US drought
threatens food price surge
By Gregory Meyer in New York and
Jack Farchy and Javier Blas in London
Cracking up: drought has
robbed farmers of critical water sources, such as this pond in Illinois that is
normally used by cattle for drinking
The worst drought in
the US in at least half a century has destroyed one-sixth of the country’s
expected corn crop in a month threatening a surge in global food price
inflation.
The US government
estimated corn farmers had abandoned fields greater in area than Belgium and
Luxembourg after the hottest
July in US historyirreparably damaged their crops. The harvest for
soyabeans, largely crushed into animal feed and vegetable oil, would be the
lowest in five years.
The US Department of
Agriculture forecast prices for the two crops would break records, with
domestic corn averaging between $7.50 and $8.90 per bushel after this year’s
harvest starts. On the Chicago Board of Trade, corn futures jumped 3.1 per cent
Friday to an all-time high of $8.43¾ before slipping.
“We’re going to see
very high prices,” said Joseph Glauber, USDA chief economist.
The failure of the US
corn crop will hit the world’s food manufacturers, including Nestlé, Kraft, and
Tyson, who have already warned that they will pass on higher prices to
consumers.
The governors of
Delaware and Maryland, US states with large chicken farms, on Friday urged the
White House to
waive a government ethanol blending mandate because of an
“undersupply of corn”. Both governors are Democrats like President Barack
Obama.
The surge in prices
has revived memories of the2007-08 food crisis, when the high cost of
food triggered riots in more than 30 countries from Bangladesh to Haiti.
The department’s
estimated corn crop of 10.8bn bushels was 2.2bn bushels less than its July
projection. The US is the top producer and exporter of the world’s most heavily
grown grain, so the shortfall has heightened concerns about the stability of
world food supplies.
Corn is mainly used to
feed animals and produce US ethanol fuel. Eyeing low supplies, the USDA
forecast sharply lower consumption and exports, with the meat industry hit the
hardest. Domestic red meat and poultry supplies will decline next year, the
department said.
“To reduce demand like
the USDA has implied, we will need to see corn prices in excess of $8 a
bushel,” said Chris Gadd, grains analyst at Macquarie. Morgan Stanley said
prices would need to top $10 for ethanol refiners to meet the USDA demand
estimate.
Ahead of the
statistics’ release, Tom Vilsack, US agriculture secretary, cautioned that the
true supply picture would only emerge later this year.
“In the past,
estimates have been off in drought years. We have to be cognizant of that
fact,” he told the Financial Times on Thursday.
Darrel Good, an
agricultural economist at the University of Illinois, warned the crop outlook
could worsen as surveyors return to fields. Although parts of the US
agricultural heartland have seen scattered rains in the past week, the drought
continues to intensify. According to the USDA, 44 per cent of the US Midwest
was suffering from “extreme”
or “exceptional” drought this week, up from 36.8 per cent a
week ago.
“My bias is we may
have some room to go down yet on the production forecast,” Prof Good said. The
USDA said farmers will harvest 87.4m of the 96.4m acres they had planted with
corn.
Policymakers are
increasingly alarmed by the current food supply situation. But José Graziano da
Silva, director-general of the UN’s Food and
Agriculture Organisation, told the Financial Times the situation was not as bad
as in 2007-08.
“We do not have the
demand pressure from China and India as five years ago,” he said. Stocks of
rice and wheat remain high, though the USDA reduced its estimate of the Russian
wheat crop due to heat and dry soils.
The US rates half its
corn crop is in “poor” or “very poor” condition, the worst such assessment
since 1988.
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