UPDATE 4-Midwest drought slashes US corn estimate, jolts market

Thu Jul 12, 2012 2:22am IST

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* U.S. corn, soy, wheat stocks lower than expected
    * USDA cuts corn yield more than trade expected
    * Despite drought, third-largest U.S. corn crop
    * Traders see more cuts after early August field tours


    By Charles Abbott
    WASHINGTON, July 11 (Reuters) - The worst Midwest drought in
a quarter century is doing more damage to U.S. crops than
previously expected with the government on Wednesday slashing
its estimate for what was supposed to be a record harvest.
    The U.S. Department of Agriculture said the corn crop will
average just 146 bushels an acre, down 20 bushels from its June
estimate and a much more dramatic drop than analysts had
projected.
    The report initially re-ignited a near-record rally in grain
prices that could eventually hit consumer grocery bills in North
America, although the impact could be more immediate for the
world's poor if the drought persists.
    The severe scaling back of the harvest has sent corn and
soybean prices up by more than a third over the past month, as
extreme heat and dry conditions stunt growth in the world's
largest grower and exporter.
 
    
    MARKET JOLT
    The deep cuts to the supply outlook shocked traders, who had
expected the USDA to be more conservative in adjusting its
views. The chairman of World Agriculture Outlook Board said the
12 percent 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.
    The news for traders softened as the day went on as
profit-taking and forecasts for slightly wetter weather
curtailed gains. After a volatile trading day on the Chicago
Board of Trade, corn futures erased earlier gains of
nearly 3 percent to end 1.9 percent lower. 
    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.
    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 percent from last month,
more than the 32-percent reduction expected.
    At 1.183 billion bushels, U.S. corn stockpiles would 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 percent 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
percent, although inventories will still be the highest in three
years.
    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.
    
    TIGHT STOCKS 
    This would be the third year in a row of tight corn
supplies. USDA also reduced its forecast of corn for ethanol by
100 million bushels, or 2 percent, and cut export and livestock
feed forecasts.
    Higher feed prices will depress U.S. meat production and cut
into margins for companies like Tyson and Smithfield
 with per capita consumption dropping by 1 percent to
200.6 lbs in 2013 because of smaller supplies and higher prices.
    Other food prices could be affected as well. Corn, wheat and
soybeans, the three most widely grown U.S. crops, are the raw
ingredients in a panorama of foods from cereals and salad
dressing to scones and cooking oil.
    "The immediate view is that crop producers will bear the
brunt of financial losses but losses in animal industries will
be enormous in the coming year, perhaps becoming considerably
greater than for the crop sector," said Chris Hurt, agricultural
economist at Purdue University, pointing to high feed prices.
    China was forecast to import 5 million tonnes of corn in the
marketing year that opens on Sept. 1, down 2 million tonnes from
the USDA's June forecast as available U.S. supplies shrink.
    The USDA also reduced its estimated carryover stocks of
wheat to 664 million bushels and soybeans to 130 million bushels
soybeans, compared with trade expectations of 718 million
bushels of wheat and 141 million bushels of soybeans.
    USDA cut its forecast of the wheat crop in Russia by 4
million tonnes due to poor yields, in Kazakhstan by 2 million
tonnes because of hot and dry weather in June, and in China by 2
million tonnes due to lower yields.
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