World soybean production will fall to a three-year low as hot, dry weather threatens output in South America, Oil World said.

Harvests will drop to 253.4 million metric tons, 2.3 percent below a December estimate, the researcher said. The Argentine crop will be 3.8 percent less than last month’s forecast at 50 million tons, Brazil’s production will be 2.5 percent lower at 71 million tons, and Paraguay’s crop estimate was lowered by 29 percent to 6 million tons, it said.

“The current situation of the South American soybean crop is worse than reflected in several of the most recent trade estimates,” Hamburg-based Oil World said today in a report. “We have already pointed to the severe irreversible damage in Paraguay and the possibility that the soybean crop will decline.”

Soybeans were down 2.5 percent this year on the Chicago Board of Trade by 8:34 a.m. London time. The U.S. Department of Agriculture on Jan. 12 lowered its estimate for global production of the oilseed by 0.8 percent to 257 million tons and cut its world stockpile forecast by 1.7 percent to 63.4 million tons.

Further pressure on prices will be limited because of the hot, dry weather in South America, Oil World said. Traders who bet prices would fall last week “overreacted” to a rainstorm in Argentina and Brazil and to the USDA announcement, the researcher said.

Dryness persisted in the year’s first 12 days in the Brazilian states of Rio Grande do Sul and Parana, resulting in “irreversible damage,” Oil World said. Weather in Argentina and Paraguay also curbed yields, the researcher said.

“Although beneficial rains arrived in several important Argentine growing areas during Jan. 10-12, the soil moisture supplies are still very short on at least 40 percent of the soybean area,” Oil World said. “A return of hot and dry conditions is now forecast.”

Source - http://www.businessweek.com/