Worst US Drought in 50 Years Drives Up Grain Prices, Ethanol Under Pressure

by | Aug 13, 2012

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The worst US drought in five decades, which has caused more damage than expected to corn and soybean crops, helped push the global food price index up six percent in July, according to a report by the United Nations’ Food and Agriculture Organization.

The FAO Food Price Index, which measures the monthly change in international prices of a basket of food commodities, averaged 213 points, up 12 points from June. The index’s sharp rebound was mostly driven by a surge in grain prices, the FAO report said. The severe deterioration of the US corn crop caused by extensive drought damage pushed up corn prices by almost 23 percent in July.

The upward pressure on food prices and a gloomy crop report issued by the USDA prompted top UN official José Graziano da Silva to call for an immediate temporary suspension of a US law that mandates about 40 percent of the corn crop be converted into ethanol.

The USDA forecast corn production at 10.8 billion bushels, down 13 percent from 2011 and the lowest production figure since 2006. The USDA expects yields to average 123.4 bushels per acre, down 23.8 bushels from 2011. If realized, this will be the lowest average yield since 1995, the USDA said.

As the outlook for crops has darkened, the pressure to lift the biofuel mandate has increased.

The Renewable Fuel Standards requires US fuel companies to ensure that about nine percent of their gasoline is made up of ethanol this year. About 40 percent of the US corn crop must be converted into the biofuel to meet the mandate.

Meat producers, who are forced to pay more for feed, and grain traders, such as Cargill and agribusiness and ethanol producer Archer Daniels Midland, have been significantly impacted by the drought and ensuing jump in prices. The American Meat Institute as well as other livestock trade organizations have urged the Obama Administration to lift the ethanol mandate.

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