CHICAGO, May 8 (Reuters) - The ascendant dollar will play a prominent role in grain markets this week as edgy investors continue to peel away from commodities.
There is a nascent yet growing thought that the greenback is set for a comeback from the doldrums, fueling a change in the investor dynamic of favoring commodities over the dollar.
While most analysts continue to have a positive outlook of grain prices over the long term as U.S. farmers struggle to plant their corn and on concerns over wheat crops from China to Germany to Canada, they agree on short-term turbulence.
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"There has been a shift in the market dynamics. Commodities have had an excellent bull run, and it's time for a correction," said analyst Karl Setzer of MaxYield Cooperative, an investment fund whose members are mostly farmers.
"Markets have been flushing out weak longs, and we'll be looking at more of that next week," he said. "Speculators who got into the market for no reason are scared and running."
Interestingly, hedge funds and other financial investors had already been reducing their exposure in grain markets before the significant sell-off of Thursday and Friday.
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The CFTC Commitment of Traders report on Friday said speculators slashed their net long position in Chicago Board of Trade corn by 36,901 contracts in the week that ended May 3, and they cut their longs in soy by 8,832 contracts.
MACRO MEETS MICRO
As investors mull economic growth both in the United States and globally -- whether Greece would actually leave the euro zone and over U.S. Treasuries -- there will be fundamental data that is likely to grab their attention as well.
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The U.S. Department of Agriculture will issue its May supply-demand report, which will offer the department's first estimate of the winter wheat crop in the United States -- which accounts for nearly half of all U.S. wheat exports.
The USDA will also give its first estimate of ending stocks for this year's corn and soybean crops. Additionally, it will update global crop production numbers, including corn and soy production in Brazil and Argentina.
"We could see a macro-micro battle (this) week," said Mike Zuzolo of Global Commodity Analytics.
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"I think the focus will shift from supply shortage to demand erosion. If old-crop corn stocks build up (this) week on demand rationing, this shift will have some validity," he said, alluding to USDA estimates on 2010/11 corn stocks.
Spot corn futures have eased in the past weeks after racing to a record high amid a slowdown in exports and in the usage of corn to make ethanol.
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The USDA has forecast U.S. old-crop corn stocks would be at their tightest since the 1930s this summer.
WHEAT ON WATCH
Traders will closely track the wheat market, which has underlying support from drought trimming U.S. crop prospects and inclement weather in Germany, France, China and Canada.
"There is a shortage of high-protein wheat and with weather issues in Germany and France, there is an upside to this market," a trader said, adding that futures at the Kansas City Board of Trade could take the lead.
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Last week's tour of the Kansas wheat crop concluded that the state's hard red winter wheat production this year would be the smallest in since 1996 at 256.7 million bushels.
Global supplies of high-quality wheat have been on the slide over the past year, with excessive rains in top exporter Australia last year downgrading its crop.
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Source: Reuters