RPT-Grains Week Ahead-One eye on the sky, one on the economy

Mon Jun 25, 2012 7:59am EDT

* US corn pollinating during dryness
    * US corn and soybean conditions to slip again
    * Global economic worries to restrain buying
    * Market preps for June 29th acres/stocks reports

    By Sam Nelson
    CHICAGO, June 24 (Reuters) - Grain traders are in a tizzy,
wanting to buy corn as a hedge against higher prices as the U.S.
crop withers in the drought-stricken southern Midwest, but a
flagging global economy is reining in bullish enthusiasm.
    The challenge is to weigh the bullish market implications
from declining crop prospects against the bearish macro economic
influences including downgrades of big banks, the ongoing euro
zone debt crisis and at best a tepid U.S. economy.
    Such opposing forces promise tense market positioning,
frayed nerves and sleepless nights.
    Wheat, corn and soybean future markets tumbled on Thursday
with corn plunging 4 percent as investors sold off commodities
and other risky assets after ratings agency Moody's downgraded
15 of the world's biggest banks.
    But on Friday, agricultural markets bounced back and moved
higher as meteorologists again warned that harsh weather would
place further stress on corn and soybean crops.
    Investors are braced for more volatility this week.
    "Unless we get some decent rains soon the corn crop is in
trouble. Come Monday with no rains, we could be sharply higher,"
a veteran Chicago Board of Trade trader said.
    Condition ratings for the U.S. corn crop have shed 14
percentage points from good-to-excellent since the season began.
The market is prepared for another 2 to 3 point drop in the U.S.
Department of Agriculture's (USDA) weekly crop progress report
on Monday.
    
    
    
    "The biggest market driver this week will be Monday's crop
condition ratings. They're going to be lower but the question is
how much," said Sterling Smith, analyst for Citigroup.
    "We're expecting conditions to drop a lot in Indiana and
Illinois but if some of the other states come down too that
would be an extra bonus for the bulls," he said.    
    Dry weather continues to stress corn and soybean crops in
the southern U.S. Midwest while timely rainfall has boosted crop
growth and development in the northwest, an agricultural
meteorologist said on Friday.
    "The rains that were expected in the eastern Corn Belt late
this week didn't pan out, the driest regions stayed dry," said
Andy Karst, meteorologist for World Weather Inc., Kansas City.
    Karst said severe dry weather stress on crops was occurring
from southeast Missouri, southern Illinois, western Kentucky,
south and central Indiana. "I don't see much help for them for
the next week or two," he said.
    Hot weather was expected over the weekend in the southwest
with highs in the 90s F and low 100s F with high readings in the
80s F elsewhere, Karst said.
    Only light rains were expected this week. "The driest areas
will get drier and areas that have been wet will begin to dry
down," Karst said.

    CORN BEARS HAVE A VALID ARGUMENT
    Corn bears also are quick to point out that the north and
northwest part of the U.S. have been getting timely rains,
boosting crop prospects there and so far the United States
remains on track to produce a record large crop.
    Cropcast, a division of MDA EarthSat Weather trimmed its
estimate of U.S. corn production last week to 13.971 billion
bushels, below USDA's current forecast for 14.790 billion.
 
    However, Cropcast's outlook is still well above the previous
record crop of 13.1 billion produced three years ago.
    Market bears also continue to focus on waning U.S. corn
export sales amid stiff competition from cheaper South American
supplies and a slowdown in U.S. ethanol output due to high corn
prices, falling energy prices and poor ethanol plant profit
margins.
    Ethanol makers are beginning to diversify their operations
because of the poor profit margins and costly corn. Pacific
Ethanol Inc. last week said it was launching a corn oil business
because of the waning economic returns from producing ethanol. 
 
    Position-squaring will begin on Monday ahead of the release
of the key USDA June plantings report and quarterly stocks
report on Friday. Also, Friday is first notice day for delivery
intentions on the spot Chicago Board of Trade July agricultural
futures contracts which always adds to market volatility.
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