Associated Press writer Stevenson Jacobs reported yesterday that, “Corn prices crept closer to an unprecedented $8 a bushel Wednesday on concerns that damage to cornfields from Midwest flooding is worse than previously thought, which could further drive up the price of food.”

The AP article explained that, “The U.S. Department of Agriculture will say how big this year’s U.S. corn crop will be later this month, but the agency has already hinted it also will do a special assessment of how many acres have been lost to massive flooding that struck the Midwest last week. Estimates of the toll vary widely, from 2 million to 5 million corn acres damaged or destroyed by floodwaters.

“‘There is a fear that this destruction may be worse than we think,’ and that’s driving corn prices higher, said Richard Feltes, senior vice president and director of commodity research for MF Global in Chicago.

“Corn for December delivery rose as high as $7.85 a bushel on the Chicago Board of Trade before easing back to settle at $7.80, up 4 cents. In the most-actively traded July contract, prices rose to $7.50 a bushel before falling back to settle 4 cents higher at $7.4625.”

Mr. Jacobs indicated that, “‘We are on the verge of a disaster if we have adverse weather in July,’ Feltes said. ‘The death knell scenario is for the rains to suddenly shut off and for us to go into a hot, dry pattern,’ which would significantly hurt corn yields.

“‘If the situation worsens, we could have $10 corn and $20 soybeans,’ Feltes added.”

David Irvin reported in yesterday’s Arkansas Democrat-Gazette (Northwest Arkansas Edition) that, “Corn futures spiked this week on news that floodwaters washed over the vast farmlands of the Corn Belt, putting extra pressure on meat processors, ethanol producers and other grain buyers.”

The article noted that, “This ‘new plateau’ of grain prices – as many analysts are calling it – is bad news for Tyson Foods Inc., the nation’s second largest poultry processor. As the price of corn and soybeans goes up, so does the cost of feeding chickens and hogs.

“The cost of producing soft drinks, cereals and ethanol also increases, since these products rely heavily on corn.

“In the past, food manufacturers absorbed spikes in commodity prices to retain market share, but that may not be possible this time.

“‘With this latest leg up in feed prices, the concern is that is going to trigger some cutback in livestock and [meat] production, and that will eventually show up in higher retail prices,’ said Darrel Good, an agriculture professor at the University of Illinois at Urbana-Champaign.”

The Democrat-Gazette article went on to state that, “On Monday, the Environmental Working Group, a Washington nonprofit focused on conservation, released a report criticizing the government’s ethanol policy as based on ‘hope’ for good weather. ‘However, hope is not a policy. And it now seems likely that some of the worst weather since the historic 1993 flood will mar the 2008 growing season,’ wrote Michelle Perez, an analyst with the environmental group. Perez contends that subsidizing the domestic biofuel industry puts corn supplies perilously close to a breaking point, and bad weather compounds the problem. The government mandates that oil companies blend 15 billion gallons of corn-based ethanol by 2015. It’s a progressive mandate, and this year the industry must blend 9 billion gallons.

“The Renewable Fuels Association, which represents the domestic industry, said the effect of the floods on ethanol production is uncertain. However, president Bob Dinneen denounced groups calling for the end of subsidized ethanol production. ‘Knee-jerk reactions to this unprecedented weather event would do even more harm to the nation against the backdrop of the current oil and economic crises it faces,’ Dinneen said in a statement Tuesday. ‘Abandoning our commitment to ethanol and biofuels, as some would suggest we do, would do nothing to provide meaningful relief from high grain prices today or in the future.’ Companies like Tyson and Texas-based Pilgrim’s Pride Corp., the nation’s largest poultry company, have blamed a large part of corn inflation on domestic ethanol production. Corn traded for about $ 1 a bushel from World War II through the 1970s. Early that decade, the price of corn tripled and food inflation reached 12 percent to 14 percent a year, Good said. ‘So far the food price inflation has been pretty modest compared to that experience,’ Good said.”

Hal Weitzman and Javier Blas, writing yesterday at the Financial Times Online, reported that, “Consumers were warned yesterday to expect even sharper increases in global food prices after US officials said that some of the country’s best farmland faced its worst flooding for 15 years.

“Agricultural officials and traders said the damage could push up worldwide corn and soyabean prices, which have soared in recent days as floods have swamped crops in parts of Iowa, the US’s biggest corn-producing state.

“The impact of severe weather is likely to thwart signs of stabilising food prices.”

Hal Weitzman, in an article posted today at the FT Online, indicated that, “Corn prices were already rising on a combination of higher input cost, such as diesel and fertilizer, robust demand, particularly from the biofuel industry, and low global stocks, which are set to hit a 25-year low by next summer, according to the US Department of Agriculture.

“That has grabbed international attention as food prices continue to rise worldwide. The crop-price spikes are set to echo through the food chain, as corn and soya are the two main feeding crops. Cattle prices have jumped to a 22-year high. The United Nations Food and Agriculture Organisation this week warned that higher feed costs, strong demand and tight supplies would continue to push up the price of meat.

