By RON NIXON and ANNIE LOWREY
Published: August 10, 2012
WASHINGTON — With the nation’s worst drought in a half-century continuing to decimate crops, the government on Friday slashed its estimate of the soybean yield, made only a month ago, to the lowest level since 2003 and its estimate of the corn yield to the lowest level since 1995.
A damaged corn crop in Rice County, in central Kansas. This year’s U.S. corn yield is projected to be the lowest since 1995. More Photos »
The smaller harvests will drive up prices for food and animal feed, analysts said. The prospects are also increasing pressure on the Obama administration to divert less corn to the production of the biofuel ethanol.
Agriculture Secretary Thomas J. Vilsack, visiting drought-stricken farmers in Nebraska on Friday, said that despite the reduced crop production, farmers are in better shape today than during the last major drought, in 1988.
“Last time only 25 percent of farmers had crop insurance, but this time over 85 percent are covered,” Mr. Vilsack said, noting that the government was still forecasting the eighth-biggest corn harvest ever.
But analysts warned of falling yields and spiking wholesale prices down the road. “It’s scary when you see the numbers out today,” said Terry Roggensack, an analyst at the Hightower Report in Chicago. “Unless there is normal weather and rain from here on out, I can easily see prices for corn and soybeans” rising 20 percent to 25 percent.
In the past month, as the country recorded the hottest month on record, the government lowered its production forecast for eggs, milk and pork. Beef production is expected to rise as ranchers cull more of their herds because of higher feed prices. But experts predict that the price of beef will not rise until next year as supplies tighten but feed costs continue to increase.
Last month, the Agriculture Department estimated that food prices would climb 3 percent to 4 percent in 2013. The overall economic effect in the United States, however, will be muted, given that American households generally spend only about 13 percent of their budgets on food and often elect to buy cheaper foods rather than pay higher prices.
On Friday, Capital Economics estimated that the rising food prices might knock 0.1 percent off the annual pace of economic growth.
Farmers in the hardest hit areas of the Midwest said that Friday’s report only confirmed what they already knew.
“We’ve lost 60 percent of our average production, if not 70,” said Nick Guetterman, president of the Johnson County Farm Bureau in eastern Kansas, who farms about 10,000 acres with his family. Mr. Guetterman said he expected crop insurance to cover his costs this year, but not much more. “You take what you get, that’s all you can do,” he said. “You go to church and pray.”
The Agriculture Department’s report has also renewed debate over the use of corn for ethanol production.
The Renewable Fuel Standard, passed in 2005 and expanded in 2007, requires that 13.2 billion gallons of corn-based biofuel be produced in 2012. The goal of the standard is to reduce greenhouse gas emissions and the nation’s dependence on foreign oil.
About 40 percent of the nation’s corn crop now goes to ethanol producers — the rest to animal feed, food and exports.
Retailers said that they did not expect to have to pass along price increases to customers in the short term.
“The drought has had an impact on commodity costs everywhere,” said John Simley, a spokesman for Kraft Foods, the maker of a range of baked goods and meat products. “It’s not likely to impact our costs in the near term, because of our commodity coverage positions,” he said, referring to the company’s hedges against fluctuations in the markets.
But severe weather has hurt agricultural production in other major exporting countries, including Brazil, Russia, Australia and India, not just the United States. That has raised concerns about global shortages of certain food commodities — shortages that will increase food prices and stoke inflation.
“The United States is the world’s largest exporter of corn, soybeans and wheat, and likely price spikes will ripple through markets globally, with devastating consequences for those already struggling to get enough food to eat,” said Eric Munoz, a senior policy analyst with Oxfam, an international aid group.
On Thursday, the United Nations Food and Agriculture Organization said that global food prices jumped 6 percent in July, with the price of corn up 23 percent. It has warned developing countries to prepare for possible price fluctuations.
