The grains rally struggled for traction despite the US slashing forecasts for its corn and soybean crops by more than investors had expected, blaming "persistent and extreme June dryness".

The US Department of Agriculture ditched ideas of the US corn yield of 166 bushels an acre, cutting its forecast instead to a nine-year low of 146 bushels per acre, "reflecting the rapid decline in crop conditions since early June, and the latest weather data".

"Persistent and extreme June dryness across the central and eastern Corn Belt and extreme late June and early July heat from the central Plains to the Ohio River Valley have substantially lowered yield prospects across most of the major growing regions," Joe Glauber, acting US agriculture secretary, said.

Major corn growing regions had witnessed "scarce rainfall coupled with record-breaking temperatures", creating "unfavourable growing conditions" evident in reports of rootless corn syndrome in Missouri, and wilted leaves in Iowa, the top corn and soybean producing state.

'Sharply declining crop conditions'

The conditions had dashed hopes of a bumper soybean yield of 43.9 bushels per acre too, with the estimate cut to 40.5 bushels per acre.

"The drop reflects sharply declining crop conditions resulting from limited rainfall since early April coupled with excessive heat across much of the producing area in late June and early July," said Mr Glauber, who a month ago cautioned investors against losing hope too early on dryness-hit US crops.

The cut increased further fears for US soybean supplies which users have been banking on to tide them over, following a disappointing South American harvest.

Indeed, the USDA cut its estimates for domestic consumption of the oilseed, exports, and stocks on top, which were pegged closing 2012-13 at 130m bushels.

At the equivalent to 4.2% of consumption, this took supplies to their thinnest in nearly 50 years, implying buyers will need to pay up to secure supplies.

The USDA lifted by $1 a bushel to $13.00-15.00 a bushel its forecast for the prices that US soybean farmers will receive for their 2012 crop.

Price hikes

For corn growers, the upgrade in the farmgate price estimate was even more dramatic – from $4.20-$5.00 a bushel to $5.40-6.40 a bushel, reflecting the price rationing that will need to take place to accommodate a smaller crop.

The corn harvest estimate was slashed by more than 1.7bn bushels (45.2m tonnes) to 13.9bn bushels (329.5m tonnes) – a downgrade bigger than the combined 2011-12 exports of Ukraine, Argentina and Brazil, the world's second, third and fourth-ranked exporters.

Ethanol plants, importers and livestock feeders were seen sharing the pain of lower supplies, although US export hopes for wheat, an alternative grain for some users, were nudged higher.

Wheat farmers were seen benefiting from the raised corn price too, with the average farmgate price pegged at $6.20-7.40 a bushel, an upgrade of $0.60 a bushel.

'$1 a bushel too high'

However, on futures markets, which have already priced in significant crop damage, futures, while managing an early spike, held on to only limited gains.

Wheat stars

In fact, wheat was the top performer, up 1.7% at $8.35 ½ a bushel in Chicago for September delivery, after the USDA cut its estimate for world production in 2012-13 by a net 6.7m tonnes to 665.3m tonnes.

"Russia production is lowered 4.0m tonnes, with lower expected yields for winter wheat and lower area and yield prospects for spring wheat," Mr Glauber said.

"Kazakhstan production is lowered 2.0m tonnes as persistent June heat and dryness have also reduced production prospects," with a 2.0m-tonne downgrade to the Chinese crop too.