Grains Week Ahead-Next move hinges on USDA drought tally

Sun Aug 5, 2012 7:30pm IST

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* USDA supply-demand report in focus

* Analysts expect cuts in yields and crop size

* Big drop possible in harvested acres for corn

* CBOT futures to get price direction from USDA report

By K.T. Arasu

CHICAGO, Aug 5 (Reuters) - Grain markets seeking a leg up amid a pause in a rally that set record highs last month could get the stimulus from a U.S. government report on Friday quantifying crop damage from the worst drought in 56 years.

The monthly crop production report from the U.S. Department of Agriculture will also show how much demand for corn and soybeans from end-users including livestock feeders and importers would be lost due to the surge in prices.

However, just as the USDA report may give grains futures at the Chicago Board of Trade fresh bullish impetus, the government data based on a survey of farmers could easily trigger a selloff if it underwhelms traders.

"The bulls don't have anything more to play with," said grains analyst Dale Durchholz of AgriVisor in Bloomington, Illinois, alluding to how prices have soared on bets the crop is shrinking. "Everyone feels the market is at a tipping point."

CBOT corn futures have soared 44 percent since mid-June as the drought expanded across two-thirds of the contiguous United States, while soybeans have rallied 18 percent.

The gains helped CBOT wheat futures to rise 34 percent over the same period, with additional support coming from crop trouble in Europe, especially in leading exporter Russia.

Having posted such sharp gains over a relatively short time, grains futures had neared a peak and were heading for a second straight weekly decline, some analysts thought, until prices surged on Friday after unexpectedly strong jobs data.

Private crop analysts have been slashing their production estimates to well below current government forecasts and the market now needs USDA confirmation before deciding on its next move.

INFORMA CUTS YIELD ESTIMATE

Closely watched analytics firm Informa Economics on Friday pegged U.S. corn yield at 120.7 bushels per acre and production at 10.338 billion bushels, down from its July 27 forecasts of 134.0 bushels and 11.5 billion bushels, respectively.

The USDA's current forecast is a yield of 146 bushels and production at 12.97 billion.

Informa pegged the soybean yield at 37.2 bushels per acre and production at 2.791 billion, down from 38.5 bushels and 2.9 billion bushels, respectively. The USDA's estimates are 40.5 bushels and 3.050 billion bushels, respectively.

In its July report, the USDA cut the corn yield by an unprecedented 20 bushels from 164 bushels per acre, and some analysts said the department might not make as big a cut this time.

But it could still sharply reduce its production estimate by slashing its projection of the number of acres that farmers will harvest. In last month's report, the USDA estimated the harvested acres for corn at 88.9 million.

Analysts expect a big drop in the harvested acres for corn because of drought damage, and a need by farmers to harvest more acres than usual for silage due to poor yields.

Agronomist Michael Cordonnier of Soybean and Corn Advisor in Hinsdale, Illinois said he expected 83 million acres of corn to be harvested this year -- nearly 6 million acres less than the USDA's July estimate.

He said farmers were not harvesting areas too severely damaged by the drought to claim insurance, and cited increased cutting of the crop to be used as silage for feeding livestock.

SILAGE AND ABANDONMENT

"A dairy farmer's priority would be to chop the plants for silage so that he has enough to feed his livestock and not harvest the crop for grain," he said.

Analysts are expecting a significant reduction in the number of corn acres that will be harvested because the crop took the brunt of the drought. The light rains that fell in parts of the Midwest in the past two weeks came after much of the crop had pollinated, when yields are determined.

Also in focus would be the demand side of the equation, with high prices already denting export demand.

Latest weekly sales of U.S. soybeans to foreign buyers were the smallest total in nine months, according to the USDA, while corn sales were 70 percent smaller than a year earlier.

"We know the yield and supply side are getting tighter, next week we'll know the demand," said Steve Georgy, grains analyst with Allendale Inc in McHenry County, Illinois.

He said that if the USDA's estimate of demand is deemed too high compared with trade expectations, prices will go higher to dent buying interest in order to preserve sufficient emergency supplies in the United States.

"We know we have lost demand, the question is how much," he said.

Cattle ranchers and hog farmers have been culling their herds because of high feed costs, scorched pasture and increased hay prices brought on by the drought.

This could result in a near-term boost to meat supplies and possible lower prices, but consumers might have to fork out more for meat next year when cattle and hog supplies tighten.

Brandon Kliethermes, a senior economist with IHS Global Insight agricultural service, said the USDA's estimate of harvested acres for corn could be the key to giving the grains markets fresh price direction.

"The ultimate question is not really what the yield is but how much they lower harvested acres," he said.

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