No let up seen in world wheat price surge

By David Evans - Analysis

LONDON (Reuters) - World wheat markets, at their highest for more than a decade after bad weather hit crops, show no sign of retreat and are feeding fear of food price inflation.

Wheat prices have surged some 75 percent since April on both sides of the Atlantic after a dry northern hemisphere spring turned into a wet early summer, denting the outlook for crops, particularly in Europe.

World stockpiles are at their lowest in 25 years and there is strong demand for grains, driven partly by the biofuels revolution, providing all the ingredients for a sustained rally.

"The fundamentals have not changed, in fact they are getting worse. Stocks are short, we're seeing no rationing of demand and it's dry in the southern hemisphere," James Dunsterville of Geneva-based analysts AgriNews said.

"We are in an extremely tight market."

The International Grain Council has cut its estimate for 2007/08 world wheat output by 7 million tonnes to 607 million, citing deteriorating crop prospects in Canada and Europe.

Economists warn of grains pushing up food prices and fuelling inflation.

Analysts said German inflation data this week reflected price increases for dairy and grain products, and on Wednesday the GfK market research survey showed German consumer concerns over higher food bills was likely to dampen sentiment.

In the United States, Chicago Board of Trade December wheat futures hit 11-year highs at $7.54 cents/bushel last week.

"The buyers... keep coming after this wheat. There is a lot of uncertainty about what price level it will take to ration demand," said analyst Shawn McCambridge at Prudential Financial.

Egypt, Iraq and Iran were among the buyers boosting U.S. exports to over one million bushels a week in the last 2 weeks.

The rally was sparked by an early April freeze in the U.S. Plains, followed by excessive rain coupled with disease and insect problems, contributing to the squeeze on world supplies.

The Canadian wheat crop has been estimated at 20.3 million tonnes, down almost 20 percent on last year. Over the past 20 years, there have only been three years when the wheat crop fell below 21 million tonnes, each during severe drought.

SOUTHERN HEMISPHERE WORRY

It is rain that has really hammered yields in Europe and turned much of the crop into animal feed quality only. French analyst Strategie Grains this month cut its forecast for the EU crop to 114.1 million tonnes from 118.9 million a month ago.