Drought Forces Russia to Ban Grain Exports

Russia yesterday (Thursday) banned grain exports after unrelenting heat left the country with its worst drought in at least a half-century.

Wheat rose to a 23-month high after Russia, the world's third-largest grower, announced a ban beginning Aug.15 that will last through the end of the year. Corn and rice prices also surged yesterday after Russian Prime Minister Vladimir Putin said a ban on those grains would be "appropriate" in light of skyrocketing prices. 

Domestic grain prices gained 19% last week, faster than at the peak of the global food crisis in 2008.  The ban includes wheat, barley, rye, corn and flour exports, according to the government decree that also set aside nearly $1.2 billion for stricken farmers.

"As of today, Russia has no grain market," Kirill Podolsky, chief executive officer of Valars Group, the country's third-biggest grain trader told Bloomberg News. "This will be a catastrophe for farmers and exporters alike."

Valars will stop exports immediately because shipments may be held at customs until the start of the ban.

Russia's Agriculture Ministry on Tuesday cut its forecast for the country's 2010 grain output to between 70 million and 75 million metric tons, down from earlier estimates of as much as 90 million tons.

Wheat for September delivery yesterday rose the permissible limit of 60 cents to $7.855 a bushel on the Chicago Board of Trade, the highest since August 2008. Wheat reached a record $13.495 in February 2008, part of a surge in prices that sparked food riots from Haiti to Egypt.
The Russian heat wave, combined with dry weather in Kazakhstan, Ukraine and the European Union, and flooding in Canada has stunted crops, sparking a 91% surge in wheat prices in Chicago since June 9.

World wheat stockpiles may decline by 2.5% to 192 million tons by June 2011 as dry weather hurts the outlook for crops, the International Grains Council said on July 29, reversing a forecast for higher inventories.

The damaged crops are spurring some analysts to warn that agriculture shortages and price increases could filter through to consumers, posing a challenge to central bankers trying to contain inflation as they struggle to sustain the global economic recovery.

Emerging-market consumers are increasingly eating meat, which means higher demand for grain that could push price rises for wheat further through the food chain. In India, where some grain stocks have been allowed to rot, annualized inflation in June rose to 10.55%, adding to the dilemma of a central bank facing calls to keep rates steady to support economic recovery.

Food costs advanced to records in 2008 as some exporters curtailed shipments amid a shortage. While the United Nations' food-price index is 22% lower than its peak in June 2008, the gauge is 13% higher than a year ago, Bloomberg reported.

Renaissance Capital boosted its forecast for Russian inflation in 2010 to between 7% and 7.5%, up from a prior estimate of 6.3% because of possible effects the drought could have on food prices.

Concern that lower-than-expected wheat output may contribute to a food crisis is "unwarranted at this stage," the United Nation's Food and Agriculture Organization said yesterday.

Although wheat accounts for just a fraction of the cost of bread, food companies passed those increases on to consumers during the 2008 crisis. But it may be different this time around as executives say they will be more cautious because recession-battered consumers are still feeling the pain in their wallets.

"Consumers are still hurting out there," Patrick Doyle, chief executive of Domino's Pizza Inc. (NYSE: DPZ), told The Wall Street Journal in late July, when the rally in wheat prices was well underway. 

The scorching temperatures and dry skies threatening Russia's wheat harvests have also been beating down on Western Europe, leading forecasters to predict lower output of crops from French wheat to Italian tomatoes. Economists forecast a boost in seasonal food prices, with the German government reporting a 12% to 15% rise in July.

Ben Lloyd-Hughes, a climate scientist at the University of Reading's Walker Institute in England, told The Journal that pockets of Western Europe also are being affected by drought, but that Southwest Russia, Ukraine and Belarus are hardest hit.

"It is the lowest rainfall and the highest temperatures that the area has seen in the last 30 years or more," he said. "Droughts at this time of year in that region tend to reinforce themselves because the soil dries out, which subsequently makes the drought worse."

The death toll from Russia's forest and peat fires hit 50 Thursday, as government efforts failed to stop the blazes from spreading.

Russian President Dmitry Medvedev declared a state emergency in seven regions on Monday, including around Moscow. Some 300 to 400 new blazes are starting every day, Vladimir Stepanov, head of the Emergency Situations Ministry's crisis center, told The Journal.

"As far as weather conditions go, unfortunately there won't be any positive dynamics, and this type of weather will persist to the end of the week, leading to a worsening of conditions on the ground," Stepanov said.

News & Related Story Links:

• Bloomberg:
  Wheat Soars to 23-Month High as Russia Bans Exports; Rice Gains 
• Wall Street Journal:
  Wheat Goes Up, Prices to Follow
• Wall Street Journal:
  Wheat's Jump Hints at Inflation Bellyache
• Wall Street Journal:
  Heat Wave and Drought Shrivel Harvests Across Europe