Government forecasters are expected to lower their outlook for U.S. soybean and corn supplies as drought curbs the South American crop and boosts demand for U.S. exports.

The U.S. Department of Agriculture will cut its forecast for end-of-season soybean inventories by 6.5% from a month ago to 257 million bushels, according to the average prediction of analysts surveyed by Dow Jones Newswires.

A similar survey found analysts, on average, expect the agency will drop its outlook for corn stockpiles held as of Aug. 31, lowering its supply forecast by 2.1% to 784 million bushels.

The new estimates will be released as part of the USDA's monthly supply and demand report due out Friday at 8:30 a.m. EST.

Recent dry weather in South America is likely to reduce soy and corn production in Argentina and Brazil, making buyers of those crops more likely to turn to the U.S. for purchases, boosting demand and eating into stockpiles, analysts said.

Concerns about the South American crop have helped drive up U.S. soybean futures this year, with prices recently trading at six-month highs.

On Friday, traders will be watching how deep the USDA cuts its South America supply estimates, and whether they lower their projections to match recent deep cuts by private forecasting firms or take a more conservative approach.

"They'll take modest reductions this month. They'll work on fine-tuning that number in the April report and into May as harvest data comes in," said Shawn McCambridge, senior grains analyst with Jefferies Bache in Chicago.

Analysts, on average, expect the USDA will peg Argentina's 2012 soybean crop at 47 million metric tons, down from a February estimate of 48 million. They also expect the USDA to cut its estimate for Brazil's soy crop to 69.5 million metric tons from a February estimate of 72 million.

Soy futures have gotten support from expected strong demand from China, the world's largest importer of soybeans. One question for traders is whether the USDA will change its export forecasts for U.S. soy in the face of Chinese demand and the shrinking South American crop.

Analysts also expect the dry weather to curb corn production in South America. The USDA is expected to estimate the corn crop in Argentina at 21.3 million metric tons compared with a February estimate of 22 million metric tons and peg the corn crop in Brazil at 60.4 million metric tons compared with a February estimate of 61 million metric tons.

Traders also want to see whether the USDA adjusts its estimates for domestic corn demand for use in ethanol. Some market participants have said the USDA is understating demand for corn among makers of the corn-based fuel additive.

The report's effect on the price difference between soy and corn prices will be watched closely. That will help determine which crop some U.S. farmers plant this year, and therefore affect the availability of supplies later in the year.