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Wheat prices rose to 22-month highs on Monday as the worst drought in 130 years in major exporter Russia threatened to chop production, while a key lobby group cut its forecast for the country's 2010 grain harvest.
Monday's jump in U.S. wheat prices followed a 42 per cent leap in wheat futures on the Chicago Board of Trade, the biggest monthly advance since 1959, as damage from drought and flooding threatened crops from the Black Sea grain breadbasket.
Benchmark November milling wheat on Euronext surged to a fresh contract high in opening trade.
While markets have focused on Russia, concerns have started to surface regarding crops in the world's fourth-largest exporter, Australia, as dry conditions threaten wheat in a key state.
Export Forecast Halved
The Russian Grain Union cut its 2010 grain crop forecast to 72-78 million tonnes from 81.5-85 million previously as a severe drought advanced in key producing regions, which showed no signs of abating.
Arkady Zlochevsky, president of the lobby group, also told reporters the union expected Russia to export between 11 million and 19.5 million tonnes of grain in the current crop year - down by as much as 50 per cent from its previous forecast.
Mr. Zlochevsky did not give a forecast specifically for wheat, which normally accounts for over 60 per cent of Russia's grain output and around 90 per cent of its exports.
"What we really want to get a grasp on is how much production has been lost, particularly in that Russian and FSU (former Soviet Union) region, to figure out what will be the impact on trade and the current rally that we have seen," said Luke Mathews, a commodity strategist at Commonwealth Bank of Australia.
Mr. Zlochevsky said that drought had so far killed crops on some 10 million hectares of land out of 78 million hectares sown for this year's harvest, with 26 regions declaring a state of emergency. He did not specify the share of lost grain sowings.
Russia has plowed capital into its grains infrastructure as part of a longer-term strategy to dominate international wheat markets, and a recent Egyptian tender has confirmed that Russian milling wheat remains competitive on regional markets.
But local Russian traders were discussing the possibility of export restrictions, said research group SovEcon.
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Mr. Zlochevsky said the government should start sales of grain from its stocks immediately to cut rising prices.
"The rise of prices beyond reasonable limits may cause dangerous consequences, like a decline in consumption and ... a reaction from the state in the form of export restrictions, which is a negative factor nobody needs," Mr. Zlochevsky said.
"People are already talking about restrictions, and even these discussions alone are negatively influencing the market."
Australian Concerns Arise
Meanwhile wheat crops in Western Australia, the country's top exporting state, were also under threat from dry weather, but favourable conditions elsewhere could make up for any crop loss, analysts said.
Any indication the crop in Australia is endangered could put further pressure on world prices. But some analysts said market reaction could be overdone, because global stocks still are at comfortable levels.
Last week the Russian economy ministry said this year's grain crop may be less than 80 million tonnes, 5 million below the latest official forecast, and SovEcon put the figure at 70 million tonnes.
Last year Russia harvested 97 million tonnes of grain and exported the equivalent of 22 million, down from 108 million and 23.5 million in exports in 2008.
Fear of Russian and other Black Sea defaults on key deals to major destinations, including the number one wheat importer Egypt, due to the drought has dominated talk in markets.
Russian state grain trader United Grain Company (UGC) on Monday denied it had defaulted on a wheat shipment to Egypt and said it was considering legal proceedings against its counterparty in the deal.
SovEcon told Reuters traders are experiencing difficulties in finding grain, which farmers are reluctant to sell at previously agreed prices.
"It appears that traders, who had actively signed supply contracts at the start of the season are now honouring them at a loss or with a minimal margin," said Andrei Sizov Jr., SovEcon's executive director.
The Russian state hydro meteorological service said on Monday it expected dry weather with temperatures of 35-43 degrees Celsius in the centre and in the south of Russia as well as along the Volga river, the region worst hit by the drought.