CHICAGO: With demand for US grains picking up following a slump in prices, investors will switch their focus from the supply-side to exports and domestic use even as weather in South America remains a driving force.
The two-day meeting of the Federal Reserve's policy setting committee starting Tuesday will also be on watch in the unlikely event the bank announces another round of bond buying to bolster the economy something not expected by analysts.
Risk trade will remain focused on the euro zone debt crisis although its impact on the grains markets last week was largely muted as traders reacted to how much rain was falling in drought-stricken crop areas of Argentina and southern Brazil.
The two South American agricultural powerhouses rank right behind the United States in corn and soybean exports, so grain markets have been sensitive to every updated weather forecast there.
"The weather issue is going to last," said grains analyst Karl Setzer of MaxYield Cooperative in West Bend, Iowa, adding that excessive rains in parts of Brazil were now a concern.
"It is affecting harvest activity," he said, adding that some anxious importers were switching their demand for soybeans to the United States in case of further problems there.
There had also been talk among traders that yield counts from the initial soybean harvest in Brazil had been less than expected but it could not be confirmed.
Any disruption to the soybean harvest in Brazil would benefit exporters in the United States. But demand could be muted next week with China the world's top importer of the oilseed on holiday for its New Year celebrations.
But there were indications that US exports were improving after prices tumbled, making corn and soft red winter wheat more competitive in world markets.
Weekly export sales data from the US Department of Agriculture on Friday showed that soybean sales surged to a three-month high, while corn sales were the highest in a month.
"We are raising our export estimates for corn," said grains analyst Dan Basse of AgResource Co. in Chicago. "We are seeing a stronger demand profile."
He said US corn was becoming more prices competitive, and that soft red winter wheat the kind traded at the Chicago Board of Trade was the cheapest in the world on a free-on-board basis, which excludes shipping costs.
The United States is the world's top wheat exporter but demand has been undercut by lower-cost producers in the Black Sea region led by Russia. Ukraine has emerged as a strong rival to the United States in the global corn market.
"Corn is only about $3 to $4 (per tonne) away from being competitive with Ukraine," Basse said. "Prices here have been dropping while going up in other parts of the world," he added.
He said investors would also be monitoring the Fed's meeting this week although it was not expected to announce another bond buying exercise which have previously fueled commodities prices as an inflation hedge.
"We'll be watching the FOMC even though it is unlikely to announce a QE3," he said, referring to a potential third round of quantitative easing to bolster the economy.
Analysts said the Fed looks set to pass on another round of bond buying as the US economy shows signs of strengthening.
Shawn McCambridge of Jefferies Bache said grain markets, which slumped after the Jan 12 US Department of Agriculture report showing more than expected supplies, could get technical support as they are considered undervalued.
"Corn and wheat are oversold and we are seeing some technical support," he said, adding that markets will, however, remain concerned about the euro zone debt crisis.
He said investors would also look for signs of demand improving for US grains. He added that much of the crop damage in Argentina and Brazil had been priced in.
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