The condition of US soybeans recovered to its best since late July as rains refreshed drought-hit crops, fuelling thoughts that a key crop report on Wednesday may turn out less downbeat than investors have forecast.

The proportion of the US soybean crop in "good" or "excellent" condition rose two points to 32% as of Sunday, the US Department of Agriculture said in a weekly report.

The revival - while helped by slight recoveries in crops in Illinois and Iowa, the top soybean producing - states, also included a four-point jump to 24% in the proportion of the Indiana crop rated good or excellent, boosted by rains including those which followed Hurricane Isaac.

USDA officials in Indiana, reporting "rain showers across most of the state", said that "topsoil moisture has been recharged in many areas", if noting that "the subsoil remains mostly dry as field tiles are still not running".

'New glimmer of hope'

The recovery in condition comes ahead of the USDA's latest monthly Wasde crop report in which investors on average expect a slight cut to 35.8 bushels per acre, from 36.1 bushels per acre, in the government forecast for the domestic soybean yield.

However, many brokers, including ADM Investor Services, FCStone and Jeffries Bache, have forecast that the yield figure could be raised.

And, indeed, the latest national condition rating, at 32% good or excellent, is three points ahead of that before the July Wasde report.

Commerzbank analysts on Tuesday called the condition improvement a "new glimmer of hope for the US soybean crop".

"This could strengthen the voices of those who are confident of a larger US soybean crop than previously anticipated, after rainfall in recent weeks improved the supply of moisture."

'Surprisingly good yields'

Their cause has been given further support by reports from the early harvest, which has shown that "yields in the northern plains have been surprisingly good", according to Benson Quinn Commodities, part of the ADM empire.

While many producers were "concerned that hot and dry conditions in mid-August had hurt the crop, the early August rains seemed to have helped the crop with early yield reports average to above - mid-30s bushels per acre to low 40s".

Reports from the corn harvest too have shown improvement from a dismal start, with Benson Quinn Commodities reporting that "some encouraging yield reports were seen from the weekend".

At RJ O'Brien, Richard Feltes said that the "expected better-yielding western/northern states are just getting started [with harvest], with trade anxiously awaiting increased flow of yield reports to either affirm or undermine current USDA forecast".

Aflatoxin 'problem'

However, the corn harvest has also revealed "some reports of aflatoxin and other moulds in the corn crop", USDA official in Indiana said, highlighting a broader concern.

Aflatoxin, a toxic residue from fungal infection, "is presenting itself as a problem in new crop receipts", Brian Henry at Benson Quinn said.

"If this proves to be a widespread issue it will be interesting to see how the price reacts to consumption of poor quality of stocks," he added, foreseeing a potential narrowing of the discount of forward contracts to distribute more evenly higher quality supplies.