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The worst drought since 1988 that has scorched crops is expected to slash Iowa's average corn yield to the lowest in 15 years, cut the national average yield to the lowest since 1995 and put pressure on food prices.
The U.S. Department of Agriculture on Friday projected the average corn yield for Iowa producers at 141 bushels per acre, reflecting the damage caused by high temperatures in June and July and lack of rainfall. That would be the lowest since 1997, when the average yield was projected at 138 bushels per acre.
Iowa corn production is estimated at 1.9 billion bushels, down from 2.4 billion in August 2011.
The national average corn yield was cut by the USDA to 123.4 bushels an acre, down sharply from the USDA projection of 146 bushels per acre last month. If realized, that would be the lowest since 1995 when the yield was projected at 125.6 bushels per acre.
Friday's USDA report sent corn futures surging more than 3 percent to a record high $8.23 per bushel on the Chicago Board of Trade.
The USDA also projected corn prices, which touched $8 per bushel last month, could rise to a record $8.90 per bushel. That is expected to drive up food prices due to the uses of corn as animal feed as well as a source of ingredients such as high fructose corn syrup.
The USDA has warned that a 2.5 percent to 3 percent increase in food prices this year will widen to as much as 5 percent next year.
U.S. corn production is forecast at 10.8 billion bushels, down 13 percent from 2011 and the lowest production since 2006.
While the reduction in the average corn yield was sharper than expected, the report also contained some positive data, according to Dax Wedemeyer, an analyst with U.S. Commodities in West Des Moines.
"The 1.25 billion bushels that was cut on the usage side kind of offset the overall bullishness of the numbers," Wedemeyer said. "We also saw that harvested acres was cut 1.5 billion acres, which was a little less than what the trade was expecting."
The lower projected corn yields and higher prices are exerting political pressure to temporarily suspend or abolish the federal government's Renewable Fuels Standard. The latter requires that at least 10 percent of the nation's gasoline supply and consumption be ethanol.
Geoff Cooper, analyst for the Renewable Fuels Association, said Friday that "based on today's USDA estimates, the U.S. ethanol industry will use 2.9 percent of the world grain supply on a net basis in 2012/2013, the lowest percentage since 2008/2009."
Earlier this week Bruce Babcock, Iowa State University economist, reported demand for ethanol amounts to no more than 50 cents per bushel for the price of corn.
The USDA also reduced the average soybean yield in Iowa to 43 bushels per acre, down from 50.5 bushels per acre in August 2011. Soybean production is estimated at 405.9 million acres, down from 466.1 million acres in 2011.
Soybean production nationally is forecast at 2.69 billion bushels, down 12 percent 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 projection sent the November new crop soybean contract up 24 cents per bushel to $16.56 on the Chicago Board of Trade.
The USDA's new estimates are based on surveys of farmers and its own experts inspecting fields for the first time since the drought began to take hold in mid-June. Iowa's corn crop was rated 20 percent very poor, 29 percent poor, 35 percent fair, 15 percent good and 1 percent excellent in the weekly USDA report issued Monday.