Corn Advances to Record as USDA Set to Report on Drought Damage

(Businessweek) – Corn rallied to a record on speculation that the U.S. Department of Agriculture will reduce yield estimates in a report today as the worst U.S. drought since 1956 scorches crops, driving global food costs higher.

The December-delivery contract rose as much as 0.9 percent to $8.3075 a bushel on the Chicago Board of Trade, surpassing a peak set yesterday. The most-active price, which was at $8.295 at 3:02 p.m. in Singapore, has rallied 28 percent this year. Wheat traded near a four-year high.

World food prices surged last month by the most since 2009 as the impact of the U.S. drought was compounded by dry weather in Russia and below-average monsoon rains in India, the United Nations said yesterday. Costlier food will fan global inflation as policy makers from Europe to China battle slowing economic growth. Goldman Sachs Group Inc. has said corn may rally to $9.

“There’s broad consensus that we’ll see yield cuts to corn and soybeans,” said Michael Creed, an agribusiness economist at National Australia Bank Ltd., referring to the USDA report.“It’s a matter of the degree.”

The USDA will probably cut its domestic corn-crop forecast to 10.929 billion bushels, the smallest in six years, according to the average estimate of 29 analysts in a Bloomberg survey. That’s 16 percent down from a July forecast. The estimate for soybeans may drop 8.3 percent to 2.796 billion bushels.

Ethanol Mandate

Corn is used in everything from food and livestock feed to biofuels. About 40 percent of last year’s U.S. crop went into ethanol, with usage backed by a government mandate. Rising food costs may strengthen the argument for reducing that mandate, Victor Thianpiriya, an agricultural analyst at Australia & New Zealand Banking Group Ltd., said by phone from Singapore today.

Twenty five senators called on Environmental Protection Agency Administrator Lisa Jackson to use her waiver authority to adjust the mandate on Aug. 7, after 156 members of the House of Representatives asked her to cut or suspend the requirement.

Wheat, soybeans and corn have risen the most this year among 24 commodities tracked by the Standard & Poor’s GSCI Index of raw materials as the drought has parched fields across the Midwest. Corn and soybean crops in the U.S. are in the worst condition since 1988, according to the USDA.

Corn yields in the U.S. may average 117.6 bushels an acre this year, compared with the USDA’s projection of 146 bushels, Farm Futures magazine said on Aug. 3, citing a survey of 1,800 growers. Yields will probably average 127 bushels an acre, Morgan Stanley said on Aug. 7.

Weekly Advance

December-delivery wheat gained as much as 0.6 percent to $9.3225 a bushel, and traded at $9.305. Most-active prices, poised for a second weekly gain, have rallied 43 percent this year, touching $9.4725 on July 23, the highest level since 2008.

Soybeans for November delivery dropped 0.4 percent to $16.2525 a bushel. Earlier, the contract rose 0.5 percent to $16.39, the highest price since Aug. 2. Most-active prices reached a record $16.915 a bushel on July 23.

The world could face a food crisis of the kind seen in 2008 if countries restrict exports due to concerns about price rally, the UN’s Food & Agriculture Organization said yesterday. World food costs, which surged 6.2 percent in July, are still 10 percent lower than the record set in February 2011 and 4.9 percent below a previous peak in 2008, according to a 55-item gauge compiled by the Rome-based agency.

India’s June-September monsoon rains are forecast to be 85 percent of a 50-year average, the worst in three years, according to the state forecaster. Rains were 17 percent below normal since June 1, it said on Aug. 7.

Russian Harvest

The grain crop in Russia, the third-biggest wheat exporter last season, is forecast at 75 million to 80 million metric tons in the season that started July 1, Deputy Prime Minister Arkady Dvorkovich and Agriculture Minister Nikolai Fedorov said on Aug. 8. There’s no reason to limit exports, Dvorkovich said.

Goldman Sachs forecast in a July 23 report that corn in Chicago may rally to $9 a bushel within three months, while predicting that soybeans may reach $20 a bushel. A corn price of $9 marks the level at which there’s so-called demand destruction of ethanol, Damien Courvalin wrote in the report.

In the U.S., the two worst levels of drought grip nearly one-fourth of the lower 48 states, the U.S. Drought Monitor said yesterday. About 24.1 percent of the region was suffering extreme or exceptional drought in the week to Aug. 7, up from 22.3 percent in the previous period, according to the monitor.

To contact the reporter on this story: Phoebe Sedgman in Melbourne at  psedgman2@bloomberg.net

To contact the editor responsible for this story: James Poole at  jpoole4@bloomberg.net