Despite the historic drought that struck much of the U.S. this year, causing corn stocks to plummet to their lowest level in decades, an unexpected boom in Chinese corn production will help mitigate the impact on world prices in the immediate future.

According to the USDA World Agriculture Outlook Board’s World Agricultural Supply and Demand Estimates report released Tuesday, the average farm price for a bushel of corn has been lowered to a range of $6.80 to $8.00 for the 2012-13 growing season, down from $6.95 to $8.25 in November’s report. Total free stocks worldwide were projected to be 647 million bushels, compared with an estimate of 988 million this past season and 1.13 billion the year before.

Total U.S. production of coarse grains (which is mostly corn, although it includes the smaller sorghum and barley industries) is projected at 285 million metric tons for 2012-13, down 12 percent from last year. The drought decreased the yield of U.S. cornfields 17 percent this season compared with last. Even in this down year, the U.S.—the world’s leading corn exporter—harvests 25 percent of all coarse grains worldwide (and consumes 23 percent).

A prolonged increase in the price of corn, as it is a primary dietary product of both humans and livestock, could squeeze meat producers, dairy farmers and processed foods companies as it works its way through the food chain, affecting everyone from Iowa farmers and California cheese makers to whomever acquires the rights to manufacture Twinkies.

The world supply of coarse grains forecasted for 2012-13 was adjusted upward by 7 million metric tons, or one-half of one percent, from November’s report—an increase almost entirely due to a pop in Chinese corn.

According to the USDA’s report, a combination of financial incentives and fortuitous rainfall in the corn-growing areas of northeastern China drove the record production.

The weather-related misfortune of farmers in the Corn Belt was thought to provide a backdoor opportunity for California’s under-the-radar grain farming sector—which relies on irrigation rather than rainfall and is therefore more easily able to adapt to parched conditions—but poor timing by some of its growers in drawing up sale contracts and a bumper crop from China may have effectively closed that window.

Wheat prices also ticked down from November’s report, to a range of $7.70 to $8.30 per bushel from $7.75 to $8.45 a month prior. The USDA raised its forecast for the total wheat supply from 704 million to 754 million bushels, attributing this 50 million bushel difference to a decline in projected exports.

As with corn, a bountiful Chinese harvest also helped keep prices low, as increased supply from China and other major exporters like Canada and Australia helped balance out the U.S.’s protected 9 percent decline in wheat production. China’s emerging middle-class—with its increased appetite for meat-centric meals—has driven demand for feed grains.
 
Wheat is down nearly 3 percent in Tuesday’s trading to $8.25 per bushel, which is still at the upper end of the USDA’s forecasted range. Corn is virtually unchanged at around $7.29 per bushel, near the midpoint of the price range assigned to it in the report.

Reach Editor-at-Large Matt Pressberg here.