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Corn falters; traders watch crop yield, demand

CHICAGO (MarketWatch) -- Corn and wheat futures ended lower Friday, pulling back after a two-session climb, and soybean futures rose as the U.S. Agriculture Department cut its 2012 estimates for corn- and soybean-crop yields and predicted an increase in wheat production.

December corn (CZ2) , the most active contract, lost 4 cents to settle at $8.09 per bushel on the Chicago Board of Trade.

The front-month September contract (CU2) lost 18 cents to end at $8 per bushel.

The contract touched a high of $8.436 earlier Friday, surpassing the previous front-month, intraday high from July 20 of $8.274, according to a CME Group spokesman.

In its July crop-production report, released Friday, the USDA adjusted its average corn-yield estimate to 123.4 bushels per acre, down 13% from 2011. For the most part, the decrease in corn estimates were largely foreseen by investors in the market.

"I don't think it was a surprise," wrote Mitch Kasper, a principal for Midwest AG Investors, in an email. "Most professionals feel the USDA is behind the market and expect another reduction in yield."

Kasper said he believes the actual yield per acre will be somewhere between 112 and 118 bushels per acre, and that prices may still rally.

But prices for corn edged lower Friday, as significant cuts to U.S. demand estimates helped offset the expected declines in corn yields, according to Muktadir Rahman, commodities economist at Capital Economics in London.

The USDA cut its estimates of overall demand for U.S. corn by 12% in August due to higher prices and as competition from South American exporters weakened feed, ethanol and export demand for domestic corn, he said.

Soybeans and wheat

Soybean-production estimates also took a hit in the USDA report, down to an estimated yield average of 36.1 bushels per acre. That's a decrease of 12% from 2011, and if it's on target, it will be the lowest average yield since 2003, according to the USDA.

November soybeans (SX2) , the most active soybean contract, gained 12 cents to settle at $16.43 per bushel on the Chicago Board of Trade. Front-month August contracts (SQ2) gained 15 cents to finish at $17.09 per bushel.

The USDA was "aggressive on cutting the yield. I think that's why you got the reaction you did," said Jason Britt, an analyst at Central States Commodities in Kansas City.

The drop in the soybean-yield estimate might be more indicative of a number you would expect to see if conditions in August were similar to July conditions, he added. "This number is low enough that if all of a sudden we start catching rain … that might be the lowest number you see."

Although soybeans are a heartier crop than corn in terms of water needs, this season's crop couldn't escape the extreme July temperatures and near-drought conditions in the Midwest.

These conditions hurt both the corn and soybean crops. Wheat, however, has two growing seasons and was able to avoid a large part of the drought damage.

The USDA report Friday showed expectations for an increase in winter-wheat production compared with last year. The crop-production report's average yield estimate now stands at a record 48 bushels per acre, and overall production estimates are up 1% from the July forecast, and up 8% from July 2011.

December wheat (WZ2) , the most active contract, lost 26 cents to end at $9.01 per bushel on the Chicago Board of Trade. Front-month September contracts (WU2) lost 28 cents to finish at $8.85 per bushel.

What's more, the USDA's World Agricultural Supply and Demand Estimates report, also released Friday, predicts a decline in international wheat supplies. Global wheat supplies are expected to fall by 2.1 million tons, mostly because of a 3.7 million-ton decline in foreign production.