Grain traders are in a tizzy, wanting to buy corn as a hedge against higher prices as the U.S. crop withers in the drought-stricken southern Midwest, but a flagging global economy is reining in bullish enthusiasm.

The challenge is to weigh the bullish market implications from declining crop prospects against the bearish macroeconomic influences including downgrades of big banks, the ongoing euro zone debt crisis and at best a tepid U.S. economy.

Such opposing forces promise tense market positioning, frayed nerves and sleepless nights.

Wheat, corn and soybean future markets tumbled on Thursday with corn plunging 4 percent as investors sold off commodities and other risky assets after ratings agency Moody's downgraded 15 of the world's biggest banks.

But on Friday, agricultural markets bounced back and moved higher as meteorologists again warned that harsh weather would place further stress on corn and soybean crops.

Investors are braced for more volatility this week.

"Unless we get some decent rains soon the corn crop is in trouble. Come Monday with no rains, we could be sharply higher," a veteran Chicago Board of Trade trader said.

Condition ratings for the U.S. corn crop have shed 14 percentage points from good-to-excellent since the season began. The market is prepared for another 2 to 3 point drop in the U.S. Department of Agriculture's (USDA) weekly crop progress report on Monday.

"The biggest market driver this week will be Monday's crop condition ratings. They're going to be lower but the question is how much," said Sterling Smith, analyst for Citigroup.

"We're expecting conditions to drop a lot in Indiana and Illinois but if some of the other states come down too that would be an extra bonus for the bulls," he said.

Dry weather continues to stress corn and soybean crops in the southern U.S. Midwest while timely rainfall has boosted crop growth and development in the northwest, an agricultural meteorologist said on Friday.

"The rains that were expected in the eastern Corn Belt late this week didn't pan out, the driest regions stayed dry," said Andy Karst, meteorologist for World Weather Inc., Kansas City.

Karst said severe dry weather stress on crops was occurring from southeast Missouri, southern Illinois, western Kentucky, south and central Indiana. "I don't see much help for them for the next week or two," he said.

Hot weather was expected over the weekend in the southwest with highs in the 90s F and low 100s F with high readings in the 80s F elsewhere, Karst said.

Only light rains were expected this week. "The driest areas will get drier and areas that have been wet will begin to dry down," Karst said.


Corn bears also are quick to point out that the north and northwest part of the U.S. have been getting timely rains, boosting crop prospects there and so far the United States remains on track to produce a record large crop.

Cropcast, a division of MDA EarthSat Weather trimmed its estimate of U.S. corn production last week to 13.971 billion bushels, below USDA's current forecast for 14.790 billion.

However, Cropcast's outlook is still well above the previous record crop of 13.1 billion produced three years ago.

Market bears also continue to focus on waning U.S. corn export sales amid stiff competition from cheaper South American supplies and a slowdown in U.S. ethanol output due to high corn prices, falling energy prices and poor ethanol plant profit margins.

Ethanol makers are beginning to diversify their operations because of the poor profit margins and costly corn. Pacific Ethanol Inc. last week said it was launching a corn oil business because of the waning economic returns from producing ethanol.

Position-squaring will begin on Monday ahead of the release of the key USDA June plantings report and quarterly stocks report on Friday. Also, Friday is first notice day for delivery intentions on the spot Chicago Board of Trade July agricultural futures contracts which always adds to market volatility.