Export ban changes market dynamics

by World Grain Staff
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Russia’s decision to ban the export of wheat from Aug. 15 until at least the end of the year has changed the face of the world’s grain market for the rest of this year. Russia’s customers are expected to look to the U.S. for supplies.

The U.S. Department of Agriculture’s (USDA) attaché in Moscow noted in a report on the move that it would free exporters from meeting their obligations. "It is rumored that some traders actually asked for this, because along with an increase in domestic prices, the gap between their purchase price and the contract price is increasing," the report said. "However, exporters were not prepared for the embargo to begin so soon."

It cited estimates from the Russian Grain Union that almost 500,000 tonnes of grain, most of it wheat, was stored at the Novorossiysk elevators, and 250,000 tonnes of wheat was in route to the port by rail or truck as the ban was announced.

"Bread is sacred to the Russians, and when the price of bread goes up it makes the headlines," the report said. "The ultimate impact of the drought and fires on this year’s wheat crop remains unclear; so (Russian Prime Minister Vladimir) Putin took this action to safeguard domestic supplies and prices through 2010."

Before the ban, according to the USDA in Moscow, estimates for Russia’s wheat exports in 2010-11 ranged between 14 and 20 million tonnes. "It is not anticipated that there will be a shortage of grain domestically in Russia and the ban may come off once the drought and fires have subsided and the actual grain situation is clear," the report said. "Putin chose to sacrifice exports for domestic stability."

The ban follows sharp downward revisions in Russia’s predicted wheat crop. In its August World Agricultural Supply and Demand Estimates report, the USDA put the Russian crop at 45 million tonnes; a month earlier it had a figure of 53 million. The USDA’s estimate for the 2009-10 Russian crop was 61.7 million tonnes.

According to a report published by Rabobank, some forecasters now put the potential Russian crop this year at 42 million tonnes. The Rabobank report describes a certain amount of apparent dithering.

"The Russian government earlier this week made a firm statement, saying 'at present export restrictions will not be introduced,’" it said. "The Deputy Russian Agriculture Minister also indicated that after building up a significant market share in the global export market, it would be irresponsible to restrict exports and lose it. The statement was made in an attempt to convince concerned importers that Russia will at the very least meet their current export obligations, while also trying to encourage liquidity back into Russian wheat export offers. However, Russian Prime Minister Putin today announced that there would be a ban on all Russian grain exports valid from August 15 to December 31, 2010."

Food price inflation was already causing concern. In another report, the attaché cited the newspaper Izvestia, which published information on the changes in retail prices for some Russian staple products from grain milling since May 2010. Buckwheat cereal prices were up by 50% to 150%. Barley cereal prices increased by 90%. The price of wheat flour was up by 60% to 80%.

The Russian State Statistical Service (Rosstat) showed an increase in wheat flour prices of 2.4% in the first week of July, following a 1.7% increase in the previous week. Bread prices grew by 0.3%-0.4% in the first week of July.

"In Moscow and the Moscow oblast alone, the bread price has increased in the last two weeks by 12% to 15%; some varieties and pastries have increased by 30%," the attaché said in the report, which was dated Aug. 16. "Bakers and retailers say these product price increases are caused by a 95% to 110% increase in flour prices.

"Millers attribute the growth in flour prices because of the grain price increase coupled with the increased expenses for grain transportation and storing (grain price comprises 85% of flour price). Most experts consider that the 15% increase in wheat flour and bread prices is driven by market speculation, as there is not a shortage for milling quality grain in Russia."

It’s not just a food problem, the report said. "These speculative expectations have also affected vodka prices, which started increasing in some provinces on the assumption that grain prices will increase."

"Essentially, it takes a large quantity of wheat that Russia was planning to export out of the export market," Doug Whitehead, Rabobank Agri Commodity Markets Research, told World Grain. "Demand will go to other origins, predominantly to the U.S."

