July 31 - Drought deepens worries about food supplies, prices

Alarm grew over the unrelenting Midwest drought on Tuesday, as one of the top corporate leaders in agriculture warned that the government must act quickly to reduce the amount of corn going to ethanol to prevent a sharp spike in food prices.

Worries about the worst drought in more than half a century afflicting the world's largest grain exporter also deepened overseas, where buyers in China and other hungry nations fret that the expected sharp drop in U.S. harvests will cause shortages and price spikes.

Greg Page, chief executive of global grains trading giant Cargill Inc, joined a chorus of critics of biofuels by urging the U.S. government to temporarily curb its quotas to produce corn-based ethanol fuel. Page said on CNBC that the U.S. biofuel mandate "needs to be addressed" through existing policy tools. Otherwise, the spike in U.S. corn and soybean prices to record highs will "ration" demand in ways that will hurt food production too much.

"If all of that is only on livestock or food consumers, it really makes the burden disproportionate. What we see are 3 or 4 percent declines in supply lead to 40 to 50 percent increases in prices, and I think the mandates are what drives that," he said.

The U.S. Agriculture Department last week raised its estimates of food price inflation due to soaring grain prices tied to the drought, saying prices could rise as much as 3.5 percent this year and another 3-4 percent in 2013, led by meat.

Grain analysts polled by Reuters pointed to a U.S. corn crop of 11.2 billion bushels, the smallest in six years and down 14 percent from USDA's latest forecast of 12.97 billion. Initial forecasts were for a crop of more than 14 billion bushels. Soybeans, which were planted later and until now escaped the drought's pressure, are now also being hurt. Analysts predict a 2.834 billion bushel harvest, the smallest in four years, and down from USDA's latest estimate of 3.05 billion bushels.

"We are continuing to see a deterioration of the crops," grains analyst Karl Setzer of MaxYield Cooperative in West Bend, Iowa said, referring to the U.S. Department of Agriculture's crop progress report issued on Monday.