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CHICAGO (Reuters) - Alarm grew over the unrelenting Midwest drought on Tuesday, as one of the top corporate leaders in agriculture warned that the government must act quickly to reduce the amount of corn going to ethanol to prevent a sharp spike in food prices.
Worries about the worst drought in more than half a century afflicting the world's largest grain exporter also deepened overseas, where buyers in China and other hungry nations fret that the expected sharp drop in U.S. harvests will cause shortages and price spikes.
Greg Page, chief executive of global grains trading giant Cargill Inc, joined a chorus of critics of biofuels by urging the U.S. government to temporarily curb its quotas to produce corn-based ethanol fuel.
Page said on CNBC that the U.S. biofuel mandate "needs to be addressed" through existing policy tools. Otherwise, the spike in U.S. corn and soybean prices to record highs will "ration" demand in ways that will hurt food production too much.
"If all of that is only on livestock or food consumers, it really makes the burden disproportionate. What we see are 3 or 4 percent declines in supply lead to 40 to 50 percent increases in prices, and I think the mandates are what drives that," he said.
In 2011, almost 40 percent of the giant U.S. corn crop went into making ethanol, and the United States still exported more than half of all corn shipments worldwide.
"There is a methodology to reduce the amount of biofuels that is mandated in the U.S," Page said.
The U.S. Agriculture Department last week raised its estimates of food price inflation due to soaring grain prices tied to the drought, saying prices could rise as much as 3.5 percent this year and another 3-4 percent in 2013, led by meat.
On Monday, U.S. livestock groups appealed to the Environmental Protection Agency (EPA) to curb or suspend the mandate, warning against the ruinous impact of soaring feed costs. Corn and soybean meal make up basic animal feedstuffs.
Page said the shortfall in supply would be "manageable" provided that consumers ration their use, that producers don't impose export constraints and importers don't embark on a panicked buying spree, as some did in 2008 -- a beggar-thy-neighbor approach widely seen to have worsened the price spike.
"We need thoughtful responses from governments. We need to be sure free trade remains. In past periods of shortage of crops, we've had embargoes, which have exacerbated peoples' supply concerns and caused people to take actions that were not helpful to global aggregate food security," he said.
Grain analysts polled by Reuters pointed to a U.S. corn crop of 11.2 billion bushels, the smallest in six years and down 14 percent from USDA's latest forecast of 12.97 billion. Initial forecasts were for a crop of more than 14 billion bushels.
Soybeans, which were planted later and until now escaped the drought's pressure, are now also being hurt. Analysts predict a 2.834 billion bushel harvest, the smallest in four years, and down from USDA's latest estimate of 3.05 billion bushels.
The drought is hitting other food producers besides Cargill.
Oilseed processor and ethanol producer Archer Daniels Midland Inc reported a larger than expected 25 percent drop in quarterly profit on Tuesday due in part to higher corn prices causing it to lose money making ethanol.
"In a challenging fourth quarter, solid results from our global oilseeds business, particularly in South America, were more than offset by negative U.S. ethanol margins and weaker U.S. merchandising results." ADM CEO Patricia Woertz said.
Brokerage BB&T Capital Markets last week lowered its earnings forecasts for U.S. pork producer Smithfield Foods Inc and U.S. chicken producer Sanderson Farms Inc, citing corn prices.
But some said that easing off ethanol production -- already at a two-year low amid soaring corn prices -- was unnecessary.
In Iowa, the largest U.S. corn and soybean producer, Gov. Terry Branstad said on Tuesday he opposed an ethanol waiver.
"Even if you took that kind of action, it probably would have no action on soybean and corn prices," Branstad said.
Ray Bardole of Rippey, Iowa, a soybean farmer and industry official now touring China, told reporters by phone that he has been reassuring the worried Chinese, who are the biggest importers of U.S. soybeans.
"As we have met with folks from the government, as well as the Chinese media and our customers themselves, that is absolutely the very top thing on their mind," he said. "'What is the dry weather going to do to our supply?'"
At the Chicago Board of Trade corn and soybean markets eased back from new record highs this week as traders took their profits. Even with Tuesday's drop, corn prices are up 20 percent in July to post the biggest two-month rally since the last major drought in 1988.
December corn futures closed down 1.1 percent at $8.05-1/4 per bushel and November soybeans closed down 0.2 percent at $16.41 per bushel.
"We are continuing to see a deterioration of the crops," grains analyst Karl Setzer of MaxYield Cooperative in West Bend, Iowa said, referring to the U.S. Department of Agriculture's crop progress report issued on Monday.
That report said 24 percent of the domestic corn crop was in good-to-excellent condition as of Sunday, down from 26 percent the previous week. That was a tad better than trade expectations for a three-point drop.
The soybean crop was 29 percent in that category, down from 31 percent in the previous week.
Those ratings were the worst for those crops since the last major drought in 1988.
Additional reporting by Jonathan Leff and Brian Winter. Editing by Peter Bohan and Leslie Gevirtz