WASHINGTON (Reuters) - World wheat supplies will be tighter than expected as a devastating drought in Russia and its neighbors erodes healthy stockpiles, but the U.S. Agriculture Department said on Thursday there was no reason for rising prices to stage a repeat of 2008's historic surge.
In its August report, the Agriculture Department cut its world wheat production forecast by 2.3 percent to 645.73 million tons, its first estimate since Russia, normally the world's No 3 wheat exporter, banned shipments to conserve domestic stocks.
But it joined other government bodies in downplaying fears that the world was headed for another food supply crisis similar to two years ago, when Chicago wheat surged to a record above $13 a bushel.
"Expectations that prices in the next few months will hit the record levels of 2007/08 are not substantiated by the reality of the global supply situation," it wrote.
As a result of reduced wheat crop, USDA reduced its forecast for world ending stocks again, having cut it by a total of by 12 percent or 23 million tons since May. But stocks still would be 40 percent, or 49.9 million tons, higher than in 2007/08.
The crop downgrade was larger than forecasts for a more modest cut to 650 million tons, and the figure helped wheat for delivery in September modestly extend overnight gains to rise 3.6 percent or 25-1/2 cents a bushel to $7.20-1/4.
Russian President Dmitry Medvedev said many farmers were close to bankruptcy and crops were lost on a quarter of Russia's grain area.
"The FSU (Former Soviet Union) numbers were breathtaking. We haven't seen USDA make an adjustment like that for some time," said Jerry Gidel, analyst for North America Risk Management Inc.
Wheat overshadowed the department's forecast of record U.S. corn and soybean yields that will push both harvests to the largest on record -- larger than expected for the USDA's first report based on field surveys.
Traders instead focused on demand for exports from the world's top seller, underscored by a robust set of weekly sales and reduced forecasts for ending stocks, helping lift corn prices by 2.4 percent to $4.05 a bushel and boosting soybeans by 1.1 percent to $10.56, both aided by wheat's gains.
An initially bullish report of a rare export sale to Canada, a rival wheat grower, was tempered by a Canadian Wheat Board official who said the cargo was only transiting Canada while headed to an off-shore buyer.
Fertilizer company shares jumped on the news, including Potash Corp, Agrium, Mosaic Co and CF Industries.
Weeks of unrelenting heat forced Moscow to halt wheat exports for the rest of this year, sending prices to a two-year high last week. The drought is also ravaging Ukraine and Kazakhstan and raised fears of a global food crisis like 2007/08 when prices soared and tens of millions of people were unable to buy enough to eat.
The USDA aggressively cut Russia's crop to 45 million tons, down 15 percent from its previous estimate, and reduced Kazakhstan by 18 percent to 11.5 million tons and Ukraine by 15 percent to 17 million tons.
It slashed Russian exports by 80 percent to a mere 3 million tons, factoring in Moscow's ban on exports.
Ahead of the report, some traders had believed the USDA's report would not fully reflect the damage from Russia's worst drought on record, but the USDA's estimate was in line with Russian analyst SovEcon's 43.5 million tons.
US CROPS LARGER THAN EXPECTED
But U.S. crops will help fill the gap, the USDA said, pegging production at record levels and beyond what traders had expected.
Farmers are poised to harvest a record 13.365 billion bushels of corn, above trade estimates of 13.279 billion bushels. The soybean crop was pegged at 3.433 billion bushels, 2.3 percent higher than trade estimates. Yields for both crops also topped average trade projections.
Crop problems in Russia and elsewhere will boost demand for U.S. wheat, the USDA said, cutting estimates of ending stocks.
U.S. wheat exports were forecast for 1.2 billion bushels, up 20 percent from the July estimate and the largest in three years. Wheat ending stocks were forecast at 952 million bushels, 1 percent less than traders had forecast, but still would be the largest in 11 years.
U.S. corn and soy ending stocks for the current 2009/10 crop year, which ends August 31, were cut by more than expected. Corn end stocks were estimated at 1.426 billion bushels, 3 percent less than trade forecasts, and soybeans 160 million, 5 percent below trade estimates.
For 2010/11, corn ending stocks were estimated at 1.312 billion bushels, slightly above trade estimates, and soybeans 360 million bushels, above trade estimates of 319 million.
(Additional reporting Ayesha Rascoe in Washington, Bob Burgdorfer in Chicago, Rod Nickel in Winnipeg and Euan Rocha in Toronto; graphics by Jasmin Melvin; Editing by Russell Blinch, Jonathan Leff and Jim Marshall)