In one impoverished region of Africa, stretching from Senegal in the west to Sudan in the east, Oxfam said that the past five years had seen a significant rise in the price of grains, making the area more vulnerable to any coming food price increases.
“There are a number of reactions,” said Eric Hazard of Oxfam in Dakar, Senegal. “People diminish the number of meals, and the quality of their meals. We’ve seen an increase in migration.”
Arif Husain, deputy chief of the Food Security Analysis Service at the United Nations World Food Program in Rome, said: “The real problem is this is the third price shock in the last five years. The poorer countries haven’t had time to recover from previous crises.”
The Agriculture Department report released on Friday forecast the corn yield to be 123.4 bushels an acre, the lowest in 17 years, down 15.5 percent from its July estimate. It also forecast the yield for soybeans, used in everything from fry oil to livestock feed, to be 36.1 bushels an acre — down 10.7 percent, or 4.4 bushels an acre below last month’s government estimate and 5.4 bushels an acre less than last year.
The new estimates are based on surveys of more than 25,000 farmers, as well as Agriculture Department experts inspecting fields for the first time since the drought began to drive up prices in mid-June.
The new crop forecast report prompted some commodity futures to rise. On the Chicago Board of Trade, soybean futures were up about 1 percent. Corn futures had already climbed on widespread expectation of a weak report. They declined on Friday, trading for about $8 a bushel, up from about $5.20 in June.
Critics of the ethanol fuel standard say the use of corn for ethanol is a major factor in the tripling in the price of corn since 2005. Livestock producers, hard hit by the rise in feed prices, have called on the Obama administration to waive the requirement until the drought is over.
“If not now, when?” said Randy Spronk, a pork farmer in Edgerton, Minn. “Livestock producers are getting killed out here with feed prices.”
Mr. Spronk, the incoming president of the National Pork Producers Council, said livestock producers would have to reduce their herds and flocks because feed was becoming scarce and too expensive.
With half the nation’s corn crop in poor condition, 156 House members and 25 senators have signed letters to Lisa P. Jackson, the administrator of the Environmental Protection Agency, calling on her to issue a waiver on the ethanol standard.
Even the United Nations has called on the United States to ease the use of ethanol.
In a letter published in The Financial Times on Friday, José Graziano da Silva, the director-general of the United Nations’ Food and Agriculture Organization, wrote: “An immediate, temporary suspension of that mandate would give some respite to the market and allow more of the crop to be channeled toward food and feed uses.”
The ethanol industry said calls to waive the fuel standards were premature.
“So far we have nothing more than speculation about what the danger to the corn crop is going to be,” said Matt Harwig, a spokesman for the Renewable Fuels Association, an ethanol industry trade group. “We need to take a wait-and-see approach.”
Mr. Vilsack, the agriculture secretary, said in an interview taped for C-Span’s “Newsmakers”: “We still need to get a farm bill passed to help to get some relief for livestock producers who lack a safety net. But American farmers are a resilient bunch. They will get through this.”
The report does give farmers an overview of the suffering their peers across the country are experiencing, said Bill Northey, the Iowa secretary of agriculture. That will help farmers make decisions on handling their own crops, like when to cut them and when to sell them, he said.
Mr. Northey, who farms in northwest Iowa, said the grim outlook nationwide would lead him to hold onto a lot of his crop until he sees exactly how much his yields are at harvest. If he sold too much now, he said, he would run the risk of not being able to deliver on the sales if the yield turns out lower than expected.
“We’ll be figuring some of those things out,” Mr. Northey said. “But most of it’s not going to happen until we get a combine in the field.”
Reporting was contributed by Adam Nossiter in Dakar, Senegal; Rick Gladstone in New York; and John Eligon in Kansas City, Mo.
This article has been revised to reflect the following correction:
Correction: August 10, 2012
An earlier version of this article misstated the Agriculture Department’s cut in its estimate of corn crop yield per acre between July and August because of the drought. It is 15.5 percent, not 17 percent.