"Globally, you can't get away from the fact that stocks are declining," AgriNews analyst James Dunsterville said.

"We can still produce enough wheat around the world, but the market is becoming more susceptible to regional losses."

The International Grains Council (IGC) sees global wheat production in 2005/06 at 608 million tonnes, down from 624.5 million last season. World wheat stocks are forecast to fall to 133 million tonnes, down five million from the end of 2004/05.

Trade is seen rising to 109 million from 106 million tonnes.

From the plains in the US midwest to the wheat prairies of Australia, water shortages have hit. Argentina is dry and India is mulling a wheat import-duty cut to combat domestic shortages.

The US Department of Agriculture said severe drought in Illinois and Missouri will hit the corn harvest there.

SPAIN HAS WORST DROUGHT ON RECORD

In Europe, Spain and Portugal are suffering their worst drought on record and in the major wheat importing countries of north Africa, much lower harvests are expected.

Drought in Morocco has caused the crop to fall more than 50 percent from last season, leading to a 33 percent rise in grain import needs to near five million tonnes. In Algeria, the crop is seen at 2.5 million tonnes, against 4.0 million last year.

This will help exporters in France, where farmers have large stocks from last season and still expect a good-sized harvest.

Much of France's ability to conquer new markets and hold onto those in north Africa will depend on the euro/dollar rate and the EU's export subsidy policy, traders said.

The EU has begun the campaign cautiously, offering refunds at up to four euros ($4.83) a tonne. Exporters say levels nearer to 15 euros are needed to make French wheat competitive against aggressively priced Russian grain in key markets such as Egypt.

French traders also said they expect Egypt to make more purchases via private buyers this season rather than the state-run GASC. Private buyers tend to be more willing to take cheaper Russian wheat, they added.

"This will be a bad surprise for French wheat this season," one trader said.

Both Spain and Portugal have seen their harvests halved and are already major importers. As a result, the European Union has already agreed to transfer an initial 200,000 tonnes of grain to Portugal and 500,000 tonnes to Spain from its bloated intervention stocks, mostly in landlocked central Europe.

RAIN SAVES AUSTRALIAN CROP

Much-needed rain in Australia looks to have now saved the country's wheat crop, probably cutting off potentially lucrative markets in Asia from eager European exporters.

China turned to be a net grain importer in 2004, having been a net exporter from 1997 to 2003, and is forecast to consume 15 million tonnes more than forecast production this year. Whilst France has already sold some wheat to China, the chance of more big sales largely depends on the Australian harvest.

"If the Australian crop turns out to be good, then Europe will be out of the picture in Asia," one French trader said.

But Argentina, a thorn in European exporters' side last season in north African markets, is still too dry in places.

The Buenos Aires Grain Exchange has cut its forecast for Argentina's wheat area, putting it at 5.5 million hectares, 10 percent down on last year and the lowest in the five years.

"On a world level, smaller harvests in the European Union, Argentina, North America, India, the Middle East (Iran and Turkey); however these will be partly offset by better harvests in China and Australia," French analyst Strategie Grains said.

"Given these circumstances, the world balance could tighten rapidly if weather events cause a reduction to the Argentine and Australian harvests compared to current forecasts. This would then have a bullish impact on prices," it added.