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Saturday, July 21, 2012

Worst drought since 1956 threatens world food crisis

A month of scorching temperatures across the country's midwest has sent corn and soybean prices to record highs, while wheat prices have reached levels not seen since the last food crisis in 2008.

The severest drought since 1956 in America's agricultural heartland has dashed the hopes that were alive just a couple of months ago of a bumper harvest. Traders and economists warned that the effect will ripple out from the US because it is the world's biggest producer of corn and a major supplier of soybeans and wheat.

"This year we have a rally in prices that is driven by the fundamentals," said Shawn McCambridge, an analyst at Jefferies Bache. "I really do anticipate these prices staying strong and producers will have to try to pass the cost onto consumers."

The dizzying gain in prices has shocked many in the industry. Corn prices have surged 51pc over the last month, wheat is up 40pc and soybeans have gained almost 20pc. The prospect of another bout of food inflation will alarm governments in developing countries where the run-up in prices in 2008 caused widespread hunger and revolts. It also presents a new headwind for western countries trying to kickstart economic recoveries.

For now - at least - all eyes are on the weather forecast for those US states that have been hardest hit, including Iowa, Nebraska, Indiana, Ohio and Illinois. While light rain fell in some parts day, there is little more forecast over the next two weeks.

The drought forced the US government last week to cut its forecast for corn production this year to 12.9bn bushels from a prediction of 14.8bn it made last month. "I get on my knees every day and I'm saying an extra prayer right now," Tom Vilsack, the US agricultural secretary, said today. "If I had a rain prayer or a rain dance I could do, I would do it."

Dan Basse, president of AgResources in Chicago, said that the government's prediction will prove too optimistic if the dry weather persists. "We've been traipsing through the fields of southern Illinois and it is worse than the government says," explained Mr Basse.

A sharp difference with 2008 is that speculative money is playing a far smaller role this time, said Mr McCambridge. Although rapid, analysts say the sharp increases over the last month are an appropriate response to the pullback in production and uncertainty over the eventual size of the corn, wheat and soyabean crops. Corn futures hit a record $8.16 a bushel on the Chicago Mercantile Exchange today, while soybeans touched $17.49 a bushel. If there is some good news, it is that rice - a staple for many of the world's poorest - has escaped the increases.

The Telegraph