Drought spurs ethanol push-back; World Bank watchful

Mon Jul 30, 2012 5:44pm EDT

1 of 10. A drought-damaged corn field is pictured near Emery, Iowa July 27, 2012.

Credit: Reuters/Karl Plume

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(Reuters) - The debate over using crops for fuel burst back onto the political stage on Monday as U.S. ranchers and poultry producers sought "a little help" from the government by waiving its ethanol mandate in the face of a dire drought.

As Chicago corn and soybean prices rallied back toward last week's record highs, the withering dry spell that has revived fears of a 2008-like spike in food prices showed no sign of relenting. According to midday weather forecasts, conditions will be even drier than expected, threatening to stunt soy plants as they enter their most crucial phase of growth.

On Monday, Oklahoma Governor Mary Fallin declared a state of emergency for all 77 Oklahoma counties due to extreme or exceptional drought conditions. The executive order allows state agencies to make emergency purchases related to disaster relief and preparedness, and is a first step toward asking for federal assistance.

A series of storms last week brought the first significant rainfall since mid-June, when the worst drought since 1956 first began to make itself felt. But the rains proved too fleeting to ease the deepening effects: Mississippi water levels have dropped so low that barges must lighten their loads; fish are dying by the thousands as lakes and rivers dry up.

Kansas Governor Sam Brownback and U.S. Senator Pat Roberts said on Monday that as of August 7 the U.S. Army Corps of Engineers would stop releasing water from three Kansas River reservoirs, allowing water to remain in the state. The Corps had started releasing water to help river navigation.

"I am pleased the Corps recognizes our critical need to preserve this water here at home where our farmers, ranchers and municipalities must use this critical resource to battle the drought," Roberts said.

The country's cattle, turkey and chicken producers have been among those hardest and most directly hit by a more than 50 percent surge in corn futures since mid-June, which has inflated costs and squeezed profits.

Their lobby groups banded together on Monday to seek a first-ever waiver from the U.S. Environmental Protection Agency for a one-year reduction or suspension in the U.S. ethanol mandate, which in essence requires that more than a third of the U.S. corn harvest be used for motor fuel.

"It's really putting a burden on our operations and many others across the nation," said J.D. Alexander, president of the National Cattlemen's Beef Association, whose Nebraska feedlot is about half full of cattle. "It's time to wean the ethanol industry, and let it stand on its own."

GLOBAL REPERCUSSIONS?

Concern over the ramifications of the drought is growing as it becomes apparent that the corn harvest may be more than a quarter smaller than initially estimated this spring, when farmers raced to plant a near-record number of acres. Meat prices are also expected to rise as producers shrink herds and flocks to reduce feed costs.

"We cannot allow short-term food price spikes to have damaging long-term consequences for the world's most poor and vulnerable," World Bank Group President Jim Yong Kim said in a statement. "The World Bank and our partners are monitoring this situation closely so we can help governments put policies in place to help people better cope."

In the Midwest, communities are coping with the immediate effects of triple-digit temperatures that have broken state and local records.

At the Wisconsin State Fair, which starts on Thursday and is expected to draw more than 900,000 people and over 10,000 farm animals during its 11-day run, huge fans and water misters will be used to cool attendees and livestock.

"The ventilation in all of our livestock barns has been upgraded and continues to be upgraded," said Kathleen O'Leary, a fair spokeswoman. "We are doubling the number of misters for the animals and for fairgoers."

Hot weather accompanying the lack of rain has turned corn stalks brown and many have grain ears half of normal size, if they have ears at all. Only 24 percent of the crop is in good or excellent condition, according to U.S. Department of Agriculture ratings released on Monday, down two percentage points from a week ago and the lowest since 1988.

"It just doesn't look good for crops at all. Now it's a matter of just how bad it's going to get," said Andy Karst, meteorologist for World Weather Inc. He said the 100-degree weather of recent weeks may be over, but is still expecting highs in the upper 80s to low 90s Fahrenheit.

Corn, which is used for food and feed as well as ethanol, has been particularly hard hit because the heat and dryness occurred just as the crop was pollinating.

The EPA has not granted a waiver to the Renewable Fuels Standard (RFS) since it was enacted in 2007. The RFS has enjoyed years of staunch bipartisan support, boosting income for U.S. farmers and helping reduce dependence on foreign oil.

Although the policy is now coming under renewed attack, it is unclear if the case can be made for waiving the mandate, which requires proving that it is causing severe economic or environmental damage.

"I am not sure if this (petition) changes the landscape all that much," said Mark McMinimy, biofuels analyst at Guggenheim Partners Washington Research Group.

(Additional reporting by Michael Hirtzer, Sam Nelson, and Doug Palmer; Editing by Toni Reinhold)

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