With Corn Crops in Trouble, Ethanol Quotas in the Crosshairs

The worst drought in more than 50 years has caused more damage than expected to corn and soybean crops, the 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 law that dictates that about 40 percent of the corn crop must be converted into ethanol.

Hours after the 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 America.

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 forecast.

"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 in Chicago.

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 statement.

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 price surge.

"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 its website.