U.S. corn futures fell on Tuesday for just the second time in two and a half weeks, retreating from Monday's 13-month high on profit-taking and forecasts for rain in some parched areas of the U.S. Midwest by the end of the week.
Soybeans retreated from a brief, short-covering bounce, slipping further from the all-time, spot-month high the prior session, as investors squared positions ahead of a monthly government crop report on Wednesday.
Declines were limited by continued concerns about the conditions of both corn and soybean crops and reduced expectations for the harvests in the fall after weeks of hot, dry weather across most of the Midwest.
Trading volume was light following Monday's very active session as traders moved to the sidelines before the U.S. Department of Agriculture updates its crop production, ending stocks and world supply/demand forecasts at 7:30 a.m. CDT on Wednesday.
"There's a little more moisture in some forecasts that seems to favour the southern areas where, really, much of the damage has already been done. But it was enough to squeeze some of the nervous longs out of their positions ahead of the report tomorrow," said Shawn McCambridge, analyst with Jefferies Bache.
"We'll continue to see strong support resting under this market, and the downside should remain fairly limited until we get a firm handle on how much damage has been done to this crop."
Weekly crop ratings from USDA late Monday confirmed a sharp deterioration in the state of corn and soy crops, keeping ratings at their lowest level since 1988.
Forecasters boosted their expectations for rain storms expected to hit the eastern U.S. Midwest late in the week, but meteorologists warned the rain would not reverse the damage caused by the drought conditions and heat wave of the past month.
"Temperatures will not be as hot as they have been, but still warm enough to keep evaporation rates high and, therefore, crop stress will continue across parts of the region," said Drew Lerner, a meteorologist with World Weather Inc.
Wednesday's USDA crop estimates may include updated forecasts for harvest yields.
Chicago Board of Trade (CBOT) new-crop December corn fell 12-1/2 cents, or 1.7 per cent, to $7.17-1/2 a bushel after hitting a contract high of $7.33 a bushel the day before (all figures US$).
Spot ethanol futures fell 1.4 percent to $2.468 a gallon after hitting a seven-month peak of $2.524 on a continuous chart the previous day.
November soybeans, the most-active contract, shed 9-1/4 cents, or 0.6 per cent, to $15.38-1/2 a bushel. The thinly traded spot contract, which climbed to a record top of $16.79-1/2 a bushel in the last session, fell 16-1/4 cents, or one per cent, to $16.48-3/4.
Commodity funds sold an estimated net 11,000 corn and 6,000 soybean contracts on the day, trade sources said.
The crop woes limited the pullback on Tuesday and kept prices firmly underpinned, traders said.
U.S. corn ratings last week notched their biggest decline in nearly nine years as plants withered in parched soil during a critical phase of development, severely reducing harvest expectations at a time when the market was relying on a bumper U.S. crop to replenish very tight stocks.
The triple-digit temperatures and lack of rain also weighed heavily on soybean health in Iowa and Illinois.
The heat wave in the Corn Belt should prompt the USDA to lower its forecast of U.S. corn yield in its Wednesday report, a factor that could slash projected stockpiles of the grain by a third, analysts said.
"Radical cuts in the yield and crop forecasts by the USDA tomorrow are inevitable," Commerzbank analysts said.
In a sign of the intensity of the weather rally in the past month, large speculators, including hedge funds, have more than doubled their bullish bets on U.S. corn as a withering drought decimates the crop in the world's top grains exporter, regulatory data showed on Monday.
Wheat futures were lower as they continued to take their cue from corn, although losses were pared by short-covering ahead of Wednesday's USDA report, traders said.
CBOT September wheat fell seven cents to $8.21-1/4 a bushel. November milling wheat on the Paris futures market settled 0.25 euro lower at 248.50 euros a tonne after setting a new contract high at 250.25 euros in the previous session.
-- Karl Plume is a Reuters reporter in Chicago. Additional reporting for Reuters by Mark Weinraub, Naveen Thukral, Colin Packham, Valerie Parent and Gus Trompiz.