Historically, the October supply/demand report is not a major market moving report. But the October, 2010 supply/demand report will go down in history as one of the biggest, surprise reports from the USDA.

USDA’s corn production forecast is at 12.664 billion bushels, down 4 percent from the September forecast and down 3 percent from last year’s record production of 13.1 billion bushels and the tightest corn supply in 15 years.

Based on conditions as of Oct. 1, yields are expected to average 155.8 bushels per acre, down 6.7 bushels from the previous month and 8.9 bushels below last year’s record of 164.7 bushels. Forecasted yields decreased from last month throughout much of the Corn Belt and Tennessee Valley.

The USDA reported with the smaller crop, the corn stockpile would shrink to 902 million bushels, the smallest reserve since 1995/96 and less than a four-week supply.

Traders expected a corn estimate of 12.96 billion bushels and soybeans of 3.475 billion bushels. USDA’s estimates of corn, soybean and wheat end stocks also were lower than expected.

Despite the reduced yield forecasts, the U.S. corn crop would be the third largest on record. The U.S. average yield is pegged at 155.8 bushels, down 4 percent, based on conditions on Oct 1.

USDA cut corn yields by 14 bushels per acre in Illinois, the No 2 corn state, by 10 bushels an acre in Iowa, the No 1 state, and by 9 bushels in Nebraska, the No 3 state.

The average U.S. soybean yield was estimated at a record 44.4 Bu/A, although that was down 0.3 bushels from a month ago.

This is the biggest drop in U.S. corn yield between the September and October crop report on record at 6.7 Bu/A. The prior record was 4.5 Bu/A. The drop in the US corn crop from September was a huge 496 mb.

Three of prior four years with corn yield declines in September and October posted further declines into January. Ending stocks fell to 902 mb, approximately a 4 week supply of corn.

A year ago, corn stock piles stood at 1.708 bb. World stocks stand at 132.36 metric tons.

Soybean production is forecast at a record high 3.41 billion bushels, down 2 percent from September, but 1 percent above last year. Based on Sept. 1 conditions, national yields are expected to average a record high 44.4 bushels per acre, down 0.3 bushel from last month, but up 0.4 bushel from last year.

Compared with last month, yields are forecast lower or unchanged in all major-producing states except Illinois, Kentucky, Louisiana, Michigan, New York, and Wisconsin. The largest decreases in yield from last month are expected in North Carolina and Virginia, down 5 and 4 bushels, respectively.

If realized, the forecasted yields in Illinois, Louisi ana, Nebraska, New York, North Dakota and Wisconsin will be record highs and the forecasted yield in Minnesota will tie the previous record high.

Area for harvest in the United States is forecast at 76.8 million acres, down 1 percent from the previous estimate, but up 1 percent from 2009. Acreage updates were made in several states based on administrative data.

Soybean ending stocks are estimated at 265 mb, down from 350 mb estimated in September. World stocks were 61.42 mt.

Wheat stocks were lowered to 853 mb from 902 mb last month while world stocks were 174.66 mts.

Hoops’ analysis: Bottom line on this report is corn must begin a rationing phase and buy acres in 2011 in an attempt to rebuild U.S. and global stocks to a more comfortable level. Corn looks to be the upside leader with wheat and soybeans in a follower’s role.

Farmer selling should dry up as hopes for price levels reminiscent of 2008 abound. A buy-the-break’s mentality exists among end users and farmers as both groups attempt to cover export and feed needs and previous sales at lower levels.

Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien.