Will Thursday go more to bulls' script?

Chicago's last session surprised many investors by seeing crops close lower despite huge downgrades by the US Department of Agriculture to its forecasts for domestic corn and soybean crops, following extreme heat and dryness in the Midwest.

(Nearly 75% of the Midwest is abnormally dry or in drought, compared with 2.8% a year ago, according to official data. This includes 99% of Missouri, 82% of Iowa, the top corn and soybean-producing state, and 100% of second-ranked Illinois.)

But anyone expecting Wednesday's late recovery from day lows to mean a strong start to Thursday would be a little disappointed.

Corn managed a decent start, but wheat struggled, and soybeans remained firmly in negative territory.

'Stratospheric levels'

That is not to say that soybeans are not attracting bullish comment, following the USDA's removal of 155m bushels from the domestic 2012 production forecast.

"Chicago soybean prices are likely to continue moving higher from what are already record levels as demand rationing is required globally due to the deterioration in the US crop," Rabobank said.

At Commonwealth Bank of Australia, Luke Mathews said: "Demand rationing is now required in the US oilseed market", inferring elevated prices.

Globally, "the oilseed market in 2012-13 is extremely reliant on the forecast 25% rebound in South American production in [early 2013].

"If South American production disappoints oilseed prices would rise to stratospheric levels."

'Dramatic change'

But there is some feeling that, for now, the market has already factored in a stack of premium.

Markets on Wednesday retreated on thoughts that the downgraded "yields were what it was already trading", Kim Rugel at Benson Quinn Commodities said.

Furthermore, the GFS weather model for the Midwest, on the seven-to-10 day outlook, has taken a "dramatic change" to the wetter, as Darrell Holaday at Country Futures noted.

While "almost everyone will question this run" of the model, it fed ideas that soybeans may yet stage a sharp recovery, as they have done in the past with timely rains.

The oilseed's sensitive, pod-filling stage does not occur in earnest for another three weeks or so in the US.

Soybeans for July stood 0.4% lower at $15.16 a bushel at 08:40 UK time (02:40 Chicago time).

'Demand rationing needed'

For corn, of course, the vulnerable stage, pollination, is now already largely completed, and will be even more so by the time any rains arrive in a week or so's time (an event which would concur more with ideas that an El Nino is forming).

That helped the grain react better to the bullish follow-up comment from yesterday's USDA crop revisions, when the corn yield forecast was downgraded from a record 166 bushels per acre to a nine-year low of 146 bushels per acre.

"Demand rationing is now needed to prevent US corn supplies being exhausted," Mr Mathews said.

"There is no room for any further production downgrades in the US or elsewhere in 2012-13.

"This means the grain market will remain extremely sensitive to any adverse weather events over the coming year."

Ethanol losses

Still, there are some fears over demand rationing already occurring, following ethanol data showing a further slide in US ethanol production.

Output last week averaged 821,000 barrels a day, down 36,000 barrels on the week and the lowest figure for nearly a year.

"Above $7.00 a bushel [for corn prices] there is no ethanol business with the current margins.

"Current Iowa ethanol plants were losing $0.70 per bushel last week and that may be the cheapest corn in the US."

December corn stood 1.4% higher at $7.14 a bushel.

Upgrade, downgrade

Wheat, meanwhile, traced a neutral route, with a downgrade yesterday by the USDA to estimates for world production viewed as largely factored in.

Furthermore, there has been some disappointment too that the department did not increase the estimate for domestic feed use of wheat, given the waning supplies of rival grain corn.

Still, Strategie Grains gave wheat some lift by on Thursday cutting its own estimate for the European Union harvest by 600,000 tonnes to 123.6m tonnes, citing Spain's drought and excessive rainfall in the UK.

Including durum, the estimate was 131.4m tonnes.

The USDA on Wednesday lifted its estimate for the EU crop by 2.1m tonnes to 133.1m tonnes, including durum.

Chicago wheat for September stood 0.4% higher at $8.29 ¾ a bushel.

Sugar sweetens

Soft commodities managed a firm start too, despite the broader financial market disappointment at a US Federal Reserve briefing which gave no hint of further plans to ease monetary policy and boost the economy.

Asian shares struggled, with Tokyo stocks closing down 1.5%, and Seoul shares down 2.2%, while, on the energy markets, Brent crude fell back below $100 a barrel.

Still, raw sugar gained 0.4% to 22.97 cents a pound, amongst its highest levels of the last three months, boosted by poor weather conditions in Brazil, the top producer, and India.

"Second largest producer India saw weak monsoons denting prospects in top producing states Maharashtra and Karnataka," Lynette Tan at Phillip Futures said.

'Neutral for cotton'

New York cotton managed some headway, adding 0.1% to 71.10 cents a pound, amid relief at USDA crop revisions on Wednesday which were, for once, not viewed as bearish.

"The USDA report was neutral for cotton prices," CBA's Mr Mathews said, noting that estimates for US stocks were raised for 2011-12, but lowered for 2012-13, thanks to better hopes for exports.