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A farmer in Dale, Indiana cuts and grinds drought-damaged corn to use as cattle feed. A worsening drought in the U.S. Midwest has pushed grain to record prices.JOHN SOMMERS II/Reuters

Grains suppliers are starting to default on previously agreed sales to major importers, including top wheat buyer Egypt, rather than deliver on contracts that are now losing money because of the huge rally in prices sparked by the U.S. drought.

The worst drought in more than 50 years is wilting crops in the U.S. Midwest and sending prices soaring, with corn alone surging by 50 per cent in the past month. Soybeans have also hit record highs, with wheat not far behind.

Crop downgrades in Russia, Ukraine and Kazakhstan as drought followed a bitterly cold winter have added to global price rises, stoking fears of unrest especially in Middle Eastern countries, where high food prices can trigger political protest.

Traders say some private grain sales to buyers in Egypt have fallen apart, but they stress that multinational trading houses will deliver on contracts and the default problem is likely to focus on smaller firms. However, such firms often put together deals of up to 100,000 tonnes.

"We are talking a few Egyptian private buyers who had contracts from suppliers in the Black Sea not executed and it's both for corn and wheat. The type of cargo sizes are small and between 10,000 and up to 25,000 tonnes," a Middle East-based trader said.

Doubts are also being raised over whether recent wheat sales to Libya will be delivered. "Only in June, traders were selling wheat and other grains to buyers in the Middle East in expectation that a record U.S. corn crop and Russian export surge would push down global grains prices," one German trader said.

"The price rises mean some sales were made at huge losses, people are now looking at the terms of their performance bonds to see if it is worthwhile not delivering."

On most contracts in international trade, sellers have to provide a guarantee that they will pay a penalty if they do not fulfill their contract called a performance bond.

In some grains deals, the performance bond means sellers must pay 10 per cent of the contract value to the buyer if a default talks place.

Grains purchases are traditionally made months in advance, with traders using their market knowledge to calculate whether supplies will be plentiful or tight at the future time when the grain has to be bought and ships loaded.

Sellers in some individual international tenders could be facing losses running into millions of dollars on single deals.

Until about four weeks ago, traders were expecting falling prices with a record U.S. corn crop on the horizon, providing the import supply chain with low cost grain many sellers had not bought yet.

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