Australia's official commodities bureau, oft-noted for upbeat crop estimates, surprised analysts by cutting its forecast for the domestic wheat harvest by 1.6m tonnes, citing "dry seasonal conditions".

Abares downgraded its estimate for Australia's 2012-13 wheat crop to 24.1m tonnes, which would represent an 18.3% drop from last year's record harvest.

Indeed, it would be the smallest crop for three years, and below the average for non-drought years of about 24.5m tonnes.

While analysts had braced for a decline in Abares' last outlook, made in March, since when conditions have been uncomfortably dry in many areas, the extent of the cut surprised many analysts.

The estimate for wheat shipments in 2012-13 from the southern hemisphere's largest exporter was reduced by 500,000 tonnes to 20.5m tonnes.

Prices rebound

Luke Mathews at Commonwealth Bank of Australia said he had "no intention to adjust" his own estimate of a 25m-tonne crop.

National Australia Bank has forecast the crop at 26.1m tonnes, and Rabobank at 24.7m tonnes, while the US Department of Agriculture on Tuesday kept its estimate for the harvest at 26.0m tonnes.

The impact on financial markets was to help a revival in wheat prices following sharp declines on Tuesday. Chicago's July contract regained 0.9% to $6.21 a bushel as of 04:45 local time (10:435 UK time).

Paris wheat for November rebounded 0.4% to E206.75 a tonne, and London wheat recovered 0.5% to stand at £154.80 a tonne.

'Poor conditions'

Abares - which in the previous two seasons was accused of "overoptimistic" wheat estimates, which were largely borne out by successive record harvests – blamed Wednesday's downgrade in part on lower grain prices, which had discouraged sowings, and encouraged farmers to turn to sheep instead.

"Dry seasonal conditions have resulted in a slow start to the winter cropping season," Abares said, highlighting particular setbacks in Western Australia, the country's top grain-producing state, whose plight Agrimoney.com highlighted last month.

"In Western Australia, conditions for crop planting and establishment have generally been poor," Abares said, pegging the state's harvest at 8.66m tonnes – a decline of 26% on last year's bumper crop.

While recent rains had gone some way to improving soil conditions "further timely rainfall will be required to facilitate completion of planting programmes and crop growth" and achieve "average" yields.

Abares vs Viterra

For South Australia, Abares' forecasts contrasted markedly with those on Tuesday from Viterra, the Canada-based grain handler being bought by Glencore, and which forecast state wheat plantings rising 6%, and barley sowings by 3%.

Abares foresaw South Australia wheat area falling by 4%, and barley sowings slumping by 17%, in part thanks to switches to canola, the rapeseed variant.

However, even here, the bureau was more downbeat, pegging state area at 277,000 hectares (684,000 acres) below Viterra's 865,000-acre estimate.

Abares said its canola forecast was "lower than initial expectations because dry conditions in some areas discouraged producers from larger increases" in sowings.

Canola hopes

Australia's overall canola harvest was pegged at 2.94m tonnes, up 10,000 tonnes on its March forecast, with higher sowings overall, of some 2.1m hectares, making up for dryness-depressed yield hopes.

The forecasts were in line with estimates last month from the Australian Oilseeds Federation, but well below speculation earlier in the season of a record 4m-tonne harvest.

The Australian barley crop was pegged at 7.3m tonnes, a downgrade of 1.7m tonnes from the March forecast, reflecting lower expectations for sowings and yields.