The worst Midwest drought in a quarter century is doing more damage to U.S. crops than widely believed, already shrinking corn yields to the lowest in nearly a decade, the government said on Wednesday.
In a report that reignited a near-record rally in grain prices, the U.S. Department of Agriculture said the crop will average just 146.0 bushels an acre, down 20 bushels from its June estimate and lower than analysts' estimates just a week ago. One official said it was the biggest such cut he could recall.
The dramatic scaling back of what had initially been forecast to be a record harvest has sent corn and soybean prices up by more than a third over the past month, as extreme heat and dry conditions stunt corn growth in the world's largest grower and exporter.
Corn prices raced more than 3 per cent higher and soybeans were close to a record high on Wednesday before profit taking and forecasts for slightly wetter weather curtailed gains. Prices are still up more than a third over the past month as the drought threatens to set off another year of food price inflation and supply concerns.
The USDA cut its corn harvest projection to 12.97 billion bushels for 2012/13 — still the third largest on record. The yield would be the lowest since 2003, although still far higher than the 85 bushels an acre following the drought of 1988.
The surprisingly deep cuts to the supply outlook jolted traders, who had expected the USDA to be more conservative in adjusting its views. The chairman of World Agriculture Outlook Board said the 12 per cent cut was the largest he could recall.
"They sent a signal of, 'Listen, we got a serious problem here'," said Don Roose, an analyst with U.S. Commodities. As a result, USDA reduced its forecast for corn ending stocks — the amount of grain still in bins at the end of next summer, before the new harvest — by 37 per cent from last month, more than the 32-per cent reduction expected.
At 1.183 billion bushels, U.S. corn stockpiles will still rise by nearly a third from this year's ultra-low levels, with the reduced supply outlook partly offset by downward revisions to exports and ethanol usage as near-record prices curb consumption. Separate data showed ethanol output fell last week for the fourth time, reaching its lowest in two years.
Wheat and soybean stocks were also below expectations. Soybean yields were cut nearly 8 per cent to 40.5 bushels per acre, the second lowest since 2003, due to the drought. The USDA cut its forecast for global corn stocks by 14 per cent, although inventories will still be the highest in three years.
By midday, December corn on the Chicago Board of Trade was down 0.9 per cent at $7.11 a bushel, while November soybean futures rose 0.4 per cent to $15.45 a bushel. Front-month wheat gained 0.7 per cent to $8.10 a bushel.
The report "tells me they feel pretty confident this crop has been hurt in a big way," says Shawn McCambridge, analyst at Jefferies Bache. Additional cuts are likely, he said, when USDA makes spot checks of fields as it prepares for an Aug. 10 report which will make the first estimate of the harvest.