Australia & New Zealand Bank warned over a correction – lower – ahead in grain futures even as prices extended gains on Thursday, buoyed by fresh talk of Chinese demand besides lingering weather concerns.
The bank acknowledged the growing expectations for hotter weather in the US Midwest, conditions which many investors believe could curtail crop potential, particularly for corn, which requires cool weather during the newly-started pollination process to give best yields.
"We expect prices to stabilise near-term, with markets unlikely to fall further until there is more clarity on US corn yields," ANZ senior ag economist Paul Deane said.
However, he questioned ideas that the hotter weather would cause more harm than good to crop for which the "main concern" has been its slow development after a cold spring.
"Slightly warm and drier conditions are needed, but such weather forecasts are also unfriendly to prices," Mr Deane said.
Yet this is "the exact scenario markets are grappling with".
The two-week weather outlook for the Midwest is for "average or slightly higher temperatures", with the top growing state of Iowa set for a drier-than-normal period – "conditions all favourable for rapid growth", with "large spikes" in heat not on the cards.
"Overall, with the greatest chance that weather remains benign for the US corn crop over the next six weeks," corn futures - which for Chicago's benchmark December lot fell to their lowest since 2010 ahead of this week's weather scare - are "at considerable risk of correcting further", Mr Deane said.
He forecast a price drop of 10% in August "as the current weather premium risk built into prices washes out of the market".
For wheat too, prices - which for the best-traded September lot set a contract low last week – will fall by some "5-10% by September", depressed by the pressure from the northern hemisphere harvest and the ramp up in supplies it brings
Indeed, with 25% of Ukraine winter wheat already in the barn, and Russia's harvest starting ahead of normal, exportable supplies will increase, a rise "most apparent in August and September", Mr Deane said.
"This is most likely to coincide with markets becoming more comfortable with spring wheat yields and the state of the US corn crop," he said.
"Downward pressure will remain on new crop [grain] prices."
However, corn and wheat prices revived their rally in early deals on Thursday, helped by ideas of demand which gained a boost for both grains from China.
Sinograin, the body in charge of China's state crop stockpiles, was rumoured to have bought more than 1m tonnes of US corn for 2013-14 delivery, on top of the 1.36m tonnes already confirmed.
The US Department of Agriculture, which on Wednesday revealed the sale of 120,000 tonnes of new crop corn to China, will unveil weekly export sales data at 07:30 Chicago time (13:30 UK time).
Meanwhile, the state-run CNGOIC crop bureau forecast Chinese wheat imports in 2013-14 at 5.0m tonnes, up from 2.89m tonnes last season, and the highest in a decade, following damage from late rains to the domestic harvest.
In Henan alone, the top wheat-producing province, some 10m tonnes of wheat failed to meet standards for state reserves, according to Henan state grain company.
However, the CNGOIC - whose comments follow a series of Chinese purchases of wheat from Australia, France and the US over the last month – kept at 120.6m tonnes its estimate for the size of the harvest.
While the USDA has forecast Chinese wheat imports in 2013-14 at 3.5m tonnes, Agritel, the French consultancy, flagged a figure of "10m tonnes expected by a number of traders".
Separately, Algeria was said to have purchased 400,000-500,000 tonnes of, most probably French, milling wheat at about $269 a tonne including freight, for September and October delivery.
The talk helped September wheat futures add 0.8% to $6.84 ½ a bushel as of 05:00 Chicago time (11:00 UK time), taking to some 5% their recovery from a contract low hit last week.
December corn was 1.2% higher at $65.27 ¾ a bushel.