Feb. 19 (Bloomberg) -- The biggest rally in the history of wheat trading defied even some of the best conventional wisdom, humbling forecasters Goldman Sachs Group Inc. and the U.S. government.

Wheat has more than doubled since May, reaching a record $11.53 a bushel on Feb. 11 and driving up costs for everything from Eggo waffles and Italian pasta to Pakistani flatbreads and Japanese pastry. This month the world's biggest securities firm scrapped projections for a price drop within 90 days, and the U.S., the biggest exporter, said it would ship 23 percent more than originally estimated before summer.

``The supply shortage has been much more acute than what we had expected,'' said Ruifang Zhang, a commodities analyst at Goldman in London. The firm, which was right about the trajectory of crude oil last year, raised its three-month price target to $13.50 from $9.20 on Feb. 8.

Wheat set a record 16 times since September, resonating around a world that relies on the grain more than any food crop except rice. Exporters Argentina and Russia halted sales or raised taxes to protect dwindling reserves. Pakistan boosted imports as inflation in January rose 12 percent, the most in 33 months.

`Unprecedented Demand'

Farmers aren't keeping pace with the diets of a burgeoning middle class in India and China. The Department of Agriculture predicted Feb. 8 that U.S. stockpiles for the 12 months through May will drop 40 percent to the lowest since 1948 as global production lags behind consumption for the seventh year in eight. Droughts and rain damaged crops in Australia, France and the U.S. last year, thwarting bets that higher prices would reverse the trend by encouraging bigger harvests.

``There's been unprecedented demand globally for grains,'' said Gordon Davis, managing director of Melbourne-based AWB Ltd., the largest wheat exporter in Australia. ``It's being driven by demand for protein in Asia, which reflects rising incomes.''

Even farm animals, which eat 16 percent of the world's wheat, are driving consumption as alternatives such as corn feed get more expensive. The appeal of corn-based ethanol is increasing as the U.S. government sets mandates for alternative energy sources.

``There is a tremendous competition for food,'' said William Doyle, chief executive officer of Potash Corp. of Saskatchewan Inc., the largest maker of crop nutrients. Corn may jump another 15 percent this year to $6 a bushel, he said.

Bread-Price Gains

Wheat's most-active futures on the Chicago Board of Trade rose more than $7 a bushel between April and the Feb. 11 high. Before then, they hadn't exceeded $6.36 in the 159-year history of the world's biggest grain exchange. Wheat for May delivery rose 5.5 cents to $10.475 a bushel in Chicago.

In the U.S., a one-pound loaf of bread sold for an average $1.28 in December, 13 percent more than a year earlier, as the cost of flour increased 25 percent to 39.8 cents a pound, Bureau of Labor Statistics show.

Sara Lee Corp., a bread and cake maker based in Downers Grove, Illinois, raised the price of a loaf 20 cents between September and December. Fourth-quarter profit at Battle Creek, Michigan-based Kellogg Co., the largest U.S. cereal maker, fell 3.3 percent as price increases failed to keep pace with the higher expense of making Eggos, Frosted Mini-Wheats cereal and cookies.

Japan Raises Price

In Japan, Asia's biggest wheat importer, companies such as Yamazaki Baking Co., the No. 1 bread and pastry maker, are passing costs to consumers as the government charges more for the grain. The Ministry of Agriculture, Forestry and Fisheries said Feb. 15 prices will rise an average 30 percent in April, the biggest increase since 1973.

Global wheat production for the marketing year through May will probably reach 603 million tons as consumption rises to 619 million tons, according to the USDA. Demand in India, the most- populous nation after China, is up 16 percent since 2001.

The U.S. is the exporter of last resort as Russia, the third-biggest exporter, and Argentina, the fourth-largest, keep more for themselves. So far this marketing year, U.S. shipments have doubled to Egypt, Iraq and Indonesia, and tripled to the European Union, USDA data show. Pakistan, which imported nothing from the U.S. last year, purchased 150,000 tons.

Not Enough Supply

``There is not enough high-protein wheat to go around, and the last thing a wealthy nation or a centrally planned economy wants to do is run out of wheat,'' said William Tierney, executive vice president for John Stewart & Associates, a commodity consultant in Washington.

Goldman didn't change its one-year price projection this month, maintaining that wheat will drop to $8.50 a bushel as production increases.

Last autumn, U.S. wheat plantings rose 3.6 percent, falling short of Goldman's 10 percent forecast, because some Kansas land was occupied by summer-sown sorghum and soybeans. Those crops substituted for the previous year's wheat, which was lost in a devastating April freeze.

``Eventually, high prices will motivate more supply,'' Goldman's Zhang said.

The American Bakers Association, a trade group that represents about 85 percent of wholesale bakeries in the U.S., said increased global demand is raising ``serious food-security issues'' and urged the government to curb wheat exports.

Stockpile Reserves

``We alerted USDA a year ago that wheat was going to be in short supply, and now three of the five wheat categories are extremely short,'' the association said in a statement on its Web site. ``Other countries are stockpiling their strategic grain reserves. The United States should do the same until USDA can ensure adequate supply.''

A shortage of higher-protein varieties has been extra expensive for bakers such as Pechters Baking LLC in Harrison, New Jersey. On the Minneapolis Grain Exchange, which trades protein-rich spring wheat used for making bread, prices tripled in the past year and touched a record $16 a bushel on Feb. 15.

``Our customers just don't believe how much our costs have gone up,'' said Pechters Vice President Anthony Battaglia, who plans to raise a two-pound loaf to almost $3 from $2.47 by the end of March. ``This industry has never had to move this quickly before and it is not structured to change pricing daily, like fruits and veggies do.''

To contact the reporters on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net; Tony C. Dreibus in Chicago at Tdreibus@bloomberg.net.

Last Updated: February 19, 2008 17:02 EST