USDA jolts traders with sharp cut to corn estimate


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.



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The USDA?s World Agricultural Outlook Board (WAOB) released the monthly WASDE report this morning. Several changes were made in supply and consumption projections for corn and soybeans. By far the most important changes were the drops in yield projections. Following is a brief summary and implications of the report.


In a major surprise the projection of U.S. corn yield for 2012 was reduced 20 bushels, from 166 to 146 bushels per acre. For some perspective on the size of the decline, the largest June to July drop in non-survey projections before this year was three bushels (in 2005). Total projected production declined from 14.79 billion bushels to 12.97 billion, a drop of 12.3%. This large decline in production naturally led to a sharp decline in projected use for 2012/13. Beginning stocks for the marketing year were increased 52 million bushels, reflecting a softening of exports late in the current marketing year, but this had a very small impact relative to the drop in production. Total available supplies for the 2012/13 marketing year were forecast at 13.903 billion bushels compared to 15.656 billion just one month ago. The main adjustment in use was to lower feed and residual use 650 million bushels to 4.8 billion. Exports were dropped 300 million bushels to 1.6 billion and ethanol use was dropped 100 million bushels to 4.9 billion. Total use was projected at 12.720 billion leaving 1.183 billion in ending stocks. Not surprisingly, the mid-point of the projected range of prices for the marketing year was boosted from $4.60 to $5.90.

One important point regarding the changes to corn usage for the upcoming marketing year pertains to feed and residual use. The 650 million bushel drop (12%) in feed and residual use would seem to imply a very large liquidation in U.S. livestock herds. However, one should keep in the mind that the June estimate of 2012/13 feed and residual use, 5.450 billion bushels, was very large relative to the estimate for the current marketing year, 4.550 billion bushels, and also large relative to livestock numbers. A ?pre-drought? starting point for 2012/13 feed and residual use closer to 5 billion bushels is more reasonable and implies a much smaller decline in feed use and animal numbers.

Another point of debate is the 300 million drop in the forecast of exports for 2012/13. This is mainly due to a projected decline in Chinese imports. Since the domestic corn production estimate for China did not change the decline in exports appears to be a reaction to higher prices. Whether these declines actually materialize will be an important development to monitor as we proceed through the upcoming marketing year.


Like corn, the major surprise in soybeans was the reduced yield projection. The USDA lowered its projection from 43.9 bushels to 40.5 bushels. The largest previous drop in June to July non-survey projections was one bushel in 1993. Total production for 2012 is now forecast at 3.050 billion bushels, down from 3.205 billion in June. The decline in production caused domestic crush to be adjusted downward by 35 million bushels and exports to drop by 115 million bushels. The net effect of the changes was to drop ending stocks by 10 million bushels to 130 million. This is very near the minimum ?pipeline? level of ending stocks and any further declines in U.S. production will necessitate further reductions in use. The mid-point of the season average price range for 2012/13 was increased from $13 to $14.

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U.S. Declares the Largest Natural Disaster Area Ever Due to Drought

The blistering summer and ongoing drought conditions have the prompted the U.S. Agriculture Department to declare a federal disaster area in more than 1,000 counties covering 26 states. That's almost one-third of all the counties in the United States, making it the largest disaster declaration ever made by the USDA.

The declaration covers almost every state in the southern half of the continental U.S., from South Carolina in the East to California in the West. It's also includes Colorado and Wyoming (which have been hit by devastating wildfires) and Illinois, Indiana, Kansas and Nebraska in the Midwest. However, it does not include Iowa, which is the largest grain and corn producer in the U.S. This map show the countries affected:

To see the map