* USDA supply/demand report could fuel food inflation
* USDA set to revise down corn, soy crop estimates
* Analysts eye cut in acres to be harvested
* Crop trouble in Europe, poor monsoon in India
By K.T. Arasu
CHICAGO, Aug 7 The U.S. government is expected
this week to slash another 15 percent off its estimate of this
year's drought-decimated corn crop, likely adding to growing
angst in nations like China and India that are fighting to tamp
In its first report based on surveys of parched Midwest
fields, the U.S. Department of Agriculture will likely confirm
widespread reports that the worst dry spell since 1988 has
devastated the world's biggest corn crop, extending a period of
ultra-low inventories into a third year.
It will also probably cut soybean production by 8 percent,
reducing domestic inventories to the lowest in 32 years of U.S.
record keeping. While there may still be time for recent rains
to revive some of that crop, corn fields are too far gone,
leaving little hope for a cool-down in near-record prices.
The troubles are threatening to multiply: dry weather in
eastern Europe has dimmed wheat crop prospects in key
grains-exporting countries including Russia and Kazakhstan,
while a less-than-stellar monsoon in India threatens crops
there, escalating the challenge for policymakers worldwide.
"If the USDA's corn and soybean estimates are much below
trade expectations, there could be negative implications for
China and their inflation rate," said veteran grains analyst
Rich Feltes of RJ O'Brien in Chicago.
There are good grounds to be concerned. Chicago Board of
Trade corn futures have soared more than 50 percent in the past
two months, and were trading just shy of a record on Tuesday.
Soybeans are up nearly 30 percent since mid-June, but prices are
9 percent below a record reached last month.
The USDA, which slashed its estimate of the U.S. corn crop
by 12 percent in July, is expected to cut it by another 15
percent on Friday to 11.026 billion bushels, according to a
Reuters poll. Traders will be keenly watching estimates of the
number of acres that will be harvested amid reports that many
farmers are plowing under fields to collect insurance.
The downgrade would trim surplus supplies in the United
States to the smallest in 17 years, leaving the country
vulnerable to any further production shocks in other parts of
the world. Global stocks are expected to fall to the smallest in
The analysts expect the USDA to reduce its estimate of U.S.
soybean production by nearly 8 percent from its July projection
of 3.050 billion bushels. They forecast soybean stocks to be the
smallest since at least 1980 at 112 million bushels.
MEAT PRICES TO DIP BEFORE THEY RISE?
Global soybean supplies were dealt a heavy blow by a drought
that decimated the crop in Argentina and Brazil.
If the trade expectations materialize, it would be unwelcome
news for China, which accounts for about two-thirds of global
imports of the oilseed.
Until recently, price gains have largely been fueled by the
shortfall in U.S. production of corn and soy.
But now, dry weather is dimming crop prospects in the Black
Investment bank Goldman Sachs said on Tuesday it
expects global wheat production, excluding China and India, to
fall below the USDA's current estimate of 665 million tonnes in
2012/13 to the lowest level since 2007/08.
"A further deterioration in weather conditions, potential
FSU (former Soviet Union states) export restrictions and pent up
demand create risks that global wheat inventories decline even
more than we expect.
"Such an outcome in the face of inelastic food demand would
likely push wheat prices sharply higher and well above corn
prices to price wheat out of feed demand," Goldman said in a
note to its clients.
A below-average monsoon in India caused the United Nations'
Food and Agriculture Organization to cut its 2012 global
forecast of rice paddy production by 7.8 million tonnes to 724.5
A combination of short crops for rice and wheat and
production problems for corn and soybeans led to the food crisis
in 2008 that sparked riots in about 30 countries.
"Eggs and poultry prices will go up followed by milk, pork
and beef," said Scott Irwin, professor of agricultural economics
at the University of Illinois at Urbana-Champaign.
Analysts said pork and beef prices might fall in the short
term as ranchers and farmers cull their cattle and hog herds due
to high feed costs. Next year, consumers could feel the pinch
when meat prices rise as a result of fewer cattle and hogs.
Analysts said that while the USDA's yield and production
numbers on Friday will grab the headlines, they will also be
paying close attention to data showing how many acres of corn
and soybeans will be harvested -- due to large swaths of crops
being ruined by the drought.
Closely watched crop forecaster Michael Cordonnier estimated
that 83 million acres (34 million hectares) of corn would be
harvested, nearly 6 million below the USDA's July estimate of
88.9 million. He expects farmers to abandon fields and harvest
more acres than usual for silage due to drought-reduced yields.
'HARVESTED ACRES' IN FOCUS
"The biggest number on Friday will be production and the
next big number will be 'harvested acres'," said grains analyst
Dax Wedemeyer of U.S. Commodities in West Des Moines, Iowa.
"'Harvested acres' will give us a better indication of
overall production," he added.
The number of harvested acres has come into close focus
after the USDA reduced its corn yield estimate by an
unprecedented 20 bushels per acre in July, and by some analysts'
account it might not make another sharp reduction on Friday. It
could instead cut its estimate of the acres to be harvested.
Analysts such as Wedemeyer expect the USDA to trim its
estimate of corn used to produce ethanol, for feed and for
exports, as it hammers down demand to balance out the reduced
If the USDA's demand number is considered to be above those
of private analysts, the market could go higher to reduce buying
interest known in market parlance as 'demand rationing."
Grain analyst Robert Bresnahan of Trilateral Inc said he was
of the view that the corn market's next big move would be a
downward correction, possibly to the $7 level.
"If we get a bullish report we'll get an upside, but that
will fail," he said, citing a technical retracement in prices
and also because of the harvest getting under way in the South.
"We might have one more rally, which will fail quick," he
CBOT December corn futures were flat Tuesday morning
at $8.04-1/4 per bushel, while November soybeans were up
0.3 percent at $15.88-3/4. On July 20, spot corn set an
all-time high of $8.28-3/4 and spot soybeans rose to a
record high of $17.77-3/4.