Washington, 12 May 2011: Reuters

Farmers around the world will harvest sharply larger grain crops this year, the U.S. government projected in an unexpectedly upbeat outlook on Wednesday, adding that a drop in U.S. exports would also help refill dangerously thin grain stockpiles.

In a report that helped knock Chicago corn and wheat prices 5 percent lower, the U.S. Agriculture Department said a record U.S. corn crop this year would more than meet demand, despite a slow start to planting.

Although the U.S. winter wheat crop will be the smallest in five years and larger biodiesel use would eat into soybean supplies next year, traders said the overall report provided a measure of relief for the world after a year of harrowing droughts and floods that drove food prices to record highs.

"This will help calm the corn and wheat markets," said private analyst John Schnittker. World grain production in the 2011/12 crop year will rise by a strong 4 percent, led by a record feed grain harvest that will rise 6 percent from 2010/11, USDA said. Output of oilseeds such as canola and soybeans would rise 2 percent to a record.

LITTLE PRICE RELIEF

But Oxfam, the international aid group, said it was unlikely prices would fall steeply enough to make food more affordable for poor people. And the crops covered by USDA's forecasts are months from harvest.

Food prices have been soaring across the globe, fueling protests that toppled leaders in Tunisia and Egypt, while leading populous nations like China and India to tighten their monetary policy in an effort to forestall any unrest.

USDA projected larger U.S. corn and soybean supplies than traders expected for this marketing year. Its figure for corn ending stocks on Sept. 1, 2012, also was larger than traders had anticipated. With a slight downturn in exports, the corn stockpile would total 900 million bushels at the end of the 2011/12 marketing year, well above the 808 million bushels expected by analysts.

Corn futures suffered their largest one-day drop in two months, down more than 5 percent at the Chicago Board of Trade. Wheat also dropped over 5 percent, with additional pressure from a second major cross-commodity rout.

NOT OUT OF THE WOODS

But traders said it was premature to suggest the report represented a conclusive turning point for markets. Heavy Midwest rains that have slowed planting, flooding in the Southeast and a dire drought in the South have put a significant risk premium into prices ahead of the fall harvest.

"The thing that probably keeps us from just falling apart is that the weather still doesn't look conducive to trend yields," said Don Roose, an Iowa-based analyst with U.S. Commodities.

USDA shaved its estimated corn yield to 158.7 bushels an acre, 3 bushels less than normal, "reflecting the slow pace of planting progress through early May."

As of Monday, farmers had planted only 40 percent of the U.S. corn crop, two-thirds of the average plantings by that date.

"We're going to need a warm summer with timely rains to realize this 13.5 billion-bushel crop," said Todd Davis, crops economist for the largest U.S. farm group, the American Farm Bureau Federation. Even with a record crop, "this is a very tight supply," he said.

U.S. corn stocks are forecast at 730 million bushels when the new crop is ready for harvest, the smallest total in 15 years. It would be a three-week supply.

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