August 10, 2012 / 4:09 AM / 5 years ago

Shriveled corn crop heralds supply squeeze drama

WASHINGTON (Reuters) - U.S. corn and soybean crops decimated by the worst drought in half a century will fail to replenish ultra-low stockpiles next year, the U.S. government is set to say on Friday in a report that may heighten fears of a new world food crisis.

In the most authoritative view yet on the state of the withered U.S. crops, the Agriculture Department report -- based on samples from parched, scorched fields -- will show the corn harvest will drop 11 percent from last year, with yields 23 percent below normal, analysts estimate.

The outlook is nearly as bleak for soybeans, with the harvest set to shrink 8 percent from 2011 with yields falling by 9 percent. Inventories of the oilseed, a key component of livestock feed from India to Indiana, would tie for the smallest since 1973.

The grim report is an abrupt reversal from just two months ago, when farmers, who raced to the largest corn plantings in 75 years, expected a record haul. Consumers worldwide were also hopeful that a robust harvest from the biggest ag exporter would help end a period of depleted global stockpiles.

Now, however, many fear record-high prices and scanty stockpiles will rule commodity markets for at least a year more -- and it may get worse if growing signs of shortage prompt some countries to impose export bans or make panic purchases, as they did during the last dramatic price spike in 2008.

"Several urgent actions must be taken to address the current situation to prevent a potential global food price crisis," said Shenggen Fan, head of an agricultural think tank funded by the World Bank. In addition to avoiding trade restraints, he said countries should throttle back on using grain to make biofuels.

The report could sharpen the emerging debate around the U.S. policy that requires use of 13.2 billion gallons of biofuels -- mostly corn ethanol -- this year, equal to 9 percent of fuel for cars and light trucks. While dozens of politicians and livestock lobby groups have called for relief, the policy has staunch Farm Belt support that is unlikely to waver in an election year.

Corn futures prices, already up more than 60 percent since before the drought began in mid-June, surged to a record $8.29-3/4 a bushel on Thursday.

27,000 FARMERS

The impact of the drought has been increasingly apparent over the past eight weeks, but the USDA's report will be the most exhaustive in measuring the damage.

The USDA surveys about 27,000 growers and test-samples yield in major states to estimate crop output based on Aug 1 conditions. It says there is a 10.7 percent margin of error for its estimate of the corn crop and 11.4 percent on soybeans.

Analysts expected a U.S. corn crop of 11.026 billion bushels, smallest since 2006 and 15 percent less than the USDA had estimated just a month ago, and a soybean crop of 2.817 billion bushels, the smallest since 2007.

Most of the wheat crop was planted early enough to escape damage from drought and output will top 2011.

Stockpiles of corn are expected to shrink to the lowest level in 17 years by the time the 2013 harvest begin; soybean stocks would tie for the smallest since 1973, according to a poll of analysts ahead of the Agriculture Department report.

USDA makes the estimates with the harvest season only weeks away for corn and soybeans; the wheat harvest is winding down. Half of the corn crop is in poor or very poor condition -- a year ago, 60 percent was top-rated.

More than 60 percent of the continental United States, including prime farm and ranch territory, was under moderate to exceptional drought this week, a slight improvement. July was the hottest month on record, beating the worst month of the Dust Bowl era in 1936.

Small U.S. crops can carry a global wallop since the United States is the world's largest farm exporter. It grows 40 percent of the corn and soybeans as well as a fifth of the wheat sold on the world market. Bad weather in Russia and India also is pinching crop output this year. High food prices were a factor in the Arab spring uprisings of 2011.

World food prices rose by 6 percent during July, driven by surging corn and sugar prices, said the U.N. Food and Agriculture Organization. The index is below its February 2011 peak but higher than in 2007-08, when fear of shortages drove up prices and prompted export bans in some countries.

In 11 of the past 20 years, USDA's August forecasts were smaller than the final figure.

Reporting by Charles Abbott; Editing by Leslie Gevirtz

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