ANALYSIS-Brazil covers wheat imports despite Argentine slump

* Argentine exports seen low for second year due drought

* Brazil may boost shipments from Paraguay and Uruguay

* Bigger Brazilian crop also seen limiting imports

BUENOS AIRES/SAO PAULO, July 17 - A bumper wheat harvest and bigger imports from Uruguay and Paraguay will help Brazil meet its needs even as drought and anger over government policy threaten to hit Argentine output for a second year.

Brazil, one of the world's biggest importers of the grain, often buys almost all its wheat from Argentina where the last harvest shrank by almost half, slashing exports and forcing its giant neighbor to tap pricier Canadian and U.S. supplies.

But those imports will likely be far smaller than some industry analysts had initially expected due to its own higher 2009/10 output, stocks and alternative tariff-free imports from the smaller members of the Mercosur regional trade bloc.

"Farmers in Paraguay and Uruguay are stepping up production because Argentina's having a problem harvest and because the price is good," said Lawrence Pih, chief executive of Moinho Pacifico, Latin America's biggest wheat miller.

"Ironically, the situation could be less tight for 2009/10," he told Reuters.

Brazil's government said earlier this month it expected imports to fall to 5.6 million tonnes -- the lowest level in five years, partly due to forecasts for another bumper harvest of 5.6 million tonnes after 6 million tonnes last crop.

PARCHED SOILS

Argentina is traditionally a top five wheat exporter, but last season's poor harvest of 8.4 million tonnes cut exports, making it the No. 6 supplier, according to the U.S. Department of Agriculture, or USDA.

Exports are set to sink to 4 million tonnes in the 2009/10 year, even lower than last year's estimated 5.5 million tonnes, the USDA said in its last monthly report.

The country's farmers are sowing new season wheat on the Pampas grasslands, but parched soils are preventing planting in many places and sowing area is expected to fall 40 percent from last year and be the smallest since records began.

Growers say government export curbs and price controls aimed at fighting inflation are also responsible for causing key buyers in Brazil to look elsewhere.

"It worries us a great deal because like any company we don't want to lose customers," said David Hughes, president of Argentine wheat association ArgenTrigo. "We're going to have enough for our own needs but we're not going to be able to supply Brazil with all it needs."

Argentina's supply crunch is good news for growers in the smaller neighboring nations of Paraguay and Uruguay, which have tariff-free access to Brazil's market as Mercosur members, giving them an advantage over suppliers such as Canada.

North American wheat faces a 10 percent tariff, making it more costly for millers, but U.S. wheat has proven cheaper than Uruguayan supplies in recent weeks because the South American harvest is still several months off.

Paraguay expects to produce a modest 1.2 million to 1.5 million tonnes of wheat this year, but about a million tonnes would be destined for Brazil -- twice the amount sold to its neighbor in the last marketing year.

"They're going to buy whatever we can sell them as long as the quality is good enough (and) we expect a good season. Wheat is in excellent shape at the moment," said Luis Cubilla from Paraguay's Chamber of Cereals and Oilseeds Exporters, CAPECO.

SUPPLY GAP

Brazil has also turned to Uruguay to help plug the Argentine supply gap. In the first half of the year, imports rose to 428,000 tonnes from just 87,000 during the same period in 2008, and Uruguay's farmers are sowing more in response.

Eduardo Blasina, from the Montevideo-based Blasina & Tardaguila agricultural consulting firm, said the small country's growers were expected to plant 550,000 hectares (1.4 million acres) this season -- up from 476,000 (1.2 million acres) a year ago.

"If the weather's normal, this is going to mean 1 million tonnes will be available for export for the first time in history," he said.

More than three years of beef export curbs have already allowed Uruguay to make inroads into Argentine markets, but Argentina's wheat farmers are hopeful they will be able to win back customers if agricultural policies change.

President Cristina Fernandez lost control of Congress in a mid-term election last month, raising farmers' hopes for changes to her interventionist economic policy.

"If our government allows us to compete with our neighbors, we're going to do very well and we'll win back our customers," said Hughes from the Argentine wheat group. "It depends what our government thinks is important."