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Fewer Crops Mixed With Ethanol Policy Makes for Volatile Food Prices


This year's record-breaking drought is bad, and the US ethanol policy is making it worse.

MINYANVILLE ORIGINAL If sensational stories about farmers feeding cattle candy or Peter Luger Steak House prices skyrocketing haven't highlighted the severity of this year's drought and the impact of soaring grain and crop prices, then Bill Lapp, the former chief economist for ConAgra Foods (CAG) and current president of Advanced Economic Solutions, a consulting firm in Omaha, Nebraska, will.

"There are more dramatic impacts than people would like to admit," Lapp explains to Minyanville. "The bigger picture is not that we're going to get through this and we don't need to adjust policy. The bigger picture is we've created a mandate for the use of 40% of the corn crop and it's exaggerating problems when you have a drought."

This year's "killer" drought is currently easing, according to the US Drought Monitor, although 63% of the United States is still experiencing some level of drought.

The amount of area downgraded from severe or extreme drought to moderate or worse drought has increased. But don't be misled: This is the worst drought to hit the Midwestern US since 1956 -- the fifth worst on record -- and it's been compared magnitude to the drought that sparked the Dust Bowl in the early 1930s.

Conditions are expected to last through November, giving little relief to an already beleaguered American crop.

Government estimates for crop yields are dwindling. The soybean yield is being pegged at its lowest level since 2003, and the corn yield at its lowest level since 1995. From last year, soybean harvests are down 12%. Corn is down 27%. Wheat is showing some resilience and is up 13% from 2011.

Tighter supplies are pushing food commodity futures to record highs at the Chicago Board of Trade, which signals that there could be higher prices in the future. As for current food prices, this week Reuters reported that prices have begun to fall.

Traders and analysts believe that prices are "a little overdone to the upside," and the dismal yields and production data have already been built into the market. Yesterday, new-crop December corn was down 4% from a record-high of $8.49 per bushel, and November soybeans were down 3% from a record-high of $17.77-3/4 per bushel. Both highs were reached in the past two weeks.

Prices have dropped even though the annual Pro Farmer Midwest Crop Tour -- which ends today -- has reported "disappointing" expectations for crops in Iowa, Minnesota, and Illinois, with some areas experiencing their lowest output in 17 years.

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