Russia Wheat Export Ban Pushes Prices Near 2-Year High

BY Talea Miller  August 6, 2010 at 3:15 PM EST

Fire in central Russia; AFP/Getty Images
Wheat prices retreated slightly but held near a two-year high Friday in reaction to a Russian announcement banning grain exports through the end of the year due to severe drought and wildfires.

“We need to prevent a rise in domestic food prices, we need to preserve the number of cattle and build up reserves for next year,” Prime Minister Vladimir Putin said Thursday about the ban, which is set to begin on Aug. 15.

Nearly 20 percent of Russia’s wheat fields have been destroyed by scorching drought and ongoing wildfires brought on by one of the hottest summers on record. Russia is the world’s No. 3 wheat producer and its crop loss has caused the price of wheat to almost double since June.

“Russia has become a big player in the world market, the problems they are confronting now are obviously sending shock waves through the whole system,” said Abdolreza Abbassian, secretary of the intergovernmental group on grains for the Food and Agriculture Organization of the United Nations.

Tom Jackson, senior economist with the agriculture group at IHS Global Insight, said the worst of the price increases may be over now that Russia has officially banned grain exports, as long as other wheat-producing countries don’t run into similar output problems this year.

“Russia can be a big player in the world wheat market, but it is pretty diversified in terms of who produces it and who exports grain,” Jackson said.

The United States and the European Union are both top world producers of wheat and have promising, large crops this year, he said. While the price hike will be a boon for farmers in those countries, it will also cause prices to go up for consumers, said Abbassian.

“We will certainly see a consumer rise in prices, for bread, feed lot, livestock, dairy,” he said.

The FAO cut its 2010 global wheat production forecast from 676 million tons to 651 million tons this week because of the situation in Russia “coupled with anticipated lower outputs in Kazakhstan and Ukraine,” but emphasized that the global supply for wheat is still strong.

“Wheat supplies are available and should be made more available at a far more reasonable price then they are now,” Abbassian said. “But if this goes unheard, and people start hoarding — traders, farmers — this will create its own reality and this is what we are really worried about because it would be so unjust.”

The memory of high food prices in 2008 — when U.S. wheat rose above $13 a bushel and food riots spawned around the globe — is still fresh and there have been concerns that Russia’s wheat woes could develop into a similar crisis. But the situation in 2010 is much more stable, Abbassian said, because the world’s stockpiles are higher than two years ago, many countries learned a lesson from the previous shortage and keep higher inventories now, and there are not global grain production problems, as there were in 2008.

The world economic situation is also likely to mute the price impact some, Jackson said.

“Consumers are not as willing or as able to keep buying [when prices get high], they will just cut back,” Jackson said. “Back then it felt like you could ask just about any price for anything and you could get it.”

But Abbassian warns that if the inflation of wheat prices seen this month continues, the first people to suffer will be those in developing countries.

“In the poorer countries, where the price transmission is the highest, the poor consumer will have to cut a meal,” he said. “Even if they rise less than international prices, an increase of 50 percent could mean ‘do I have dinner or not?’”