Wheat prices may surge on global crop setbacks

Crop setbacks coupled with a high level of short positions held by speculators have left wheat prices vulnerable to a spike, analysts said.

Forecast for world wheat output in 2010-11 has been cut to 660 million tonnes, reflecting in the main the worsening prospects for the harvest in Canada, where heavy rains have prevented farmers from planting up to 12.5 million acres of crops, and flooded much of what has been sown.

"Weather developments in Canada over recent weeks have possibly been the most damaging of any of the recent setbacks for world wheat production," analysts said, cutting forecast for the country's crop to 20.5 million tonnes.

That implies a 23% slump in production in the world's second biggest wheat exporting nation.

Furthermore it was likely that exportable surpluses out of Black Sea states would be lower due to high winterkill rates.

EU supplies were also tighter than anticipated thanks to a jump in exports fuelled by the slide in the euro, which had made the region's grain more affordable to foreign buyers.

Further rallies in wheat may force speculators to close some of the considerable short positions they have in the grain. This could result in a short covering rally, causing a spike in prices similar to that in spring 2009 where prices gained 33% between late April and June, analysts said.