The past week has seen a retreat in both corn and soy; with the former falling 7.5% to the US$7.80/bushel range and the latter slipping 4.1%, to just under US$17/bushel at one point. This occurred on the back of supply related news that appears to be more illusory than real.

For example, China, which was rumoured on September 10th to be cancelling soy import cargoes, is suddenly said to be taking advantage of lower prices, which fell sharply from their recent peaks. Of course, China's decision to proceed with the purchase implies it does not expect prices to fall my lower.

Market softness was fuelled by recent rains supposed reviving of soy crop growth, putting the US crop in its best condition since late July. Unfortunately, according to Bloomberg, investor consensus still expects the USDA to cut this year's soy yield from the current 36.1bushels/acre to 35.8bushels/acre -a far cry from the 44bushels/acre expected near the start of this growing season.

We see a similar story of underlying strength in feed grains. US wheat was selling at a U$40/tonne (US$1.09/bushel) premium to Russian wheat in mid August. By the second week of September, it was selling at slightly under a US$12/tonne (US$0.33/bushel) premium to Russian wheat. After Russia offered 420,000 tonnes of wheat in last week's tender, Egyptian state wheat buyer GASC this week opted to purchase only 120,000 tonnes of Russian wheat and a mere 60,000 tonnes of Russian wheat.

Egypt's first purchase of French wheat since January sold at a mere US$4/tonne (US$0.11/bushel) premium to Russian wheat. With their supplies of exportable wheat dwindling, Russian traders appeared interested in fetching the highest price possible, not in winning large orders they can no longer fulfil. According to Societe General, this represents a shift in wheat sourcing, "back to the European Union and US in the second half of the wheat June-to-May marketing year, likely towards the end of 2012 or early 2013."

With corn, US Commodities noted the high risk of early frosts occurring in 11 to 15 days northern US Midwest states. While this would come too late to appear in this month's USDA report, it could further constrain already tight corn and soy supplies. It could also make worse high levels of mycotoxin contamination found in this year's drought damaged crop.

What to make of all this? It would not be surprising if tomorrow's USDA report drastically slashes US feed consumption or exports, temporarily deflating prices.  But over the medium term, serious supply issues remain. Despite such a demand drop, America would be lucky to have 2012/13 corn stocks close at the same 2011/12 levels that pushed corn over US$7/bushel. Soy ending stocks can only go lower. Hence, despite the recent price weakness, for both grains and oilseeds, things continue to look bullish.