As expected, the Agriculture Department lowered the corn production forecast in its August crop report released today due to heat stress over much of the Corn Belt. Economists with the American Farm Bureau Federation (AFBF) continue to stress that tight supplies mean the United States needs every bushel of corn that farmers can produce this year.

“Analysts were expecting to see a drop in both average yield and production compared to the July report, but the yield and production numbers actually came out lower than what market watchers were anticipating,” says Todd Davis, AFBF crops economist. “This tells us we still have a very tight supply situation in corn this year. We will need a good harvest this fall to meet market demands and add to our very tight stocks.”

USDA forecast corn production at 12.9 billion bushels in its August report, which is 4% larger than 2010 production, and if realized, will be the third-largest corn crop on record. However, the August estimate is 5% lower than USDA’s July crop estimate, when production was forecast to be 13.5 billion bushels.

“The big drop in production, compared to the July report, is clearly due to the summer heat wave that slammed the corn crop during pollination,” Davis says.

USDA forecasts the average yield for corn to be 153 bushels per acre this year. In July, the average yield was pegged at 158.7 bushels per acre by the agency. Davis says analysts were expecting yields to average 155-158 bushels per acre.

“It is a tale of two cities with the corn crop this year,” Davis says. “The western Corn Belt is faring better weather-wise than the eastern Corn Belt. The corn crop is doing better in Illinois, Iowa, Minnesota, Nebraska and Wisconsin, while it is below average in Indiana, Colorado, the Dakotas and the southern states.”

However, Davis says tight corn supplies are still a concern, which is why corn farmers are hoping for a big harvest this year.

“USDA is pegging 2011-2012 ending corn stocks at 714 million bushels, which represents just 20 days of supply. We are on the razor’s edge when it comes to reserves,” Davis says.

Meanwhile, tight supplies are also becoming a concern for soybean farmers. USDA estimated soybean ending stocks to be 155 million bushels, compared to 175 million bushels in the July report.

“This represents just 18 days of supply, which is very tight, but you have a little more wiggle room with soybeans than corn because the South American soybean crop can help make up the difference,” Davis explains. “Brazil and Argentina harvest their soybean crop when the United States plants ours, and plants their soybean crop when we harvest ours.”

Davis says the heat stress prompted USDA to lower its average soybean yield to 41.4 bushels per acre, down 2.1 bushels per acre from last year. Soybean production in the August crop report is forecast at 3.05 billion bushels, down about 5% from the July forecast.

“The tight supply situation for both corn and soybeans is very supportive for higher prices this year. Farmers clearly have the incentive to harvest every possible acre,” Davis says.