk prices have doubled over the last two years. In parts of the United States, milk is more expensive than gasoline. There are reports of cows being stolen from Wisconsin dairy farms.

“There’s a world shortage of milk,” said Philip Goode, manager of international policy at Dairy Australia in Canberra.

But the biggest force driving up milk prices is the same one that has driven up prices for conventional commodities like iron ore and copper: a roaring global economy. Rising incomes in emerging economies from China and India to Latin America and the Middle East are lifting millions of people out of poverty and into the middle class.

It turns out that, along with zippy cars and flat-panel TVs, milk is the mark of new money, a significant source of protein that factors into much of any affluent person’s diet. Milk goes into infant formulas, chocolate, ice cream and cheese. Most baked goods contain butter, and coffee chains like Starbucks sell more milk than coffee.

Just meeting that demand, said Alex Duncan, an economist at Fonterra, the dominant dairy cooperative in New Zealand and one of the world’s largest dairy-exporting companies, will require the addition each year of the equivalent of New Zealand’s entire annual milk output.

That is a lot of milk. New Zealand is one of the world’s largest milk producers, according to IFCN Dairy Research Center in Germany, but it is the largest exporter of dairy products. Some dairy economists doubt that the world’s cows are up to the task and say there is a possibility that the shortage of milk now being seen in parts of the world will spread.

Others say there are plenty of places where more milk can be produced if the price is right. One thing they agree on is that milk prices are likely to stay high and rise even higher.

“No one forecast this rapid shortage of milk,” said Torsten Hemme, head of the IFCN center.

This is not good if you are in the market for milk. Pizza parlors and ice cream vendors are raising their prices. Starbucks has raised the price of its drinks. Milk is also weighing on profits at Cadbury Schweppes and at Kraft Foods’ cheese unit.

What is unusual, and somewhat confusing, about the milk boom compared with other booming commodities is that milk is not like oil: You cannot stick it in barrels and stockpile it. It goes sour. Even in powder form, the most commoditized version, milk has a shelf life. As a result, only about 7 percent of all the milk produced globally is traded across borders. The rest is consumed in domestic markets, which are protected by geography and just as often by tariffs or subsidies.

Big buyers like chocolate makers and grocery stores buy their milk under long-term contracts and so can smooth out sudden spikes or dips in prices. Thus, the full effect of the global shortage varies from country to country, and not all consumers are yet suffering the full impact.

But because of the local nature of the market, there is little spare capacity. In the past, the world could always count on the United States and Europe to fill shortages by exporting some of their subsidized stockpiles of cheese, butter and milk powder. But the United States has drawn down its butter mountain and other stockpiles; the same is true of the European Union, which started cutting dairy subsidies in 1993 and will finish this year. Rising dairy demand in the United States and among the European Union’s new members, moreover, is draining supplies. As a result, Mr. Hemme said, “This storage capacity is empty now.”

At the same time, rising demand for biofuels is pushing up the price of corn and other grains, which is what farmers in the United States, Europe, Canada and Japan feed their cows instead of grass. Rising feed costs help to push milk prices even higher.

Production is growing in emerging markets like China, but demand there is growing even faster. The average person in China now consumes more than six gallons of milk a year, up from more than two gallons in 2000, according to IFCN. So while China is now one of the world’s top milk producers, it is also the world’s largest milk importer.

Experts say the growing demand for milk will have to be met in countries like China and Argentina as higher prices lead to greater investment in lifting milk yields.

Some see the United States as another main source of milk supplies. International prices have now risen above the subsidized price of milk there, making it profitable for American dairies to export their milk. “There’s a real opportunity for the U.S. to export without government support or subsidies,” Mr. Goode said.

Mr. Hemme at IFCN estimates that both the American Midwest and Europe could multiply their milk production. But it would take one or two years and require using more costly corn and grain. So even if milk supplies keep up with demand, the price will stay high.

“Even when prices start easing back, we don’t expect them to go back to where they were,” said Hayley Moynihan, a dairy analyst at Rabobank in New Zealand. “The cost of production and ongoing demand is going to see prices eventually settle at higher levels than they did in the past.”