The government cut its U.S. corn harvest projection 1.6 percent and said stocks of the grain will fall to a seven-year low, signaling higher feed costs as livestock producers compete with exporters and ethanol distillers for shrinking supplies.

Tightening corn supplies and higher prices present a growing concern for pork and beef producers, analysts say. Further gains in corn prices may jeopardize producers’ recent return to profit after at least two years of losses stemming from high feed costs.

American farmers are expected to harvest 13.16 billion bushels of corn this year, the USDA said in a report last week. While that would be a record crop, the estimate is down from the USDA’s projection of 13.37 billion bushels a month ago.

Heavy August rains in parts of the Midwest caused crops to deteriorate, prompting the USDA to trim its average U.S. corn yield projection to 162.5 bushels an acre from 165 bushels.

In Iowa, excessive rainfall early in the month “left many low-lying fields completely saturated, stunting growth and yellowing portions of the crop,” the USDA said. The USDA’s production estimate was about 40 million bushels below trade expectations, sending corn futures in Chicago to 20-month highs in early trading today.

“Fragile” time for pork, beef industries

“It’s kind of a fragile time for the feed sector,” Brian Basting, an analyst with Advance Trading, Inc., said at a press briefing held on the CME Group trading floor following the release of the report.

An increase of another 25 cents or so in corn “puts them in a lot more difficult position,” Basking said, referring to livestock producers. “Profitability is coming back, but I don’t think they could handle another surge” in corn.

In late morning trading, December corn futures on the Chicago Board of Trade rose 4 ¼ cents to $4.75 a bushel, after rising to $4.79 ½, the contract’s highest price since January 2009. December corn is up 38 percent since the end of June. Livestock producers “would be vulnerable if we continue to rally,” Basting said.

Farm prices for corn are expected to average $4 to $4.80 a bushel in 2010/2011, up from a previous forecast of $3.50 to $4.10, the USDA said.

Also today, the USDA raised its estimate of the U.S. soybean crop to 3.48 billion bushels, a record, from 3.36 billion in an August report.

U.S. grain in demand amid Russia drought

Overseas demand for U.S. grains is increasing as China’s economy expands and drought cuts Russia’s wheat crop. In the U.S., the biofuels industry is using a larger share of the country’s corn production as fuel makers blend more ethanol to comply with federal mandates.

In a separate report today, the USDA raised projected U.S. corn exports to 2.1 billion bushels from 2.05 billion bushels in a previous estimate. Projected U.S. corn stocks at the end of the 2010/2011 marketing year were trimmed 196 million bushels to 1.12 billion bushels, the lowest since 2003/2004.

Corn stocks as a percentage of use in 2010/2011 are expected to be the lowest since 1994/1995, the USDA said.

Today’s USDA reports “opens plenty of opportunities to tighten that further,” said analyst Terry Roggensack, who also spoke at the CME press briefing today.

Beef and pork producers can still make money as corn rallies if animal prices remain high, said Roggensack, who’s a founder of The Hightower Report, a Chicago-based advisor. He doesn’t expect a reduction in livestock numbers in coming months.

“Livestock feeders could handle it if cattle and hog prices continue to rise,” Roggensack said. “It would take a serious double-dip recession to knock down livestock numbers further.”

“The cost of producing livestock is going up and the livestock producer needs to be rewarded with higher prices,” Roggensack added. “It’s going to cost more to do business.”

Hog prices are expected to be higher than previously forecast, partly reflecting stronger exports, the USDA said. Citing lower pork production, the USDA said slaughter-ready hogs will average $55 to $56 per hundred pounds in 2010, up from a previous forecast of $54 to $55.