World Is Reliant on the U.S. for Its Wheat

By SCOTT KILMAN, ILAN BRAT And LIAM PLEVEN

The drought decimating Russia's grain crop is helping put more money into the pockets of U.S. farmers and leaving the world more dependent on the U.S. harvest.

The U.S. Agriculture Department said Thursday it expects U.S. wheat exports to soar 36% amid higher prices, and in a rare move raised its one-month-old harvest forecasts and price forecasts for several major U.S. crops, including wheat, corn, and soybeans at the same time.

"The U.S. is an island of supply in a year of very big demand," said Daniel W. Basse, president of AgResource Co., a Chicago commodity forecasting concern.

Higher prices for these commodities could end up driving up food prices for recession-weary consumers.

The USDA said that based on Aug. 1 conditions it expects U.S. farmers to harvest a record 13.4 billion bushels of corn in the next few months, up 1.9% from the record 2009 harvest, and yet reap $3.80 cents a bushel, give or take 30 cents. The $3.80 midpoint is 7% higher than last year.

"Crop revenues look to be much improved with record crops and generally higher prices than we anticipated earlier this year," said Joseph Glauber, the USDA's chief economist.

In the wake of the USDA's wheat export forecast, the wheat futures contract for September delivery at the Chicago Board of Trade jumped 18.25 cents a bushel Thursday to settle at $7.13 a bushel, up 56% from two months ago.

While the USDA's report highlighted the opportunity for U.S. farmers to fill at least some of the gap created by problems elsewhere, it also means the global food supply—and prices—are even more vulnerable if U.S. crops encounter their own weather or other troubles.

"The pressure is on us to produce this corn," said Peter Meyer, an agriculture products specialist at J.P. Morgan Chase. "This year's corn mightn't be as good as we think."

Rising wheat prices are beginning to send a chill down the spines of food executives, who were baffled by gyrating commodity prices in 2007 and 2008.

In an earnings conference call Thursday with investors, Sara Lee Corp. executives said they expect to raise prices of its bread lines over the next year, driven in part by rising wheat costs.

Sara Lee, which didn't disclose how much it intends to raise its prices, said it expects the prices of the major food commodities it buys, such as wheat, pork and coffee, to climb a combined 15% by July 2011, when its fiscal year ends.

The drought gripping the Black Sea region is having a broad impact on grain prices in part because Russia and its neighbors in recent years have emerged as major rivals of wheat exporting nations such as the U.S., Australia and Canada. Wheat is not only used to make food but in rations for livestock, which could increase demand for crops such as corn.

The USDA estimated Thursday that Russian wheat production is plunging 27% from last year to 45 million metric tons. The USDA expects Russia to export just three million metric tons of its new crop, compared with the 18.5 million metric tons it exported from last year's harvests.

The stubborn drought—which is also cutting the wheat exports of neighboring Ukraine and Kazakhstan and forced Moscow to ban wheat exports until Dec. 31—is clearing the way for U.S. wheat exports to climb to 1.2 billion bushels from 881 million bushels during the year that ended May 31, according to the USDA.

Thursday's forecast of a record corn crop largely reflects favorable growing conditions earlier in the year. But an unusual combination recently of hot and wet weather in some Midwest areas also highlights the risk that the harvest could fall short of the USDA prediction of a record 165 bushels per acre.

"That's a pretty ambitious number," said Paul Kassel, an agronomist with Iowa State University Extension who works in nine northern counties of the state.

Among the potential problems in Iowa are wet fields and unusually warm night temperatures, which can undercut the corn plant's ability to fill kernels. In Indiana, meanwhile, some fields have encountering plant diseases while others have received too little rain, said Bob Nielsen, a Purdue University agronomist.

It isn't clear that problems such as these will significantly dent potential yields. But Mr. Meyer said the USDA report has raised the expectations for production. "From here, it can only come down," he said.

If the USDA does revise the data lower as the crop is harvested, the market reaction could be pronounced, particularly in the wake of the problems with the Russian wheat crop. In June, for instance, the USDA said corn reserves were much lower than the market expected, sending futures prices up 9% that day.

Write to Scott Kilman at scott.kilman@wsj.com, Ilan Brat at ilan.brat@wsj.com and Liam Pleven at liam.pleven@wsj.com

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