* Farmers sending younger animals to feed yards
* Grain cargoes being shipped into Queensland
* Road trains take cows away from drought-hit pastures
* Higher demand to tighten wheat available for exports
By Naveen Thukral and Colin Packham
SINGAPORE/SYDNEY, Feb 12 (Reuters) - Soaring demand for Australian wheat to feed starving cattle is diverting grain away from export markets, as embattled ranchers are forced to send tens of thousands more animals than usual to feedlots to fatten them up before slaughter.
With a scorching drought withering pastures, farmers in Queensland state - home to half of Australia's 28 million strong herd - are also having to transport cows huge distances due to feedlots being full to bursting with underweight cows.
Queensland has recorded less than half of the normal rainfall in the last three months, stunting grass growth in pastures double the size of France and curbing grain output.
Australia is the world's second-biggest wheat exporter and extra feed consumption means Asian buyers, such as China, will have to buy more cargoes from other suppliers in North America or Europe.
Wheat prices have already shot up in Australia's drought-hit areas and the premium over global prices is around three times the normal level paid. The tightening of supply could also add upward pressure to benchmark U.S. prices, which have risen on concerns of crop damage in America from icy conditions.
"If it doesn't rain in the next few weeks, there will be a lot more cattle going to feedlots, assuming the feedlots can fit them in," said Ross Fraser, co-owner of Frasers Livestock Transport, one of the biggest cattle transporters in Queensland.
Feedlots use wheat or other grains such as sorghum.
But Australian sorghum production is forecast to fall more than a third to 1.278 million tonnes this crop year, meaning extra wheat will be needed to fatten cattle.
More than half of Australia's feed yards are in Queensland, but with little room remaining, farmers are sending cows as far as the state of Victoria, some 1,500 km (930 miles) away.
In Australia's remote cattle country, animals have to be driven across land in herds or transported using road trains, which can be more than 50 metres (160 feet) long and carry up to 130 head of cattle in multiple trailers.
Typically, cows go to feedlots for about 90-100 days to certify them as grain-fed before culling, but due to drought animals are being sent earlier and kept there longer.
"The priority of late is to send cows to feed yards because there simply is no grass left on many properties to feed them," said Simon Quilty, meat and cattle analyst at FCStone Australia.
In an average year, about 2.5 million tonnes of wheat is used for feed in Australia, the government estimates.
Australia has 450 feedlots with a capacity to hold about 1.1 million cows, according to the Australian Lot Feeders Association, with most of the herd relying on pasture.
There were 787,487 cows in feedlots at the end of September 2013, according to the latest data from the association, but in Queensland feedlots were nearly 90 percent full even before drought conditions worsened at the end of last year.
To feed the cattle, grain is being diverted from exports, traders say.
"We are already seeing exports go down from Queensland and New South Wales. This is directly resulting from lower production and higher consumption by the livestock industry due to the drought," said one Sydney-based grains trader.
The trader estimated exports from these two states would be cut to 1.5 million tonnes this year, down from 2.5 million tonnes normally.
Australia's overall wheat output is expected to top 27 million tonnes in 2013/14, the third highest on record, but this is mainly due to a big crop in Western Australia while Queensland and northern New South Wales suffer from drought.
Australian wheat is being sold at a premium of $100 over Chicago Board of Trade prices in the drought-ravaged eastern region, up from the usual $20-$30 a tonne, traders said.
Sorghum, which typically trades at $30 discount to wheat, is selling at par.
STRONG CHINESE INTEREST
The extra local demand comes as export demand for Australian wheat has been unusually strong with China locking in more supplies after bad weather reduced its production in 2013.
This could force some of Australia's key customers, including Indonesia and Japan, along with China, to seek more cargoes from the United States, Canada and France
The extra feed demand also comes as Chicago wheat futures hit the highest in more than three weeks on Feb. 6 at $5.92-3/4 a bushel, as frigid temperatures across the U.S. grain belt raised concerns about crop conditions.
With the drought conditions, most cattle farmers have no choice but to send the animals for culling early which is boosting beef supplies in the short term, but spells longer term shortages due to the reduced stock.
The increased culling of Australian cattle is already stoking fears of a global beef shortage in coming years with the U.S. herd at its lowest in six decades. (Editing by Joe Radford and Ed Davies)
Our Standards: The Thomson Reuters Trust Principles.