Wed Jul 11 10:31:06 2012 EDT

  --U.S. corn futures rally Wednesday

  --The USDA cuts yield projection to 146 bushels per acre, down from

166

  --Traders eye weather for further potential crop damage

   By Ian Berry

  CHICAGO--U.S. corn futures surged Wednesday after the government slashed its crop outlook amid withering drought conditions.

  Corn futures for December delivery at the Chicago Board of Trade were recently up 21 1/4 cents to $7.38 3/4 per bushel. Front-month July corn was up

18 cents to $7.79 a bushel.

  The U.S. Department of Agriculture's monthly supply-and-demand report estimated the average U.S. yield at 146 bushels per acre, down sharply from its projection of 166 bushels per acre a month ago.

  While that is in line with what many analysts were already projecting, most were expecting the USDA to be more conservative in cutting the yield projection.

  It's rare for them to make any changes in the July forecast but this is no normal year, Ken Morrison, editor of the Morrison on the Markets newsletter, said in a note to clients.

  Along with the yield reduction, the USDA projected a total crop size of 12.97 billion bushels, down from a June estimate of 14.79 billion. It projected stockpiles at the end of the 2012-13 marketing year at 1.183 billion bushels, down from a June estimate of 1.881 billion and below the average analyst estimate of 1.232 billion.

  Given the smaller crop, demand is going to have to drop like a rock here,

said Don Roose, president of U.S. Commodities in West Des Moines, Iowa.

  While the government raised its projected average farm price for

2012-13 to

$5.40 to $6.40 per bushel, up from $4.20 to $5 last month, the higher projection is still well below current price levels, Mr. Roose said.

  Traders will be watching the weather closely and noting the adage, small crops get smaller, Mr. Roose said. This means that, once a crop's yield potential starts dropping and crop estimates are lowered, they are usually lowered further as the season progresses.

  The western Corn Belt has generally fared better than parts of the eastern Corn Belt, such as Indiana, but the prospect of intense heat in the days ahead could severely hurt the western crop as well, Mr. Roose added.

  While heat stress in many areas has abated slightly after temperatures hit the century-mark last week, most of the Corn Belt is still very dry, and brokerage FCStone noted that heat will ramp back up towards the 100-degree mark next week in the western and central Corn Belt.

  In addition to the smaller crop, the USDA also slashed projected demand significantly Wednesday. The government cut projected corn exports for the

2012-13 marketing year to 1.3 billion bushels, down from an earlier estimate of

1.9 billion, and cut projected feed and residual use by 650 million bushels to

4.8 billion. Ethanol use was also cut, by 100 million bushels.