09/07/2010 (Agrimoney) - Crops made a tentative start to the day, as the prospect of influential data later distracted Chicago investors from their adjustments to weak reports on foreign wheat, and a campaign to reinject premiums into prices.

For the record, external markets were pretty upbeat, with Tokyo's Nikkei share index closing up 0.5% to complete its best week in seven months, while oil gained 0.6% to $75.92 as of 06:45 GMT (07:45 UK time), heading for its best week since May.

But food commodity investors were focused on the US Department of Agriculture's latest monthly estimates of global crop supply and demand, much anticipated in any month, but particularly when wheat crops in many countries are going pear-shaped.

Most lately, Canada, which suffered an unusually wet spring, cut its wheat harvest forecast by 3.3m tonnes, if a figure within many analysts' estimates.

The downgrade follows disappointing forecasts from Kazakhstan and Romania too, with analysts already factoring in drops in and the European Union and Russia, thanks to dry weather.

"Analysts expect to see significant declines in 2010-11 Canada, EU and former Soviet Union production [in the USDA report]," Jonathan Watters at Benson Quinn Commodities said.

Estimates for the downgrade to the USDA's world wheat production estimate range from 5m-20m tonnes.

He added: "One whopper of a bullish number appears to have already been discounted,"

Prices ease
Indeed, is the market on for a "buy the rumour, sell the fact" setback after the report is released, at 12:30 GMT?

The thought was enough to keep a lid on Chicago prices in early deals, encouraging a touch of profit-taking, even if weather fears are growing for US crops too.

September wheat dipped 0.7% to $5.44 ½ a bushel. Corn, which also faces some much anticipated USDA forecasts, notably on stock levels, fell 1.5 cents for July delivery at $3.76 a bushel.

Soybeans were 0.25 cents lower at $10.12 ½ a bushel for July and down 1.5 cents at $9.44 ½ a bushel for November.

Heatwave ahead?
Back to weather, the immediate threat to US crops is of a ridge of hot conditions setting in late next week, a potential setback to corn pollination, for example.

But the bigger fear is that this is a sign of the La Nina weather pattern which official US meteorologists have warned is likely to set in.

"La Nina conditions are likely to develop during July-August," the Climate Prediction Center said.

La Ninas, linked to cooler Pacific water temperatures, not only coincide with worse North Atlantic hurricane seasons, but with hot and dry weather in the Midwest. (The notorious US drought year of 1988 was a La Nina year.)

As a sign of market twitchiness, Benson Quinn noted one, unnamed, private analyst who had cut their estimate for US soybean yields to 41.0 bushels per acre this year, below the 42.9 bushels per acre the USDA has been counting on, as well as last year's 44.0 bushels per acre.

"If realised this would reduce production by nearly 150m bushels," the broker said.

Funds switch
Technical factors are also playing a part, with the grains rally of more than 20% over the past six trading days viewed as largely fuelled by investors covering their significant short positions.

Funds were estimated to have bought 12,000-15,000 corn lots in the last session, although it is in wheat that the biggest short covering is believed to have occurred.

"When positions go against your expectations, whether you believe it or not, you are forced to satisfy margin call pressure, which usually is accomplished through at least some liquidation activity," Duane Lowry at FarmAssist said.

"Net fund positions are now plus" in wheat, Mike Mawdsley at Market 1 said, without citing a source for his information.

"This is the first time funds have had a net long position in wheat since back in December."

Interestingly, open interest in wheat contracts has help up inferring that new long positions have been taken out, as well as shorts closed.

Palm revives
It was a better day for Malaysian palm oil, which added 1.1% to 2,315 ringgit a tonne, also lifted by some short covering ahead of key statistics.

The Malaysian Palm Oil Board will on Monday unveil estimates for palm output, exports and stocks in the world's second biggest producer of the vegetable oil.

Soyoil in Chicago, for which net shorts reached record levels last week, and on China's Dalian exchange also rose, adding extra support.