Drought Leads To Fears Over Food Prices

Drought worsens crop damage, raising world food, fuel worry

""We're moving from a crisis to a horror story," said Purdue University agronomist Tony Vyn. "I see an increasing number of fields that will produce zero grain."

CHICAGO (Reuters) - Corn and soybeans in the U.S. Midwest baked in an unrelenting heat wave on Monday with fears rising of big crop losses that will boost food and fuel prices and cut exports and aid from the world's top shipper of the key crops.

The condition of the nation's corn and soybeans as of Sunday deteriorated even more than grain traders had feared, and the U.S. Agriculture Department cuts its weekly corn crop condition rating by the biggest amount in nearly a decade.

After weeks of growing drought some lucky farms have been doused by scattered thunderstorms in the past few days. But weather forecasters warned the heat and dryness would only intensify through the end of July and possibly beyond.

"We're moving from a crisis to a horror story," said Purdue University agronomist Tony Vyn. "I see an increasing number of fields that will produce zero grain."

The drought scorching the U.S. Midwest is the worst since 1956, theNational Oceanic and Atmospheric Administration said in a report posted on its website on Monday. Drought is affecting 55 percent of the land mass in the lower 48 states.

The corn crop is in the greatest danger. Plants are trying to pollinate to let ears fill with kernels, a period when adequate moisture is vital for final yields. The United States ships more than half of all world exports of corn, which is made into dozens of products, from starch and ethanol to livestock feed.

The USDA on Monday rated the corn crop - which had once been estimated to total a record 14 billion bushels this year - at only 31 percent good-to-excellent, down 9 percentage points on last week.

The soybean crop rating was cut to 34 percent good-to-excellent, down 6 percentage points from the previous week.

Chicago Board of Trade corn for December delivery has soared 54 percent since mid-June, reaching a contract high of $7.78 on Monday and approaching its record price near $8.

Soybeans for November delivery soared to a new contract high of $15.97 before slipping back a few cents.

Crop watchers were alarmed that corn rated poor-to-very poor jumped to 38 percent, versus 30 percent last week and 11 percent a year ago.

"They're moving corn from good-and-excellent condition to poor-to-very poor in one week, which skips fair condition. What they're saying is it's a lot worse than they thought," said farmer Larry Winger, who farms along the Illinois-Indiana border 30 miles south of Purdue, commenting on the USDA report.

To make matters worse, Winger said, drought has created ripe conditions for spider mites, which suck the moisture out of soybeans and can slice yields in half. Japanese beetles and other pests were feeding on Midwest corn, which can also develop toxic fungal diseases in drought years, analysts said.

Both grains are exported around the world, raising concerns about global food shortages and inflation. The impact on American grocery and meat case prices may take time to be felt but will likely be seen in inflation in coming months.

DISASTER AREA

Last week, U.S. Agriculture Secretary Tom Vilsack designated more than 1,000 counties across the country as natural disaster areas due to the drought conditions, the largest single designation in the history of the USDA loan aid program.

In Nebraska, where most farmers irrigate their corn, flows in streams and rivers had dropped so much that the state on Monday asked 1,100 of Nebraska's 48,000 farmers and ranchers to stop pulling water from the waterways and use wells instead.

Iowa and Illinois produce a third of U.S. corn and soybeans. But prospects there have turned down sharply, raising fears losses will be the worst since 1988, the last major drought.

Prospects for the later-developing Midwest soybean crop were better than that for corn, though substantial rains were needed during the next three weeks to salvage Indiana's crop, Vyn said.

"The window for soybeans is closing," he said.

Soybeans usually go through their key growth period of flowering and pod-setting in August, a few weeks after corn in the Midwest. Soy is used in scores of products, from paints and feeds to edible oils and increasingly for soy-based diesel fuel.

"We need soaking rains now. We need 2 to 3 inches and that's not in the forecast," AgResource Co analyst Dan Basse said.

AccuWeather meteorologist Erik Pindrock said a seemingly immovable ridge of high pressure on Monday kept much of the central Corn Belt in a dome of heat, and he predicted the hot, dry weather would persist through July and possibly into August.

Monday's heat matched high temperature records for the date in many locations including Flint, Michigan, where it was 97 Fahrenheit (37 Celsius), and in Indianapolis, where it was 98 F, he said.

"We've seen Raleigh, North Carolina, tie its all-time record of 105 (F) degrees three times ... so this is definitely a country-wide heat wave," Pindrock said.

(Additional reporting by Kay Henderson in Des Moines, Karl Plume and Michael Hirtzer in Chicago; Editing by Peter Bohan and Lisa Shumaker)