By Rod Nickel and Julie Ingwersen
WINNIPEG, Manitoba/CHICAGO, July 19 (Reuters) - Buyers looking to Canada for high-quality wheat to make bread as drought roils output in the northern United States may be thwarted, as dry weather has also hit crops there.
Wheat plants with the high protein content needed to bake bread have shrivelled in the United States, one of the world's top exporters, creating a rare tight spot in a world awash with grain after four years of bumper harvests.
Supplies are so short and demand so strong that the United States itself could rack up its third-highest level of wheat imports in the year from June 1, according to the U.S. Department of Agriculture (USDA).
The biggest importers of U.S. high protein spring wheat are Japan and the Philippines, and they are already shopping around.
Just this month, buyers from the Philippines who are normally U.S. customers bought three Canadian spring wheat cargoes for autumn delivery, said Rhyl Doyle, director of export trading at Winnipeg-based Paterson Grain.
But in the southern Canadian Prairies, some farmers are giving up on failed spring wheat crops, said Larry Weber, president of Saskatchewan-based Weber Commodities.
"There are some absolutely horrible crops. We're not going to have an average crop in Western Canada," he said.
Poor crop conditions drove prices for high quality spring wheat this month to four-year highs 1MWEc1 on the Minneapolis Grain Exchange (MGEX). Nearby September futures 1MWEU7 traded at a rare premium to deferred December 1MWEZ7 for most of June and early July, with the nearby contract peaking on July 5 at a premium of more than 35 cents a bushel.
The spread has since eased, with September closing Tuesday at a slight 2-3/4 cent discount to the December, due in part to farmers and grain elevators moving old-crop supplies of spring wheat into domestic milling and export channels.
"The market is saying, 'Give me your wheat, now,'" said Austin Damiani, who trades MGEX spring wheat futures.
The USDA this month forecast supplies of U.S. spring wheat left at the end of the marketing year on May 31, 2018, at 122 million bushels. That would be the smallest since 2007-2008 when MGEX prices soared to an all-time high above $24 a bushel.
The current surge in wheat prices has raised investor concerns about shrinking profit margins at packaged food companies, such as Flower Foods Inc FLO.N , Treehouse Foods Inc THS.N and Snyders-Lance Inc LNCE , although near-term risks are modest, said BMO analyst Amit Sharma on Tuesday.
Consumers could also eventually feel the pain, Sharma added, as higher costs may be passed along.
Russia, one of the world's biggest wheat exporters, does not typically produce grain with a high enough protein content to meet current needs. The main sources for high protein wheat are the United States, Canada and Australia, which is also suffering from drought. DEMAND
In Canada's two biggest wheat-producing provinces, Saskatchewan and Alberta, development of spring wheat is behind last year's pace, according to provincial governments.
Much of Saskatchewan's crop belt has received less than 40 percent of normal precipitation in the past 30 days as of Sunday, according to Agriculture and Agri-Food Canada.
Even ideal weather starting now would have limited benefits, said Todd Lewis, president of Agricultural Producers Association of Saskatchewan.
"It's so behind that it will never make it through," he said. "Production is going to be pretty limited, no question."
Some demand for high protein wheat is inelastic, from those bakers unwilling to change their baking processes.
Asian demand is 11 million to 12 million tonnes a year for hard red spring wheat (HRS) and Canadian spring wheat, according to Gabriel Omnes, analyst at French consultancy Strategie Grains. HRS wheat supplies should still meet demand, he said, but "at the expense of a strong cut in global stocks and a sharp rise in prices."
Millers and bakers can make some substitutions in flour grinds or add vital wheat gluten, the natural protein found in wheat, to boost dough strength, said Dave Green, executive vice president of the Wheat Quality Council.
"Millers and bakers are all going to be looking at value. Do we absolutely need this protein that we are paying for?" Green said.