Tight global supply of staple grains after a year of bad weather may push prices to record highs as traders await signs of whether the next round of crops will stave off a full-blown supply crisis.

World prices of basic foodstuffs have come off highs seen during the northern hemisphere summer when the worst drought in half a century in the United States ravaged crops in the world's top producer of corn and soybeans, and this has led the United Nations to play down the immediate threat of a food crisis.

But with adverse weather affecting wheat harvesting in the southern hemisphere and wheat sowing in the United States and western Europe also facing poor conditions, grain markets are already contemplating the risk of prolonged supply tensions, analysts and traders said at a major grain gathering.

Rising food prices can have wide-ranging implications for the global economy, driving up inflation at a time when consumers in many developed countries are struggling with rising unemployment and potentially making it harder for central banks to keep interest rates low.

"We're living on the edge in terms of grain supply," AgResource President Dan Basse told the Global Grain conference in Geneva on Wednesday.

"We better have good weather next year. If we don't have good weather we don't know how high is high," he said of prices.

Corn, a common ingredient in livestock feed, has been the focus of market upheaval this year in view of the U.S. drought and the deep drop in world supply leaves it liable to set new record prices until South American crops arrive early in 2013.

After U.S. corn futures hit a record in August near $8.50 a bushel, AgResource sees prices hitting $9 by May while Macquarie analysts expect them to reach the $8.50-$9 range in the latter part of the season.

"The fundamentals driving the whole grain complex are the fundamentals of corn," Chris Gadd, grains analyst at Macquarie Capital, told Reuters. "The market looks very tight in the second half of the year and that looks a concern for prices."


Despite some upward revisions to the U.S. corn harvest since the height of the drought, U.S. supply is still set to fall to a 17-year low by the end of the 2012/13 season and many operators fear the U.S. Department of Agriculture will cut U.S. output when it adjusts its acreage estimate in January.

"If you get a USDA report in January that shows any sign of a smaller harvest then the money flows will come back. When the managed money comes back then the consumer has to hope for a recovery in output led by South America," Jeffrey McPike, grains trading manager grains at Dutch-based Cefetra, said.

Heavy rain in Argentina is now causing concern that corn planting there could be disrupted and limit the major exporter's ability to replenish global supply in the months ahead.

"The weather in South America is what is going to determine the market," Erin FitzPatrick, agricultural commodity analyst at Rabobank, said. "There are still a lot of 'ifs'."

The squeeze on corn supply has been exacerbated by tightening availability of wheat, which acts as an alternative to corn in livestock feed as well as a human staple in bread.

Poor weather in Argentina and Australia, two major wheat exporters, is threatening to deprive the world market of extra volumes at a time when it is grappling with fading exports from Russia and Ukraine after weather-hit crops there.

Europe is set to become a flashpoint for this twin pressure on corn and wheat supply, with the region facing very tight wheat stocks as it exports briskly and also faces a sharp rise in corn import needs.

"We're seeing a very tight balance sheet in Europe," FitzPatrick said, stressing Rabobank estimates a record low for the wheat stocks-to-use ratio in the European Union this season.

"Matif wheat needs to get more expensive to shift more demand to U.S. wheat," she said, referring to Paris futures.

AgResource also sees European wheat prices rising to curb export demand and limit import demand in corn, which it sees the EU struggling to find in a tight global market.

Favourable weather conditions in the coming months could take some of the tension out of the market, and probability suggests a repeat of the back-to-back droughts that battered crops in South America and then the United States in the past year is unlikely.

"At this time last year we were looking at La Nina, now it's more neutral," FitzPatrick said, referring to the weather system that provoked a drought a year ago in South America.

But even if a supply recovery occurs next year and cools prices, the underlying picture of robust world demand driven by China will keep prices historically high and stocks light.

"China's Achilles heel is food," Basse said on the sidelines of the conference, noting that the country has become an importer of corn and rice after already becoming in recent years the world's biggest buyer of soybeans. (Editing by Patrick Graham)