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© Erik M. Lunsford/St. Louis Post-Dispatch/MCT/Zuma PressCorn in Belleville, Illinois.
The worst U.S. drought since Ronald Reagan was president is withering the world's largest corn crop, and the speed of the damage may spur the government to make a record cut in its July estimate for domestic inventories.

Tumbling yields will combine with the greatest-ever global demand to leave U.S. stockpiles on Sept. 1, 2013, at 1.216 billion bushels (30.89 million metric tons), according to the average of 31 analyst estimates compiled by Bloomberg. That's 35 percent below the U.S. Department of Agriculture's June 12 forecast, implying the biggest reduction since at least 1973. The USDA updates its harvest and inventory estimates July 11.

Crops on July 1 were in the worst condition since 1988, and a Midwest heat wave last week set or tied 1,067 temperature records, government data show. Prices surged 37 percent in three weeks, and Rabobank International said June 28 that corn may rise 9.9 percent more by December to near a record $8 a bushel. The gain is threatening to boost food costs the United Nations says fell 15 percent from a record in February 2011 and feed prices for meat producers including Smithfield Foods Inc. (SFD)

"The drought is much worse than last year and approaching the 1988 disaster," said John Cory, the chief executive officer of Rochester, Indiana-based grain processor Prairie Mills Products LLC. "There are crops that won't make it. The dairy and livestock industries are going to get hit very hard. People are just beginning to realize the depth of the problem."

Top Commodities

Corn rallied 18 percent in the month through July 6 on the Chicago Board of Trade to $6.93, trailing only wheat among 24 commodities tracked by the Standard & Poor's GSCI Spot Index, which rose 2 percent. The MSCI All-Country World Index of equities advanced 4 percent, and the dollar gained 1.3 percent against a basket of six currencies in the period. Treasuries returned 0.5 percent, a Bank of America Corp. index shows. Corn for December delivery in Chicago extended the rally today, jumping 5.3 percent to settle at $7.30.

About 53 percent of the Midwest, where farmers harvested 60 percent of last year's U.S. crop, had moderate to extreme drought conditions as of July 3, the highest since the government-funded U.S. Drought Monitor in Lincoln, Nebraska, began tracking the data in 2000. In the seven days ended July 6, temperatures in the region averaged as much as 15 degrees Fahrenheit above normal. Soil moisture in Illinois, Indiana, Ohio, Missouri and Kentucky is so low that it ranks in the 10th percentile among all other years since 1895.

Fields are parched just as corn plants began to pollinate, a critical period for determining kernel development and final yields. About 48 percent of the crop in the U.S., the world's largest grower and exporter, was in good or excellent condition as of July 1, the lowest for that date since 1988 and down from 77 percent on May 18, government data show.

Yield Losses

The USDA may cut its production forecast by 8.5 percent, the biggest July reduction since a drought in 1988 led the government to cut its estimate by 29 percent, a separate Bloomberg survey of 14 analysts showed. Farmers probably will collect 13.534 billion bushels, compared with the USDA's June forecast for a record 14.79 billion, based on the average of estimates in the survey.

Goldman Sachs Group Inc. said July 2 that yields will reach 153.5 bushels an acre, below the USDA estimate for an all-time high of 166.

"Corn yields were falling five bushels a day during the past week" in the driest parts of the Midwest, said Fred Below, a plant biologist at the University of Illinois in Urbana. "You couldn't choreograph worse weather conditions for pollination. It's like farming in hell."

Record Crop

Even with the drought, U.S. production in 2012 is expected to rise 9.5 percent from last year to a record after farmers sowed the most acres since 1937, the survey showed. Higher output would help boost inventories before next year's harvest, up from what analysts said will be a 16-year low on Sept. 1 of 837 million bushels.

Futures fell 2.2 percent on July 6, the most in two weeks, after the USDA reported a 90 percent drop in export sales in the week ended June 28. U.S. refiners curbed output of corn-based ethanol last week to the lowest since September as gasoline demand weakened, government data show.

Corn's rally also may stall if Europe's widening debt crisis and a faltering global economy erode record demand for the grain. The International Monetary Fund will reduce its estimate for growth this year because of weakness in investment, employment and manufacturing in Europe, the U.S., Brazil, India and China, Managing Director Christine Lagarde said July 6.