EU wheat rallies with Chicago as crop risks fuel short-covering

PARIS, May 20 (Reuters) - Euronext wheat climbed to a two-week peak on Tuesday, in step with Chicago futures, as concern over crop risks in some Northern Hemisphere production belts spurred short-covering by investors after recent price lows.

Benchmark September milling wheat BL2U5 on Paris-based Euronext settled 3.3% up at 209.00 euros a metric ton, its highest since May 2, moving away from a contract low of 201.00 euros struck last week. The daily rise was its biggest in a year.

Chicago wheat Wv1 also rallied by about 3% in U.S. trading, rebounding from a multi-year low last week.

Investment funds have built up large short positions in wheat futures amid ample global supplies and tepid import demand, making the market prone to bouts of short-covering.

Traders were monitoring possible crop damage in China after temperatures in the wheat-producing region of Henan reached 40 degrees Celsius (104 degrees Fahrenheit) on Tuesday, adding to weather stress after recent drought.

"It's not new, the lack of rain in winter wheat zones in China, but the spike in temperatures is making things worse," one futures dealer said.

Reports of adverse crop conditions in Russia's largest grain producing region, Rostov, also raised doubts about harvest prospects in the world's biggest wheat-exporting country, though traders said spring frosts were not thought to have caused significant damage to wheat.

An unexpected decline in U.S. winter wheat crop ratings tempered recent optimism about U.S. field conditions.

There has also been background concern about low rainfall this spring in northern Europe, though showers forecast this week were expected to ease the strain on crops.

“Rain is urgently needed in north Germany, Denmark, south Sweden and Poland, but this is forecast to arrive from Thursday, continuing into Monday,” one German trader said.

“If the forecast rain actually falls, wheat would still have time to recover to achieve a decent harvest, although some north German wheat will not now reach top yields.”

In exports, negative reaction to Black Sea competition in tenders held by Saudi Arabia and Algeria was offset by hope that this could ease market supply.

Traders still expect late-season shipments of French wheat to Egypt after a poor campaign that has contributed to lower European Union exports.

In barley, there was renewed talk of Chinese demand for French supplies, with traders saying this pushed up premiums at Rouen port.