The U.S. Department of Agriculture gave its assessment of the historic drought Friday, forecasting national corn production at 10.8 billion bushels, down 13% from 2011 and the lowest production since 2006.
The report is the USDA’s first official assessment of the impact of the drought that has hit the Corn Belt and is considered to be the worst since 1956.
Analysts knew lower projections were coming but “this is a substantial drop. Wow,” says Harry Kaiser, head of the Food and Agricultural Economics program at Cornell University in Ithaca, N.Y.
The government report said corn prices, which already have reached record levels above $8 per bushel in the last month, could go as high as $8.90 per bushel, well above $6.40 per bushel projected in July and $4.80 per bushel projected in April at planting time.
On the Chicago Board of Trade, corn futures sold for $8.43 a bushel shortly after the report was issued, as traders already had factored lower production into their numbers.
About 40% of the U.S. corn crop is used to make ethanol, under federal mandate. Another 40% is used as animal feed, both here and abroad. The remaining 20% is eaten in mostly processed foods in the United States such as high-fructose corn syrup and items like corn flakes.
U.S. food prices are predicted to increase between 3% and 4% because of the sky-high corn prices, and will probably go higher with the new, lower corn numbers. But overall high prices don’t hit consumers too hard because so little of what we pay at the supermarket is actually for food. The corn in a box of corn flakes is worth about 7 to 8 cents. We pay for processing, transportation.
The USDA has warned that the 2.5% to 3% increase in food prices this year will widen to as much as 5% next year.
Based on conditions as of Aug. 1, yields are expected to average 123.4 bushels per acre, down 23.8 bushels from 2011. If realized, this will be the lowest average yield since 1995.
U.S. corn production for 2012-13 is forecast at 10.8 billion bushels, the lowest since 2006-07. Surplus corn stocks going past the upcoming harvest into 2013 are projected at 650 million bushels, 533 million lower, down from 1.18 billion bushels forecast a month ago and the smallest carryout since 1995-96.
The USDA said global corn ending stocks were 123.33 million metric tons (1 ton equals 39 bushels) vs. 134.09 metric tons forecast by the USDA last month.
The ending stocks figure, a key determinant of corn prices, was “about what the trade had been expecting at 650 million bushels,” said Des Moines commodity broker Tomm Pfitzenmaier.
By contrast, at the time of the last major drought in 1988, the nation’s surplus stocks of corn stood at more than 4 billion bushels.
While the USDA yield and production forecasts are drastic, they aren’t the most steep. At least two private forecasters, Doane Agricultural Services and Farm Futures Magazine, have pegged the U.S. or state corn yields below 120 bushels per acre.
The USDA said total corn use is projected 1.5 billion bushels lower and at 11.2 billion would be a six-year low. The biggest reduction again this month is for feed and residual disappearance, projected down 725 million bushels.
The USDA said feed grain supplies will be 2.2 billion bushels lower than earlier projections, as livestock producers reduce their herds in the face of higher feed costs. That reduction of herds, in turn, is expected to drive up meat prices next year.
The USDA predicts a 400 million bushel reduction in the demand for ethanol, which now consumes almost 40% of the U.S. corn crop.
Soybeans will suffer somewhat less drastically, the USDA said, with production forecast at 2.69 billion bushels, down 12% from last year.
Based on Aug. 1 conditions, yields are expected to average 36.1 bushels per acre, down 5.4 bushels from last year. If realized, the average yield will be the lowest since 2003.
The impact of high corn prices already has made itself felt around the world. On Thursday, the United Nations Food and Agriculture Organization said that world food prices soared 6% in July, ending a streak of three consecutive months of declines, following a sharp increase in grain and sugar prices.
The rising prices for corn will have an enormous impact on people in developing countries, where people spend 30% to 40% of their income on food. “They’re the ones that are hardest hit,” and hunger will rise, says Colin Carter, a professor of agricultural economics at the University of California-Davis.
The drought also has entered into the debates in Congress over the new Farm Bill, which would replace the current version, which expires Sept. 30. Proponents of emergency measures to help livestock producers, who unlike their crop-producing brethren aren’t insured against losses, have argued for emergency assistance.