UPDATE 1-Cash flow crisis forces Ukrainian farmers to sell grain

* Farmers sell stocks in face of credit crunch

* Some farmers, traders renegotiate sales contracts

* Crop prospects now in focus for 2014 harvest

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LONDON, March 7 (Reuters) - Ukrainian farmers are selling grain again to address cash flow problems after a hiatus in recent weeks triggered by the local currency spiralling lower and political turmoil.

Global grain prices, along with domestic ones on Ukraine's physical market, have rallied this week on the rising tensions in one of the world's top grain exporters.

Farmers are feeling the effects of Ukraine's desperate financial position, which has deteriorated in the two weeks since pro-Western protesters in Kiev brought down Moscow-backed president Viktor Yanukovich, prompting Russian forces to seize control of Ukraine's Crimea peninsular.

"A lot of the farmers are selling, you've got to assume there's going to be problems in liquidity and cash flow and that's pushing these guys to sell," a trader at an international commodity trade house said.

Global corn prices have jumped by around 8 percent since the start of the week, while wheat has risen around 9 percent, supported by the political instability in Ukraine.

A cash flow crisis this week overtook farmers' desire to hold their stock as a security against a rout in the local hryvnia currency and an uncertain future.

The liquidity crunch was also expected to impact spring plantings.

"Mid-sized and smaller farmer groups of 50,000 hectares or so definitely face problems getting financing and there could be less spring plantings than initially thought," said a trader specialising in Ukrainian grain.

"We won't know for another couple of weeks because if they don't get the financing in time then it will be too late for buying the seed. They have to get the financing within two weeks."

Traders said international banks with local units in Ukraine were cancelling existing credit lines to traders and part of that finance would usually go into crop financing.

"All of the international banks, European banks, active in Ukraine are reducing their exposure drastically," the Ukrainian grain trader added.


Traders and lawyers said some contracts were being renegotiated after the rally in prices and the risk of delays and defaults had risen.

"There are a couple of situations which could develop into defaults, mainly in soft commodities - grain. There are also concerns about the impact of sanctions and war risks," Chris Swart, senior partner in the commodities team at law firm Holman Fenwick Willan, said.

"Some types of delays are permissible within a contract, many are also commercially tolerable in that buyers would rather have the product late than not at all - but price movements can change this."

The Grain and Feed Trade Association (GAFTA) provides contract templates and arbitration services and any defaults would likely be referred to the organisation.

"Due to the rally in prices and delays, I would expect there to be a few defaults coming and that GAFTA will be getting a few arbitrations in the next couple of months," said Swithun Still, Director of Solaris Commodities.

"Some contracts are being renegotiated for later delivery or shipment periods."

Traders said contract renegotiations in a rising market are more common in the Black Sea region than in some other grain producers.

"It's quite common in Ukraine that if prices go up that sellers pull out and try to renegotiate," said the trader specialising in Ukrainian grain.

(Reporting by Sarah McFarlane; Editing by Veronica Brown and David Evans)