Demand for grain is increasing, putting pressure on prices

Australian Crop Forecasters cut its estimates for 2006/7 to 11.5 million tonnes, from 25 million a year earlier.

Harvests have also been hurt in Ukraine and Argentina, and North America, and crops have been damaged by beetles.

Should the drought continue then the harvest would worsen, and it may mean higher flour and bread prices at a time when demand was rising, analysts said.

"Several of the world's major exporters have had crop problems, and it has happened in a year when global import demand is going to be at a record," Amy Reynolds of the International Grain Council told the BBC's World Business Report.

Higher wheat prices will mean a small increase in the price of bread Terry Sheales, the Australian Bureau of Resource Economics

According to official figures, eastern Australia has had five years of below average rainfall, and more than 90% of New South Wales, which contains Sydney, is said to be suffering from drought.

Reports said that farmers have abandoned crops in South Australia, Victoria, and New South Wales.

Terry Sheales, chief economist at ABARE, the Australian Bureau of Resource Economics in Canberra, spoke to the BBC's World Business Report.

"This year has been a really difficult one with climate conditions," Mr Sheales said. "It has been a particularly dry winter - and that's the main growing season for our crops - and it has remained dry during the spring."

"Higher wheat prices will mean a small increase in the price of bread," he said, adding that the drought "will affect production of other commodities and we could see that reflected in the price we pay for our food."