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Impact of Drought

Little doubt exists about the many negative consequences of drought in the agricultural industry. However, the additional impacts of drought in other large industries and experienced throughout the world are less apparent. This is due to an economic chain of events that ripple through industries, and even governments in the form of less income or higher associated costs.

Production

Drought has a large impact on the quality and viability of grain crops. According to the U.S. Department of Agriculture, global crop yields around the world fell short of preliminary expectations for 2012. Moreover, the United States was expected to produce 35.8 percent of the World’s corn in 2012, but by August that percentage had fallen to near 32.2 percent. That decline came despite additional shortfalls in corn production across the globe.

Inflation

Global crop yields affected by drought had also caused food prices to rise 10 percent in July 2012 per The World Bank. Another substantial impact of drought is the price of non-perishable consumer goods. For example, the U.S. Energy Information Administration reported over 75 percent of total U.S. corn crops had become poor to very poor in terms of quality by mid-August. Since corn is used to manufacture ethanol used in gasoline, the affects of drought also include pressures on the price of energy.

Insurance

Since crops have been failing to yield in line with estimates, the agricultural industry has made use of available insurance to alleviate the financial shortfalls arising from drought. To illustrate, National Crop Insurance Services Incorporated reported the financial impact of drought cost federal crop insurers over $822 million with several months to go before year end per the Business Record. Additionally, according to the Environmental Working Group, the federal government paid insurers $12 billion between 1995-2011, and also lost tens of billions more due to indemnification subsidies to farmers.

Commerce

Regional influences of drought also include agricultural commerce and industrial economics. Furthermore, if a country’s economy is largely dependent on farming for the majority of its gross domestic product, then the impact is more damaging to a nation than if it is a relatively small industry by proportion. For example, according to The World Bank, in the United States agriculture comprises approximately one percent or less of GDP, but in Sierra Leone it is closer to 44 percent of GDP.

Regulation

The need for effective administration of drought is evidence of its financial implications and importance to the well-being of a nation. When damage caused by drought becomes large enough, then governments also become involved. Furthermore, according to the Journalist Resource published by Harvard University’s Kennedy School of Government, the U.S. Federal Government has passed two laws to expedite and better handle drought management. In addition, it is possible the government will also reassess the effectiveness of applicable government agency programs in the future.

The impacts of drought are not entirely unavoidable, and numerous solutions to the problem have been implemented. Technology and adjustments to agricultural infrastructure have traditionally been a method of choice for combating the impact of drought. For instance, the Inter-Developmental Bank reports its Agricultural Intensification Program has boosted Haitian rice crop production from 1.8 to 4.5 metric tons per hectare via financing of higher quality seeds, better pest control and improved fertilization.

Byline
This article was written by Karl Stockton for the team at http://www.insuranceswami.com.

Picture Credit- Sweet corn – Golden Berries Of Health