Russia's Drought-Driven Ban on Wheat Exports Panics Markets
Wheat prices surge after Russia ban
Financial Times, Aug. 6, 2010
Wheat
prices extended their rally on Friday, surging another 6 per cent,
after Russia on Thursday imposed a ban on grain exports, triggering
panic in commodities markets and sending wheat prices to their highest
level since the 2007-08 global food crisis.
Wheat prices were
heading towards a 25 per cent increase on the week, opening the door to
a sharp increase in the price of everyday staples such as bread and
flour.
The
market was frenetic on Friday amid talk of contract defaults following
the ban, and as food companies and importing nations scramble to find
alternative supplies.
Vladimir
Putin, Russian prime minister, on Thursday announced the ban on all the
country’s grain exports, effective within 10 days, after a severe
drought devastated crops and wildfires spread across the country.
The
move, which caught traders and food producers by surprise, pushed the
price of wheat to its highest level in two years and evoked memories of
the last time the Soviet Union suffered a catastrophic crop failure in
1972.
“There is full-blown panic in the European grain market,” a senior trader said.
On
Thursday, European wheat prices rose more than 12 per cent to hit a
peak of €236 a tonne on record trading volumes. US wheat futures jumped
by their daily limit to $7.85 a bushel and are up more than 80 per cent
since mid-June, the fastest rally in nearly 40 years.
On
Friday, US wheat futures extended their rally, adding another 6.4 per
cent to $8.35 a bushel, after hitting earlier an intraday high of $8.41 a
bushel.
“Bottom
line – no sign of a top as yet,” said Richard Feltes at brokerage MF
Global in Chicago. “We think wheat end users are still short and at risk
for further price gains,” he added, echoing a view widely held among
grain traders.
Other
trader added prices could continue to move higher next week amid panic
buying, but added that from a supply and demand point of view, prices
probably have already risen enough. “That does not mean the rally is
going to stop,” he added.
The
rally is triggering fears that food price inflation could take off and
that the world could even suffer a repeat of the 2008 food crisis should
the big shortfall in wheat output persist. “Soaring grain prices have
brought food inflation back to centre stage,” said Joachim Fels of
Morgan Stanley in London.
Prices of other crops including barley, corn and rapeseed also jumped sharply.
Shares
in some of the world’s largest food companies tumbled on fears they
would struggle to pass on all the increased costs of buying wheat to
millions of households already suffering the effects of the financial
crisis. However, several companies have already said they plan immediate
price rises on goods, such as bread and biscuits.
Unilever,
the British consumer goods group, dropped 5.2 per cent, while General
Mills, , one of the world’s largest food companies, was 2.5 per cent
lower. Nestlé fell 2.1 per cent. But the shares of trading companies
such as ADM and Bunge surged on the prospect of more businesses
exporting wheat from the US.
On
Thursday, Mr Putin told a cabinet meeting: “I think it would be
expedient to introduce a temporary ban on export grains and other
agricultural goods.”
“We cannot allow an increase in domestic prices and we need to maintain the number of cattle.”
The ban would take effect from August 15 and last until December 31, a spokesman for Mr Putin said.
The
worst drought in more than a century in the Black Sea region has led to
widespread alarm. Forecasts for the Russian grain crop have been
falling daily, with the agriculture ministry’s most recent projection at
70m-75m tonnes, down from 85m tonnes a fortnight ago.
Last year, the harvest was 100m tonnes.
Traders at Glencore, the world’s largest commodity trading company, on Tuesday warned the crop could fall to about 65m tonnes.
Cargill,
the world’s biggest trader of agricultural commodities, criticised
Moscow’s move. “Such trade barriers further distort wheat markets by
making it harder for supplies to move from areas of surplus to areas of
deficit, and by preventing price signals from reaching wheat farmers,”
it said.
Arkady
Zlochevsky, president of the Grain Union lobby group, said that the
swift imposition of the ban risked undermining Russia’s reputation as a
reliable supplier.
Mr
Putin said the government would disburse Rbs35bn ($1.17bn) in subsidies
to agricultural producers. He added that Russia would use its grain
stores for distribution without auction to regions in need
Copyright The Financial Times Limited 2010.
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