U.S. forecasters again cut their estimates for the nation's corn and soybean harvests as a widespread drought continued to take a heavy toll in the Farm Belt.
But the Department of Agriculture made a smaller reduction in its forecast Wednesday for this fall's corn crop than analysts were expecting. Corn-futures prices, which hit a record last month, fell more than 1% after the report to trade at two-month lows.
Cool temperatures and rains improved growing conditions in parts of the Midwest last month, but came too late to improve yields for most corn growers.
The U.S. drought this year, by some estimates the worst since the 1950s, has stunted crops from Ohio to Nebraska and sent grain and soy prices soaring over the summer. The drought is raising the cost of feed for livestock producers and will ripple through food markets, eventually hitting consumers.
Now, as farmers start to harvest corn and soybeans, traders are paying keen attention to the latest estimates of just how low national production will be.
The USDA again projected the worst corn yields--or harvested bushels per acre--since 1995. It now expects corn yields to average 122.8 bushels an acre, down from its August forecast of 123.4.
The government forecasts total corn production of 10.727 billion bushels this year, down 0.5% from its August estimate. The nation's corn harvest would be the smallest in six years.
"The corn number is clearly the headline," said analyst Jack Scoville, vice president of Price Futures Group in Chicago. The USDA's corn production estimate "is significantly higher than anyone was expecting."
The USDA cut its estimate for corn demand in the marketing year that ended Aug. 31, including by trimming its export estimate by 0.6% and its estimate for the "feed and residual" category, including corn used in animal feed, by 3.3%. That suggests that record corn prices have curbed demand for the grain more than analysts had expected.
The USDA also estimated greater corn supplies a year from now than analysts had projected.
Corn futures for September delivery recently were down 11.75 cents, or 1.5%, at $7.705 per bushel at the Chicago Board of Trade. The more-active December contract was down 10 cents, or 1.3%, at $7.6775 a bushel.
The USDA now expects soybean yields this year to average 35.3 bushels per acre, down from its August forecast of 36.1 bushels per acre. The USDA estimated that the overall soybean harvest will be 2.634 billion bushels, down 2% from its estimate last month.
The USDA is projecting that both soybean yields and the total soybean harvest will be the lowest in nine years.
The government's reductions in soybean yields and production were both greater than analysts expected. Soybean futures rose after the report.
Soybeans for September delivery at CBOT recently were up 35.5 cents, or 2.1%, at $17.32 a bushel. The more-active November contract was up 36.5 cents, or 2.1%, at $17.38 a bushel.
Some analysts think the soybean crop will be larger than the USDA projects, partly because the agency's forecasts are based on a mix of physical crop measurements and farmer surveys.
In surveys, the farmer "doesn't have much of an incentive to tell the government the truth," said Chad Henderson, president of Prime-Ag Consultants Inc., a commodity brokerage based in Brookfield, Wis. "I think the bean number is too low...You might not have big, big yields out there any places, but you just don't have the really poor crops in beans which you need to get a low national average yield."
About 15% of the U.S. corn crop has been harvested, which is higher than normal for this time of year, in part because warm spring weather led to early plantings.
Some farmers are trying to speed up their corn harvest to maximize yields after the drought battered their fields. "Because of the drought, our plants are not very strong and they're starting to fall over," said David Hardin, a 39-year-old farmer in Danville, Ind., who planned to start harvesting corn this week. "To salvage what bushels we can, we're going to start harvesting earlier."
Mr. Hardin and his father, who farm together, also raise hogs. In a normal year, they grow enough corn to feed their swine. But they don't think they'll have enough corn after this year's harvest, so they will have to buy corn at high market prices. This will lead to "significant red ink" next year, because the cost of raising the hogs likely will outstrip the price the Hardins can fetch from meatpackers, Mr. Hardin said.
In Emington, Ill., farmer Mike Haag said August rainfall may have helped the soybean crop he manages with his father, but that yields will be below average. "Some of these late rains probably helped some," the 45-year-old said, "but it hasn't by any means alleviated the problem."
The USDA didn't change its forecast for domestic soybean inventories a year from now, though the forecast of 115 million bushels would still be a nine-year low.
Globally, the government slightly boosted its forecast for corn inventories, on the expectation that reduced demand will make up for production shortfalls in North America and Europe.
U.S. forecasters made small trims to their estimates for world soybean and wheat inventories, due to demand reductions offsetting production cuts. For wheat, the USDA cut its output forecast for Russia by 9.3%, in line with analysts' concerns about drought-damaged crops there.
--David Kesmodel and Ian Berry contributed to this article.
-Write Owen Fletcher at Owen.Fletcher@dowjones.com
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