He played down the potential for substitution by E.U. supplies. "In our view, that's massively overstated," he said.

Australia and Argentina could, potentially, be in a position to supply some extra wheat for export, he said.

"It’s changed the whole dynamic," he said. "It’s gone from an oversupplied market to a very, very tight market. As a consumer, you’re concerned about your availability into next year. Part of the rally was consumers looking to get price coverage, but they were also trying to get physical coverage."

Whitehead pointed out that a large part of the world’s grain stockpile is in discretionary exporters, like China and India. "If you exclude those countries, it’s very tight," he said.

China exported 2 million tonnes of wheat in 2008, but Whitehead said he doesn’t expect that to happen this year.

"It’s difficult to see them being a major exporter," he said. "The same is true for India. They’re vulnerable to weather."

He expected U.S. suppliers to fill the gap. "Fortunately, the U.S. has quite abundant stock levels. These higher prices we’re seeing at the moment are likely to encourage additional winter plantings in Europe and the U.S. That could help alleviate the situation."

Even though the Russian ban would hold down prices in Russia, they’re still high enough to send the right signals to producers. "You look at where Russian prices are now versus where they were 12 months ago, and they’re still pretty attractive," he said.

It’s more a question of weather. "Russia really needs rain to get on with planting," he said. "If we see Russian production not recovering next year, you have to look at the Black Sea becoming a net importer."

How importers will react depends on their attitude. "If you’ve got a longstanding relationship and you break that relationship, that’s going to be detrimental to you coming back," he said. "If you look at Egypt, it’s very price sensitive. Instead of booking Russian wheat forward, they might only take it on a spot basis."

Jack Watts, senior analyst at the British Home Grown Cereals Authority, told World Grain that, in Russia, the world has lost its cheapest source of wheat. "Importers are going for the next cheapest supply which will be Europe and the U.S. You have a growing livestock herd in Russia. They want to protect it."

Watts said whether it imposes a ban or not, Ukraine is expected to be out of the market. "It’s unclear what they are going to do," he said. "If you look in Ukraine, movements of grain to the ports have effectively stopped anyway. No one is expecting to get anything from Ukraine, regardless of what the politicians say."

John Anderson, economist at the American Farm Bureau, told World Grain that the Russian ban has introduced more uncertainty to the market. "We certainly saw the market respond to that uncertainty," he said. "How this plays out is really hard to determine right now."

He believes that the Russian government was thinking more about the planting of next year’s crop than about the current situation. "If you look at what they did and when they did it, it looks like very aggressive pre-emptive action," he said. "If they can’t get winter wheat planted this fall, then things start to look extremely worrying. They were sitting on large stocks of wheat when they made this announcement, but they were staring at a scary planting season.

"There’s a lot of uncertainty. We all know markets are uncomfortable with uncertainty."

The Russian move made a big difference, even in a market where stocks were relatively high.

"If you go back to the USDA’s July supply and demand evaluation report, stocks in the U.S. were at a 23-year high, stocks in Russia were to 15-year high," he said. "The balance sheet doesn’t look so bad. Then with a stroke of a pen, the situation changed."

The situation in the U.S. is complicated by what’s happening with the corn (maize) market, Anderson said, explaining that the carryover was at less than 10% of usage, a level liable to create volatility.

"The corn market is very well supported by supply and demand fundamentals right now," he said. That would mean that high wheat prices might not be enough to persuade farmers to switch out of, or not to switch into, corn.

"Corn is set to pick up quite a few acres," he said. "In a lot of places, what is planted with winter wheat this fall will be used for corn. We’ve got a fairly short window to make this determination."

The incentive to plant wheat has increased enormously, he said.

"We know, as well as we can know anything, that corn stocks are going to tighten up. We don’t know what the Russians are going to do. If they get a good winter wheat crop, I don’t think there’s any way they will extend this ban longer. They were looking at a planting season that was really starting to get very, very scary. By December, it could look very different."