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By Souhail Karam

RIYADH, Jan 8 (Reuters) - Saudi Arabia is abandoning a 30-year programme to grow wheat that achieved self-sufficiency but depleted the desert kingdom's scarce water supplies.

The government will start reducing purchases of wheat from local farmers by 12.5 percent per year from this year, officials from the agriculture and finance ministries said on Tuesday.

The kingdom aims to rely entirely on imports by 2016.

"The reason is water resources," said one official, who did not want to be identified.

Saudi Arabia produces 2.5 million tonnes a year of durum and soft wheat, enough to meet domestic demand.

"The drought problem is crucial for Saudi Arabia but it is also more and more frequent in other dry countries such as Australia," a European trader said.

In the 1970s, the government started a programme to encourage farmers to produce wheat, guaranteeing them at the time a massive 3,500 riyals ($933.5) for every tonne.

The kingdom even ended up with a large enough surplus in the early 1990s to export some to the ex-Soviet Union and donated a portion of it to Syria, said Abdulrahman al-Qahtani, a Saudi agriculture expert.

Faced with criticism for overpaying farmers, the government gradually cut the price to 1,000 riyals per tonne.

Global prices, in contrast, have soared in the last few months and wheat of milling quality for March delivery was trading at 252 euros ($370.5) per tonne in Paris on Tuesday.

OIL-FUNDED COMPENSATION

The government is considering offering wheat farmers compensation, either through helping them switch to other crops, such as feed for livestock, or cash handouts, officials said.

"With oil prices at record levels, there is no better time to do this than right now," al-Qahtani said.

A surge in input costs, such as pesticides, fertilisers and transport, has drastically eroded farmers' margins.

Samir Qabbani, deputy chairman of the National Committee of Agriculture, said farming in the kingdom relies totally on underground water resources.

"It is possible to save 1,300-1,500 cubic metres of water for every tonne of wheat produced," Qabbani said.

The phasing out of Saudi wheat production will have little impact on global prices, said Abdoulreza Abbassian, a Food and Agricultural Organisation grain analyst.

"We are dealing with a world situation where the strain on supplies is predominant and when we have an unexpected increase in imports, it will provide some support to prices, but it will not be anything exceptional," Abbassian, secretary of the intergovernmental group on grains, said.

(Additional reporting by Summer Said in Dubai, Svetlana Kovalyova in Milan and Valerie Parent in Paris; editing by Michael Roddy

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