Global rice production will be 6.5 million metric tons smaller than previously estimated as crops around Asia "deteriorated" because of droughts and flooding, the United Nations said.

Rough-rice production will be 697.9 million tons, or 465.4 million tons of milled grain, smaller than the 704.4 million tons estimated in June, the UN Food & Agriculture Organization said in a report yesterday. That's the agency's third output forecast reduction since April.

The FAO trimmed its harvest estimates for China and India because of a combination of drought and floods. Still, global output will be the highest on record, it said.

The export price for Thai rice, the benchmark for Asia, has gained 20 percent from this year's low in July as flooding in Pakistan, Thailand and Vietnam, the three biggest exporters, damaged crops, while hot weather curbed yields in the U.S.

The FAO Rice Price Index, which tracks 16 export prices from the world's biggest shippers, surged 50 points since June to 260 points in November, the highest in at least a year, as prices of Thai and Vietnam rice gained.

"International rice export prices will be heavily influenced by the arrival of newly harvested supplies from 2010 main paddy crops in major northern hemisphere countries," the FAO said. "Government policies will continue to play an important role in determining the direction" of prices, it said in the report.

The FAO's estimates compare with the U.S. Department of Agriculture's forecast for 451.4 million tons of global milled rice output, and a supply deficit of 1.1 million tons, the first deficit in four years.

Eoin Treacy's view Two points highlighted in this article indicate prices will have to rise to promote investment in additional supply. These are that a deficit is predicted even though this year's rice harvest is due to be the biggest on record. Adverse weather in much of the world has put pressure on supply, while robust economic growth in the world's population centres continues to support increasing demand. Weather can have an immediate effect on agriculture prices but does not account for the fact that stocks of grains and beans are at historically low levels. Rising input costs, tighter credit conditions and resulting tighter margins are not ideal conditions for increasing supply, which will have to take place if the current elevated pricing structure is to be ameliorated.

The use of grains and beans in the production of ethanol and biodiesel has helped to siphon supply from the food sector and perhaps artificially supported demand. In tandem with a rising population, that is increasingly capable of paying higher prices for food, the medium-term outlook for grain and bean prices remains favourable.

Rough rice rallied impressively from $10 to $15 between July and November. It pulled back sharply over the last few weeks but found support above $13 and a sustained move below that level would be required to question scope for some additional upside.

Wheat was an early leader and surged out of its two-year base in July. It has been consolidating above 600¢, in what has the appearance of a first step above the base, and is currently firming from the lower side of the four-month range. A sustained move back below 600¢ would be required to question medium-term upside potential. Wheat traded on the Matif exchange has firmed more impressively and Liffe traded wheat has already broken upwards to new recovery highs.

This article focusing on a new strain of wheat rust was kindly forwarded by a subscriber. I am unfamiliar with MediaGlobal so I cannot attest to the story's validity but they appear to have a working relationship with the UN. If the wheat rust threat is credible, it is likely to be bullish for wheat over the medium term. If subscribers have any additional information on this topic we would welcome feedback.

Corn broke out of its base in September and encountered resistance in the region of 600¢ three weeks ago. It has steadied in the region of 525¢, which also marked the October peak and a sustained move below 520¢ would be required to question scope for some additional firming.

Soybeans had become quite overbought when it peaked near 1350¢ three weeks ago. It has since found support in the region of 1200¢ and a sustained move below that level would be required to question potential for some additional upside.

Oats has lost momentum following an impressive advance from the June lows. It is now testing the lower side of the range and will need to rally back above 375¢ to indicate demand is returning beyond scope for a short-term bounce.