Given that the EU is the world's largest wheat producer and consumer, the production decrease will see the global and local market tighten in 2010/11, which could threaten to take prices out of their current sideways trading range.

Production is expected to further decrease in 2011/12, as the removal subsidies squeezes producer margins.

However, continued elevated wheat prices are a significant upside risk to the 2011/12 outlook.

In 2010/11, we estimate European wheat production to have fallen by 2 per cent y-o-y to 134mn tonnes, as weak prices during the planting season (which for 2010/11 ran from September to December 2009) led farmers to reduce plantings.

Another factor causing the production decline in 2010/11 was the continued rollback of Common Agricultural Policy subsidies, which caused the wheat area harvested to decrease.

Moreover, poor weather in Western Europe in H110 led to a 1% decline in yields which impacted production.

For 2011/12 (for which planting began in September 2010), production is expected to decline again to 129mn tonnes, as producers struggle with higher production costs and decreased subsidies.