“The floods are hitting the price of other crops. As corn prices rise, some ranchers are choosing wheat as a feed crop, boosting demand for the cereal and its price.[E]ven if Pike County [Illinois] can hold back the Mississippi this year, the heavy rain has already affected the area’s productivity significantly, as some farmers are up to five weeks behind on planting.”

The Financial Times article explained that, “Not only will late planting mean punier crops and lower yields: many in the area also fear it could complicate the corn plant’s pollination process. The pollen is normally caught on the crop’s moist ‘silk’, but with the delays in sowing, pollination could be occurring in late July and early August, when the heat could dry out the silk.

“Dale Plumer, the grain merchandiser at JBS United in Griggsville, near Hull, says there is very little slack in the supply chain. ‘Up to this point, I’d say there was a lot of speculation in the market. But with this flooding, the demand and supply situation is supporting these high prices. If there are pollination problems, prices will go up even more.’

“Tight supplies have been exacerbated by the problems of transporting grain. All river traffic on 300 miles of the Mississippi has been stopped, as have many local rail lines and roads. Barge freight prices have soared on the Ohio River, one of the few waterways in the region on which grain is still being shipped.”

Monica Davey and Catrin Einhorn reported in today’s New York Times that, “Looking out from the highest hill in this town [Canton, Missouri], it suddenly seemed that there were two rivers: the Mississippi, of course, and now a new river, a nameless renegade that had appeared out of nowhere on Wednesday when the Mississippi’s waters broke over a levee near the tiny hamlet of Meyer, Ill., and surged over tens of thousands of acres of farm fields.

“The runaway river was gruesome news for the farmers and the residents – about 100, the authorities said – near Meyer and in other towns near where more than 20 levees have overflowed so far, creating their own bodies of water during this week’s flooding along the upper Mississippi. Around Meyer, part of a region of endless fields of soybeans, corn and cattle, state conservation police officers rode door to door in boats to ensure that everyone had left, and flew over in a helicopter, scanning for anyone stranded.”

The Times article added that, “So it went all along the Mississippi on Wednesday, through Iowa, Illinois and Missouri, north of St. Louis: People marching along levees and flood walls, scanning for the slightest puddle or hint of pressure in the sand, waiting for what might come. In Quincy, Ill., local officials raced to reinforce a levee they were worried about south of town; at stake were 100,000 acres of farmland and access to the Mark Twain Bridge. And federal authorities said they were closely monitoring more than 20 other levees they view as vulnerable, as the waters continue to rise downstream in the coming days.

“Around Meyer, farmers were devastated. ‘That’s all been lost, and it’s not going to be replanted this season,’ said Gerald Jenkins, general manager of Ursa Farmers Cooperative, not far from Meyer. One of the cooperative’s grain elevators, in Meyer, was swamped, Mr. Jenkins said, another at risk.

“Worse, Mr. Jenkins said he feared that so many fields under water would mean not much grain for the cooperative to sell come the fall harvest. ‘It’s a very sickening feeling,’ he said.”

Philip Brasher, writing in today’s Des Moines Register, stated that, “For consumers feeling the pinch of higher food prices, the flooding of prime Midwest farmland will bring more bad news in supermarkets through next year.

“By wiping out corn and soybean crops across Iowa, Illinois and other states, the flood is driving up prices that were already at historic highs and increasing the cost of feed for cattle, hogs and poultry.

“Economists say that will force livestock farms to cut back on production even more than they were, and that will eventually lead to higher prices for beef, pork, chicken, milk and eggs.”

The Register article indicated that, “Government options for controlling food prices are limited:

“* The Agriculture Department is considering releasing land from the federal Conservation Reserve Program for planting to crops. However, the idea has already been panned by wildlife groups because the land is prime habitat for pheasants, quail, ducks and other wildlife. Some 34.7 million acres of former cropland nationwide, including 1.8 million acres in Iowa, are idled under the program.

“* The Environmental Protection Agency is considering a request from Texas Gov. Rick Perry to roll back the nation’s ethanol usage mandate. Refiners are required to use 9 billion gallons of grain ethanol this year. However, economists say that at today’s oil, ethanol and grain prices, it’s still economical to convert corn into fuel without the mandate.

“What economists say would likely have a greater impact on ethanol production is ending both the mandate and the 51-cent-a-gallon subsidy for the fuel.

“Defenders of the ethanol industry say that cutting its incentives could shut down plants and deter investment in new technology.”

With respect to corn ethanol production, Peter Harriman reported yesterday at the Argus Leader (South Dakota) Online that, “Flooding across the Midwest is threatening corn production this year, and the ethanol industry sees the resulting price hike threatening to overwhelm the price of its product and seriously hurt profits.

“The national average rack price for ethanol was $2.88 a gallon this week. That is close to what ethanol sold for in 2006, when it replaced the additive MTBE in the nation’s fuel supply. Then, however, producers were making ethanol with corn that cost close to $2 a bushel. This year, it’s approaching $8 a bushel.”

