The USDA’s forecasts that the crop will now yield just 123.4 bushels per acre, well below its last reduced forecast of 146 bushels and a 17-year low.

The government also pared back its projection for ending inventories for the 2012/2013 crop year to 650 million bushels, a stunning 533 million bushel decline. Citigroup analysts say this is the tightest ending inventories level since the 1995/1996 crop, and it is well below the historic 900 million bushels level.

The drought hit 62.5 percent of the country and struck the Midwest corn belt at the worst possible time in the growing season. The industry had warned that the lack of rain and extreme heat during the “tasseling” season, when corn kernels form, would result in a sharply reduced crop, but the USDA report, released Friday, include the first results of actual field checks by the federal agency.

The USDA also cut the outlook for soybean production to 2.692 billion bushels, down from its July forecast of 3.05 billion, the smallest in nine years. Nelson said the drop in yield was slightly more than expected, though the soybean crop still has a chance for some recovery since it was not in the critical phase corn was in when the worst of the drought hit it. The USDA, meanwhile, raised its forecast for the wheat crop.

Nelson said the soybean report looked neutral, but he pointed out one interesting aspect. He said the USDA shaved its estimate for Chinese soybean imports to 59.5 million tons from 61 million tons.

“But China’s been buying soybeans all week. They bought 290,000 tons over night,” he said.

China is a major global buyer of soybeans, used to feed its massive pig herd.

While there are many industry forecasts for corn at $9 a bushel and above, Nelson said the drop in demand could temper the price rise. The USDA adjusted its demand forecast, as well.

“We’re dropping corn production by 2.191 billion bushels. They offset that with drops in old crop demand and new crop demand. The total offset was actually 73 percent of the production decline. They have declines coming out of all sectors here,” he said.

The biggest reduction in the demand forecast was for livestock feed, from 4.8 billion bushels to 4.075 billion. Demand by the ethanol industry, the biggest user of U.S. corn, was forecast to drop from a previous estimated 4.9 billion bushels to 4.5 billion, and exports were seen dropping to 1.3 billion bushels from 1.6 billion, he said.