Without too much noise, the worst drought for years is turning into a potential disaster — you can see it in the way world grain markets are reacting. Australia is the third biggest grain exporting country but with the drought cutting production forecasts, coupled with a sharp fall in world wheat stocks, prices in the US markets hit a ten-year high last night before trading restrictions stopped them from rising further. Wheat futures for December delivery rose US30c, or 6.5%, to $US4.94 a bushel in Chicago, the highest since the middle of 1996. Wheat prices have jumped 45% compared to a year ago on the big dry in Australia, parts of Europe, India and the US. Abare, the Australian Bureau of Agricultural and Resource Economics, last month said the Australian wheat crop would be down 35% or so to around 16.4 million tonnes. But it warned that this could fall even further because of the big dry. Now a leading US forecaster has slashed its forecast of the Australian crop even further, to just 9.5 million metric tonnes: news of this sent prices soaring in US markets.  Australia does have carry-over stocks from last season to ship this year, so the shortfall won’t be too large to start with, but the further we get into 2007, the less wheat we will have to export, meaning a drop in farm incomes and more demands for higher drought aid from state and the Federal Governments. It is quite possible that Australia will not be able to satisfy all its export contracts in 2007 if there’s not more rain. If wheat production does fall to around the nine to ten million tonne range then there are inflationary implications to be considered as well for the price of bread, breakfast cereals, rice and meat (lot-fed cattle, pigs and chickens). Even if banana prices fall as supply rises this summer, stone fruit and other fruit and vegetables have been hurt already by a big frost in the Goulburn Valley and by the impact of the drought and water restrictions in many states.