U.S. stockpiles will drop to 272 million bushels at the end of May, 6.8 percent less than expected a month ago and down 40 percent from the prior year, the Department of Agriculture said in a report today. Inventories will be the lowest since 1948 when farmers grew less and shipped more wheat overseas to help rebuilding countries after World War II, economists said.

Higher costs for commodities including wheat and fuel eroded fourth-quarter profit reported this week by Kellogg Co., the largest U.S. cereal-maker. Sara Lee Corp. Chief Executive Officer Brenda C. Barnes said Feb. 6 the company raised bread prices ``to keep pace with historically high wheat costs.'' Wheat has more than doubled in the past year.

``We have a limited supply, and we got confirmation of that this morning,'' said Jamey Kohake, a broker at Paragon Investments in Silver Lake, Kansas. ``We had the early frost last year and drought pretty much worldwide, and we kept demand at a rapid pace, so our stocks started to dwindle.''

Wheat futures for March delivery rose 30 cents, or 2.8 percent, to a record $10.93 a bushel on the Chicago Board of Trade. The contract rose the 30-cent exchange limit for five straight days. The 16 percent gain this week is the biggest in history.

Commodity Rally

Wheat was the third-biggest gainer today behind lead and sugar on the UBS Bloomberg Constant Maturity Commodity Index of 26 commodities, which rose as much as 3.1 percent to a record 1,388.19. Wheat has jumped 30 percent this year, the most of any commodity in the index, as corn, soybeans, gold and platinum jumped to records.

Oil futures for March delivery rose 4.2 percent to $91.80 a barrel at 2:29 p.m. on the New York Mercantile Exchange, the biggest gain since Dec. 12. Metals also rallied as lead surged 6.8 percent, sugar jumped 6.1 percent, copper gained the most since March 2007 and coffee rose to the highest since 1999.

The rally in wheat has accelerated in the past year after weather damaged crops from the world's biggest producers. Rising food consumption in China and increased demand for corn and soybeans used to make alternative fuels also are eroding global crop supplies.

``We are seeing a demand curve largely from Asia and augmented by the biofuel discussion,'' Monsanto Co. Chief Executive Officer Hugh Grant said Feb. 6 in a telephone interview from the company's headquarters in St Louis. ``I don't think we have seen this since the 1940s, when there was a global rebuilding effort after World War II.''

Weather Damage

U.S. wheat yields were hurt by a freeze, followed by excessive rainfall, and then drought hurt production in Canada and Australia. Global buyers increased purchases of supplies on speculation farmers wouldn't harvest enough to meet needs and to curb rising food costs.

Most of the available U.S. spring wheat, a variety used to make staple foods including bread and pasta, has already been sold by growers that contracted their grain when futures were lower, thinking prices wouldn't go up much more, said Andy Swenson, a farm management specialist at North Dakota State University in Fargo.

``In North Dakota, all of our wheat got sold at harvest between $5.50 and $6'' a bushel, Swenson said. ``That was an extra-good price, so guys were happy to unload at harvest.''

With most of the grain already committed to buyers, anyone trying to secure supply now is finding little available, Swenson said. Spring wheat is planted in April and May and harvested in September and October in the U.S. northern Plains, including North Dakota, the largest producer.

Spring Wheat Demand

On the Minneapolis Grain Exchange, wheat for March delivery rose the exchange limit of 30 cents, or 2 percent, to a record $15.53 a bushel. The price has more than tripled in the past year and rose the exchange limit for 11 of the past 12 sessions. Harvest of spring wheat was limited after drought hurt plants last year in the northern Plains and in Canada.

Higher prices usually encourage farmers to plant more acres. That may not occur this year because the prices of other crops also have risen, which may make them more profitable than spring wheat, said Jason Britt, an account executive at Central States Commodities Inc. in Kansas City, Missouri.

``The best fertilizer for any crop is higher prices, however, this year is a little different in that competing crops of corn and soybeans are also at historic highs,'' Britt said. ``Most of the time it is easy for a crop to buy the acres. This year, all crops are competing for acres with the higher prices.''

Global Inventories

World inventories of all wheat are expected to fall to 109.7 million metric tons by the end of the marketing year on May 31, down 1.1 percent from the government's January estimate and the lowest since 1978, the USDA said.

Global exporters of the grain are expected to ship 3.9 percent less wheat in the year ending May 31 because more countries are retaining domestic supplies to ensure food prices stay low. That's stepped up demand for U.S. exports.

Advance overseas sales of U.S. wheat rose 61 percent since June 1 compared with the same period a year earlier, the USDA said yesterday. Actual shipments are up 57 percent in the same timeframe versus the prior year, government data show.

India, the world's second-largest consumer of the grain, may import 68 percent more this year, said Mark Samson, vice president for South Asia at U.S. Wheat Associates, a government- and producer-funded trade advocacy group. India imported 6.71 million tons in the year that ended on May 31 and is expected to buy 2 million tons in the current marketing year, USDA data show.

Kansas City Prices

Wheat for March delivery in Kansas City also rose the exchange limit of 30 cents, or 2.7 percent, to a record $11.4025 a bushel. The price, also up the exchange limit every day this week, gaining 15 percent, has more than doubled in the past year after an April freeze followed by excessive rain curbed yields.

The exchanges in Chicago, Kansas City and Minneapolis said they will raise their daily price limits starting Feb. 11 to 60 cents. That may encourage more holders of contracts to sell who have been unwilling to do so during the rally, allowing investors with short positions, or bets that prices will decline, to buy back their positions, Kohake said.

Volatility in grains may discourage some investors from buying agriculture commodities as a hedge against inflation, Central States' Britt said.

``This type of action makes it extremely difficult to trade,'' he said. ``The margin calls can become very severe, making farmers and end-users and banks very nervous. The type of action that is happening in Minneapolis could ruin that market because no one will want to trade in it because there is just too much risk.''

Wheat was the fourth-biggest U.S. crop in 2006, valued at $7.7 billion, behind corn, soybeans and hay, government data show.

To contact the reporter on this story: Tony C. Dreibus in Chicago at Tdreibus@bloomberg.net .

Last Updated: February 8, 2008 18:47 EST

bloomberg.com/apps/news