Australian farmers are holding back new-crop wheat sales on fears an El Nino weather pattern will slash yields, though their cautious approach means they risk losing sales to aggressive European rivals in Asian markets.

Russia and Ukraine are making inroads in countries such as Indonesia, which is traditionally dominated by Australia, while a big global crop could push prices even lower by the time Australia's new wheat marketing season starts in September.

Despite the best start to an Australian season for many years, the country's farmers have shied away from exports - selling only about 10 percent of the new crop forward compared with a typical 30 percent in a good year.

Growers have been hurt in the past by selling grains forward, but then not being able to deliver wheat in the right amount or to the correct specification due to bad weather. This can lead to contract defaults and financial penalties.

"If you commit and forward sell and you can't meet that physical delivery, you can't just unwind it. It happened in 2008 and it can get very, very ugly," said Dan Cooper, a grain farmer in Caragabal, 400 kilometers (250 miles) west of Sydney.

Drought can wreak havoc with wheat output in Australia, the world's third-largest exporter. Production slumped to just 9.74 million tonnes in 2006/07 from 25 million tonnes a year earlier, according to Australian government data.

"Australian growers in the last 12 years have gone through three or four droughts, so they are very wary of an El Nino situation when the rain stops," said a Sydney-based grains trader.

The chance of an El Nino developing this year remains at least 70 percent, the Australian Bureau of Meteorology said last week, adding to growing global fears of the weather pattern that can bring severe drought across much of Asia.


The world, meanwhile, is well supplied with wheat.

The U.S. Department of Agriculture this week raised its forecast for global wheat output to 701.6 million tonnes, which would make it the second-biggest crop on record after last year's 714 million tonnes.

Wheat prices hit a one-year high at $7.35 a bushel on May 6, but have since fallen 20 percent on the prospect of plentiful global supplies and as Northern Hemisphere growers have rushed to market a near record harvest.

Don Campbell, head of trading at Australia's largest exporter CBH Group, said Russian wheat was being aggressively offered, widening the price spread between Australia and Black Sea origins.

At this time of year, Australian new-crop wheat is quoted at $10-$20 a tonne higher than U.S. soft red winter wheat, including cost and freight into China. The spread between similar varieties of Russian and Australian wheat offered in Southeast Asia is much bigger at $50 a tonne.

With Australian wheat unable to compete at present, millers were switching to Russian grain, which would continue until new-crop Australian supplies come into the market, Campbell said.

Flour millers in Indonesia, Asia's biggest wheat buyer and Australia's top customer, have already bought around 325,000 tonnes of Russian wheat in recent deals for shipment in August and September, well above normal levels.

Indonesia typically buys about 7 million tonnes of wheat a year, with about 70 percent coming from Australia.

"The Black Sea region has ample supply this year," said a Singapore-based trader who sells Australian and U.S. wheat into Asia. "We see stiff competition right from August when Black Sea crops enter the market and continuing through the end of the year when the Australian harvest starts."

The big unknown is El Nino, despite a strong start to the Australian growing season.

Most areas, including top exporting Western Australia state, have had ample soil moisture and benign temperatures to aid crop development, although Queensland and northern parts of New South Wales have remained dry.

"For the country as a whole, I think it is fair to say the best start in at least 10 years," the Sydney-based trader said.

Australia currently expects a crop of about 24.6 million tonnes, which would be the sixth biggest on record, but has warned that dry conditions are affecting yields and output could fall further if an El Nino forms.