Adds closing prices in paragraphs 7-8, 16

By Tom Polansek

CHICAGO, May 12 (Reuters) - U.S. wheat futures surged by their daily trading limits on Tuesday as the Department of Agriculture projected that farmers in the drought-hit Plains will harvest the smallest crop since 1957.

Dryness has ravaged the southern Plains, the heartland for growing hard red winter wheat used to make bread, as farmers have also struggled with spiking input costs due to the war between the U.S. and Iran.

U.S. hard red winter wheat production for 2026 will drop to a 69-year low of 515 million bushels, the U.S. Department of Agriculture said in its first report on the size of the crop.

Nationwide, growers will produce 1.561 billion bushels of wheat, the lowest since 1972, USDA said.

"The magnitude of USDA's cuts to wheat production was a surprise," said Jack Scoville, analyst at The Price Futures Group.

PLAINS WHEAT CROP SUFFERS

K.C. July wheat KWN26, which represents the Plains crop, climbed by its 45-cent limit to $7.31-1/4 per bushel, a contract high.

Chicago Board of Trade July wheat WN26, which represents soft red winter wheat grown in the Midwest, also soared by the 45-cent limit, ending at $6.79 per bushel. The contract set the highest level since October 2024.

On Wednesday, trading limits will expand to 70 cents.

Prices spiked as millers, farmers and dealers this week are inspecting wheat fields across Kansas on an annual crop tour.

WATCHING SOY DEMAND

Rising fuel and fertilizer prices due to the closure of the Strait of Hormuz have increased production costs for U.S. farmers, heaping more stress on growers already reeling from trade disruptions caused by President Donald Trump's tariff battles.

China and the U.S. may reach a farm deal at their summit this week that expands Beijing's purchases of grains, though market watchers said they did not expect major new soybean purchases.

USDA estimated 2026-27 U.S. soybean ending stocks at 310 million bushels, below analysts' estimates of 364 million, and raised its estimate from 2025-26 for soybeans that processors will crush.

"The data point that stuck out to me most is next year's demand," said Don Roose, president of U.S. Commodities. "They're taking crush up 120 million higher, which is a strong crush."

CBOT July soybeans SN26 closed up 13-3/4 cents at $12.26-3/4 per bushel, while July corn CN26 rose 4-3/4 cents to $4.80 per bushel.