Loss of 25 percent of Russian wheat crop worries international grain markets

MinnPost (Link) - Miriam Elder (August 17, 2010)

The deadly forest fires ravaging the Russian countryside have wiped out a quarter of Russia�s grain crop, prompting the country to ban all wheat exports as of Sunday and inflaming worries of a global food crisis.

A similar food crisis in 2007-08 provoked riots around the developing world, from Bangladesh to Yemen and from Haiti to the Ivory Coast. Is the world in store for a similar fate this year? Not necessarily, analysts say.

This time around, global reserve stocks are stuffed, and healthy grain crops in countries like the U.S. and Argentina are expected to mitigate Russian shortfalls. This year, a crisis will likely be avoided, analysts say.

Yet with Russia already making predictions that its fall and winter planting will likely be disrupted, bigger problems could lie ahead. And analysts warn that a heavy reliance on this year�s record U.S. crop means that if the weather stateside changes, all predictions would go out the window.

Russia is the world�s third largest grain producer, taking roughly a 13 percent share of the global wheat trade. Much of Russia�s wheat is exported to the Middle East. Egypt is its largest market, followed by Turkey, Syria, Iran and Libya, according to reports.

Since the heat wave, and its attendant drought and fires, began nearly two months ago, Russian officials have repeatedly revised downward the amount of wheat expected to be harvested this year. The latest estimates put the figure at between 60 and 65 million tons, some 20 million tons fewer than expected before the crisis hit.

Russia�s domestic demand alone stands at around 77 millions tons. Luckily, agriculture officials say, it has managed to store nearly 22 million in reserves.

Yet announcements of a Russian shortfall have already helped wheat prices soar. By early August, they had risen nearly 70 percent in 30 days to reach a two year high. Analysts blame that mainly on speculators and market uncertainties. As the situation in Russia began to become clearer, and speculators began to fade away, prices started to dip back down.

In a bid to protect Russia against the global price rise, Prime Minister Vladimir Putin on Aug. 5 announced a ban on wheat exports, which came into effect Sunday and will last at least until the end of the year.

That means less wheat on global markets � but does it mean critically high price rises? Not necessarily.

Experts point to strong reserve stocks of grain, following two years of better than expected harvests. And strong production is expected to come this year from the U.S. and Argentina, making up in part for Russian shortfalls.

On Monday, an economy ministry official in the United Arab Emirates said there was �no shortage of any kind.� �There are alternatives,� Hashem Al Nuaimi told Dow Jones newswires.

In Saudi Arabia, the CEO of Herfy, one of the Middle East�s largest restaurant chains, said it did not expect to be affected by the ban. �Herfy has wheat reserves enough for four to six months, so we won�t affected this year of any price increases caused by the Russian ban,� Ahmad Hamad Al Saeed told al-Arabiya on Sunday.

Other signs outside Russia look positive. On Thursday, agriculture authorities in Kansas said they expect a record corn crop this year.

�Even taking into account Russian, Ukrainian and Kazakh losses, there is going to be enough grain this year,� said Konstantin Fastovets, an analyst at Renaissance Capital, a Russian investment bank. An expected increase in the global harvest of wheat substitutes like corn and millet, as well as confidently high stockpiles, should avoid a severe crisis, he said.

�Prices are going to be higher year-on-year,� Fastovets said, predicting an 8 percent overall rise. �It�s not a drastic price rise, but it is a price rise nonetheless.�

Yet the situation could still get worse. In a report released Thursday, the U.S. Department of Agriculture said it expected the world wheat harvest to fall by 2.3 percent this year, to 645.73 million tons.

It said it expected Russian wheat production to drop 27 percent from last year, bringing in just 45 million tons. Of that, it expects Russia to export 3 million tons � down from 18.5 million last year. The Russian Agriculture Ministry continues to insist it will export between 2 and 4.5 million tons, but Russian statistics are proving harder and harder to trust as signs of a cover-up of damage from the fires begin to emerge.

Russia is also encouraging members of its customs union, Belarus and Kazakhstan, to institute a similar ban. Ukraine, a major wheat and barley exporter, is on the verge of imposing its own export ban as its crop suffers amid record heat.

In addition to its export ban, Russia appears to be putting its faith in little else but divine intervention. On Thursday, President Dmitry Medvedev flew into the heart of Russia�s grain-producing region to meet with farmers and traders. �It is necessary to pray that next year is not so difficult,� he said.

Yet all signs say it will be. As the fires, heat and drought continue and Russia�s traditional seeding season nears, officials have begun to warn that next year�s wheat crop is already at risk.

�Sowing is unlikely at least until September,� Roman Vilfand, Russia�s chief weather forecaster, told reporters in Moscow on Thursday. �There will not be sufficient rains for the sowing until the last 10 days of August.�

Inside Russia, farmers are fighting hard to mitigate the effects of the wheat export ban. The Russian Grain Union lobbied the government to push the ban�s start date back to Sept. 1.

�They did this without warning, and too quickly,� union spokesman Anton Shaparin said. He said Russia�s main port at Novorossiysk was already loaded with 240,000 tons of wheat, with a further 300,000 tons en route. �It�s a logistical nightmare,� he said. The government will consider allowing those shipments to export as planned, he said.

Politicians worldwide are training a keen eye on the situation, with memories of the 2007-08 food crisis still very much alive.

Egypt, the world�s largest wheat importer, has already asked Russia to follow through on a shipment of 540,000 tons of wheat in a deal agreed before the export ban was announced. Egypt relies on Russia for more than half of its imported wheat.

In Mexico, wheat flour prices have soared 20 percent as a result of the Russian drought, and a further 20 percent price rise there is expected.

These are the countries that might be most directly affected by the bans in Russia and its environs. The EU, for example, relies on wheat from Russia, Ukraine and Kazakhstan for less than 5 percent of its stock, and most of that is used for animal feed, according to the Confederation of the Food and Drink Industries of the EU. This, it noted, can lead to higher meat prices internally.

Nonetheless, the Russian drought and ban contributes to uncertainties on the market, it said.

�Taking into account only the internal EU situation, i.e. lower yields, but very good quality this year, the prices should not change drastically,� said a spokesman in an email response to questions. �However, global production has lowered in recent months creating lots of uncertainty in some markets.