Like the wise farmer who knows disaster can and does strike, no matter how carefully he cultivates his harvest, policy makers at the Kremlin must be shaking their heads at how badly their well-laid plans have gone arwy.
Moscow had sown all the seeds a country should need to achieve a greater share of the global grain export market in recent years, having overhauled its agricultural industry and boosted sector investment. The result had been a near doubling of wheat exports between 2005 and 2009, from 10 million to 18 million tons, with Russia’s biggest export markets including Egypt, Turkey, Syria and Iran.
This amounted to Russia last year cornering 14 percent of global market share — a number that is precipitously set to plummet in 2010 from the disastrous interventions of Mother Nature and rising temperatures.
The wildfires raging across Russia this summer have destroyed as much as 25 percent of Russia’s wheat crop, with widespread drought diminishing yields of surviving fields. The United States Department of Agriculture (USDA) issued a revised forecast predicting that by year’s end the crop will shrink to 45 million tons from 2009’s 60 million.
In response, Prime Minister Vladimir Putin at the beginning of last month imposed a moratorium on grain exports for the rest of the year to protect domestic supplies and stave off inflation in the price of local foodstuffs. Russians consumed 42 million tons of wheat in 2009 — slightly less than the total expected crop this year, helping to explain the export ban.
Yet the move surprised many international observers, who expected Russian leaders to continue to complete export sales by tapping into government inventories, as moves to restrict trade can damage a country’s reputation as a reliable exporter.
Futures contracts for wheat were dipping to nine-month lows in early June, trading at $4.30 per bushel — some $158 per ton — on the Chicago Board of Trade (CBOT), effectively the world benchmark for wheat prices. Prices rose quickly as the Russian fires spread and reports emerged that other major wheat producing countries — such as Canada and the Ukraine — were also facing crops losses. Wheat spiked following Putin’s announcement, reaching near $285 on the CBOT [See graph page 24].
Abdolreza Abbassian, senior grains economist at the United Nation’s Food and Agriculture Organization, told international press on August 6 that: “a situation which was not serious has now become serious.”
A New York-based commodity, who was not authorized to speak to the media, told Executive that wheat “futures have been very volatile recently,” adding, “they made new highs right after the Russian export ban… but have come off [those highs].”
As Executive went to print at the end of August, the CBOT’s price-per-ton was about $243.
Production vs consumption of wheat (millions of tons)
Source: USDA, (Qatar wheat data not covered)
Imports vs exports of wheat (millions of tons)
Source: USDA, (Qatar wheat data not covered)
Last time around
In 2007, an unusually volatile spate of natural disasters beginning in the summer caused widespread crop damage across the globe. This, coupled with rapidly rising fuel prices, spurred sharp inflation in foodstuffs globally. The price of wheat tripled on world markets, leading to social unrest and violence in many developing countries, including Egypt, where rioters clashed with police when bread prices doubled.
This international food crisis revealed the interconnectivity of the modern world’s food and commodities markets, and exposed how dependent many countries are on these markets for their political and social stability.
Russia’s sudden wheat export ban will force the Egyptian government to fork out $877 million extra to secure new supplies
Russian wheat in the Middle East
Egypt, as the world’s largest importer of wheat, has been particularly affected by Moscow’s export ban. The country’s total wheat consumption was 17 million tons in 2009, vastly outstripping domestic wheat production of 8 million — meaning Cairo must import the difference. The Egyptian government has said Russia’s sudden halt to wheat exports will force it to fork out $877 million to secure new supplies [For more see story on page 26].
Neighboring Jordan has taken steps to shore up its domestic stores of wheat last month, floating a tender for 100,000 tons, which was filled by Germany at a cost of $328 per ton on August 13. However, the increased price of wheat is not expected to cause a corresponding price uptick in Jordan’s bread market because of government flour subsidies, which cost Amman some $169 million in 2009.
“Despite the rise in international wheat prices, which will increase the cost of the government bread subsidy, we will continue supporting bread with the same mechanism,” said Amer Hadidi, the Jordanian Minister of Industry and Trade, to the Jordan Times.
Syria and Lebanon will also have to import significant amounts of wheat this year. The effects of the Russian wildfires have combined with a ‘wheat rust’ fungicide epidemic, which has affected Syria particularly badly. According to the USDA, “the concentration of rust-affected crops is the highest in north-east Syria and southern and south-east Turkey, where the governments reported outbreaks in the prime wheat growing regions.”
Syria imported 2 million tons of wheat this past year, which is its third consecutive year as a net importer after years of drought.
Wheat Futures US cents/bushel
GCC prepared and spared
Gulf States appear to be better equipped to manage the price spikes and supply shortages, with Saudi Arabia intending to wait another five months before issuing its next wheat tender. The kingdom is betting that wheat prices will drop in the interim period and that it won’t have to pay the current, inflated price.
Speaking to Reuters, Waleed el-Khereiji, director general of the Saudi Grain Silos and Flour Mills Organization said: “I don’t foresee a crisis, or a crisis similar to what happened in 2007 and the prices now are still below their level in 2007.”
Saudi stores of wheat are enough to meet domestic needs until April 2011; not counting another 200,000 tons of wheat that will be delivered in September. The kingdom imported just under 2 million tons of wheat in 2009, none of which originated in Russia.
The United Arab Emirates also appears to be minimally affected by the inferno that burned across the Russian heartland.
According to a report issued by the Department of Analysis and Business Information, 89 percent of the UAE’s wheat imports originate in Canada, Germany, Australia and Argentina. Russia by contrast, provides only 2 percent of the total.
“I don’t foresee a crisis, or a crisis similar to what happened in 2007 and the prices now are still below their level in 2007”
The next harvest
Fortunately, there is some optimism that a good wheat harvest in other parts of the world will make up for the damage caused by the loss of Russia’s crop.
The USDA has reported that North Africa produced 20.2 million tons of wheat in the 2009-2010 season, up from 14.4 million tons the previous year. Factoring in Russia’s harvest failure, the USDA forecast for the 2010-2011 global wheat supply was only slightly adjusted from 676 million tons to 651 million tons, as other countries are stepping in to close the supply gap left by the Russians, led by the United States and Australia.
The prospect of Russia being forced to import grain from other countries over the next year, however, caused price volatility toward the end of August, with Dow Jones Newswires reporting Moscow may import up to four million tons of various grains through the 2011 harvest season.
Speculators are also adding momentum to the price swings and were a major factor in the steep rise in prices seen in the past month, according to Makram Makarem, senior financial consultant at FFA Private Bank in Lebanon
“This up-move [of prices] is led by investors buying back their short positions after Russia banned grain exports, as well as speculators and hedge fund managers wanting to ride the wave,” said Makarem to Executive.
He pointed out that people should keep things in perspective, however, when making comparisons to price hikes that caused the 2007-2008 food crisis.
“We need to note that wheat reached a high of $13.34 per bushel in February 2008 after a much steeper increase in price,” remarked Makarem, while the highest prices peaked last month was $7.75 per bushel.
