By K.T. Arasu
For nations like China and India fighting to
tamp down inflation while spurring growth, even as the global economy faces
headwinds from Europe's debt crisis, shrinking U.S. crops could be an
additional headache as food prices creep higher.
Add to that, dry weather in eastern Europe
dimming crop prospects in key grains exporting countries like Russia and
Kazakhstan, and a less-than-stellar monsoon in India, the troubles for policy
makers could escalate into major challenges.
These nations could get a heads up on the
severity of the problems they might face when the U.S. Department of
Agriculture on Friday unveils its supply-demand report that will feature crop
estimates for the United States, the top grain exporter.
"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 soybeans by nearly 30 percent as the worst drought in 56
years had devastated the crops.
The USDA slashed its estimate of the U.S.
corn crop -- the world's largest -- by 12 percent in July and analysts polled
by Reuters are expecting it to cut that by another 15 percent on Friday to
11.026 billion bushels.
That would trim the ending stocks 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.
The analysts expect USDA to reduce its
estimate of U.S. soybean production by nearly 8 percent from its July estimate
of 3.050 billion bushels and they expect soybean stocks to be the smallest
since 1980 at 112 million bushels.
MEAT PRICES TO DIP BEFORE THEY RISE?
Global soybean supplies were dealt a heavy
blow by a drought decimating the crop in Argentina and Brazil.
If the trade expectations materialize, it
would be unwelcome news for China as the world's largest importer of the
oilseed, which accounts for about two-thirds of total global imports.
Up until recently, price gains have largely
been fueled by the shortfall in U.S. production of the corn and soy crops.
But now, dry weather in Europe is dimming
crop prospects in the Black Sea region.
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 metric tons (8.6 million tons)
to 724.5 million metric tons.
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 food 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 that pork and beef prices might
actually decline 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 fewer cattle and hogs drive up meat prices.
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 decimated by the drought.
Closely-watched crop forecaster Michael
Cordonnier estimated that 83 million acres of corn will be harvested, nearly 6
million below the USDA's July estimate of 88.9 million acres as he expects
farmers to abandon fields and to 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.
"Because '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 might not make
another sharp reduction on Friday. It could instead cut its estimate of the
acres to be harvested.
Analysts like Wedemeyer expect 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 supply.
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.
CBOT December corn futures closed on Monday
at $8.05 per bushel, while November soybeans finished at $15.84-1/4. Spot
contracts set record highs of $8.28-3/4 and $17.77-3/4, respectively, on July
20.
"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 underway in the South.
"We might have one more rally, which
will fail quick," he added.
(Additional reporting by Julie Ingwersen, Sam
Nelson, and Mark Weinraub; Editing by Bob Burgdorfer)
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