Soybean futures closed higher on Tuesday, as the government cut its forecasts for U.S. soybean supplies and traders worried that dry weather could hinder development of Midwest soy crops.

Soybean futures for July delivery settled up 10 1/4 cents, or 0.7%, at $14.35 a bushel at the Chicago Board of Trade. November soybeans rose 5 3/4 cents, or 0.4%, to $13.37 a bushel.

The U.S. Department of Agriculture, in a monthly supply-and-demand report, forecast tighter soy inventories due to stronger demand from domestic users and from China.

The report highlights a shift in the soybean market, which rallied earlier this year on shrinking forecasts for soybean production in drought-stricken Brazil and Argentina. Analysts expected the shortfall to boost export demand for U.S. soybeans. But with the harvest in South America complete and the U.S. growing season beginning, soybean traders have shifted their focus to domestic weather forecasts in an effort to divine the crop's likely yield at harvest.

• Marketing Talk: See how Tuesday's USDA reports, weather shaped Tuesday's trade
• Read more: USDA numbers push soybeans higher

"We're starting to get late enough in the growing season where all the focus is more on weather," said Chad Henderson, president of Prime-Ag Consultants Inc., a commodity brokerage based in Brookfield, Wis.

The USDA on Tuesday forecast domestic soybean inventories as of Aug. 31, the end of the current marketing year, at 175 million bushels, down 17% from its previous forecast and 11% less than predicted by analysts in a Dow Jones Newswires poll.

The cut was due partly to strengthening export demand, especially from China, the world's largest importer of soybeans, the USDA said. It was also a result of a higher USDA forecast for domestic soybean processing--known as crushing--to satisfy demand for soybean meal, a key ingredient in animal feed.

The USDA also cut its forecast for inventories at the end of the next marketing year by 3%, to 140 million bushels.

Those forecasts boosted futures prices. "They reinforced the fact that global stocks are tight and expected to stay tight into next year," said Arlan Suderman, an analyst in Wichita, Kan., for agricultural publication Farm Futures.

Traders on Tuesday also focused on recent dry conditions in states like Iowa and Illinois, where soil on farms will need more rain to ensure healthy development of soy crops.

Meanwhile, the USDA didn't change its forecast for U.S. corn inventories to be 851 million bushels at the end of the current marketing year. Analysts had expected the USDA to cut its forecast.

The USDA raised its forecast for domestic corn use in ethanol in the current marketing year by 1% to 5.05 billion bushels, saying weekly ethanol production has increased since mid-April after declining from the record levels of late December. But that was balanced out by a lower forecast for corn exports, due to tight domestic supplies and increased competition, especially from Brazil.

For the 2012-13 marketing year, the USDA raised its forecast of world corn production by 0.4% to 949.9 million metric tons, due to higher projected output in China, the European Union and the former Soviet Union.

CBOT July corn fell 8 cents, or 1.4%, to $5.84 a bushel.

Wheat futures also closed lower, as the USDA forecast tighter wheat supplies than previously expected, but its estimates didn't contain any major surprises. Market participants appeared to be performing spread trades, buying soybeans while selling corn or wheat, traders said.

CBOT July wheat fell 14 1/2 cents, or 2.3%, to $6.16 a bushel. Kansas City Board of Trade July wheat fell 12 1/4 cents to $6.40 3/4 a bushel. MGEX July wheat fell 15 1/2 cents to $7.64 1/4 a bushel.

Write to Owen Fletcher at owen.fletcher@dowjones.com
(END) Dow Jones Newswires
June 12, 2012 15:28 ET (19:28 GMT)
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