* Corn stressed by drought at risk for aflatoxin
* Aflatoxin, byproduct of a grain fungus, is a carcinogen
* Mold that causes aflatoxin has emerged in the Corn Belt
* Extent of outbreak unclear; more harvest results awaited
By Julie Ingwersen
CHICAGO, Aug 29 (Reuters) - The grain industry, makers of milk products and crop insurers are on high alert for a naturally occurring toxin in corn that could present another challenge to farmers already hit by the worst drought in 56 years.
Trace amounts of aflatoxin have shown up in some of the corn harvested in the United States, with top U.S. dairy company Dean Foods in talks with state officials in Indiana and Iowa about testing milk for the carcinogenic byproduct of mold.
Any major outbreak has the potential to snarl the grain handling system in the Corn Belt and trigger a scramble -- and price spike -- for untainted corn which will already be in short supply this year due to the drought.
"We've actually seen it this bad before, but this year it's just a lot more widespread," said Jeffrey Richter, manager of a Missouri Department of Agriculture grain inspection facility in St. Joseph, Missouri.
His office was testing corn samples from Kansas, Nebraska and Iowa and finding some level of aflatoxin in most of them. Richter said most of his site's samples were sent by crop insurance adjusters who suspect a problem with the grain.
Aflatoxin is the byproduct of a powdery, olive-green mold that has emerged in corn fields from Kansas through Indiana and is harmful or even fatal to livestock. The presence of the mold does not necessarily lead to aflatoxin.
With the corn harvest only 6 percent complete in the United States, the world's largest corn producer and exporter, it's too soon to know whether aflatoxin will be a significant problem.
Strict regulations and testing of finished foods and feeds should prevent a major health scare, and human exposure to high levels of aflatoxin is rare
"We are seeing (the mold) in fields. Whether or not it's something that's going to be a serious problem, we're not sure yet," said Kiersten Wise, a plant pathologist with Purdue University in Indiana.
Aflatoxin contamination prompted a series of pet food and livestock food recalls last December, including products produced at Cargill's Lecompte, Louisiana, plant and Procter & Gamble Co plant in Henderson, North Carolina.
MORE COMMON IN SOUTHERN UNITED STATES
Aflatoxin, caused by the Aspergillus fungus, develops on crops stressed by severe heat and drought and is most commonly found in the southern United States. Typically, the heart of the Corn Belt, which tends to benefit from cooler summers and ample rains, is spared from aflatoxin. But given the worst Midwest drought in 56 years, this year is different.
The U.S. Department of Agriculture's Risk Management Agency, which oversees crop insurance programs, warns that insured farmers who suspect their fields might have aflatoxin must contact their insurance agents before they harvest the grain in order to receive compensation.
Testing grain is a challenge because the mold can appear in highly variable levels within a field.
"I am spending 80 percent of my day talking to farmers about having to handle this. It's consuming a great deal of time in the industry," said Dennis Wieseman, grain manager for the Shipman Elevator Co, a grain elevator in Shipman, Illinois, an hour's drive north of St. Louis.
Wieseman said his elevator is testing shipments because farmers in the area have noted mold in their fields. "I don't think it's an alarming amount, but we are going to have some issues," Wieseman said.
Under guidelines from the U.S. Food and Drug Administration (FDA), certain types of animal feed can contain an aflatoxin concentration of up to 300 parts per billion (ppb). Human foods must contain less than 20 ppb, while the threshold for milk is even lower, at 0.5 ppb.
Grain elevators typically discount loads of corn containing more than 20 ppb -- the equivalent of only seven kernels in a railcar full of grain -- while loads containing higher levels risk being rejected. A few grain buyers have begun posting aflatoxin discount schedules.
Grain handlers typically respond to corn quality issues by slowly blending off low-grade corn with other supplies, as they did with aflatoxin outbreaks that followed the drought of 1988, and a smaller outbreak in 2005. The FDA generally forbids such blending but has relaxed its policy during years of widespread aflatoxin problems, upon the request of state officials.
However, blending requires access to supplies of clean corn -- and the latest aflatoxin threat comes at a time when U.S. corn inventories from the 2011 harvest are almost exhausted, and drought has decimated the 2012 crop. So a major aflatoxin outbreak could cause headaches for corn suppliers.
"The worse it is in a local area, the more stress the local grain handlers will face to try to find non-aflatoxin grains to blend with," said Dan O'Brien, an agricultural economist with Kansas State University.
Aflatoxin can spread once the grain is stored.
Said Wieseman, "We could have some horror cases this winter, if guys stored it and this grew on them."