Sept. 19 (Bloomberg) -- Australia, the world's second- largest wheat exporter, cut its harvest forecast by 28 percent because of dry weather, helping to boost prices that are averaging the highest in 10 years.

The nation may produce 16.4 million metric tons of wheat from October to January, the Australian Bureau of Agricultural and Resource Economics said today. The country earned A$3.5 billion ($2.6 billion) from wheat last year and was forecast in June to earn A$4.6 billion from sales of 22.8 million tons.

Wheat futures have risen 18 percent this year in Chicago on concern Australian, European and U.S. output will fall because of dry weather. Without rain in Australia, under threat from developing El Nino conditions in the Pacific Ocean, the crop may fall as low at 13 million tons, Emerald Group Australia Pty. said last week.

``Most analysts think the balance of risk is tilted well to the smaller crop side,'' Tobin Gorey, a commodities analyst at Commonwealth Bank of Australia, said in an e-mail. ``That has only grown as more conclude an El Nino event has begun.''

Australia's wheat exports accounted for 2.8 percent of the nation's total commodity earnings last year.

Wheat for delivery in December rose as much as 4 cents, or 1 percent, to $3.995 a bushel in after-hours electronic trading on the Chicago Board of Trade. The contract traded at $3.9925 at 4:43 p.m. in Sydney. Wheat futures have averaged $3.70 a bushel this year, the highest since 1996.

Low Rainfall

``Most cropping regions of Australia recorded below to very-much-below average winter rainfall, with some regions recording their lowest winter rainfall on record,'' the bureau's acting executive director Karen Schneider said in a statement released in Canberra.

The reduction in forecast beat the expectations of five analysts and traders surveyed by Bloomberg News before today who estimated the bureau may reduce its estimate to 17 million tons.

``Wheat supplies have been cut in a number of major exporting nations, not only in the northern hemisphere but also in the southern hemisphere,'' Skye Dixon, an agribusiness economist at National Australia Bank Ltd., said in Melbourne. ``You would expect wheat prices to be volatile and to react positively to the cut in production.''

Barley production will fall to 5.8 million metric tons and canola output will drop to 775,000 tons, the lowest in 10 years, the bureau said.

Western Australia, the largest wheat growing state, may produce 5.8 million tons of the cereal in 2006-07, the bureau said, 39 percent less than a year earlier.

Output in New South Wales may fall to 5.3 million tons, 33 percent less than a year earlier.

Production in South Australia may be 2.5 million tons, while Victoria may harvest 2 million tons of wheat, it said.

To contact the reporters on this story: Gemma Daley in Canberra on gdaley@bloomberg.net Madelene Pearson in Melbourne on mpearson1@bloomberg.net;

Last Updated: September 19, 2006 02:56 EDT