Chinese wheat output may have dropped to 114.5 million tons at the last harvest, compared with 115.1 million tons a year earlier, the U.S.

Department of Agriculture estimates. Macquarie expects production to decline another 4 million tons this year.

"This drought in North China seems to be putting further pressure on wheat prices," the Rome-based FAO said. "The situation could become critical if a spring drought follows the winter one."

The provinces most affected by drought are Shandong, Jiangsu, Henan, Hebei and Shanxi, accounting for 67 percent of national wheat production in 2009, the FAO said. China has 14 million hectares (34.6 million acres) planted with winter wheat in those provinces, of which about 5.16 million hectares may have been affected by the drought, the FAO said, citing government estimates.

"Temperatures are beginning to heat up in North China, coaxing wheat out of dormancy," Gail Martell, an agricultural meteorologist at Whitefish Bay, Wisconsin-based Martell Crop Projections, wrote in a report. "Rain is needed soon."

Eoin Treacy's view Food prices continue to hit headlines with price gains well supported by fundamentals. A drought in south west China last year had a knock-on effect on rice prices and a corresponding situation in the north east is now affecting wheat prices. China plans massive investment in potable water infrastructure and irrigation to both provide adequate water for its citizens and to feed them. This should help to mitigate prices pressures over the medium term but is unlikely to have any short-term impact on commodity prices. How China manages its stockpiles of food grains will probably be of more importance to how prices perform.

Strong Gluten Wheat surged, following the Spring Festival holiday, to more than CNY3000. While it is becoming increasingly overextended relative to the 200-day MA, a reaction of greater than 200 Yuan would be required to check momentum beyond a brief pause. Hard While Wheat also reasserted it medium-term uptrend today. Chicago quoted wheat consolidated briefly in the region of the August peak and hit a new recovery high yesterday. A sustained move below 820¢ would now be required to begin to question potential for additional upside.

Commonality with other food and agriculture products remains strong. Canola, barkey, corn, oats, rough rice, soybeans, sunflower seeds, maize, yellow maize, white maize, rapeseed, rapeseed oil, palm oil and cotton all remain in relatively consistent medium-term uptrends. Some of these commodities are comparatively illiquid and the fact that commonality is so strong confirms that the supply squeeze evidenced in the price charts is not simply a matter of speculative interest pushing prices higher.