USDA slashed U.S. corn production by 1.82 billion bushels in July 11 crop report estimate on news that Midwest yields were dropping daily due to extreme heat and drought. With the prospect of more hot weather in the forecast, market observers are now wondering if soybeans could the next shoe to drop.

USDA dropped projected U.S. corn yields by a stunning 20 bushels per acre in the report, to 146 bushels, and lowered U.S. corn production from 14.79 billion bushels to 12.97 billion bushels, which puts the 2012-13 stocks-to-use ratio to 9.3 percent.

It could get worse, according to Jim Bower, president of Bower Trading, Inc., speaking at a Minneapolis Grain Exchange press briefing. “The kicker is that normally, a large percentage of the time, the USDA number on corn production starts to come down after July. We could have the potential to see a sub-140-bushel yield on the U.S. corn crop unless the situation turns around very quickly. We are running out of time and water in some key areas.”

Bower said he’s been “shocked” at the poor yield potential of corn, “particularly Illinois and Indiana. We have some customers who are great producers and long-time customers of Bower Trading who have fields being zeroed out already.”

Projected U.S. corn ending stocks of 1.183 billion bushels came in just the below the average trade estimate of 1.279 billion bushels, noted Bower, “and certainly it’s grinding its way lower.”

Bower noted that global stocks of corn “are coming down and coming down fast.”

Bower says end-users and producers should “not get sidetracked on today’s numbers, rather keep your focus on weather and the direction of crop ratings, especially for soybeans. We are in a very tight global situation for soybeans and there is no room for further yield reduction on the U.S. crop. The critical time for soybeans lies out ahead of us, particularly from about July 15 through Aug. 25, when those soybeans plants are flowering and trying to reproduce.”

USDA lowered projected U.S. soybean yield to 40.5 bushels per acre in the July report, down 3.4 bushels per acre from the June estimate. “The current heat wave hitting U.S. soybeans, following a smaller South American complex this year, may actually mean that global soybean, soybean meal and soybean oil supplies may have to be rationed in the months ahead,” Bower said.

Bower expects soybean end-users to step in and aggressively buy breaks in soybeans, “especially if they sense that the July 15 through Aug. 25 timeframe looks inflammatory. But I don’t think they have much choice if they want to have inventory.”

Rationing of soybeans, Bower said, “will reduce crushing below year-ago levels in the July through December time frame. Soybeans will become the market leader once we get past this report.”

Bower noted that current forecasts for continued hot weather, especially in the western Midwest, threaten to make a bad situation even worse.

“We may see a situation where 50 percent of the U.S. corn and soybean crops will still be under stress. Even though we’ve had little relief short-term (with some rainfall), we need a general soaking rain through a great portion of the United States. That includes the spring wheat country where hotter, drier temperatures have really taken a toll.”

Bower said USDA’s projection of spring wheat production at 435 million bushels “can decline further based on what I’m seeing from weather forecasts. It also appears that a significant portion of the former Soviet Union is under moderate to severe stress. So we have two places in the world where the spring wheat number is grinding lower.”