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Hot Year Helps Wheat Prices Soar by Kevin Morrison and Lucy Warwick-Ching in London Financial Times, October 11, 2006

US wheat prices struck a10-year high yesterday on fears of a further decline in global production at a time when world stockpiles are near 20-year lows. The latest rise is expected to lead to higher food prices.

Wheat harvests from Australia to Argentina, Europe and North America have been affected by drought, heatwaves and, in Ukraine, infestation from the Eurygaster beetle. Global wheat supplies have fallen about 5 per cent - or 30m tonnes - from last year. Also Ukraine's wheat exports were stalled after authorities in Kiev insisted that grain traders apply for export licences.

Wheat futures in Chicago reached a 10-year high yesterday morning, $5.24 a bushel, a rise of more than 13 per cent in two days.

Traders said if the highs of 1996 were stripped out, current prices would represent their highest levels in 30 years, referring to the heatwave of 1976.

Chicago wheat futures rose more than a third in the past month on dramatic revisions of the outlook for Australia's wheat crop, now expected to be less than half last year's 24m tonnes.

About 70 per cent of Australia's wheat output is exported, mainly to flour millers in Asia. Other big wheat importers include Egypt, Nigeria and Iraq.

"This is not just an issue of an odd drought here and there but a structural issue with the wheat market, with global stockpiles so lowand demand continuing to rise," said Chris Brodie, a partner at Krom River Partners, a London-based hedge fund.

Investors have waded into global wheat futures in recent weeks, betting on further price rises.

The US department of agriculture is expected this week to lower its assessment of global wheat stockpiles. Its current estimate of 126m tonnes - about 57 days of global demand - is the lowest level of demand cover in more than 20 years.

Gary Sharkey, head of wheat at the National Association of British and Irish Millers, said global markets would remain finely balanced over the next 12 months. "If we have another dry spring or summer in the US, then we could be facing all sorts of issues," he said.

Analysts said flour and food prices would rise if current wheat prices held. Analyst Andrew Saunders at Numis, the investment bank, said: "Food producers will seek to pass this on to the retailers and in turn consumers will bear the brunt."