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A historic Midwest drought prompted the US government on Friday to slash supply estimates for nearly everything in the US cornucopia, including corn, soybeans, and sorghum – a move that caused commodity prices to jump and concerns about the state of the global food cupboard to rise.

US corn and soybeans are crucial to global food supply because they are used for food, feed, cooking oil, and even motor fuel. Reduced supply and higher prices mean that poorer, import-reliant nations may not be able to replenish their food stocks.

"This is shocking,” Dan Basse, president of Ag Resources, said during a conference call on Thursday, ahead of the World Agricultural Supply and Demand Estimates report from the US Department of Agriculture. “This is getting people at the United Nations very concerned. The poor in the world are going to see tremendous pressure on their budgetary expenditure for calories. This has become a very scary situation, particularly for those in the world who are impoverished."

With the release of the global supply and demand report Friday morning, prices on the commodities exchange in Chicago rose to all-time highs for corn and soybeans, the hardest-hit crops so far. The estimate for the US corn crop is at the lowest level since 1995-96, when many fewer acres were planted.

The report piggy-backed on the release Thursday of the United Nations Food and Agriculture Organization’s Food Price Index, which showed global food prices rising by 6 percent, largely because of the US drought. Untimely rains in sugar-producing Brazil and dry conditions in Russia's wheat belt, too, have taken a toll.

The hottest July on record in the Lower 48 and scant rainfall have created the widest US drought since 1956, wiping out much of the corn and soybean crops, which are used globally and domestically for food, feed, and ethanol production. In the US, which is the world’s top exporter of corn, more than half the crop is now considered in “poor” condition. The Agriculture Department on Friday slashed yield estimates by 12 percent, from 146 bushels per acre to 123 bushels per acre.

American farmers had planted the largest corn crop ever this year, in response to high commodity prices and high global demand. The US was supposed to be “swimming” in corn this fall. Instead, the harvest will be a “train wreck,” Kelly Wiesbrock, a fund manager for Harvest Capital Strategies, tells the Reuters news service

Higher commodity prices mean poorer countries will import much less, putting millions of people on the lower rungs of the global food chain in jeopardy, and potentially creating a situation similar to the world food crisis of 2007-08. In all, estimates for this year's global grain supply are down by 180 million metric tons – enough to fill about 360 supertankers to the brim.

"This is not some gentle monthly wake-up call,” Oxfam spokesman Colin Roche told the press after the latest figures were released. “It's the same global alarm that's been screaming at us since 2008. These new figures prove that the world's food system cannot cope on crumbling foundations. The combination of rising prices and expected low reserves means the world is facing a double danger."

Government economists expect corn prices to rise to a record $9 a bushel, up from a $6 bushel estimate in early July. But private ag economists suggest that the drought is worse than advertised and that prices could go even higher.

Such prices could make some farmers and commodity traders wealthy, but they could be devastating for poorer, food-importing nations. “The U.S. leads the world in exporting corn, soybeans and wheat, and the surging prices are expected to be felt across the international marketplace, hurting poor food-importing countries,” said a study by British charity Oxfam issued ahead of this week’s UN report. http://www.csmonitor.com/USA/2012/0810/Alarms-sound-over-world-food-su
pply-as-drought-wilts-US-Corn-Belt

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Because of the severe heat and drought in the Midwest, global food prices are going up. Why? Because the U.S. is the leading producer and exporter of staple grains. We are for food production what Saudi Arabia is for oil production. Our crop shortages have ripple effects throughout the food system and disrupt the global markets, especially in the food-insecure nations.

The U.S. hasn't reached 2008's level of high food prices yet because rice and wheat stocks are ample. These are the two most important food grains for human consumption worldwide.

Corn and soybean levels are extremely tight, and their prices have skyrocketed since June. However, these two grains are mostly used as livestock feeds. Corn is also diverted to produce ethanol because of our government mandate.

Earlier this month, the United Nations urged the U.S. to ease its ethanol mandate. The origin of this policy goes back to 2005 when Congress set requirements of corn to be used for automotive fuel. In 2007, the Energy Independence and Security Act greatly increased those requirements to improve air quality and become more energy secure. Behind the scenes, however, corn and other agricultural lobbyists were promoting the mandate to create a larger market for corn. Using current numbers, this year's ethanol mandate would theoretically require 44% of this year's corn crop, a third of which is recycled back as distillers grains for livestock feed.

We are being told by the ethanol producers, the corn growers and Secretary of Agriculture Tom Vilsack that eliminating the ethanol mandate would not significantly reduce global food costs. But how could that be when roughly 14% of the world's corn crop is being converted into ethanol in the U.S.? In addition to corn being used for biofuel, taxpayer-subsidized biodiesel is using up more soybeans each year.

While some say that attempting to change the ethanol mandate is politically impossible in an election year that depends so much on the Midwest swing states, there is a loud and growing chorus of voices that are calling for an urgent end to the mandate. Greg Page, CEO of Cargill, one of the world's largest agricultural corporations, recently urged: "We need to move to more market-driven biofuels policies, not inflexible mandates, subsidies and tariffs."

Just as the USDA's recent estimate of a corn yield at 123 bushels per acre is certain to be reduced further, its estimate of food costs rising only 3% to 4% next year is certain to be raised.

The least politically palatable condition in any nation is high food prices. Expect beef, pork, chicken, turkey, eggs, fats and oils, cereals and dairy products to go up the most in the coming months. Americans have already reduced their meat consumption over the past few years partly because of higher prices.

It is time for policymakers to admit they made a mistake in setting the corn ethanol mandate level too high in 2007. This year, the mandate is 13.2 billion gallons of ethanol, which would require 4.7 billion bushels of corn. The mandate is set to top out in 2015 at 15 billion gallons.

If politics dictates that we must have an ethanol mandate, then at the very least we should consider cutting the level by half, which could be done by using only 5% ethanol, or E5, in gasoline instead of E10, which is a combination of 10% ethanol and 90% unleaded gasoline.

The mandate should never be allowed to use more than 20% of the annual U.S. corn crop. This amount would be enough to help stimulate corn demand for this overproduced commodity. As a bonus, more sustainable farming practices could return to the Midwest following this frenzy of growing corn on corn, fencerow to fencerow, to cash in on the high prices.

It often takes a crisis to get government to take action and correct a policy that was wrong to begin with. This growing season, we have had extreme heat and drought in the most productive farming region in the world. Let's use this unfortunate plight to get our ethanol policy right, before it causes food prices to go up more.

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