The United States should consider lowering its targets for the use of corn in alternative fuel ethanol, as the impact on U.S. crops from the worst drought more than 50 years becomes clearer, an official of the Organization for Economic Co-operation and Development (OECD) said on Tuesday.
Searing heat has parched crops in the Midwest grain belt, rattling markets that had anticipated big harvests would replenish low stocks and driving prices to record highs.
The situation was not yet comparable with that of 2007/08 when supply tensions across all major staple crops sparked rioting in some countries, but the threat to this year's U.S. harvest would put a spotlight on demand for ethanol, Ken Ash, head of trade and agriculture at the Organisation for Economic Cooperation and Development, said.
"What I would like to see is where we are a little further along in the growing season, I don't mean in October but I mean in the middle of August, that's a real good moment to ask that question and to think about whether the situation is such that a relaxing of the mandates makes sense," he told Reuters.
Ethanol absorbs about 40 percent of corn production in the United States, which is the world's largest grower and exporter of the grain, as part of government targets for biofuels.
The Paris-based OECD, like some other observers, has regularly criticised biofuel targets as costly in public subsidies and disruptive in their side-effects on grain supply and prices.
Making temporary adjustments to biofuel targets was hard to do, however, Ash added.
"If you're not going to get rid of them at what moment do you want to begin to respond to a crop situation?," he said. "It's much more difficult to say here's when you should manage your mandates and manage your domestic market."
DROUGHT SURPRISED MARKET
Next month's updated crop forecasts from the U.S. government, which will be based on surveys of corn and soybean fields, will give a firmer indication of drought impact on U.S. supply and global grain supply, Ash said.
"It's way early to say this is a big deal or this is not a big deal," he said. "At the moment with what's on the table we're calm but watching what happens."
"The next milestone for us is the next U.S. forecasts on Aug. 10," he said, referring to the USDA's monthly crop report. "What's really important is whether it gets worse or stays about where it is in corn as the weather evolves."
The U.S. Department of Agriculture already slashed this month its yield forecasts for corn and soybeans and private forecasters have continued to scale back estimates.
Rain in parts of the Midwest triggered a pullback on prices this week after record highs on Friday, with soybeans leading movement as the crop could benefit more from rain than earlier-planted corn has already suffered irreversible damage.
Ash said surprise at the U.S. drought had amplified a price rise at a time when fundamentals were much less fragile than in the 2007/08 season.
Despite cuts to the outlook for U.S. corn, world production of the crop was still on course to rise this year, while wheat output should remain relatively high, he said.
Markets were wrong-footed after assuming a large crop area and early planting would lead to bumper U.S. harvests, he said.
"Then in July it's, uh oh, that's not going to happen. So the fact that this rather positive expectation is not coming about is a shock that's probably bigger than the numbers themselves."
Last year's launch of an global data-sharing system for staple agricultural commodities, known as AMIS, at the behest of the G20 group of leading economies could help policy, he added.
"I have much better information today than I did a couple of years ago and it derives from our participation in AMIS," he said.
"Hopefully this information will be transmitted more quickly and clearly to policy makers in governments to the extent we can avoid making decisions about things like export restrictions that made the situation worse in 2007/08 and in 2010." (Reporting by Gus Trompiz; Editing by Veronica Brown)