* Drought-hit U.S. crops worse than feared
* Japan's warning on El Nino raises food price concern
* Corn prices reach record as importers scramble for US
* USDA data draws calls for cuts in ethanol use
By Charles Abbott
WASHINGTON, Aug 10 The worst U.S. drought in
more than 50 years has caused more damage than expected to corn
and soybean crops, the U.S. government said on Friday,
heightening calls for a suspension of ethanol quotas to head off
another global food crisis.
While benchmark corn and wheat futures closed lower in
Chicago, experts say food prices appear set to keep rising after
a 6 percent jump last month, escalating a food-versus-fuel
debate centered on a U.S. law that dictates that about 40
percent of the corn crop must be converted into ethanol.
Hours after the U.S. Department of Agriculture said the corn
yield would likely fall to its lowest since 1995, worse than
forecast, the governors of two poultry-producing states asked
the Obama administration to waive the ethanol requirement, the
first formal request for relief.
Pressure is also building internationally, as poorer
countries bear a larger burden of rising food costs. The top
United Nations food official, José Graziano da Silva, wrote in
the Financial Times that an "immediate, temporary suspension" of
the mandate could help head off another world food crisis.
Bill Lapp, president of Advanced Economic Solutions, said
U.S. food inflation would reach 4.5 percent next year, adding
about $30 billion to domestic costs.
"Globally it's a much more direct impact, a more immediate
impact," he said. "A greater deal of the food consumption is
done without further processing so you can have a much more
dramatic impact in global prices. That's what's compelling the
United Nations to ask for some relief on the biofuel mandates."
Under the five-year-old Renewable Fuel Standard, U.S. fuel
companies are required to ensure that 9 percent of their
gasoline pools are made up of ethanol this year, which means
converting some 40 percent of the corn crop into the biofuel.
A White House spokesman said President Barack Obama was
"looking at" the possibility of a waiver together with the
Environmental Protection Agency and the USDA.
But with staunch farm belt support and an election looming,
many political analysts say the odds of a waiver are low.
Meanwhile, the outlook for crops abroad is darkening. Japan
said an El Nino weather pattern was under way and would last
until winter, foreshadowing disruptive conditions that could
harm crops from Australia to India.
DROUGHT WORSE THAN FEARED
Corn prices have surged more than 60 percent in the past two
months as the United States reels from the extreme weather,
while global soy supplies are also tight after drought in South
In the most authoritative statement yet on how the drought
is affecting crops, the USDA estimated that the corn harvest
would drop 13 percent from last year, a bigger fall than
"The numbers came in very low. The USDA knows there's a big
problem out here; we all do. They are acknowledging a big
problem," said Jack Scoville, an analyst at Price Futures Group
With production at just 10.8 billion bushels, the yield
would be the lowest since 1995. It would also be the third
disappointing crop in a row for the world's largest corn grower
and main agricultural exporter.
The USDA numbers highlight the crisis faced by livestock and
poultry producers in trying to feed their animals, the American
Meat Institute said.
"The report makes a waiver of the Renewable Fuel Standard
ethanol mandate, which is exacerbating corn demand and prices,
even more urgent," AMI President J. Patrick Boyle said in a
U.S. inventories of soybeans, a key component of livestock
feed from India to Indiana, would be the smallest in nine years
after the USDA said only 2.69 billion bushels would be harvested
this fall, 4 percent less than traders had expected. Stocks will
drop to 115 million bushels, the second-smallest since 1973.
NO CRISIS, YET
A mix of high oil prices, growing use of biofuels, bad
weather, soaring grain futures markets and restrictive export
policies pushed up prices of food in 2007/08, sparking violent
protests in countries including Egypt, Cameroon and Haiti.
The U.N.'s Silva said the world food system had not yet
reached a crisis point, but reiterated warnings against the kind
of export restraints and panic buying that extended the 2008
"Countries and the U.N. are better equipped than in 2007-08
to face high food prices," he said.
So far, most governments have refrained from trade
intervention to secure food supplies.
Russia's Deputy Prime Minister Arkady Dvorkovich said this
week he saw no grounds to ban wheat exports, as the country did
in 2010, but he did not rule out protective export tariffs after
the end of 2012.
China, however, said it would release corn and rice from
government reserves to pad supplies until the fall harvest.
Bangladesh said on Thursday it had extended a
ban on exports of most varieties of rice until next June to
ensure domestic supplies.
The USDA report is an abrupt reversal from just two months
ago when farmers, making the largest corn plantings in 75 years,
expected a record haul. Consumers worldwide were also hopeful
that a robust harvest from the biggest agricultural exporter
would help end a period of depleted global stockpiles.
Then came the weather. More than 60 percent of the
continental United States, including prime farm and ranch
territory, was under moderate to exceptional drought this week.
It is not just agriculture that is feeling the pinch. In its
inaugural season, the American Queen steamboat has been held
back by drought-reduced water levels on the Mississippi River,
the Memphis Commercial Appeal reported.
The Queen, with roughly 300 passengers, arrived in Memphis
on Wednesday morning and was supposed to depart that afternoon.
But because of well-below-average river levels, the boat could
not finish its journey to Vicksburg, Mississippi by Friday as
planned, the newspaper said on it website.
(Writing by Dale Hudson; Editing by Jonathan Leff and David