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Shorter world wheat supplies bolsters market

DJ UPDATE: Wheat Prices Climb; World Crop Cut Stokes Supply Fears

Tom Polansek - DJ - 3 mins ago

(Adds prices, analyst comments, news of Ukraine blocking some grain exports, and background on corn demand, in the third, seventh through ninth and 17th through 19th paragraphs.)

CHICAGO (Dow Jones)--Wheat prices climbed sharply as the latest official U.S. estimates of global output undercut previous predictions.

In a widely anticipated report, the U.S. Department of Agriculture on Thursday cut its forecast for 2010-11 global wheat output by 2.3% to 645.73 million tons. That was lower than expectations and below recent estimates from the Food and Agriculture Organization and International Grains Council, which both saw the crop at 651 million tons. This is a surprising move from the USDA, which is traditionally more cautious in its crop adjustments.

Wheat-production forecasts have been slashed repeatedly since the middle of the summer, when the severity of record-setting heat and drought in the former Soviet Union became apparent.

Wheat prices hit nearly two-year highs on August 5 as Russia banned grain exports because of the drought, but prices have pulled back since then.

"USDA's data today only adds to the drama," said Bryce Knorr, analyst for Farm Futures. "The agency came in with a very low estimate of 2010 world production."

Soft red winter wheat for September delivery recently traded up 28 1/2 cents, or 4.1%, at $7.23 1/4 a bushel on the Chicago Board of Trade. That is down from the nearly two-year high of $8.41 but up 70% from a nine-month low in June.

Adding to the bullish fervor, Ukraine's state customs service on Thursday said it had blocked the export of more than 28,500 metric tons of wheat on two boats due to incorrect paperwork. Unlike Russia, Ukraine, also a big wheat exporter, hasn't put an official ban in place, but some analysts say government officials there are using bureaucratic means to slow down shipments overseas.

Prices may be able to top $8 again if Ukraine and neighboring countries join Russia in officially banning grain exports, said John Christopher, grain analyst at Linn Group, a brokerage. After announcing its export ban, Russia asked Belarus and Kazakhstan, its partners in a recently formed customs union, to halt grain exports, fearing that Russian grain would be exported via the two countries.

"The market's going to need another catalyst to really get it off and going," Christopher said.

U.S. wheat export sales for last week, issued Thursday, beat expectations at a hefty 1.3 million tons, an increase of 58% from the previous week, as importers turned to the U.S. from the former Soviet Union. Top buyers were Egypt, the world's largest importer, and Japan, a reliable U.S. customer.

Drought has prompted Egypt to start buying U.S. wheat after directing the bulk of its business to the former Soviet Union during the 2009-10 year, which ended at the end of May. The USDA on Thursday raised its forecast for 2010-11 U.S. wheat exports by 20% from last month to 1.2 billion bushels due to declines in foreign production.

"The Russian drought has changed the landscape of agriculture for the next 18 months at least," said Dan Basse, president of AgResource Company, an agricultural research firm. "There will be plenty of volatility in the months to come."

The USDA separately Thursday announced U.S. exporters had sold 275,000 tons of hard red spring wheat to Canada, which is typically a competitor for export business on the world market. Canada's crop is struggling because of excessive rains at planting time, but traders said the shipment would probably end up offshore.

Increased demand for U.S. wheat prompted the USDA to lower its estimate for U.S. wheat inventories as of May 2011 by nearly 13% from July to 952 million bushels. The inventory is down from last year but still at its second-highest level in the last 23 years.

The rally in wheat and strong demand helped to pull up corn and soybean prices. The USDA raised its estimate for 2010 U.S. corn exports by 5% from last month to 2.05 billion bushels and could raise it another 50 million to 100 million bushels, said Terry Reilly, grains analyst at Citigroup.

December corn was up 14 cents, or 3.4%, at $4.25. November soybeans were up 14 1/2 cents, or 1.4%, at $10.30.

Livestock producers need corn to make up for a shortfall in the amount of wheat available for animal feed from the former Soviet Union, which is known for growing low-quality wheat. Increased wheat demand will likely be for higher-quality hard red wheat, traded in the U.S. at the Kansas City Board of Trade and Minneapolis Grain Exchange, Reilly said.

"The food wheat consumption won't change," he said. "That is going to help out U.S. exports for hard red spring wheat and in turn should lift Kansas City and Minneapolis higher over Chicago in the long run."

Traders may increasingly buy corn and sell wheat at the CBOT because of expectations for strong demand for corn as animal feed, Reilly said. The USDA on Wednesday announced that nearly one million tons of U.S. corn, a large amount, had been sold to other countries in deals that were seen as a sign buyers were scrambling to cover their feed needs.

-By Tom Polansek, Dow Jones Newswires; 312-341-5780; tom.polansek@dowjones.com

(END) Dow Jones Newswires

August 12, 2010 13:03 ET (17:03 GMT)

Copyright (c) 2010 Dow Jones Company, Inc.

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