U.S. corn supply shrinks as floods ravage new crop

CHICAGO (Reuters) - Deluges of rain that keep pounding U.S. corn-growing areas and floods that have heavily damaged the newly sown crop already are making the government's latest dire forecast for corn output look more like an optimistic Polyanna pronouncement.

The U.S. Department of Agriculture (USDA) on Tuesday shocked the corn market, revising its forecast for national corn output down 3 percent from last month's prediction. But experts said the picture probably will get even bleaker because the bad weather will force the USDA to lower its estimate of corn acreage in addition to the lower yields per acre that were announced on Tuesday.

With demand for corn for food and fuel forging ahead while huge corn areas remain under water even as more rainstorms loom ahead, analysts see the threat of a perfect storm.

"They've lowered yields ... and now people are going to start to adjust the acreage because of the rains we've had this last week," said Roy Huckabay, analyst with The Linn Group in Chicago. "It's wildly bullish corn."

The USDA June supply/demand report trimmed its forecast for this year's crop to just over 11.7 billion bushels, down from its May forecast of 12.1 billion. If the crop comes in as forecast, it would be a huge 10 percent reduction from last year's record crop of over 13 billion bushels.

The USDA tweaked its forecast earlier than some had expected as it cut corn yields by 5 bushels per acre but left the corn acreage unchanged at 86.0 million.

"The biggest surprise is how aggressive USDA was in dropping yield, it's the second biggest drop (ever). It only magnifies how much in jeopardy this crop is, it's starting off on the wrong foot for 2008," said Joe Victor, analyst for Illinois-based research and advisory firm Allendale Inc.

USDA also cut its outlook for the corn supply at the end of next summer (August 31, 2009) to only 673 million bushels, the lowest in 13 years, a three-week supply and roughly half the expected stockpile at the end of this summer at 1.433 billion.

Torrential rainfall has damaged the crop in the heartland of the world's largest corn-producing country at a time every bushel is needed to meet the soaring demand for food and fuel.

Corn is the root stock for the growing U.S. ethanol fuel industry so the current market and weather turmoil in the Corn Belt is bound to stir further controversy about the use of corn as fuel versus feed and food.

U.S. corn prices on Tuesday soared to a record high of $7.20-1/2 per bushel for July futures in the new-crop marketing year. Persistent rains and flooding in key corn states Iowa, Illinois, Indiana, Nebraska and Missouri should make the crop outlook more precarious and send corn prices still higher.

"The yield reduction was probably greater than what was anticipated, but here again, we have a lot of problems out in the country," said Shawn McCambridge, analyst for Prudential Financial. "We didn't see any acreage reduction, so that still remains a possibility."

CORN DEMAND FOR FUEL/FOOD HUGE DESPITE HIGH PRICES

The ethanol fuel industry next year is expected to use 4.0 billion bushels or nearly 35 percent of the corn crop -- up 33 percent from this year when 3.0 billion bushels of corn will be used as fuel, 23 percent of the crop, according to the USDA.

The U.S. Renewable Fuels Association said ethanol capacity at 8.8 billion gallons is 40 percent more than a year ago as producers expect government mandates and record oil prices to help open new markets for the alternative fuel.

As ethanol output booms, corn earmarked for exports is expected to slide and beef, pork and chicken producers are scaling back meat output because the record high corn prices are boosting feed costs and squeezing profit margins.

USDA said corn exports next year are expected to be 2.0 billion bushels, almost 20 percent less than this year.

On June 30th, the USDA will release an updated forecast for the amount of corn to be used by livestock and poultry feeders. Corn prices at record highs and nearly 75 percent above a year ago are bound to trim the amount being fed, reducing the output of beef, pork and poultry and likely boosting the price for each at the grocery store, the analysts said.

The stock price for leading U.S. chicken producer Pilgrim's Pride Corp PPC.N fell over 10 percent early this week because of high corn prices and weak chicken prices, analysts said.

Shares of No. 2 producer Tyson Foods Inc. (TSN.N) and No. 4 producer Sanderson Farms Inc (SAFM.O) also fell. The No. 3 U.S. chicken producer, Perdue Farms Inc., is not publicly traded.

"Corn is the big thing and demand (for chicken) is ho hum so far this summer," said Len Steiner, a food industry consultant for Steiner Consulting Group referring to the declines in stock prices.

(Reporting by Sam Nelson, Bob Burgdorfer, Christine Stebbins, Julie Ingwersen and Lisa Shumaker in Chicago; Editing by David Gregorio)