Drought conditions have taken a toll on wheat production potential in the European Union.

Dry weather has plagued western Europe between March and May, leading some analysts to call it the worst drought in the past 50 years. According to Meteo France, the country's government weather agency, the conditions this spring have been similar to 1976 when severe drought drastically reduced agricultural output.

Many analysts have made sharp reductions in their 2011/12 EU production forecasts due to the unfavorable spring growing conditions. In its latest estimates, French analyst Strategie Grains projected this year's EU soft wheat production at 126 million metric tons (MMT), a 6 MMT decline from last month's forecast and one percent less than last year's production. Recent rainfall is not likely to improve production prospects, especially in western Europe according to the analytical firm.

The spring drought hit the European Union's largest wheat producers, France and Germany, hardest. Strategie Grains reduced its French soft wheat production outlook by 4 MMT to 32.1 MMT. If realized, this would be the lowest production total since 2007/08 and a 10 percent decline from last year. Germany's production outlook fell by 1.8 MMT from Strategie Grains' May forecast, putting production at 22.9 MMT.

The U.S. Department of Agriculture (USDA) also made a significant reduction in this year's projected EU output. In its June World Agricultural Supply and Demand Estimates report, USDA reduced its forecast by 7.1 MMT. USDA now projects total EU wheat production (including durum) at 131.5 MMT, falling for the fourth consecutive year.

The reduced production outlook and increased feed use will strain the European Union's exportable supplies in 2011/12. USDA estimates EU carryover stocks from 2010/11 at 11.7 MMT, a 27 percent decline from the previous year and the second lowest total since 1984/85. Projected EU supplies are down 6.5 MMT from 2010/11 and five percent below the five-year average.

Given the existing supply situation, USDA lowered its EU export forecast by 3 MMT to 15 MMT. This would fall well below 22 MMT in 2010/11, and, similar to production, would decline for the fourth consecutive year. Current FOB prices have reflected the tight supplies and reduced production potential.

In Egypt's June 14 tender, French FOB prices stood at a $21.30/MT premium to U.S. soft red winter (SRW). Egypt purchased one cargo of SRW at $306/MT and one cargo of French wheat at $327.30/MT. It is worth noting that Egypt's General Authority for Supply Commodities (GASC) did not seek bids from Russia, the country's top supplier in 2009/10, indicating that GASC wants to be certain Russian supplies are of the best quality and can be reliably delivered.

Russian exporters failed to deliver 690,000 metric tons (MT) of wheat to GASC last year when its government abruptly banned exports following a drought.