UPDATE 3-USDA's cut to corn, soybean crops catches market off guard
* Corn crop still a record, soybeans third-largest ever
* Dry weather in western Corn Belt holds down yields
* U.S. 2013/14 corn, soy end stocks not as big as expected
* Soybean futures up 3 percent for the day, corn up 2 percent (Adds closing market prices, yields are below trend-line)
WASHINGTON, Aug 12 (Reuters) - U.S. farmers will reap the biggest corn crop and the third-largest soybean crop ever this fall, government forecasters said on Monday, but the harvests will be smaller than traders expected because of lower yields and ending stocks are projected to be below traders' estimates.
Chicago corn and soybean futures, which have been beaten down recently by an outlook for massive crops and climbing inventories, rose sharply on the report.
New-crop soybean futures closed up more than 3 percent and new-crop corn was up more than 2 percent. Most traders had expected the Agriculture Department to raise its crop forecasts, not cut them.
"The production number and the carryout projections for soybeans are very bullish relative to expectations," said Joe Vaclavik, an analyst at Standard Grain.
Until now, USDA's forecasts assumed normal weather and yields. The August estimate is based on surveys of 24,000 farmers and spot checks of fields. They suggest yields will be well below "trend line" levels.
"A steady drying trend" struck the western Corn Belt in early July, and rainfall is still needed in some central and western Corn Belt states, USDA said.
By early August most of Iowa, the No. 1 corn and soybean state, was termed abnormally dry and much of Nebraska, No. 4 in both crops, was in moderate to severe drought, according to an interagency weekly drought monitor.
With harvest a few weeks away, USDA forecast a corn crop of 13.763 billion bushels, a 28 percent increase from drought-hit 2012, but 2 percent smaller than traders expected.
Soybeans would total 3.255 billion bushels, up 8 percent from last year, but more than 2 percent below trade expectations. USDA, in its first field-based survey of the crop, put the average yield at 42.6 bushels per acre, against 44.5 bpa projected in July.
"That's a severe cut," said Karl Setzer of MaxYield Cooperative. "You have new-crop stocks back down to 221 million bushels now and that's a pretty bullish number."
Weather over the next few weeks will be critical to realizing yield potential for soybeans and corn.
"The soybean crop could get smaller if we are dry the next 10 days. The trend now is a lower yield... but they are also suggesting that the prices in the global market are starting to ration demand," said Mike Zuzolo of Global Commodity Analytics.
Corn and soybean crops are also maturing slightly later than usual due to a cold and rainy spring that delayed planting, and will be particularly vulnerable if a killing frost ends the growing season early. For now, though, weather forecasters expect a warm September to finish the growing season.
"The report was bullish. The biggest number that stands out is the soybeans - the margin of error has shrunk. The same thing on the corn, but it's still a burdensome supply," said Don Roose, analyst at U.S. Commodities in West Des Moines, Iowa.
U.S. stockpiles are forecast to fall to a 17-year low for corn and a nine-year low for soybeans when the current marketing year ends on Aug. 31. Ending stocks for the 2013/14 marketing year were forecast by USDA at 1.837 billion bushels of corn, largest since 2006, and soybeans at 220 million bushels, also the largest since 2006.
However, analysts had expected corn stocks of 1.971 billion bushels and soybeans of 263 million bushels.
The bumper crops will end three years of declining production and ever-tighter stocks, meaning lower commodity prices are likely through next summer.
USDA estimated this year's corn crop will sell for an average of $4.80 a bushel at the farm gate, down $2 a bushel from the record set by the 2012 crop. Soybeans would sell for $11.35 a bushel, down $3 from the record season-average price for the 2012 crop.
The corn and soybean crop forecasts have a margin of error of roughly 11 percent. The forecasts for ending stocks, looking 13 months into the future, have a margin of more than 60 percent.
USDA resurveyed soybeans planted in 14 states after the late planting campaign and lowered the area marginally, mostly in Kansas, North Carolina and North Dakota. Harvest acreage in key states such as Iowa and Illinois was unchanged from USDA's June report.
USDA estimated a medium-sized U.S. wheat crop of 2.114 billion bushels, up slightly from its July estimate and very similar to the 2.112 billion bushels expected by traders.
World wheat production was forecast at 705.4 million tonnes, a record high, USDA said. It raised its estimate of the crop in Kazakhstan by 2.5 million tonnes, citing "abundant spring and summer rainfall" that boosted the yield outlook in Kazakhstan and adjoining spring wheat areas of Russia. USDA also raised Ukraine's wheat forecast by 2 million tonnes "based on the latest harvest results."
Brazil was forecast to boost its corn exports over the next few months, USDA said. It boosted its forecast of 2013/14 exports by 2.5 million tonnes, to 24.5 million. (Additional reporting by Tom Polansek in Chicago,; Editing by Ros Krasny, Maureen Bavdek, Peter Galloway and Dan Grebler)