The article pointed out that, “Because the ethanol industry developed early in South Dakota, ethanol plants here have paid off more of their loans and probably have more money in reserve than newer plants elsewhere in the Corn Belt, Jennings [Brian Jennings, executive director of the American Coalition for Ethanol] said. Until corn prices recede or ethanol prices catch up with them, ‘these plants are better able to withstand’ the disparity between corn and ethanol prices ‘than plants that opened for business this year,’ he said.”

With respect to the CRP, a Reuters news article from Wednesday (posted at DTN, link requires subscription) reported that, “As a response to crop damage this spring, the U.S. Agriculture Department said on Wednesday it is speeding up an examination of whether to release land from the Conservation Reserve for crop production.

“USDA spokesman Keith Williams did not suggest a date when a decision would be made. Livestock and grain processor groups say land should be released early and without penalty because grain stockpiles will run low this year.

“Agriculture Secretary Ed Schafer ‘says the timeline will be accelerated for making that decision,’ said Williams.”

The Reuters article added that, “USDA will assess a range of factors in estimating if grain supplies will be adequate and in deciding what to do. They include an assessment of flood damage, whether fields can be replanted, whether other regions will expand their plantings and the likely size of the fall harvest.

“In 1995 and 1996, USDA offered penalty-free withdrawal of Conservation Reserve land as a response to high grain prices and shrinking stockpiles. Owners removed roughly 1.5 million acres.”

Also yesterday, the “Washington Insider” section of DTN (link requires subscription) stated in part that, “Increasingly, ag weather events continue to close in on administration officials and both official and unofficial barometers of concern are sounding alarms. On Tuesday, weather and crop and livestock officials and analysts met to brief President Bush about the flooding in Iowa, Indiana, Wisconsin and other Midwest states. Now the president, not just Agriculture Secretary Ed Schafer, is checking daily weather reports and worrying openly about the possible effects on crop progress and quality.

“It probably is an overstatement to say that the mood at USDA is near panic, but not by much. Expert observers who were confident last week that the administration was not even considering changes in energy and conservation policies are now openly suggesting that the most recent spate of bad weather has shifted the outlook. Changes in all programs that can boost crop acreage and production are clearly under consideration now, along with possible active efforts to change the renewable fuels standard.”

The DTN item noted that, “And, if this year’s acreage and crop outlook turns out to be as gloomy as it now seems it could be, USDA seems almost certain to take steps to permit CRP contract holders to exit the program without penalty, and to make the rule changes in time to plant 2009 crops. Sen. Chuck Grassley, R-Iowa, who has a keen ear for the approach of policy changes, is now talking about going even further. He wants to open the CRP for 2008 crops to boost feed supplies now threatened by flooding in his state. Observers say it is too late in the season for that, but they also believe the agency is well along in its consideration of such a move for 2009.”

Concluding, the DTN “Washington Insider” article stated that, “For some time ¬at least since the March 30 planting intentions report – the possibility of severe grain price shocks has been simmering in the background of policy discussions in Washington. Certainly, the magnitude of price changes needed to move Congress, the administration and private investors to reconsider both energy and agricultural prospects and policies continues to be uncertain. However, the belief is growing rapidly that the current crop damage may well rise to that level.

“So, the problem of how to adjust competing demands to available crop supplies is attracting wide attention. As it moves higher and higher among policy-makers’ priorities, the need for adjustment includes discussions of the role policy changes should play, a debate that has now moved front and center – and is being amplified by the proximity of the 2008 elections.

“This setting makes each acreage and crop report front-page news for the rest of the summer – and, will contribute to the now perpetual agricultural policy debate at least through the fall elections, Washington Insider believes.”

Farm Bill and Doha

Reuters news reported yesterday that, “The U.S. Senate on Wednesday joined the House of Representatives in overriding the second veto by President George W. Bush of the new U.S. farm law, a step that enacted a 35-page section dealing with farm-export and food aid programs.”

An AFP article from yesterday reported that, “The head of the World Trade Organisation on Wednesday criticised US legislation giving hundreds of billions of dollars of subsidies to farmers and said only a global trade deal could redress the balance.

“‘Those who criticise US agricultural policy, quite rightly in my view, need a WTO deal if they want to change things and not just criticise,’ WTO director general Pascal Lamy told Swiss French-language radio.

“‘The Americans have just voted again on massive agricultural subsidies; this is the best proof, if proof were needed, that the only way to change the US positions on agriculture and subsidies is a deal at the WTO,’ Lamy said.”

Meanwhile, a Reuters article from yesterday reported that, “A broad swathe of U.S. businesses urged World Trade Organization countries to make the concessions needed to clinch a new global trade pact, but cautioned that a bad deal was worse than no deal at all.

“‘Without a major breakthrough in the coming weeks, we fear that this opportunity to liberalize trade will be lost for some considerable time,’ the industry groups and companies told WTO Director-General Pascal Lamy in a letter.

“But the letter also voiced dissatisfaction with the current proposals to liberalize agriculture and industrial trade, along with services like telecoms or banking, in the WTO’s Doha round of talks.”