Societe Generale diluted its bearishness on corn and soybean prices to recommend long positions in at least one contract, warning that US drought was poised to jump back up the agenda.

The bank – one of the most bearish commentators ahead of the autumn crop price decline, and which three weeks ago forecast that corn prices would "trend lower" over 2013 - said that Chicago's July contract in the grain, and in soybeans too, were poised for gains.

While saying the changes of a "decidedly bullish surprise" to prices of the crops from South American weather was "quickly becoming unlikely", given improved weather outlooks, the US drought remained a concern.

Although rains have replenished soil moisture levels in many major growing area, including Indiana, one of the states worst affected last year, of which none is now rated in drought, undue dryness remains a problem further west.

Official forecasters predict the persistence of drought in the central and southern Plains, and parts of the western Corn Belt, until at least May, when the spring sowing window will be beginning to look mature.

'Continue to show problems'

"While we do not expect a repeat of last year's problems, during which the entire Corn Belt was engulfed by drought, current indications continue to show problems in the western half," SocGen analyst Christopher Narayanan said.

Just short of 100% of Iowa, the top corn and soybean producing state, remains in drought, along with 98% of Minnesota and 77% of Missouri.

"The expected recovery in US production, while still likely to be intact, may not be as high as initial current estimates," he said.

The US Department of Agriculture, in a preliminary estimate on Monday, pegged this year's domestic corn harvest at a record 14.435bn bushels, with soybean output seen at 3.34bn bushels, the second highest result.

'We like long positions'

"The ongoing drought in the western Corn Belt should quickly come to the forefront and raise prices of the summer contract months to reflect continued inventory tightness," Mr Narayanan added.

"We like long positions in the [Chicago] July 2013 contracts for both corn and soybeans."

The comments came even as soybeans extended their losing streak to four sessions, standing, for March delivery, down 1.1% at $14.05 a bushel at 05:30 Chicago time (11:30 UK time).

The July contract was 1.2% lower at $13.84 ¾ a bushel.

For corn, the March contract was down 1.0% at $6.89 a bushel, falling for a ninth successive trading day, and the July lot down 1.2% at $6.78 ½ a bushel.

Bets on spreads

SocGen, nonetheless, maintained something of a contrarian streak in forecasting some weakening in spreads between front contracts and more distant lots, as South American supplies come onstream and ease supply weakness.

Goldman Sachs, even as it cut forecasts for grain and soybean futures following the USDA's latest Wasde crop report, said that "we expect that the low level of US inventories will prove supportive to Chicago corn and soybean timespreads rather than prices".

At Chicago-based broker RJ O'Brien, Richard Feltes flagged a "strong tendency" in years of tight soybean stocks for May soybean contracts "to gain on deferred July and November options from late February onward".

The broker advised "looking for opportunities on corrections to bull spread soybean contracts until evidence emerges that rationing is occurring, via either a reduced US soybean export sales pace, a slowing US crush, stepped-up US soymeal imports, or soybean sales cancellations to China," Mr Feltes said.

"The magnitude of March-to-August US soybean rationing, compared with last year, is daunting—i.e. the need to cut March-to-August US soybean US soybean use by one-third compared with year-ago levels."