By K.T. Arasu
CHICAGO (Reuters) - After a breather on Friday, U.S. grain markets are likely to resume their scorching drought-fueled rally this week with a U.S. government report on Wednesday expected to give price direction even as hot and dry weather remains center stage.
The 30 percent summer rally in Chicago Board of Trade corn futures sparked by one of the worst droughts in nearly a quarter century in the U.S. grain belt could add to food inflation not just in the United States but across the globe.
And meat companies like Smithfield Foods and Tyson Foods could see margins being crimped, raising the prospects of consumers having to dig deeper into their wallets even as concerns over global growth escalate.
Weather in the U.S. Midwest, which grows about 80 percent of the corn and soybeans in the United States, has been key in the rally that began about three weeks ago and there is little relief in the cards for this week, forecasters said.
Some analysts are expecting corn futures to blow past their current record high price of $7.99-3/4 per bushel set in June last year and soybeans to move above its peak of $16.63 set in July 2008, in the coming weeks if the drought persists.
On Friday, spot July corn futures closed at $7.43-1/4 per bushel and July soybeans at $16.19-3/4 per bushel.
Analysts are also expecting the surge in prices to affect a policy change in the ethanol industry that mandates companies to produce 12.6 billion gallons of the fuel additive this year.
"The market's goal seems to be to change the ethanol mandate policy," said grains analyst Dan Basse, president of research firm AgResource Co. in Chicago.
"EPA (Environmental Protection Agency) has the authority to change the mandate," he said.
Basse said that based on weather conditions and feedback from crop scouts, the corn yield this year could fall to below 140 bushels per acre -- compared with the U.S. Department of Agriculture's current estimate of 166 bushels.
He said CBOT corn futures were trading on expectations that the yield was around 147 to 148 bushels per acre.
A Reuters poll of 13 analysts this week showed the yield to be 153.4 bushels per acre, down 2.5 percent from a similar poll a week ago.
USDA TO CUT CORN YIELDS?
Analysts were expecting the USDA's July crop report to be issued on Wednesday to revise down its yield estimate, but added that the department was unlikely to adjust it in one fell swoop.
There could be a further revision in August when the USDA conducts field surveys and has more data available.
"They have to take a whack at yield and total supply to soften the blow of the drought," said grains analyst Mike Zuzolo of Global Commodity Analytics in Lafayette, Indiana.
"I also expect them to substantially take down demand," he said, adding that high corn prices had already dented demand for the grain from the ethanol and export sectors.
He said some of his livestock clients were contemplating liquidating their hog herds if the drought in the Midwest persists and continues to raise feed costs.
Darrel Good, agricultural economist with the University of Illinois in Urbana-Champaign, said some of the corn crop in parts of southern Indiana and southern Illinois were damaged beyond recovery by the heat and dry weather.
"The question now is do we hold what we got or lose more," he said, adding that the corn crop in states like Minnesota in the northern Midwest was in good condition.
Good said that while the USDA only rarely adjusted its corn yield estimate in July, there was a strong likelihood that the department would make that revision in its report this week.
"In 2005, they revised it down by three bushels. We got to believe they'll come down by more than three bushels this time."
EUROPEAN MODEL SHOWS 'WETTER' MIDWEST
Joel Widenor, meteorologist and director of agricultural services at Commodity Weather Group, said weather in the U.S. Midwest could cool off into the 80s degrees Fahrenheit by the end of this week before ramping up to the low 90s degrees -- which would still be 5-10 degrees cooler than last week.
"Moisture is still looking tough over the next 10 days (for the Midwest)," he said on Friday, but added that rains of 1/2 inch to three to four inches could fall in the Mississippi Valley over the next one to five days from Friday.
"This could be the first hint of the El Nino pattern," he said, adding that the rains would sweep across Arkansas, Louisiana, Mississippi, Tennessee and spread to the Southeast.
The El Nino weather pattern that occurs every four to 12 years is often linked to heavy rainfall and droughts.
He said that the European weather model was showing a "wetter" trend than its U.S. counterpart in the Midwest in the 11-15 day forecast. The European model was also showing a larger area of the Midwest getting rains compared with the U.S. model.
He said the European model is showing that two-thirds of the Midwest will have showers in the 11-15 day forecast, while the U.S. model is forecasting rains in the northwestern Midwest and around the Great Lakes region.
"It's intriguing. This is the wettest forecast I have seen in quite a while," he said of the European model.
(Editing by Leslie Gevirtz)